Luis R. Luis       

Gauging Cuba’s external payments is challenging.  There is scant statistical information about the balance of payments beyond merchandise trade and tourism.  Data is unavailable on the capital account from the ONEI statistical office or the central bank.  In this note I use information from international agencies and private estimates to get a sense of capital flows.  More specifically I look at capital outflow from Cuba, its relation to capital flight, reserve behavior, investment flows and the black peso market.

Capital Outflow vs Capital Flight

Developing countries expect to get net capital from the rest of the world.  This is suggested by economic theory as returns to capital are higher in developing countries than in wealthier lands.  Actual experience indicates however that capital does not always flow from richer to poorer countries.  Flows are conditioned by many factors.  Risk-adjusted returns to capital may often be lower for less developed countries due to restrictions on capital movements, political instability, business conditions, policy uncertainty and other factors.  In conditions of financial and political instability many countries experience what is commonly knows as “capital flight”.  This is an informal name for the rapid accumulation of foreign assets by individuals and firms due to home country instability.  It is most often accompanied by pressure on the exchange rate and the build-up of foreign financial assets as well as real estate and other physical assets. There are elements of “capital flight” in Cuba.  Nonetheless the shallow depth of the financial system and currency inconvertibility narrow capital flight.  I look instead at the broader concept of capital outflow in a balance of payments sense.  This involves divestment of assets in Cuba by both foreign and domestic entities and individuals.  Capital outflow comprises return of capital, repayment of loans and the conversion of domestic assets into foreign assets.  It is a broader concept than capital flight.  It centers on flows related to fundamental imbalances in the economy’s productive and financial structure.

Operational Reserves

International reserves are a key indicator of net international capital flows.   A loss in international reserves signals a net capital outflow while a buildup of reserves points to a net inflow of capital.  The Central Bank of Cuba unlike other central banks does not publish its international reserve position. I turn to data from the Bank for International Settlements (BIS) to get relevant information about Cuba’s international reserves. BIS reports assets and liabilities of international banks in 48 countries comprising all developed economies, major developing countries and offshore financial centers.  Assets and liabilities of BIS banks versus Cuba correspond to the liabilities and assets of Cuban banks including the Central Bank of Cuba.   This is a proxy for Cuba’s international liquidity.  IMF data from neighboring countries in the  Caribbean and Central America show, for example, that deposits in BIS banks cover over 70% of the  reserves of central banks (IMF 2023).  BIS data provides an estimate of Cuba’s operational reserves. 

Table 1 shows assets and liabilities in Cuba of banks reporting to the BIS.  Lines A and B show BIS bank claims and liabilities in Cuba.  BIS liabilities are Cuban deposits.  They halved from $3.8 billion in 2018 to $1.9 billion in 2023. Claims from BIS banks which are loans to Cuba also nearly halved to $1.4 billion.  The fall in claims means that Cuba returned capital to international banks. Line I is an estimate of operational reserves of Cuba and excludes non-financial liabilities of BIS banks. These also halved from $3.4 billion to $1.7 billion in 2018-2023.  The central bank has access to the assets of Cuba’s banks as well as to non-bank financial entities. It is interesting that foreign currency holdings of non-financial entities such as GAESA, a state holding for export firms, rose in 2023 by $131 million while Cuban bank assets declined.  Net operational reserves, line J, are equal to operational reserves less claims (loans) on Cuba.  This corresponds to the balance of payments and confirms a net capital outflow in 2018-2023.  Note that in 2021 amid the pandemic net operational reserves barely remained positive and improved in 2022-2023 though to a still thin level in relation to the country’s imports.

BIS data show a sizable $2.5 billion loss of operational reserves in 2018-2021 while there is a partial recovery following the pandemic.  In the last five years the government drew down  assets to help pay for imports, loan repayments and return of capital by foreign investors in Cuba while providing some funding for CADECA exchange houses.  This naturally is an incomplete picture.  First, the BIS data does not cover Cuban assets outside of BIS banks in places such as  Chinese financial institutions and developing countries that do not report to the BIS.  Second, the BIS data does not reflect capital moving by way of informal transactions.

Foreign Investment

The business environment in Cuba is far from ideal for foreign investment in spite of government efforts to ease some procedures and give investors a bit more management leeway.  It is a high risk financial and regulatory environment requiring high returns on capital.  Cuba also lacks the support of international agencies and wealthy countries that could provide some risk coverage and incentives to the Cuban government to carry out meaningful reforms. 

Cuba does not publish data on foreign investment flows. Officials occasionally mention investment projects in Mariel and other locations but these are long-term commitments not disbursements (Reuters 2020, EFE 2022).   Cuba is one of a handful of countries not covered in the World Bank’s foreign investment database (World Bank 2024).   The OECD  publishes data on direct and portfolio investment from the 24 countries that are members of its Development Assistance Committee (OECD 2024).  This includes the 20 largest economies in the OECD.

