Cuba’s External Liquidity Crisis Takes Surprising Turns
Luis R. Luis
Cuba is being pressed by external liquidity shortages for a number of years, the consequence of deteriorating production and export capacity. Stagnant or falling farm output is a prime driver of consumption imports. Receipts on the current account of the balance of payments are not all translated into actual cash as many services exports, for example medical services in exchange for oil, are paid for in kind or not paid at all.[1] This is made worse by Venezuela’s own acute external payments crisis in the last two years. Raul Castro mentioned in his speech to the National Assembly on July 2017 that Cuba has not been able to make current payments to foreign suppliers.[2] The impact of the external payments crisis can be seen on the island as periodic shortages of fuel, pharmaceuticals, industrial parts and electric power derive from an inability to import needed raw materials and intermediate goods.
It is not easy to gauge the current situation of the external sector of Cuba given the lack of comprehensive statistics on production, monetary accounts, international trade and finance. Government officials provide some information in periodic reports to state bodies and these provide more of an impressionistic than comprehensive and systematic coverage. Available data from the national statistical office (ONEI) is published at least 18 months in arrears, the latest statistical yearbook covering the year 2015. One approach to obtain up to date information on the external sector is to use data from trading partners and international organizations. Cuba’s data on external finance is especially lacking with data on capital movements unavailable for many years. Fortunately there is up to date data from the Bank for International Settlements (BIS) that shed light on relations between Cuban banks and those of over 50 countries and banking centers that report to the BIS.[3]
The latest data shows a rise of $1.5 billion in Cuban assets (BIS liabilities to Cuba) on BIS banks to $3.6 billion in the first half of 2017 illustrated by the top line in the chart. Some 67% of this represents larger Cuban deposits in banks of France, Switzerland and Spain. This important but partial picture of Cuban external assets leads to the question: What kind of liquidity crisis does Cuba have that allows it to have such a sudden increase in external assets?
There are four possible explanations, not mutually exclusive. The first is that Cuba is pursuing an stringent austerity policy with a tight control on imports, manifested in the shortages seen at shops, pharmacies and in the intermittent power supply. State officials have been quite cautious on the economic outlook. The second is the compounding impact of supplier difficulties that lead to a fall in domestic output and in the demand for imported goods. A third explanation relates to a possible shift of Cuban assets from non-BIS banks to BIS institutions. This would have to be mainly assets in Chinese banks which does not appear likely given expanding trade between Cuba and China that requires financial support in Chinese banking institutions. A fourth explanation is that somehow liquidity was derived from Paris Club debt renegotiations with France, Spain and other countries. As I understand these renegotiations provided foreign assets in local Cuban currency to be used for project finance although there may be residual amounts in European currencies. It is also possible but unlikely that new lending by European and Japanese export credit agencies may provide temporary liquidity. Such lending is closely tied to import payments and would result at best in a temporary liquidity impact.
An interesting observation is that while Cuban financial assets expended by $1.546 billion, lending by BIS banks only rose by $368 million in the first half of the year. This means the higher assets are not being used as collateral for new bank loans to the island but rather as a reserve for future contingencies. The bulk of the new lending, placed by the BIS at $300 million, derives from banks in France which have now access to some credit guarantees from COFACE, the French export credit agency.[4]
The BIS data also sheds some light on credits by non-banks, usually financial departments or agencies of exporting companies. These credits provide a partial view of supplier finance flows. During the first half of 2017 such flows actually declined by $20 million. This confirms information from island officials about the precarious relations with suppliers.
So to sum up, what does the reported increase in BIS liquidity mean? It implies some increase in international reserves, a positive move given the uncertainties in Cuba’s domestic and international environment but taken at a cost on the local population by exacerbating shortages of many essential items in the island.
[1] See Luis R. Luis, “Cuba’s Capital Account of the Balance of Payments,” paper presented to the 27’th Annual Meeting of ASCE, July 2017.
[2] Cuba Debate, 14 de julio de 2017.
[3] BIS Explorer, downloaded.
[4] “Cuba / France : les priorités cubaines pour les entreprises françaises et les accords conclus.” Le Moci, February 2, 2017.