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May 26, 2018
Cuba's economic backbone

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In Cuba, tobacco (an export) and tourists are two main drivers of the economy.

The Cuba Factor

Cuba's economic backbone

Mark R. Howard | 4/28/2015

FOUR MAINSTAYS

Cuba in Context ...

If it were a U.S. state, Cuba, with 11.3 million citizens, would rank eighth, between Ohio and Georgia in population. Cuba’s gross domestic product of about $70 billion would place it 41st among states, between West Virginia and New Hampshire.

1. Exports

Cuba, with just $1.76 billion in exports, sells less abroad than Kyrgyzstan, which has fewer than 6 million people, and only slightly more than Jamaica, which has a quarter of Cuba’s population. Cuba’s major exports are sugar, rolled tobacco, nickel mattes, refined petroleum, medical products and liquor. Cuban sales of medical services and products to Brazil generated an estimated $404 million in 2013. The major customers for Cuban exports are China, Spain, Brazil, Belgium-Luxembourg and Italy.

2. Tourism

More than 3 million people visited Cuba in 2014, but the total should be higher because the Cuban government counts Cuban-Americans as nationals returning home rather than as tourists. Most of the estimated 600,000 Americans who visited Cuba in 2014 are thought to be Cuban-Americans, and the U. S. is the second-leading source of visitors to Cuba after Canada. Tourism is a bright spot in the Cuban economy, contributing some $2 billion in direct contributions to GDP and expected to grow by 6% from 2013-14.

3. Barter

Venezuela sends Cuba more than half of Cuba’s total oil supply at subsidized rates. Cuba sends Venezuela doctors, teachers, social services professionals and also intelligence and military advisers that train the Venezuelan security services. The Brookings Institution estimates that there are 40,000 Cuban professionals in Venezuela, 75% of whom are health care workers. Venezuela pays Cuba $5.4 billion a year for these services, with the lion’s share of the money going to the government: A Cuban doctor in Venezuela is paid $425 a month, according to Brookings, while Cuba charges Venezuela more than $11,000 a month for each professional it provides. Cuba also hosts thousands of Venezuelan students. One key question Brookings raises: Whether economic and political crisis in Venezuela could produce a rapid decline in assistance to Cuba.

4. Remittances

Depending on who provides the estimates, Cuban-Americans sent between $3.5 billion and $5 billion in cash and goods to relatives on the island last year. The remittances “reach 62% of Cuban households, sustain about 90% of the retail market and provide tens of thousands of jobs,” according to the Havana Consulting Group. The transfers from overseas exceed the value of the sugar industry and profits from tourism, nickel and medical products manufactured by the Cuban biotech industry, according to the company.

Assets …

Ports: Cuba has eight seaports, but the island is trying to create a “special development zone” — with a $900-million free-trade zone and container facility — at the Port of Mariel, about 30 miles west of Havana. The project is financed largely by Brazil and will be managed by PSA International, a Singapore firm.

Work Force: Cuba has the besteducated work force in Latin America, and the boom in small, private-sector enterprises indicates an untapped entrepreneurial spirit. Architect and urban planner Miguel Coyula, a former adviser to Havana’s municipal government, says there are no MBA programs at Cuban universities, however, and the quality of economics education is not high.

Oil: Cuba sits adjacent to a basin off its northwest coast thought to contain significant oil reserves, but recent exploration projects have had little success. The embargo is considered a deterrent to the availability of the best deep-water drilling technology and expertise.

Beaches/Natural Environment: In addition to unspoiled beaches, Cuba’s coral reefs remain biodiverse and protected from over fishing and development. Off Cuba’s southern coast, the Los Jardines de la Reina National Park encompasses one of the most pristine marine environments in the world.

Minerals: Cuba is the sixth-largest nickel producer in the world and accounts for 8% of the world’s cobalt production.

