Larry Catá Backer's comments on current issues in transnational law and policy. These essays focus on the constitution of regulatory communities (political, economic, and religious) as they manage their constituencies and the conflicts between them. The context is globalization. This is an academic field-free zone: expect to travel "without documents" through the sometimes strongly guarded boundaries of international relations, constitutional, international, comparative, and corporate law.
Tuesday, August 02, 2022
From the ASCE Blog: Luis Luis on "Cuba: Handling of the Dollar Crunch"
The Association for the Study of the Cuba Economy
(ASCE) is a non-profit, non-political organization that pursues the
study of Cuba in a broad sense, with particular emphasis on the
financial, economic, social, legal and environmental aspects of Cuba
today and its process of transition and reforms. Its blog presents
original contributions on the Cuban economy and society. These essays
remind us both of the challenges to normalization, and the future
difficulties of reform as Cuba considers the extent to which it means to
plug back into the global economy.
Cuba’s external liquidity crisis continues as data shows net international bank assets became negative in 2021. At the same time commercial lenders and official institutions including Chinese entities are cutting credit lines to the island. The government attempts to manage the crisis by sequestering dollar flows from remittances and Cuban doctors rather than by effective measures that boost international competitiveness and make Cuba attractive to foreign capital. Cuba is a high-risk place for foreigners to lend and invest. There is no evidence that the Cuban communist party is ready to move towards a necessary broad liberalization of the economy.
Cuba suffers from a long-standing dollar liquidity crisis, a symptom
of deep problems in the economy. Sadly the crisis does not appear to
reach bottom. Indeed a mix of inadequate policies and adverse external
events in the last three years has led to falling production and a
critical shortage of foreign exchange needed to import foodstuffs,
medicines, oil and essential farm and industrial inputs. In this note I
take a look at recent data on Cuba’s external liquidity and sources of
foreign exchange. A look at the Cuban government’s handling of the
financial crisis follows.
EXTERNAL LIQUIDITY
An important way to gauge the tightness of a country’s external
liquidity is its international reserve position. One also looks at the
availability of foreign credit that will help a country get over a
shortage of foreign exchange caused by cyclical factors or external
shocks. These shocks are hitting developing countries which are
struggling from the disruptive effects of the pandemic and the rising
cost of foodstuffs.
CHART 1
Source: Bank for International Settlements, bis.org/locational statistics, 2022
Cuba does not publish data on its international reserve position. An
alternative is data from the Bank for International Settlements on
claims and liabilities of foreign banks vis a vis Cuba (BIS 2022). This
data includes deposits and liabilities of Cuban banks (including the
central bank) in banks of 48 countries and offshore financial centers.
While Cuban banks hold accounts in Chinese institutions and in a number
of countries in Latin America that do not report to the BIS, the BIS
data is the best available indicator of the international liquidity of
the Cuban financial system.
The red line on Chart 1 shows the net asset position of the Cuban
banking system. During 2012- 2018 BIS data showed a net asset position
oscillating between $1 billion and $2 billion meaning that Cuban
deposits exceeded loans by that magnitude. To be sure with overall
Cuban imports of $12.6 billion in 2018 net assets comprised a bit over
one-month worth of imports and were precariously low. After 2018 the
implosion of the Venezuelan economy and hardening U.S. sanctions led to
further declines in the net asset position. The COVID pandemic and the
collapse of tourism added more pressure and by the end of 2021 Cuba
recorded a negative net asset position. This implies that net
international reserves became negative as measured by net assets in
international banks.
It is no coincidence that lending to Cuba by foreign banks also
became negative in 2019-2021 after a period 2015-2018 when banks
extended new credit to Cuba following restructuring of Paris Club debt
in 2015. Thus in 2019-2021 Cuba made repayments to foreign banks as
these failed to renew maturing loans to the island. Cuba’s weak credit
position requires collateralization of many loans by bank deposits.
Rebuilding Cuban banking assets is necessary both as a way to provide a
liquidity cushion for Cuban import and foreign exchange operations and
as a guarantee for the issuance of international letters of credit,
loans and other financial instruments used in international trade.
CHART 2
Source: Derived by author from ONEI (2022). Assumes use of 180-day import credit lines.
China is a major source of import credits for Cuba. However, import
data suggests that Cuba since 2017 has received no net credit from China
(Chart 2). There are unconfirmed reports that Chinese official
entities have restructured portions of Cuba’s debt. It is unclear if
the restructuring involved some debt forgiveness as well as a
rescheduling of maturities. In any case China has ceased to be a source
of new import funding.
