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ECONOMY-CUBA: “Impossible to Escape Impact” of Crisis – Experts

Patricia Grogg

HAVANA, Oct 22 2008 (IPS) - After three years of high growth, uncertainty is hovering over the Cuban economy once again, although experts are not yet ready to predict exactly what impact the current global financial turmoil will have on the island.

The global crisis coincided with the worst natural disaster to hit this Caribbean island nation in five decades, caused by hurricanes Gustav and Ike, which produced an estimated five billion dollars in losses.

“It is practically impossible to escape the impact, although Cuba is relatively protected, and Latin America is also in a better position than it was a few years ago,” Esteban Morales, a researcher at the University of Havana’s Centre for the Study of the Hemisphere and the United States (CEHSEU), told IPS.

“A marked slowdown in the growth of Cuba’s gross domestic product (GDP) is likely,” economist Pavel Vidal wrote in an article for the Economics Press Service, a publication of the IPS office in Havana.

In January, the Centre for the Study of the Cuban Economy (CEEC) forecast GDP growth of 5.1 percent for 2008, based on the expansion of investment and growth in sectors like tourism and professional services. This figure, however, already reflected a slowdown that began to be seen in 2007.

On Oct. 2, the Economic Commission for Latin America and the Caribbean (ECLAC) predicted that the region would continue to enjoy economic growth in 2008 at an estimated 4.6 to 4.7 percent. However, the regional United Nations agency adjusted its forecast for 2009 downwards, to between three and four percent, because of the global financial crisis.

The International Monetary Fund (IMF) also projected that the region will grow at a rate just above three percent next year, due to falling commodity prices and a decrease in the flow of expatriate remittances from developed countries, among other factors.

The Caribbean region is anxious about a possible drop in tourism, given that sector’s vital importance to the economies of small island nations.

The prospect would also dim the hopes of Cuban authorities for reinvigorating tourism, which became the driving force of the economy in the 1990s.

In 2007, the flow of tourists to Cuba, the largest island in the Caribbean with a population of 11.2 million, fell for the second consecutive year by around three percent. Deterioration of hotel and other infrastructure, and stagnation in the recreational options on offer have caused Cuba to lose ground with respect to competitors like the Dominican Republic.

The current turbulence could also limit access to foreign credit, and so have a negative impact on investments, as well as affecting commodity exports to developed countries because of the effects of the crisis on their productive sectors.

Soaring food and fuel prices drove up Cuba’s foreign debt by 14.3 percent in 2007. Progressive worsening of its financial situation has prevented Havana from honouring some of its international commitments, resulting in a loss of creditworthiness in the eyes of creditors.

“The seriousness of an economic crisis originated by the bursting of a financial bubble depends on the extent to which it affects the real economy,” wrote Osvaldo Martínez, the chairman of the parliamentary Commission on Economic Affairs, in an article in the governing Communist Party’s newspaper, Granma.

In Vidal’s view, “nickel exports and tourism will initially be hit the hardest” in Cuba, although this “could be offset by lower bills for oil and imported food.”

In 2007, nickel overtook tourism as the country’s main source of foreign exchange, bringing in about 2.7 billion dollars in revenue. Cuba produces 75,000 tonnes of nickel a year, and has over one-third of the world’s proven nickel and cobalt reserves.

But the price of nickel has plummeted in recent months, to around 15,000 dollars per tonne, less than one-third of the price a year ago. Similarly, oil prices have plunged to 70 dollars a barrel, half of their July level.

“Prospects for GDP growth will depend largely on maintaining the expansion in exports of professional services, although these may be limited by restrictions on the Venezuelan economy caused by the fall in the price of oil,” Vidal told IPS.

The professional services in question are those mainly provided by a contingent of some 30,000 Cuban doctors working in Venezuela, who in 2007 produced an income that represented over 70 percent of the island’s GDP.

Meanwhile, productive activities like mining, agriculture and industry have shrunk as a proportion of total GDP.

This imbalance has led economists like Juan Triana, of CEEC, to warn about a repetition in Cuba of “past structural distortions that once were characteristic of the economy, and encouragement of unilateral dependence on a single sector,” as he wrote in an analysis for the Economics Press Service.