Cuba loosens spending rule for state companies

Thu Mar 26, 2009 12:46pm EDT
By Marc Frank
HAVANA (Reuters) - Cuban President Raul Castro has loosened controls on how state companies spend foreign currency in the first sign a recent cabinet shake-up heralds changes in the running of the economy, businessmen and economists said. The Cuban and foreign sources said authorities have ended a regulation requiring the Central Bank to approve all state company expenditures of more than $10,000. Analysts said the move would mean less bureaucracy and central control. The regulation now lifted had slowed the day-to-day operations of state businesses and hurt production, but in the end had done little to effectively control state spending on the island, the sources said. They asked not to be named due to government restrictions on talking with foreign journalists. "The Central Bank's foreign exchange commission is no longer in business," one Cuban businessman said. A foreign businessman also said the control measure was lifted. The latest move followed a major government reshuffle earlier this month that replaced eight ministers and several top officials and brought armed forces generals, former officers and middle-aged Communist Party officials into the cabinet. The shake-up by Raul Castro, who is widely viewed as a pragmatist and took over as president last year from his ailing elder brother Fidel Castro, appeared targeted at streamlining and improving Cuba's communist system and economic model.

A number of business leaders said the measure would benefit all sectors of the economy by quickening the flow of parts for factories and supplies, especially those that require the most agility, such as tourism and agriculture. Analysts said the latest regulation change ended a control that dated back to 2003-2004 when the government, then headed by Fidel Castro, reimposed rigid centralization over the economy after previously allowing more autonomy for state companies in the 1990s to cope with a deep economic crisis. "It means less bureaucracy, less central control, and more authority and responsibility in the hands of managers of state enterprises," said Phil Peters of the Lexington Institute in Virginia, who has studied Cuban state business practices. "If deeper reforms follow, then state enterprises will be more efficient and profitable -- and fewer, because losers will go out of business," Peters added. Communist authorities often do not comment on internal reforms and official decrees announcing them are often published well after they are signed.

BATTERED ECONOMY

Peters and other analysts believe that Raul Castro, by bringing trusted military officers and other allies into his cabinet team, is seeking to shake off the bureaucratic inertia and disorganization that has long afflicted the Cuban economy. The Caribbean island's economy has been badly battered by three hurricanes last year, wild spikes in commodity prices and the global financial crisis. The balance of payments that measures the flow of foreign exchange in and out of the country went from a $500 million surplus to a deficit of more than $2 billion last year, according to various estimates. This left the country with little choice but to negotiate new payment terms with foreign creditors and businesses. The latest policy move appeared aimed at removing some rigidities in the state-dominated economy. "In the future a more normal budgetary process will be followed under which the ministries will approve annual company budgets in coordination with the Economy and Planning Ministry," a Cuban economist said.
"It will be up to the cabinet to ensure there is financial backing for the budgets, then company managers will be able to purchase what they need without further regulation, unless very large sums are involved," he said.

Cuba experts see the recent cabinet appointments by Raul Castro as following a military reform model called "perfeccionamiento empresarial" -- a Spanish term which translates as "perfecting the (state) company system". The model was developed for companies supplying the armed forces when Raul Castro was defense minister. It seeks to incorporate modern management and accounting practices and grant local managers more day-to-day decision-making power, and also ties wages to individual and collective performance. Since taking office last year, Raul Castro has taken small but symbolic steps such as lifting restrictions on some consumer goods for ordinary Cubans and allowing them to enter tourist hotels previously reserved for foreign visitors. He has also decentralized decision-making in agriculture, granted producers more autonomy and land, and lifted income caps, declaring workers and farmers should earn all they can through their efforts. (Editing by Kieran Murray)