Official lending by national and multilateral agencies is an
important source of financing for developing countries. Cuba’s lack of
access to the main multilateral lenders, The World Bank, IMF and IBRD,
is a major problem. While there is some bilateral financing available
to Cuba, this is generally project-related and of limited assistance in a
liquidity crisis. Net official lending from the main countries in the
OECD (DAC countries) was practically zero, averaging $-6 million per
year in 2017-2020 (OECD 2022). Likewise OECD countries cut official
export financing to Cuba in 2017-2020 by an average of $-56 million per
year. The main factor behind the credit contraction is payments arrears
by Cuba on previous export credits or guarantees by official agencies.
What about the dollar/peso exchange rate as an indicator of
liquidity? The black-market rate of the dollar in Cuba has tripled
between the end of 2020 and July 2022 from about 35 pesos per dollar to
over 110 pesos. This provides information about the dollar crunch and
signals on-going excess demand for dollars. In the absence of
government participation in the black market, it reflects private supply
and demand for dollars and indicates a dollar shortage in the private
sector. The weakness of the peso contributes as well to strong
inflationary pressures in the island.
CUBA’S MYOPIC HANDLING OF THE DOLLAR CRUNCH
As is well known Cuba launched a monetary and exchange rate policy
package at the end of 2020 known as “Ordenamiento Monetario” (Mesa Lago
2021). The package included monetary unification, a devaluation of the
official rate of the peso and numerous changes to subsidies, wages,
pensions and regulated prices in the state sector of the economy. The
monetary reform aimed at implementing major changes in the financial and
exchange rate system and contributing to the medium-term improvement of
the external sector. The large devaluation of the peso and other
measures were not however accompanied by a serious reform of the price
system and a balanced fiscal policy which prevented stabilization of the
economy. At the same time the government continues to face the dollar
crunch mainly with short-term measures geared at keeping control of
dollar flows while not addressing the deep problems in the economy which
need a broad liberalization of prices and markets, opening of
international trade, fiscal and domestic credit reforms.
Remittances from relatives living abroad is by some measures the most
important source of dollar flows into the island. While these funds
are sent to private citizens the government in contrast with other Latin
American countries attempts to capture a substantial portion by means
of schemes in government-controlled financial and retail firms. Chief
among these is the forced requirement of hard-currency deposits for use
in state dollar stores or MLC stores. This mechanism is accompanied by
monopoly pricing of goods and results in a substantial loss of welfare
for private citizens (Luis 2022A). Cuban residents pay high dollar
prices for many essential goods that are only available in MLC stores.
Like a tax the scheme discourages dollar flows through the formal
financial system. On July 2022 the government lowered tariffs on goods
brought by travelers which may lower demand for black market dollars to
spend in MLC stores (Granma 2022).
A sizable source of revenue are medical services abroad. The main
source of such income has been Venezuela, and this continues to this day
as Cuba gets payment in-kind by way of petroleum products. The
financial details of these bi-national transactions between Cuba and
Venezuela are a state secret. The arrangement exposes Cuba to the risk
of the Venezuelan government’s mismanagement of its oil sector. To be
sure shipments to Cuba were cut in 2022 by roughly two-thirds from
nearly 100,000 barrels per day in 2014 (Reuters 2022). Cuba exports
medical services to some 60 nations, but most of these are unable to pay
Cuba in hard-currency (Luis 2020).
Cuba’s attempt at capturing dollar flows by schemes directed at
remittances and by what amounts to confiscatory taxation on medical
doctors working abroad are deeply flawed. It limits the benefits of
remittances to families and to the overall economy. Likewise the export
of medical services is a tool of Cuba’s foreign policy which relies on
the questionable use of medical professionals. Cuba would benefit more
from medical and other professionals freely sending funds back to Cuba
without the compulsory mechanisms presently in use.
FOREIGN INVESTMENT
Cuba’s low domestic savings and the dollar crunch mean that the
island desperately needs foreign capital. Attracting foreign
investment is very difficult because Cuba is a high-risk place to
invest.
The Cuban government in recent years has announced changes in its
foreign investment legislation, rules and bureaucratic procedures.
Foreign investors can now have full ownership of operations without
need of a joint venture with a local partner. Venues have opened for
association with cooperatives and small firms while the government
streamlines tax rules and tries to ease bureaucratic procedures.
