The deputy prime minister and minister of Economy, Alejandro Gil, said in late May 2023 that annual inflation in Cuba – measured between April 2022 and April 2023 – was 45.4%, and food products were the hardest hit. 

Cuban economists, Pavel Vidal among others, estimate that the current inflation rate stands at approximately 200%, a percentage that is more in keeping with the evolution of foreign currency exchange rates on the illicit market and prices going up on the island.

The main reason for this number is linked to excessive liquidity – the amount of money circulating that is meant to finance the fiscal deficit -; the Government has greater expenses than it does revenue. Vidal spoke about the macroeconomic monetary crisis in a live conversation with El Toque on June 2nd 2023.  

The excess liquidity and inflation we’ve seen in Cuba in recent years, “is almost always linked to financing the country’s fiscal deficit,” he analyzed. 

The equation is simple: in order to keep the country running despite lower revenue, the State needs money. They get money from the Cuban Central Bank (BCC), which prints pesos that it then gives to the State budget. This is known as the monetization of fiscal deficit. The problem here is that if you abuse the mechanism, you end up affecting price stability at every level of the economy. 

“It’s an issue that is put up for discussion at the National Assembly every year, although nobody or almost nobody pays any attention to it. To tell you the truth, this situation dates back to pre-pandemic times, but it has continued to get worse, becoming an unprecedented “fiscal hole” within the Government’s finances. Everything has to be paid in the economy, you can’t create new wealth as if by magic. Cubans are paying for the monetization of the fiscal deficit which is what I call an “inflation tax,” the university professor said. 

A more sustainable alternative, which should also be used with caution, is issuing so-called Government bonds, a financing mechanism that overflowed in 2021 with the Tarea Ordenamiento (economic reforms process).

Bonds represent a debt that you have to pay in the short to mid-term. A report published by the BCC explains that “financing the deficit by issuing Government bonds [was carried out] with a redemption date that ranges from 1-20 years and an average interest rate of 2.5% for every issue.” Despite the above, issuing bonds is a lot healthier for the economy than excessive liquidity and inflation tax that Cuban families have been paying more and more of since 2021.

What has happened to Cuba’s fiscal deficit?

According to Vidal, who worked in the 1990s as an analyst of Monetary Policy at Cuba’s Central Bank, fiscal deficit is one of the key factors that determine current inflation rates and the devaluation of the Cuban peso on the illicit market.

Between 2011 and 2015, Cuba’s fiscal deficit stood at 2.5% of the Gross Domestic Product (GDP), on average. 

However, since 2016, expenses without financial support began to increase, accounting for up to 7.4% of national economic activity in the four-year-period that ended in 2019. That year, even after the “coma” induced by the “temporary crisis” the fiscal deficit reached an alarming 6.2%. Economists recommend that this fiscal imbalance doesn’t exceed 3% of a country’s GDP.  

Regarding 2020, Vidal said that the fiscal deficit amounted to 63 billion pesos, almost 20% of Cuba’s GDP, ten times what it was in 2019. 

The National Assembly had approved a deficit of 75.827 billion pesos for 2022, which will be revised in Parliamentary sessions now in July 2023, when budget debts from the previous year are traditionally liquidated. 

A summary about the state of public finances in the first semester of 2023 also needs to be published, which deals with the fiscal deficit, and needs to be reduced, according to the Minister of Finance and Prices, Meisi Bolaños Weiss.

The deficit was supposed to be 7.700 billion less than in 2022.

According to Vidal, another two key factors that affect the Cuban economy right now are the lack of physical capital and emigration.

About the lack of physical capital, the economist explained that “sufficient maintenance hasn’t been carried out due to the crisis, beyond hotels. We see this the most in agriculture and electricity generation, and it limits the country’s ability to recover production levels of goods and services to pre-pandemic levels.”

In 2022, Cuba experienced its greatest migration exodus, over 300,000 Cubans reached the US alone along its southern border with Mexico. We have yet to learn just how many left for Europe and other places in Latin America.

This is why Vidal says that while Cuban emigres “generate remittances, there is a significant brain drain and human capital flight which is needed here.”

More revenue, less public spending 

Even if the situation were to change and the economy recovered, “inflation would continue” because the State needs to get “its books in order” and reduce the fiscal deficit, Vidal weighed in. Cuba’s roadmap out of the crisis can’t sidestep the path of mainstream economics: implementing a fiscal adjustment program and cutting public expenses, while looking for new sources of revenue for the Public Treasury. 

As well as undertaking other structural reforms that will be difficult for the current system from an ideological and political standpoint. 

The “SME matter” – limiting or amending legislation to allow them to go further – will be a good indicator of opinion trends within the Government’s leadership.  

“They are still clinging to the idea of promoting socialist state-led businesses, and this is precisely the bottleneck they want to improve on. The same thing we’ve been doing for 60 years and it doesn’t work,” Vidal said. 

Amidst this whole situation, the dollar reached 200 pesos on June 12th 2023. It wouldn’t be surprising if this exchange rate continues to rise in the immediate future.

“Exchange rates are one more price, like a taxi fare or the price of a tomato, and inflation affects it just the same. As long as the fiscal deficit exists and hyperinflation, [which the academic calculates is “five or six times higher than the official rate”], pesos will continue to be printed in excess which will ultimately end up being used to buy foreign currency. Monetization of the fiscal deficit not only raises prices on consumer markets, but it also influences the evolution of exchange rates. The exchange market isn’t exempt from macroeconomic imbalances,” Vidal said.

It’s inconceivable to think of it any other way, especially in a country that has quintupled its average fiscal deficit in the past decade.

This article was translated into English from the original in Spanish.