The Significant Venezuelan Assistance to Cuba: How Long Will It Last?

Three well-known economists of the Cuban diaspora with different backgrounds and perspectives (Carmelo Mesa-Lago, university professor; Ernesto Hernández-Catá, former IMF official; and Luis Luis, private financier) agree that Cuba has received considerable Venezuelan assistance, as high as 20% of Cuban GDP.  As Luis indicates this support is fundamental to Cuba that faces severe external liquidity and solvency problems.  In other words, the assistance conceals fundamental imbalances and systemic distortions in the crumbling Cuban economy. Official statistical information about this assistance is scarce and opaque which has helped to underestimate it and to avoid a strong reaction against it in Venezuela.  Nevertheless, the presidential candidate Henrique Capriles and the Executive Secretary Ramón Guillermo Aveledo of the opposition movement have denounced it and have promised to stop it. Mesa-Lago refers to some main components of the assistance (oil at subsidized prices and concessional deferred payments, overpayments for professional and technical services, investment in development projects and credits) but does not provide a specific estimate.  Hernández-Catá uses Cuban fiscal accounts and balance payments from the National Statistical Office (ONE) to estimate the total assistance indirectly. To evaluate the significance of this assistance to Venezuela and Cuba, I use some key economic variables for both countries for 2011, as estimated by the Economic Intelligence Unit´s Economic Reports for February 2013.  For Venezuela, payments of US$11.5 billion in 2011 (as estimated by Hernández-Catá) amounted to 3.6% of GDP (US$316 billion), 12.4% of exports of goods (US$92.6 billion), and 42.3% of the current account balance surplus (US$27.2 billion).  For Cuba, US$11.5 billion in 2011 corresponded to 18.9% of GDP (US$60.8 billion), to 183% of exports of goods (US$6.3 billion), 52.5% of external debt (US$21.9 billion) and 261% of international reserves (US$4.4 billion). The three economists concur that if assistance is discontinued, Cuba will suffer a severe external shock (the ordinary citizen will be thrown again to the lions without shield or sword); similar to what happened in the early 1990s when Soviet assistance was eliminated.  All three coincide that the best way for Cuba to confront the shock will be to broaden and deepen the raulistas´socioeconomic reforms.  Raúl Castro has occasionally mentioned that substantial structural reforms are needed (i.e. on July 26, 2007), but so far he has made only limited changes and has insisted on a cautious approach to reforms.  There has been a clear disconnect between his rhetoric and his actions.  Recently the new vice president Díaz-Canel indicated that until now only the easy reforms have been made –and, it should be added, with insufficient results. The issue of the assistance to Cuba is a present-day topic for Venezuela due to its escalating economic problems generated by economic dysfunctionality that has consistently reduced its potential output and has made the large assistance to Cuba and other countries unsustainable.  Notwithstanding the oil boom and the expanding foreign debt to be paid back with immediate oil shipments and high interest rates, Venezuela lost international reserves in 2011 and 2012.  In 2013 Venezuela has made two major exchange adjustments to address its growing shortage of foreign exchange: the 46.5% devaluation of the bolivar on February 8 and the initiation of foreign exchange auctions starting on March 27.  In addition, in 2013 the inflation rate increased to 7.9% in the first quarter and the shortage index to 19% in March. As Mesa-Lago indicates, Venezuela has to choose between investing more to restore its oil production capacity and maintain social spending to preserve the debilitated internal political support; or keep its foreign assistance to Cuba.  Furthermore, Venezuela needs to increase its international reserves to handle the dynamics of an expected decline in future oil prices due to the increasing production of oil and gas in the US. Consequently, it is a short-term issue that the Venezuelan authorities have to take some hard decisions to deal with their current economic problems and their collateral sociopolitical damages, reducing or eliminating the assistance to Cuba.  Inaction has consequences.  The significant assistance reduces income to Venezuela while it continues to encourage Cuba to postpone the inevitable painful economic reforms that are needed to reduce its external vulnerability and dependence. In short, Venezuela assistance to Cuba is a flawed economic policy and a political blunder; it is a major part of the problem and not of the solution to its increasing economic difficulties.  Venezuela can no longer afford the assistance to keep the Cuban economy afloat.  Its impending elimination would be beneficial for both countries, even for Cuba over the medium-term.

  Ernesto Hernández-Catá, How Large is Venezuelan Assistance to Cuba?, ASCEBLOG. Luis Luis, Cuba Ill-Prepared for Venezuelan Shock, ASCEBLOG. Carmelo Mesa-Lago, El posible impacto de la muerte de Chávez en la economía cubana en Cuba, Cubaencuentro. Carmelo Mesa-Lago, Cuba en la era de Raúl Castro, Madrid: Editorial Colibrí, pp. 135-141.