The Cuban government weighs allowing foreign companies to invest in the private sector

·6 min read

In a first in the communist island, the Cuban government is considering allowing foreign investment into private small and medium-size businesses as the country hits a deep recession and discontent grows.

Following criticism and a cold response from Cubans abroad and potential investors to the current law, the Cuban National Assembly will discuss a proposal to modify a private-sector law passed in August to allow direct foreign investment in recently approved small and medium private enterprises.

Under the current version of the law, foreign entrepreneurs and companies can only partner with the state in mixed ventures or invest in fewer projects in areas of interest that the government lists annually.

The new proposal was approved during a meeting of the Council of Ministers last week, as reported by the official newspaper Granma.

Officials acknowledged that the country’s effort to attract investors has stalled.

In the meeting of the ministers, the minister for foreign trade and investment, Rodrigo Malmierca, said that the level of investment from abroad is “well below the needs of the country.” The minister has said the country needs to attract at least $2.5 billion annually.

The island’s prime minister and former tourism top official, Manuel Marrero, said the government needs to be more “proactive” to attract investment, the report says.

The Council of Ministers also approved a proposal to allow agricultural cooperatives to partner with foreign companies.

Agricultural production has plummeted in recent years, and food shortages have become chronic. For decades, calls to improve food production have become a routine line in official meetings. Still, the government has resisted liberalizing agriculture and allowing farmers to sell their produce without capped prices or imposed quotas. Farmers also lack the means to buy technology, tools and supplies.

If the new measure is finally approved by the National Assembly, allowing foreign investment in the agricultural sector could boost production at a critical moment for the Cuban economy. The National Assembly usually rubber-stamps decisions taken at the Council of Ministers and the Communist Party Politburo.

Cuba’s Economy Minister, Alejandro Gil, has been trying to convey an optimistic message, saying the economy is expected to slowly start growing again next year, after a severe contraction in the past two years driven by the coronavirus pandemic. But the measures approved by the Council of Ministers suggest economy officials have managed to persuade Party hardliners that the country needs an immediate injection of cash and that food production needs an urgent solution.

The proposed changes come after the population has shown unprecedented levels of discontent that erupted during street demonstrations in July. On November 15, authorities were forced to deploy large numbers of police officers and military officials to patrol the streets to foil plans for an opposition march.

A challenging climate for investment

But even if the measures mean a step forward towards liberalization of the economy, many still doubt they would promote significant investment.

The proposed changes do not alter the current foreign-investment law, which many experts and diplomats believe does not offer enough guarantees for investors. For example, it does not establish independent arbitration, and there are few protections against private-property seizures by the government.

Over the years, several high-profile cases of foreign investors sent to jail under questionable charges and the government’s seizures of private businesses owned by foreigners and Cubans have sent a chilling message about the lack of protections for businesses.

Foreign diplomats and potential investors have urged the Cuban government to modernize the legal framework passed in 2014, but Marrero’s statements in the meeting suggest that it is not under consideration.

“Cuba has a good foreign investment law; what is not going well is the way in which we implement it,” he said.

In November, Moody’s Investors Service downgraded Cuba’s capacity to repay debt to almost default. Moody’s said it expects Cuba’s credit profile to remain “very weak” due to its poor hard-currency liquidity, U.S. sanctions, a heavy debt burden, lack of transparency and “social risks.”

“An aging population will weigh on growth potential and raise government expenditure,” the report said. “Government repression of basic social freedoms and deteriorating economic conditions, as well as an aging ruling class, could spark social and political unrest, particularly as the power is very slowly transitioning away from historical leaders.”

Cuba watchers have pointed out that worldwide headlines on the government’s crackdown on protesters this summer and the harsh sentences many are facing are unlikely to help Cuban authorities sell investment opportunities.

Other practical challenges make Cuba a complicated place to do business. Due to U.S. sanctions, the country is cut off from financial entities linked to the U.S. banking system. And the chronic lack of foreign currency in Cuba also makes repatriating capital gains an ordeal. For Cuban Americans, navigating the embargo regulations adds a layer of complexity.

There are also restrictions on the private-sector law regulating small and medium-size businesses that may deter many potential foreign partners. For example, there is a 100-employee cap for a private business, and expansion is forbidden since a person or company can only own one company. Entire industries are off limits and under exclusive state control.

Foreign investors also are not allowed to hire workers directly, and it is still unclear if they would be allowed to do so if they partner with a private business. Officials said they have approved 900 businesses since the law was passed in August.

“Recent statements and measures suggest some senior officials are pushing hard to build a market economy, but the system struggles to get out of its own way,” said Ricardo Herrero, executive director of the Cuba Study Group. “Bureaucratic and ideological resistance to the specter of capitalism still prevails, most evident in recent restrictions against foreign investment in newly legalized, private SMEs [small and medium enterprises] and the number of employees they can hire.”

Still, government officials were pitching investment opportunities for Cubans abroad in a business event last week. Officials again said there were no barriers in the country’s laws preventing Cubans in the diaspora from investing in the island. The private-sector law, however, states that only Cubans residing in the country can create a small or medium-size private company.

The government has denied authorization to most Cuban Americans seeking to do business in the past. It is unclear if this policy will be reversed as part of the proposed changes.

“The day Cuba creates a truly attractive business market for foreign investors, they will show up, starting with those from its diaspora,” Herrero said. “It’s that simple. But it hasn’t happened yet.”

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