The economic and inflationary situation in Cuba

All people think they know what inflation is until they experience it firsthand, then they realize: reality is worse than imagined. Now picture it if is sustained over time and other factors come together in the process.

Disappointment, helplessness, despair, and depression, are just some of the feelings that you will feel intensified. For most people, inflation can be a catastrophe.

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Today I am going to try to describe the economic and inflationary situation in Cuba, and why not? I am also going to give you some general concepts so that you have a better understanding of things. If you are interested in this topic or want to learn from this particular experience, read carefully!

What inflation is?

According to Oxford Languages:

Inflation is an economic process caused by the imbalance between production and demand, that causes a continuous rise in the general prices of products and services. Which causes a loss of purchasing power.

Given the concept, let us analyze in more depth some of the causes of inflation:

• Demand is higher than supply, that is, what is produced in goods and services does not satisfy customer requests, which leads to prices rising. For example, if there is only the capacity to make one million cars a year and purchase requests reach 2 million, the price increases.
• The rise in the production costs of a good or service (price of raw materials, labor, or taxes) generates the same effect on sales prices. This happens to even out and maintains profit levels.
• Self-constructed inflation in anticipation of a possible event that increases the price of other goods, services and/or raw materials. This introduces a gradual increment in the final price so the impact is less and manageable.
• Oversize of the monetary base (stimulus checks, money printing without backing, debt issuance to cover the fiscal deficit, etc.). When there is more money in circulation to spend on goods and services, it generates a greater demand that cannot be assumed by the suppliers, therefore, prices rise.

Truth is not a difficult concept to understand, and obviously not popular when it is done present. Even many government managements are judged by the fact of achieving or failure of controlling inflation.

You may already understand what inflation is, but why do monetary and economic policies worldwide consider an inflation rate of 2% per year acceptable?

Is inflation good?

Almost all experts agree that 2% inflation is not only acceptable but is a sign of a healthy economy. However, this has the effect that over a long period of time the accumulated percentages reduce purchasing power since wages do not grow at the same level.

This results in that if in the year 2000, a Big Mac hamburger cost $2.51, in this year 2023 it will cost $5.15 or more.

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So, if everything becomes more expensive, why is inflation good according to some?
The reason could be that, in the financial environment, moderate and stable inflation reduces public and private leverage, increases income and "encourages economic development."

This is why most central banks try to keep inflation low, but always above zero. A measure that favors large corporations and financial and commercial emporiums more than ordinary people.

Inflation, deflation and stagflation

Inflation can be related to other phenomena and create different situations; in fact, it can exist the opposite effect to inflation having an equally negative effect.

• Hyperinflation: when the price increase exceeds 1000% per year. When these levels are reached, it means that the country is going through an economic catastrophe.
• Deflation: is the opposite effect of inflation, in this case, prices fall. It occurs when demand contracts excessively and producers of goods and services lower prices in an attempt to get rid of excess supply. One of the scenarios that favor it is the fall in wages, which means that consumers cannot maintain a demand equivalent to the supply. If consumers decide to postpone their purchases to wait for lower prices, they can lead to a deflationary spiral.
  This continuous decrease would end up inducing a downward adjustment in the supply resulting in the destruction of employment and less investment that could lead to a recession.
• Stagflation: is a phenomenon that combines high inflation with economic stagnation and unemployment. The extreme difficulty of this process is that the two causes cannot be treated at the same time. To resolve stagflation, the country must determine which objective (inflation or recession) to attack first according to its interests.

Another no less worrying variant is shrinkflation, where the products maintain their price, but reduce the quantity contained in each package. Undoubtedly, economics is a somewhat complicated branch of science in which a small variation can generate gigantic impacts. If this is added to bad financial policies, the case could be devastating; as we will see below.

The economic and inflationary situation of Cuba

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The economic situation in Cuba has not been favorable for more than 50 years, but it has rarely been as critical as in the current period (from 2020 to date). In fact, what is experienced today, which is expected to continue or worsen in the near future, is only comparable to the 1990s. At that time, with the fall of the USSR and the consequent loss of markets, loans and subsidies, the Cuban nation plunged into a crisis known as the "Special Period".

