Cuba is Broke

In the August 1, 2022, issue of the Association for the Study of the Cuban Economy blog, my friend Louie Louie (Luis R. Luis, ex-chief economist at the Organization of American States [OAS] and Director for Latin America, Institute of International Finance, among other positions) published “Handling the Dollar Crunch in Cuba.” The short version of the article is that Cuba is broke. As he summarized its content to me, “They have no money, no lenders, and worse, they appear incapable of reform.”

In 2021 the island’s net international bank assets became negative. Commercial lenders, official institutions (though not the World Bank, the International Monetary Fund [IMF], or the Inter-American Development Bank, to which Cuba does not belong), including Chinese entities are cutting credit lines to the island. China has ceased to be a source of new import funding. Even Venezuela has failed to lend a helping hand. The 2018 implosion of its economy resulted in its oil shipments to Cuba being cut this year by roughly two-thirds from nearly 100,000 barrels a day in 2014 (Reuters 2022).

Cuba’s three main sources of hard currency income — tourism, family remittances, and medical services — are completely inadequate to reverse the trend. Tourism, for one, has plummeted because of the covid crisis.

“They have no money, no lenders, and worse, they appear incapable of reform.”

Foreign remittances remain strong in spite of the Trump administration’s curtailment. But a portion of the value of remittances is being captured by the Cuban government by means of dodgy schemes. “Remittances from relatives living abroad are by some measures the most important source of dollar flows into the island,” according to Luis. While these funds are sent to private citizens the regime attempts to capture a substantial portion by sleight of hand. “Chief among these is the forced requirement of hard-currency deposits for use in state dollar stores or MLC (Freely Convertible Currency) stores. This mechanism is accompanied by monopoly pricing of goods,” he adds. Consequently, Cubans pay high dollar prices for many essential goods that are only available in the government stores. The scheme disrupts the free flow of funds through the economy.

But remittances often take the form of goods brought into the island by visiting relatives. On my last trip to the island, one airline passenger brought in, as checked baggage, four plastic-wrapped car tires, while I attempted to bring a Chromebook to a relative. These remittances-in-kind can be subjected to 100% tariffs of the original price, as was the case with my Chromebook (which I ended up smuggling in). In a pathetic attempt at increasing this type of remittances, in July of this year the government lowered tariffs on goods brought by travelers. Luis writes — quoting Granma, the official organ of the Cuban press — that this “may lower demand for black market dollars to spend in MLC stores.”

The third source of hard currency, medical services abroad, is currency-free. The main source of such income has been Venezuela. 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,” Luis says. “The arrangement exposes Cuba to the risk of the Venezuelan government’s mismanagement of its oil sector. Cuba exports medical services to some 60 nations, but most of these are unable to pay Cuba in hard currency.”

Cubans pay high dollar prices for many essential goods that are only available in the government stores. The scheme disrupts the free flow of funds through the economy.

But that’s not the only way Cuba exploits medical services for its benefit. The government lends doctors (some poorly trained and nicknamed “preemies” [siete mesinos, a reference to a seven-month-old premature baby]) to other countries but pays its MDs a fraction of the billed rate, pocketing the difference. Luis opines:

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.

Mismanaged public finances led to high inflation aggravated by the unification of the CUC (convertible peso) and the CUP (national peso), the two currencies on the island on January 2021. 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.

But that’s not all. Being broke has real life consequences. According to Reuters:

Soaring prices for food, fuel, and shipping have exposed import dependence and vulnerabilities such as a decaying infrastructure. The country’s economy declined 10.9% in 2020, recovering just 1.3% last year. Cubans have withstood more than two years of food and medicine shortages, long lines to purchase scarce goods, high prices, and transportation woes. The Cuban capital of Havana will begin electricity blackouts in August and is taking other measures as the country’s energy crisis worsens, state media reported on [July 30].

According to Jorge Piñon, director of the University of Texas at Austin’s Latin America and Caribbean Energy and Environment Program, the entire power grid was near collapse after recent fires in two of 20 already obsolete plants, with others constantly breaking down. “When you keep running the equipment past its capital maintenance schedule it falls into a downward spiral with no short-term solution.”

The Cuban American National Foundation reports that the blackouts sparked unrest this past June. University students in Camagüey and Manzanillo protested the running blackouts, lack of water, and poor food, consisting of white rice and mashed plantains, by dancing to conga rhythms and singing, “ponme la corriente, puta!” (give me current, whore!). To everyone’s surprise, it worked! And so far, there have been no repercussions. A separate protest on Facebook bemoaned the lack of liquefied natural gas, corruption, and undependable internet connections.

The entire power grid was near collapse after recent fires in two of 20 already obsolete plants, with others constantly breaking down.

To attract investment, the Cuban government has announced changes in its foreign investment legislation, rules, and bureaucratic procedures. Luis reports that

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. Attracting foreign investment is very difficult because Cuba is a high-risk place for foreigners to lend and invest.

And then, in what Cubans would certainly attribute to an act of God, indicating his displeasure with the godless, incompetent, and obtuse regime, lightning struck a storage tank at Cuba’s main oil terminal in Matanzas. Reports indicate that the lightning rod had not been maintained. According to the August 13 issue of The Economist, “The fire spread to three other tanks and “contributed to a water shortage that forced the shutdown of a nearby power plant.”

Compounding the problem, as it now appears, was the government’s response to the conflagration. Lacking a well-trained fire brigade, it recruited soldiers from the Servicio Militar (Military Service) to put out the fire. Vivian López, grandmother of 19-year-old Leo Alejandro Doval Pėrez de Prado, one of the firefighters who perished attempting to control the fire, declared, “He was just a kid.” Yanelis Naranjo Gonzales, cousin of Fabian Naranjo, one of the 17 dead firefighters, questioned “Who is going to take responsibility for sending those inexperienced kids to such a dangerous situation? Who ordered them to enter the red zone, where they’d be engulfed by the strength of the fast-spreading inferno?”

Apparently, neither the government — at best, or criminally, at worst — nor the recruits were aware of extreme fire dynamics, characterized by a high rate of spread, prolific crowning and “spotting,” the presence of fire whirls, and a strong convection column that can suck the nearby in.

So much for socialism’s objective of rule by experts, a dream that has gone up in flames.