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Viewing cable 09HAVANA490, CUBA'S ECONOMY - WHERE TWO PLUS TWO EQUALS THREE

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Reference ID Created Released Classification Origin
09HAVANA490 2009-08-10 18:06 2011-02-04 21:09 CONFIDENTIAL US Interests Section Havana
VZCZCXRO8975
RR RUEHAO RUEHCD RUEHGA RUEHGD RUEHHA RUEHHO RUEHMC RUEHMT RUEHNG
RUEHNL RUEHQU RUEHRD RUEHRG RUEHRS RUEHTM RUEHVC
DE RUEHUB #0490/01 2221845
ZNY CCCCC ZZH
R 101845Z AUG 09
FM USINT HAVANA
TO RUEHC/SECSTATE WASHDC 4659
INFO RUEHWH/WESTERN HEMISPHERIC AFFAIRS DIPL POSTS
RUEHBS/USEU BRUSSELS
RUCOWCV/CCGDSEVEN MIAMI FL
RUEAIIA/CIA WASHINGTON DC
RHEHAAA/NATIONAL SECURITY COUNCIL WASHINGTON DC
RUCOGCA/COMNAVBASE GUANTANAMO BAY CU
RHMFISS/HQ USSOUTHCOM MIAMI FL
RHMFISS/JOINT STAFF WASHINGTON DC
RHEFDIA/DIA WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
C O N F I D E N T I A L SECTION 01 OF 03 HAVANA 000490

SIPDIS

DEPT FOR WHA/CCA

E.O. 12958: DECL: 08/09/2019
TAGS: ECON PREL PGOV PINR CU
SUBJECT: CUBA'S ECONOMY - WHERE TWO PLUS TWO EQUALS THREE

REF: A. HAVANA 477
B. HAVANA 322
C. HAVANA 208
D. HAVANA 33
E. HAVANA 78 AND PREVIOUS

Classified By: COM Jonathan Farrar for reasons 1.4 (b) and (d)

-------
Summary
-------

1. (C) Amidst a flurry of activity starting with Raul
Castro's July 26 speech and ending with the August 1 National
Assembly, Raul and his ministers painted a desperate picture
of the Cuban economy. The Government of Cuba (GOC) lowered
its GDP growth projection for the second time in three months
and Raul promised to cut expenditures to bring them in line
with expected revenue. The GOC approved measures to address
the "tense financial situation," without offering any
details, and predicted an equally difficult 2010.
Expectations for any meaningful reform have been delayed
along with the Sixth Party Congress (Ref A). Instead, we can
expect the GOC to continue to offer only marginal steps
(forward and backward) including Raul's latest suggestions to
improve the productivity of Cuban land by farming with oxen
instead of tractors and sending young communists out to plant
trees. Meanwhile, it remains too early to tell if or when
earlier reforms, such as the leasing of idle farm land, may
impact Cuba's bottom line. End Summary

------------------------
I,m No Economist, but...
------------------------

2. (SBU) Vice President and Minister of Economy and Planning
Marino Murillo Jorge reported on July 30 to the Central
Committee of the Cuban Communist Party (PCC) a GDP growth
forecast of 1.7 percent, down from 2.5 percent reported in
April/May (Ref C) and 6 percent forecast in December (Ref D).
(Note: The calculation of GDP in Cuba is not comparable
with other countries, but GDP movements within a Cuban
context are noteworthy. End Note.) The economy grew by 0.8
percent in the first half of 2009, which means the GOC
expects the economy to grow faster in the second half of 2009
(in order to average 1.7 percent overall) probably due to an
improved trade deficit led by slightly higher prices for
nickel and an across the board reduction in imports. Reuters
reported on July 21 that Cuba had lowered its forecast for
imports by 22 percent and exports by 13 percent. The new
estimated trade (in goods) deficit of around USD 8 billion is
USD 3 billion less than Cuba's record 2008 negative balance,
but remains unsustainable. Tourism, a significant source of
foreign income, is up in terms of the number of visitors but
down in terms of revenue. Tourists are buying cheaper
packages and spending less time and money in Cuba. According
to Raul, Cuba is also affected by a weaker U.S. dollar.
Economy Minister Murillo added that Cuba's economic
conditions in 2010 promise to be equally difficult.

