Country Report Cuba August 2008

Outlook for 2008-09

• Although the new president, Raul Castro, has opened a debate that could lead to major changes, the Economist Intelligence Unit expects gradual, rather than sudden, political and economic change.
• There will be no easing of tensions with the US in 2008, but some rapprochement is possible from 2009, following the inauguration of a new US president.
• The government has started to introduce a series of reforms to improve economic management, but progress will be constrained by conservatism and its commitment to fullemployment.
• Increases in some administered prices and higher real household incomes are likely to fuel inflationary pressures in 2008-09, although this will partly be offset by an increase in the purchasing power of the Cuban peso.
• A strategy for moving towards a single currency and single exchange rate is under way, but until this objective is achieved, dislocation and perverse incentives will impede economic efficiency.
• We expect growth to moderate in 2008-09, but at 5-6% it will be sufficient to allow for improvements in living standards. US sanctions will be relaxed a little, but they are unlikely to be fully lifted.
• The current-account balance is forecast to shift into deficit, owing to a widening goods trade deficit on the back of rising oil and food import costs.

Monthly review

• Raul Castro has indicated that reforms will continue in an attempt to boost domestic productivity. However, he has ruled out any sudden "shock therapy".
• Animosity between Cuba and the US has not abated. The US president, George W Bush, has confirmed that he would veto a bill seeking to ease travel and trade restrictions.
• Visits from delegations in Brazil and China have suggested closer ties.
• Efforts to boost output have included a law for the redistribution of idle or under-used agricultural lands and greater decentralisation in transport and communications.
• Officials have announced GDP growth of 6.2% in the first half of 2008, despite the negative impact of higher import prices on state investment.
• The number of joint ventures with foreign partners has been falling but the level of foreign investment activity has increased.