An Update of Cuba’s Balance of Payments[1]
Ernesto Hernández-Catá
Cuba’s balance of payments has been subject to very long publication delays. In its latest annual report, Cuba’s National Office of Statistics and Information provided figures on current account transactions only through 2012;[2] and data for capital movements have not published for ages.
The table below presents a balance of payments updated through 2014. For the period 2012-14 it relies on estimates for investment income and current transfers,[3] and takes services transactions from the Cuban national accounts; it inserts data for Cuba’s claims and liabilities vis-a-vis banks reporting to the Bank for International Settlements (BIS); and it calculates errors and omissions as a residual. The BIS data cover claims and liabilities vis-à-vis banks in the industrial countries, international banking centers, and many developing countries. Therefore the errors and omissions item probably includes (i) Cuba’s position vis-a-vis countries not reporting to the BIS (like Russia, China and Vietnam); (ii) direct investment; (iii) and accumulation of arrears (exceptional financing in the terminology of the IMF).
Developments since the turn of the century can be summarized as follows.
The trend towards a deterioration of the trade balance continued throughout the period 2001-2008. Imports of goods rose very rapidly, but they fell in 2009 in response to administrative restrictions adopted by the authorities after the financial crisis of 2008. By 2014 imports were still below their peak in 2008 because of both continued restrictions and the slowdown in aggregate demand resulting from a shift toward fiscal restraint. Export growth picked up a little beginning in 2010 but not enough to make much of a dent in the trade deficit.
The surplus on the services balance surged throughout the period because of the rapid growth in exports of medical, teaching and security services to Venezuela and other satellites like Bolivia and Nicaragua. These exports represent (and actually exceed) the counterpart of Venezuelan shipments of oil to Cuba. To a minor extent Brazil may have replaced Venezuela as a recipient of health professionals in 2012-13, reflecting Cuba’s effort to diversify their exports.
Net interest income payments (mainly on Cuba’s officially held external debt) surged from 2005 to 2010, but declined over the next two years. The estimated rise in 2013-14 reflect a reported increase in the external debt.
Net current transfers have followed a yo-yo pattern since 2004, probably because the rapidly rising trend of private remittances was partly offset by what I believe to be Cuban transfers associated with the excess of Cuba’s services exports to Venezuela over Cuba’s oil imports.[4]
Borrowing from BIS-reporting countries occurred in most years through 2007 but there was a shift to net repayment in 2008 reflecting Cuba’s difficulties in obtaining credit in world markets amidst severe financial difficulties. Net repayments continued through 2014.
From 2001 to 2007, Cuba’s trade deficit was roughly offset by a surpluses in services, so that the current account registered relatively small imbalances. However the the current account shifted to an unusually large deficit in 2008 as the country was affected by a severe financial crisis.[5] Since then the current account has improved greatly largely because exports of services have surged (not all of it as a counterpart of oil imports from Venezuela).
Outflows associated Cuban claims on BIS-reporting banks rose from 2004 to 2009 but the rate of asset accumulation slowed in 2010 and Cuban claims fell substantially in 2011-12, perhaps reflecting intervention by the central bank.
Net errors and omissions went up and down in 2001-07, but they exploded in 2008-09 before turning sharply negative thereafter. There are two possible reasons for the large positive residuals in 2008 and 2009. First, there were large inflows of Venezuelan direct investment in those two years. Castañeda (2010) mentions investments of $2001 million in 2008 and $1355 million in 2009—enough to wipe out almost half the errors and omissions item in 2008 and about 80% in 2009. Second, “involuntary” financing associated with arrears and the freezing of foreigners’ CUC accounts in Cuba probably also boosted the residual, particularly in 2008. The large, negative residuals in 2011-13 possibly reflect continued repayment of arrears by Cuba, although the magnitude of these outflows suggest something else might be going on.
These developments illustrate the fragility of Cuba’s balance of payments position. To be sure, the improvement in the current account over the past several years is encouraging. As show in the figure above, the negative items in the current account (the trade deficit and payment of interest on the external debt) are offset by positive items (services exports and private remittances). But this apparently satisfactory situation is hostage to fortune. The problem is that while the positive items are vulnerable to political changes in Venezuela that are largely beyond Cuba’s control, the negative items are very difficult to compress. The inelasticity of imports is clear from its composition: in 2014 fuels and foods jointly accounted for 70% of total imports of goods. Moreover, Cuban exports are extremely concentrated in a few commodities and are highly vulnerable to fluctuations in commodity prices. [6] An improvement in this area will require a fundamental change in the current exchange rate system and its anti-export bias, as well as a realignment of the peso. Finally, interest payments on Cuba’s active debt—which are raised by recent rescheduling agreements with Russia and other countries—should be paid scrupulously to help restore Cuba’s credibility in world financial markets after the events of 2008. Cuba still is not paying interest to Paris Club creditors. A future agreement will undoubtedly improve Cuba’s reputation and access to credit markets, but it will also increase the burden of interest payments.
Improving Cuba’s balance of payments position will require measures to stimulate exports and tourism and contain the growth of imports, both of which would require a devaluation of the non-convertible peso. Increasing foreign direct investment, of course will improve the capital account. But a more fundamental way to look at the problem is to recognize that the current account is identical to the difference between output and expenditure. Because the rate of utilization of resources in Cuba has been growing rapidly over the past two decades and is now at a historical peak, any effort to boost aggregate demand in the absence of supply-side measures would spill over into the current account of the balance of payments. Other things equal, this would force the central bank to intervene and, if reserve losses continue, it would threaten the viability of the fixed exchange rate.
References
Bank for International Settlements, Annual Reports, various issues.
Castañeda, Rolando H. (2010). ”El Insostenible Apoyo Económico de Venezuela a Cuba y sus Implicaciones”. Cuba in Transition, Volume 2. Association for the Study of the Cuban Economy. Miami FL.
Comisión Económica para América Latina y el Caribe (2011). “Cuba: evolución económica durante 2010 y perspectivas para 2011”. Naciones Unidas.
Morales, Eduardo (2013). “Cuba: $2.6 Billón in Remittances in 2012”. http./www.havanatimes.org
Oficina Nacional de Estadística e Información (2014 and earlier issues), Anuario Estadístico de Cuba. La Habana, Cuba.
[1] I am indebted to Luis R. Luis for his comments and his help with the BIS numbers.
[2] See ONEI (2014), Cuadro 8.1.
[3] Net current account transfers include private remittances, net donations, and a residual item explained below. Investment income was projected by imputing an international interest rate to an estimated stock of external debt and adding a judgmentally determined premium.
[4] Virtually all of Cuba’s oil imports come from Venezuela and are covered by the 2001 Acord between the two countries. Official data for 2013 show a substantial portion as coming from the Netherlands Antilles. But these imports originate in Venezuela even though they are transshipped in the Antilles and then directed to Cuba. Cuba imports about $300 million a year in natural gas from Algeria.
[5] Cuba suffered from a variety of shocks in that year, including a large drop in the price of nickel, the world recession which affected the demand for tourism, and several tropical hurricanes. But the more fundamental cause of the crisis was the surge in aggregate demand stemming from an unusual and temporary loss of fiscal discipline.
[6] In 2013, four products (Nickel, sugar, coffee and re-exports of Venezuelan oil refined in Cuba) accounted for 95% of the total exports of goods. Excluding oil products, nickel, sugar and coffee reached almost 80% of non-oil exports.