Agriculture: Cuba imports more than half of the food it distributes via rations to the public but overall produces the majority of the fresh fruits and vegetables it consumes. In addition to sugar cane, the island grows coffee, rice, tobacco and produce.

Size: About three-fourths the size of Florida, Cuba is nearly as large as all other Caribbean islands put together.

Real Estate: In 2011, Raul Castro permitted Cubans and foreign nationals who are permanent Cuba residents to buy and sell real estate. Cuban- Americans and others, working through relatives on the island or straw buyers, have been buying. The process remains murky and complicated.

Liabilities …

Roads and Utilities: Roads in the urban areas and major cities are usually in good condition but less so between the urban areas. Electricity is reliable, but tourists are advised not to drink the tap water.

Debt: Cuba’s ratio of external debt to exports is 377%, considered very high, according to the Washington Economics Group. Moody’s rates Cuba’s debt at Caa2 — high risk. China, Japan, some commercial creditors, Mexico and Russia all have had to reschedule debt with the country recently. Cuba is negotiating with the Paris Club — a group of 19 wealthy creditor nations including Australia, Britain, Canada, Germany, Japan and the U.S. — to restructure or reduce its debt, freeing up credit limits. Meanwhile, financing from either the U. S. Export-Import Bank or U.S. banks remains highly unlikely. “Deep structural reforms needed before trade with U. S. improves steadily with increases in credit availability,” according to Washington Economic Group.

Hiring Requirements: One factor discouraging foreign investment is that foreign companies with operations in Cuba can’t hire employees on their own. They must go through a government agency and pay the agency in dollars for the workers’ labor. Many foreign companies pay under-the-table bonuses to the workers.

Demographics: Cuba’s population is aging, with about 20% of the population 60 or older.

Outdated: Many of Cuba’s manufacturing operations lack upto- date machinery and equipment.

Government Control: The government’s centrally planned command-and-control economy has proved inefficient and unable to produce a thriving economy. While the government is attempting to attract more foreign investment, it steers outside capital into government joint ventures.

What’s Changed and What Hasn’t

America’s embargo on trade with Cuba allowed businesses in the U.S. to sell medical goods, food products and some telecommunications equipment to the island. The most recent changes announced by President Obama allow the sale of building materials for private residential construction, goods for use by private entrepreneurs and agricultural equipment for private-sector farmers. Independent Cuban entrepreneurs can now export certain products and services to the U.S., but many remain banned, including tobacco, vegetable products, minerals, machinery and some base metals.

Exporters in the U.S. still can’t extend credit, but payment terms have been loosened so that Cuba doesn’t have to pay cash upfront. Some legal analyses say that’s a significant change that should help American businesses sell more goods while the rest of the embargo remains in effect. But all imports and exports have to be made through a government agency, ALIMPORT, so it’s unclear how much impact the most recent changes will have.

Embargo, What Embargo?

Despite the embargo, the U.S. does considerable trade with Cuba already. The U.S. is Cuba’s fifth-largest import partner, accounting for 7.6% of Cuba’s imports. Though the embargo has limited exports to Cuba to food and medicine, America still has exported more to Cuba than Mexico, Canada, Italy, France, Germany or Russia — all countries with no trade embargo — export to the island.

Meanwhile, there are already 350 flights a month from the U.S. to Cuba. And the U.S. Interests section in Havana has more foreign service personnel than any other country’s embassy.

Some experts say the fact that the U.S. continues to classify Cuba as a “state sponsor of terrorism” — a designation that could be removed soon — is a bigger obstacle to economic development in the country than the embargo itself. The designation makes multinational banks wary of financing projects in Cuba for fear of facing sanctions from the U. S., such as the record $9 billion fine levied last year against French bank BNP Paribas for lending in Sudan, Iran and Cuba. Cuba’s continued presence on the terrorism list, “has a direct impact on the funding of projects in Cuba,” says Guy Chartier, a Canadian developer with projects in Cuba.

Tags: Travel & Tourism, Cuba

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