To get out of that basement, certain economic measures were taken that favored recovery, although being a dictatorship, control and political and social repression were maintained. There were some measures that seemed to work, but actually set the stage for an even worse disaster to come. Among these was the dual currency. This monstrosity led to the population being paid in Cuban pesos and almost all the products being sold to them in another currency supposedly backed in dollars.

This only generated an imbalance in the accounts of the nation and most of the companies, but it gave an appearance of stability. Although this process could be reversed earlier, it was erroneously not done and the decision was delayed until the worst possible moment.

On January 1, 2021, at the height of the Covid-19 pandemic in Cuba, the start of the "Ordering Task" was announced with the aim of eliminating dual currency, dual exchange rate and restructuring of the economy.

This, although necessary, was doomed to failure from the start: two months earlier the MLC (freely convertible currency) had been introduced. A digital currency supposedly backed in foreign currencies in which high-end products would be sold, but in which almost all products in the country are sold today. Yes, the same mistake from the 90s, but now in digital money.

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In a new chapter on the economic and inflationary situation in Cuba, overnight, many people saw half of their purchasing power lost. Mainly due to the devaluation of the Cuban peso against the dollar in the informal market (the only one where it was possible to buy and sell this currency). Cuba continued with two currencies, the Cuban peso in which the people are paid and the MLC currency in which the state sells almost everything and to which the people do not have direct access.

The official exchange rate was established at 24 pesos per dollar, but by not selling dollars an informal exchange market was created. So in August 2022 the sale of dollars by the government was announced with a second exchange rate for natural persons. This new rate would be 120 pesos per dollar; although, due to the low sales offer, today in the informal market the rate is around 225 pesos for each dollar. The country went from having two exchange rates to having three, failure.

Despite the fact that positive measures were taken, such as allowing Cubans to create small and medium-sized companies, the obstacles to imports and exports and the inability of Cubans to invest in the main rubles have minimized the positive impact that these could have. Nor did any of these measures manage to stop the mass exodus of more than 500,000 Cubans in the period from November 2021 to date.

Currently, Cuba is in a situation where inflation is galloping and running the risk of stagflation due to low economic growth. There are no salary or pension increases, which is why the minimum wage has plummeted to around USD 9.33 per month and pensions to USD 6.67 per month. The value of the dollar went from 25 Cuban pesos in January 2021 to 225 today; a 900% devaluation in just 2 years and that has no intention of stopping.

Luckily, a growing group of Cubans choose to keep their savings not only in dollars, but also in cryptocurrencies such as Bitcoin, Hive and $HBD. In this way, they have even a small escape from the economic and inflationary situation in Cuba.

On the other hand, the incapacity of the totalitarian Cuban government to face this situation is only comparable with the effectiveness of the marketing they carry out to make the world see that it is not their responsibility. Meanwhile, the Cuban people continue to suffer extreme scarcity (food, medicine, basic supplies, etc.), galloping inflation and ferocious repression and imprisoning if they dare to make legitimate social and political demands.

Final Thoughts

In addition to finding out what inflation is and its consequences, I have provided you with evidence that this phenomenon is not a pleasant thing for most people. One only has to look at the economic and inflationary situation in Cuba. However, many affirm the importance of its existence in moderation to ensure development and technological advancement; Personally, I find it more and more difficult to believe this hypothesis. Above all, when the consequences of an imbalance can be catastrophic.

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The future is uncertain, however, the economic actions of governments for a few decades are directing it towards a rather negative one. If they do not begin to take measures to prevent the economic course that is taking place today, the day everything explodes it will be an apocalyptic event worldwide.

Of course, as individuals, we can prepare ourselves in many ways, but one that cannot be missing is to acquire productive land; at least for self-consumption. After all, human beings can do without almost everything, except food.

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