3. (C) Raul also acknowledged Cuba's liquidity issues (Ref
B) and committed to repay all of its debts. We understand
from some diplomatic contacts that most foreign businesses
started receiving token payments on long overdue debts in
July. Credit lines with foreign banks, including BNP Paribas
and Societe Generale, are being renegotiated. In a public
effort to save every penny, Cuba continues with an austerity
energy plan introduced in June. The electricity and fuel
restrictions even affect businesses that capture foreign
currency like shopping markets and restaurants. One paladar
owner told us that they could lose their operating license if
they use more than their quota of electricity even though the
paladar pays for the high electricity rates in Cuban
Convertible Currency, rather than the subsidized rates paid
in local national currency by state entities and residences.

4. (C) To his credit, Raul's speeches did not solely blame
all of Cuba's present economic and financial woes on the U.S.
embargo, the world financial crisis, or the 2008 hurricanes.
More than ever before, Raul emphasized the responsibility of

HAVANA 00000490 002 OF 003


Cubans and, more surprisingly, the responsibility of the
Cuban system. Specifically, he said, "I'm no economist, nor
has it been my responsibility during the years of the
revolution to focus on the details of developing the economy,
but I believe in the idea that, as I said in the last session
of the Parliament, no one, no person or country, can spend
more money than they earn. Two plus two always equals four,
never five. Today...in the conditions of our imperfect
socialism, because of our own shortcomings, two plus two
often produces three." Since his first speech as interim
president in July 2007, Raul has surprised Cubans by candidly
highlighting many of the symptoms of the failed economic
system in Cuba (lack of housing, water, electricity, and
food; high levels of inefficiency, bureaucracy, and
corruption) and some of the causes (lack of incentives to
work, two currencies, and an aging population). What he has
failed to identify (or admit) are the root causes endemic to
a system where the government tries to control every aspect
of the economy, and of life in general.

----------------------------------------
Raul's Latest Solutions: Oxen and Trees
----------------------------------------

5. (SBU) The GOC has not publicly detailed its plans to
resolve its liquidity and deficit issues, other than to
vaguely mention guidelines adopted by the Central Committee
on July 29 to balance Cuba's twin deficits. According to
Raul, changing Cuba's economic system is not an option (Ref
A). Unlike in previous July 26 and National Assembly
speeches, Raul offered no new initiatives. Instead, he
focused on the status of previous initiatives: leasing idle
land (see below), a new Comptroller General (Ref A), the
energy austerity plan, and urging retired teachers back to
work. Meanwhile, Raul failed to mention the status of one of
his most promising proposals - pay for performance - which
has passed several public deadlines without taking full
effect.

6. (SBU) Rather than proposals, Raul spent a lot of time in
both speeches on one of his most common themes - extolling
Cubans, especially young Cubans, to return to the land and
make it fruitful. "The land is there, the Cubans are here,
let us see if we work or not, if we make the earth yield or
not..." Raul said in his July 26 speech. In both speeches,
he referenced the use of oxen to till the land and transport
goods. He praised a new "suburban agriculture" program
starting in Camaguey and to be rolled out to other
municipalities using animal traction. "In this project, let
us forget about tractors and fuel, even if we had them in
sufficient quantities..." Where the land is useless for food
production, Raul urged young and old to plant trees, "which
represent a major wealth too." The GOC has identified
increasing agricultural production in order to substitute
imports as a matter of national security.

7. (C) In that regard, Raul also reported on the status of
the initiative launched in September 2008 to lease idle land
(Ref D). Raul said that 82,000 applications for 690,000
hectares (1.7 million acres) of land have been approved and
distributed. One-third of that amount (225,000 hectares or
550,000 acres) has been sowed, which represents about 6
percent of all state and non-state (cooperatives and some
private) idle land in Cuba. Success stories in the press
mainly highlight retired Cubans who have taken on 10-15 acres
each. The new farmers usually lament the low prices paid by
the state and a lack of interest in farming by Cuban youth,
but otherwise claim to be proud that they can do something to
provide for their country and family. It is unlikely this
initiative will affect overall Cuban agricultural production
in 2009, which reportedly fell by 9.3 percent through June.
Once all 690,000 hectares (or more) are productive, then we
may start to see a positive impact throughout the country.
While agriculture production itself represents less than 5
percent of GDP, any increase in the domestic production of
agricultural products that can replace costly imports will
help ease Cuba's financial problems.

-------
Comment

HAVANA 00000490 003 OF 003


-------

8. (C) The week following the National Assembly, First Vice
President Machado Ventura traveled around the country
visiting agriculture cooperatives, refineries, and
laboratories. With no new initiative to tout, Machado's
primary message simply repeated the GOC's mantra for
perfecting the socialist system through hard work, savings,
and efficiency. With a bleak outlook for 2010 and no Party
Congress to look forward to, these words have become
meaningless slogans to any Cubans who are still listening.
FARRAR