October 11, 2010 / 4:04 PM / 9 years ago

Cuba looks ready to allow small loans for reforms

* Spanish credits scheduled to go to agriculture next year

* Microcredits could help Cuban economy

* Brazil also offers expertise to develop small businesses

By Esteban Israel

HAVANA, Oct 11 (Reuters) - Some European countries are quietly working to bring hard-currency loans to Cuban farmers, an idea the communist-led government has traditionally resisted but now looks ready to accept to help its economic reforms.

A small flow of Spanish money for credits in Cuba is set to start up in 2011 and there are hopes it can grow as Cuba modernizes its state-dominated socialist economy.

The first loans will be financed by Spain’s Agency for International Development Cooperation, which next year will donate 490,000 euros ($680,000) for agriculture, a priority for the cash-strapped Caribbean state dependent on food imports.

“We are trying to help create a financial instrument currently nonexistent in Cuba to provide the agriculture sector with credit in hard currency,” said Juan Diego Ruiz, local coordinator of the Spanish government aid agency.

Cuban officials have for long been wary of “microcredits” — first developed in the 1980s to provide financial services to the poor in Bangladesh — because they worry the small loans to groups of individuals could undermine the country’s socialist principles, especially if coming from abroad.

But Western diplomats say Cuba’s government now appears ready to give such financing a try, even though it does not want to talk openly about “microcredits”.

Hard currency loans would allow groups of Cuban farmers, who lease land from the state, to buy the imported supplies, ranging from irrigation systems to seeds, they badly need to increase production, Ruiz said.

Cuban President Raul Castro has made a series of reforms aimed at boosting agricultural output and he unveiled plans last month to lay off 500,000 state workers in the next six months.

The government says many of those being laid off will be allowed to enter the private sector in the boldest reform since Castro succeeded his older brother Fidel Castro in 2008.

Those changes have made Cuba more appealing for European policymakers and Ruiz said the hard currency small loans “could eventually become an instrument linked to the ongoing process of economic adjustments.”

OUTSIDE HELP

Spain has offered 4 million euros ($5.5 million) to finance potential future loans for microcredit in Cuba under very favorable terms that take into account the island’s current acute liquidity shortage.

The 27-nation European Union also has been discussing providing up to 2 million euros ($2.8 million) for credit.

“The European Commission is willing to accompany or facilitate the process of economic reforms at the request of the Cuban government,” said the EU representative in Cuba, Javier Nino-Perez.

Brazil’s Foreign Minister Celso Amorim recently offered Castro the South American giant’s expertise in developing small and medium enterprises.

Western diplomats say Cuba’s resistance to microcredits in the past seems to have eased following sharp economic shocks in recent years. The island was battered by three hurricanes in 2008, which did an estimated $10 billion in damage and dragged down the already struggling economy. The global financial crisis that followed delivered another blow.

Traditionally, the government blames the long U.S. trade embargo against Cuba for most of its financial woes.

When last month’s ground-breaking labor reforms were announced, state media said the central bank was studying the idea of offering credits to small private enterprise, but specifics were not spelled out.

Because of the political sensitivities, diplomats said the loans will not go directly from foreign providers to individuals. Instead, the initial Spanish funds will be channeled through the state-owned Bank of Credit and Commerce to groups of farmers leasing land from the state.

But Cuba would have to allow microcredit recipients to open bank accounts in hard currency.

Cuba does not belong to multilateral financial institutions such as the International Monetary Fund or World Bank, so its success in microfinancing will depend on credits from friendly nations.

“The main challenge is scale. Microfinances only work when there is sufficient scale to have an impact, and in order to reach that, external financing is critical,” said Sergio Navajas, an expert with the Inter-American Development Bank in Washington.

Experts say Cuba appears headed down a path taken by its communist ally Vietnam, which has developed a market socialism often seen as a model for Raul Castro’s current reforms.

Microfinances played a key role in the Vietnamese economic transformation. “At first, Vietnamese authorities were also cautious,” a Western diplomat in Cuba said. (Editing by Jeff Franks, Pascal Fletcher and Kieran Murray)

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