Marino Murillo Jorge, head of the standing committee for Policy Guidelines Implementation and Development, presented to the National Assembly a summary, from an economic point of view, of progress in implementation of the Reordering Task, its impact on the enterprise system, inflation of wholesale and retail prices, and changes in the current monetary environment.
As part of the implementation, he explained, a temporary task force was created, given the need to rectify design problems and make adjustments to the process, as initially foreseen, also affectedly the difficult situation of the national economy and deviations given the context in which the monetary and exchange rate reordering was conducted.
To date, he pointed out, this group has held 93 meetings and 294 topics have been addressed; some 256 decisions were made, leading to the establishment of 171 legal norms, 30 of which 30 are already in effect.
Murillo argued that, in order to evaluate results of the reordering, the original design of the changes must be compared to what has actually happened in practice over these last few months.
As part of this reflection, Murillo explained that the financial statements submitted by enterprises to the National Statistics and Information Office have been taken as a source of information, and this data is expressed in Cuban pesos (CUP), at the exchange rate of 24 to one convertible peso (CUC), which is longer in use.
Through the end of the second semester -since some financial indicators were through August - net sales in the enterprise system were on the order of 308 billion and 14 billion in exports, he reported, adding, "Earnings, in the environment of peso devaluation in the first semester, were 33 billion."
Losses reached almost 7 billion, and 82% were concentrated in the agricultural sector, provincial commerce and other activities subordinated to territorial governments, among others.
Some technologically similar companies reported losses, while others did not, he noted, indicating that the latter group can tell us something about how to manage the devaluation and operate efficiently.
Some 1.609 billion pesos were required to cover losses and mitigate shortages of goods, with 75% of the total going to two companies: 632 million to Medicuba S.A. and 572 million for Havana Provincial Retail Commerce.
Before the Reordering Task, in a 1x1 exchange rate environment, for each peso of sales, companies received 14 cents from the state budget, which meant that those receiving this subsidy could show earnings and, moreover, distribute these funds to their workers, Murillo noted. Now, he said, this subsidy has been reduced to four cents, which is a positive result of the reordering, since inefficiencies within the enterprise system are made clear.
Of this four cents, 75% reflects a consumption subsidy, which next year, if prices stabilize, will be gradually eliminated, and then we will be talking about not subsidizing products at all, but rather persons, which is the objective, he recalled.
Referring to the profitability of state enterprises, he pointed out that the average is around t 17%, although some, especially in the agricultural sector, show a lower rate, closer to 6%.
ADDRESSING WHOLESALE AND RETAIL INFLATION
Murillo recalled that, for the first year, a devaluation of 2.3% was designed for the wholesale market, with a wholesale inflation target of 1.2%, but estimates for the end of the year indicate that this figure will not be reached.
"The projected adjustment of the economy, that wholesale prices would increase less than the devaluation, was achieved. The problem is in retail inflation." he said, asserting that whenever there is a devaluation of this magnitude, prices rise, inflation is produced.
On the other hand, in the informal foreign exchange market, the going rate is70 CUP to the dollar, representing inflation of 6.9%, which impacts both wholesale and retail inflation, he said.
"This means, for example, that an economic actor acquiring raw materials in the state enterprise system (1x24) and setting prices at 1x70, will show a huge profit without being very efficient or productive, and this may contribute to increasing inflation in the future."
"Furthermore, if prices in the domestic economy are set on the basis of a 1x70 rate, and imported goods are priced at1x24, then domestic products would be more expensive than imports."
To regulate this, the Ministry of Finance and Prices is working on a wholesale price policy for 2022, in order to manage these exchange rate differences, he reported.
Among the recommendations offered in developing this policy, is to consider the behavior of the prices in the foreign investment sector and among other actors, given that they have grown at a higher rate, as well as the impact of the exchange rate difference on prices established by non-state economic actors.
Murillo summarized the situation emphasizing that the peso was devalued in the state enterprise system and a process of relative price correction was initiated; the adjustment of the economy was designed and accounting has become more transparent.
Regarding retail inflation, he explained that according to the reordering design, total sales were going to grow 1.6 times and the population's income, five times, and on this basis, the decision was made to implement monetary and exchange rate reordering and a salary reform. It was assumed that all wage earners were going to be better off than before the changes; but, in practice, the population is facing prices up to ten times higher than what was foreseen, he explained.
"Retail prices are rising the most in transportation, housing (building materials), and food, and all of these have a significant impact on domestic life," he said.
On the other hand, the average salary is 3,888 pesos, and the reference basket of goods and services designed was 1,528 pesos, which is what a person should consume in a month; however, the cost of that basket has been rising, especially in Havana and eastern provinces, he said.
For example, in March this basket was 2,347 pesos, in May 2,628 pesos, in June 2,700 pesos and in August 2,821 pesos, he said. "This last price for August, is 1.85 times the cost of the basket that we used to calculate the minimum pension, which means that those living on a pension or minimum wage, at this time, are not consuming what was foreseen." And although anti-inflationary measures were designed, they have not had the desired effect, he added. "For a Cuban to eat something in the street today is costing twice as much as designed."
This translates into the fact that higher than designed retail inflation has reduced the purchasing power provided by the salary reform, increased pensions and Social Assistance, especially for lower income sectors, he said.
Murillo emphasized that, if there is to be a monetary equilibrium, the state economy must absorb 92% of the population’s income, and according to the latest estimates, the figure is around 67%.
Finally, he noted that the scenario in which the economy is performing has become very complex as a result of the U.S. government’s tightening of the economic blockade, the COVID-19 pandemic and consequences of the international economic crisis.
The combined effects of the situation in the economy and the expected reordering processes have generated phenomenon far removed from what was designed, he stated.
Although the principal potential risks were identified, among them inflation, there are objective conditions that favor inflationary pressure, especially the supply deficit, the increase in the population’s income, which increases its solvent demand, an exchange rate in the informal market well above the official rate, and the high fiscal deficit, he said.
Murillo added that among the central effects of the monetary and exchange rate reordering process is the devaluation of the CUP, which has allowed progress to be made in the complex process of correcting relative prices in the state enterprise sector, and a real devaluation.
As a final recommendation, he called on the state enterprise system to take advantage of this correction, and to apply the measures designed to make management more efficient.
