Country Report Cuba September 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 full employment.
• 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 over 5% 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 return to deficit in 2008, owing to a widening goods trade deficit on the back of rising oil and food import costs.

Monthly review

• The number of short-term detentions of dissidents has increased in 2008, with a further 32 cases in August, but the number of political prisoners has continued to decline.
• Relations between Cuba and Russia have become closer, in both economic and political spheres, while Cuba policy has been a minor issue in the US presidential election campaign.
• Fiscal accounts for 2007 show shifting priorities but also raise questions about large unexplained items.
• The official national income series has been revised. The new data confirm that the GDP growth rate has eased since its peak in 2006.
• Direction of trade data show that China and Russia increased their shares of Cuban trade in 2007. No new official figures have been published for external debt.