However the rules governing labor contracts remain onerous, and foreign
trade and exchange operations are tightly controlled. The lack of an
independent judiciary and the ample discretion of regulatory bodies
compound risk. Cuba’s long history of default and payments arrears on
external debt obligations render the island uncreditworthy. Lenders and
investors face a high risk of non-payment of financial obligations.
The government has published data on approved foreign direct
investment (FDI) contracts with no data on associated outlays (ONEI
2021). The minister of foreign trade mentioned that Cuba “attracted”
foreign investments of $1.7 billion in 2019 and $1.9 billion in 2020
(Reuters 2020). These are commitments not disbursements. Commitments
include domestically financed components and management contracts for
hotels and other services not considered an inflow of FDI. Net FDI in
Cuba from developed countries in the OECD averaged $27 million per year
during 2018-2020 (OECD 2022). Based on OECD data net yearly investments
from all countries averaged some $100 million in 2018-2020 compared to
2% of GDP or about $2 billion targeted by the government.
WAY OUT OF THE DOLLAR CRUNCH
The external payments crisis derives from deep problems in the
economy (Hernández-Catá 2019). It cannot be solved without major
policy changes. It may be eased temporarily because of favorable
outside factors such as an inflow of tourists, a windfall from donor
countries or a sharp fall in the price of essential imported goods. A
lasting solution depends on launching adequate short-term and long-term
policies that help manage the crisis and set course for improvements in
productivity and international competitiveness. Government policies as
mentioned above center on management dollar scarcity by the clumsy
sequestering of dollar flows rather than having an effective strategy to
improve the economy’s competitiveness.
There is a long list of needed reforms some of which have been
discussed at meetings of ASCE and in this blog. These reforms crucially
involve a decisive move towards a market economy with an important role
for private actors and the opening of international trade and finance
to private and state firms as well as individuals. Solid moves in this
direction will lower the risk of lending and investing in Cuba by
foreigners.
There is no evidence that the Cuban communist party is considering
moving towards the broad liberalization needed to boost the productivity
and growth of the economy. In this case management of dollar scarcity
will remain centered on limited measures involving controls and
distortions. A sad signal sent recently is the announcement of a new
special exchange rate for some exporters, creating new distortions and
the provision of incentives by administrative fiat rather than by market
forces (Granma 2022).
CONCLUSION
Cuba’s external liquidity crisis continues as data shows net
international bank assets became negative in 2021. At the same time
commercial lenders and official institutions including Chinese entities
are cutting credit lines to the island. The government attempts to
manage the crisis by sequestering dollar flows from remittances and
Cuban doctors rather than by effective measures that boost international
competitiveness and make Cuba attractive to foreign capital. Cuba is a
high-risk place for foreigners to lend and invest. There is no
evidence that the Cuban communist party is ready to move towards a
necessary broad liberalization of the economy.
REFERENCES
BIS, 2022, Locational Statistics, bis.org
Granma, 2022, “Nuevas medidas que se ajustan a la realidad y al modelo socialista,” July 22.
Hernández-Catá, E., 2019, “The Misery of Cuban Merchandise Exports
and the Sustainability of the Balance of Payments.” ascecuba.org/blog.
Luis, L., 2022A “Cuba: Dollarization and Devaluation,” Paper
presented at the Annual Meeting of the Allied Social Sciences
Association”, ASCE Session.
Luis, L., 2022B “Foreign Investment in Cuba: Risk, Uncertainty and Sanctions,” Paper to be presented at the 32nd Annual Meeting of ASCE.
Luis, L., 2020, “Cuba’s Uncertain Revenues from Medical Exports.” ascecuba.org/blog.
Mesa Lago, C., 2021, “La unificación monetaria y cambiaria en Cuba:
normas, efectos, obstáculos y perspectivas, Documento de Trabajo. Real
Instituto Elcano.
OECD, 2022, Geographical Distribution of Financial Flows to Developing Countries. www.oecd.org/dac.
ONEI, 2022, Anuario Estadistico de Cuba. Sector Externo. onei.gob.cu
Reuters, 2022, “Cuba struggles to buy fuel as imports from Venezuela dwindle,” April 5.
Reuters, 2020, “Cuba attracts $1.9 billion in foreign investment despite U.S. sanctions, December 8.
About Luis Luis
Luis
R. Luis is an international economist in Massachusetts specializing in
international finance and investments. He has been active as an officer
of international organizations, international banks and investment
management companies. Luis has taught economic theory and international
economics at universities in the U.S., South America and Europe and has
authored many articles on international finance and investments. He
holds a PhD degree in economics from the University of Notre Dame.
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