Cuba

major macro economic indicators

(e): Estimate (f): Forecast

Risk assessment

A slow recovery from the crisis

The country's economic situation should slowly improve over the course of 2022, boosted by the global recovery, while the consequences of the recent and painful reforms implemented by the government will diminish. The initial effects of currency unification, which took place on 1 January 2021, should begin to fade, and the single currency’s exchange rate should stabilise after plunging throughout 2021 (CUP 64 to USD 1 on the black market in September 2021 compared with an official exchange rate of 24 to 1). However, supply constraints and growth of the black market will keep upward pressure on prices, while the sanctions implemented by the Trump administration are still in place. As a result, inflation should remain contained at double-digit levels after exploding in 2021, and pressure on households should ease. However, the constraints on household consumption will remain high, while the fourfold increase in the public sector minimum wage in 2021 failed to keep pace with inflation. Public subsidies are trending downwards, while shortages of necessities are accumulating. Expatriate remittances and receipt of foreign currency sent by expatriates will also continue to be restricted by U.S. sanctions and government exchange controls. Public consumption, within a largely state-owned economy, will continue to suffer from the lack of government funding. This is expected to push the government to continue with reforms aimed at partially liberalising the economy, following the expansion of self-employment in February 2021 and the law passed in August 2021 allowing the creation of small and medium-sized enterprises with up to 100 employees. Despite the opening up of 678 projects to foreign investment, 175 more than in 2021, investors will probably remain cautious. Title III of the Helms Burton Act has still not been repealed by the Biden administration and continues to authorise legal action to be taken against entities benefiting from assets expropriated in Cuba since 1 January 1959. External demand should, however, allow the country's exports to pick up somewhat, helped by higher nickel and sugar prices. The agricultural sector is poised to benefit from this, but remains highly vulnerable to climatic events. The manufacturing sector should benefit from global demand for pharmaceuticals and chemicals but will continue to be heavily constrained by supply problems. The tourism sector (10.3% of GDP in 2019), which is largely seasonal, should perk up a little in the first quarter of 2022 after the country reopened to tourists on 15 November 2021.

Limited improvement in the public and current accounts

Following monetary unification, and with GDP no longer being overestimated at a rate of USD 1 = CUC 1 (the old currency used in external trade) = CUP 1, debt as a percentage of GDP surged. The increase was further exacerbated by the high level of the deficit and the elevated share of external debt (131% of GDP). With the country in default since 2020, an agreement was finally reached in spring 2021 with the Paris Club allowing Cuba to meet its obligations under the debt restructuring agreement signed in 2015. A proposal to restructure the debt with private creditors was also sent to the government by the London Club, which suggested a 60% haircut for this debt, most of which is held by CRF I Ltd, an investment fund. Against this backdrop, the public deficit should decrease in 2022. Reduced spending on COVID-19 and the gradual recovery in tourism will provide significant revenue in the face of rising oil prices, at a time when U.S. sanctions prevent Cuba from obtaining low-cost supplies from its ally, Venezuela. Domestic bond issuance will finance this deficit along with some sparse international financing provided through bilateral loans, notably from China.

Turning to the external accounts, the fall of the CUP has increased the import bill, while domestic production is struggling to meet internal needs and oil prices have risen. However, exports, notably of pharmaceuticals, chemicals, agricultural and mining products (nickel), should be made more competitive by the devaluation, allowing them to rebound. The same goes for services exports, which will be driven by the tourism recovery and sales of medical services abroad. Cuban doctors were in high demand during the pandemic and undertook around 40 external missions. This, together with expatriate remittances, should allow a small current account surplus to be restored, while foreign direct investment, particularly from Europe, is set to increase timidly.

Tensions running high in urban areas

In July 2021, the government faced a historic nationwide wave of protests over worsening economic and health conditions. The government responded by taking a repressive stance and making hundreds of arrests, particularly in the cultural sector. Externally, the main issue will remain the normalisation of relations with the United States, a possibility raised by the arrival of Joe Biden in power. However, the prevalence of domestic interests and the new president's need to win votes in Florida ahead of the mid-term elections are likely to slow the pace of this normalisation, as evidenced by the automatic renewal of sanctions implemented by the Trump administration. 

Last updated: February 2022