There is negligible net direct investment in Cuba in 2016-2022 from the OECD comprising the most important market economies (Table 2).  OECD investment is estimated to be about one-third of all net direct investment as offshore financial centers are used frequently to book foreign investments in developing countries.  Adjusted flows comparable to World Bank data place net direct investment at about $100 million in 2022 or some 0.1% of Cuba’s GDP, well below the government’s target of 2%.  Data on net portfolio investment from OECD countries shows outflows in four of the five years to 2022.  Portfolio investments in Cuba consist of certificates of deposit and similar instruments.  There are no marketable securities issued by Cuban entities.  A net outflow means that foreigners are taking assets out of Cuba in excess of flows coming into the country.

Black Peso, Currency Substitution and Remittances

Cuba has three exchange rates, an official rate for state entities, a retail rate for individuals through CADECA and a black or informal market rate.  Only the  black rate of the peso is set in an open market by demand and supply of foreign currency.  It is a residual market since the bulk of foreign exchange transactions are at the controlled official rate used by state companies and government entities.   CADECA operations are limited by the restricted supply of foreign exchange and by the unappealing prospect of selling dollars and euros at rates well below the black rate.  There was a 112% differential between the retail and black peso rates at the end of 2023 and over a 10 times multiple between the official and black peso rates.

The peso depreciated in the black market from 32 per dollar in 2020 to 265 at the end of 2023 and near 400 in mid-May 2024.  This follows excess demand for dollars in the black market.  Demand for dollars in turn is driven by differing forces: import and travel needs of individuals and small private firms, dollar use as a medium of exchange, and dollar use as a store of value (Calvo 1992).  The first element is derived from the on-going need of individuals and small firms to satisfy consumption and operating expenses.  The other two elements involve currency substitution from pesos to dollars exacerbated by woefully inadequate monetary policy (Vidal 2022).  Generally currency values are driven by monetary conditions, and this is largely the case as well for the peso.  High inflation resulting from ultra-lax monetary policy fuels dollar demand.  There are additional factors in the story of currency substitution such as the incomprehensible move to soak up peso currency circulation by the authorities adding fuel to the fire by further undermining the peso as a means of payment and standard of value.

What about dollar supply in the black peso market? Remittances are the main source of dollars in the black market.  Tourist outlays to individuals and foreign currency savings held by the population are additional sources.  There are no official statistics on remittances.   Table 4 presents estimates by Orozco (2024) and the Havana Consulting Group (2024) of remittances to Cuba in 2014-2023.  These two estimates coincide in registering a marked fall in remittances during the pandemic but diverge in the level of pre-pandemic flows and in the pattern of recovery in 2021-2023.  Orozco and HCG place 2023 remittances in a range of $2 to $2.5 billion.  Orozco’s estimates place remittances in 2023 above pre-pandemic levels while HCG’s numbers denote a considerable fall. 

Remittances are transfers and not capital flows.  However remittances play a major role in the operation of the informal peso market.  Remittances allow residents to obtain dollars and euros for pesos in the foreign exchange market, some of which are an outflow of capital if held abroad.  What is the extent of this outflow?  One can think of the estimates in Table 4 as an upper limit to the capital outflow as remittances are the dominant source of foreign exchange in the black market.  In practice a large portion of remittances are used for consumption of domestic or imported goods and services directly or through the currency market.  Nonetheless, remittances working through the informal peso market are an important element in the outflow of capital.  They enable island residents to build up foreign assets and support migration and travel abroad.

Conclusions

Data from the BIS and OECD show a picture of net capital outflow in Cuba, a troubling sign for a developing economy.  There is a loss of operational reserves by the central bank, negligible net direct investment and a net outflow of portfolio investment.  Informal transactions are difficult to gauge.  Capital outflow takes place in the black peso market.  Remittances provide dollar liquidity to the peso market and allow the transfer of assets abroad by residents.  Capital loss in Cuba is evidence of deeply flawed monetary and development policies. 

REFERENCES

Bank for International Settlements, 2024, bis.org/locationalstatistics

Calvo, G. and Vegh, C, 1992, “Currency Substitution in Developing Countries: An Introduction.” IMF Working Papers, May.

EFE, 2022, “Monto de Inversiones Comprometidos de mas de $3,000 millones.” swissinfo.ch, July 10.

Havana Consulting Group, 2024, Table published in revistaestornudo/remesas, February 19.

Luis, L, 2023, “Determinants of Recent Foreign Investment in Cuba.” ascecubablog, May 11.

OECD, 2024, Geographical Distribution of Financial Flows to Developing Countries.” oecd-library.org

Orozco, M., 2024, “Remittances to Cuba and the Marketplace in 2024.” Inter-American Dialogue.

Reuters, 2020, “Cuba attracts $1.9 billion in foreign investment despite U.S. sanctions,” December 8.

Vidal, P., 2022, “Ten Point Program to Stabilize Cuban Economy.” Cuba Capacity Building Project, horizontecubano.law.columnia.edu, November 15.

World Bank, 2024, databank.worldbank.org.