In recent times, in Cuba we constantly hear that we must “correct distortions and re-boost the economy.” Well-sounding phrases that are added to the usual ones of “increasing exports and replacing imports,” or attracting more foreign investment, or achieving food sovereignty, or many others, which are correct, but then the actions to be taken and the legal regulations to achieve these objectives are not clear and are not sufficient.
It seems that it is about correcting distortions of the past, when in reality, in addition to those that remain, new ones have emerged that, it could be said, are more harmful than those that have been dragging on for years.
I will not repeat what has been mentioned so many times, and by so many economist colleagues, about the incentives for production, the autonomy of enterprise managers and the necessary Law on Enterprises, about the role of prices in the economy, salaries, investments, the three exchange rates of the national currency (a situation worse than in previous years), dollarization or its antipode, loss of value of accounts in freely convertible currency (MLC) for the population, or liquidity capacity (CL) accounts for enterprises, etc. This has been talked about for a long time.
I will focus on one of the biggest distortions in the current Cuban economy, which arose not long ago: the gradual and growing decline of the banking system. Through this system, like nutrients and oxygen in the blood system of animals, the resources of society circulate, whether from enterprises, individuals, or the State. The poor functioning of the banking system directly affects the health of the economy as a whole.
It is not about the low volumes of credit for the business sector, because it is not new that Cuban banks do not have enough foreign currency to grant loans in these currencies, and there is not much that the business sector can do with loans in national currency to modernize its productive base. Nor am I referring to the well-known problems of bancarization, ATMs, long lines at banks…, or even to the renegotiation of the Cuban banking sector’s external debt, or the defaults of almost all Cuban banks for the letters of credit issued by them. Almost all of these are long-standing problems.
I am referring to the near-paralysis of transfers abroad, due to payment instructions given by bank clients, with sufficient balances in their accounts in foreign currency. This is something that has been periodically observed in the Cuban economy, but this time it has spread, with a greater scope, since the end of 2021, and there is no solution to the issue ― at least in the short term ― nor firmness in resolving it. Without a banking system that is not only robust, but at least fulfills its basic obligations, it is not possible to talk about re-boosting the economy.
It is known that the measures of the U.S. blockade hit, above all, the country’s financial system. Many foreign banks decline to receive or send transfers from/to Cuba, either for fear of coercive and extraterritorial measures from the United States, or because many transactions with Cuba are linked to enterprises and financial institutions belonging to GAESA, and therefore included in “black lists” with prohibitions of all kinds.
The above does not mean that Cuban banks cannot send and receive transfers to or from any foreign bank. It is difficult, but not impossible. There are accumulated skills. However, the transfers do not go out, and the main cause is the shortage of resources in freely convertible currencies of the banks.
However, the economy cannot stop. This is when the search for alternative solutions begins.
First, Non-State Management Forms (FGNEs) were allowed to use relatives, friends or financiers residing abroad to pay for their purchases from external suppliers. The “permission” did not appear explicitly in a regulation, but it was considered that in our legislation there is no prohibition to pay, from accounts abroad, FGNEs’ debts with foreign suppliers.
However, it was not mentioned whether these “accounts abroad” could belong to the FGNEs themselves (which is apparently prohibited in the country’s exchange control regulations), or to financiers and other external payers. Nor was there any regulation on how to return the funds to relatives, friends or external financiers, because aid can be received once, but a business cannot be maintained with gifts from third parties.
Logically, since they were unable to repay loans and temporary aid from their foreign currency accounts in Cuban banks, the FGNEs had to find alternatives to convert foreign currency in their possession in Cuba into foreign currency abroad, often using unclear means (with all the danger this entails, both in terms of safety for their own lives and the loss of resources through confiscation, or possible imprisonment in any country), or by looking for financiers willing to make these illegal and costly exchanges of local money for foreign money.
This distortion has been growing. From time to time, we hear about someone detained at an airport in Mexico, Panama or the United States, or closed FGNEs and their owners imprisoned, because the Cuban banking system does not execute transfers abroad, in violation of orders from its clients, and they seek non-traditional solutions, but which are dangerous, illegal, or both.
It is incalculable how many new FGNEs could have requested licenses for their establishment, even to produce necessary goods, if the risks mentioned above, associated with the payment of their obligations abroad, did not exist.
The issue was not limited to the FGNEs. A little more slowly, but inexorably, state enterprises had to find solutions to the problems of non-payment to their suppliers. Of course, in this case no one would resort to cash transfers and smuggling.
Some enterprises exporting products and services began to ask their foreign buyers that, instead of transferring funds to Cuban banks, they keep them with them, until they were instructed where to transfer them. In other words, the buying clients themselves became payers of the debts of Cuban enterprises, in payment for raw materials and other inputs acquired by Cuban enterprises.
Without a doubt, it was an alternative to the solution, but full of unusual risks: possible bankruptcy of the client, maintaining balances of Cuban exporting enterprises; additional fees for the payment service, not usual in the activity of that client buyer; potential questions from foreign banks, due to the movement of payments on behalf of third parties, which is not always well received by international banking; payment services provided by entities that do not have a license from the central banks of their countries to carry out that activity; and, above all, these were funds that stopped circulating through Cuban banks, or remained in the hands of third parties, and could be used temporarily at the will of those third parties.
Considering these dangers of depositing funds in the hands of clients, now we see the search for another solution: that Cuban exporters try to open accounts in foreign banks. This, in addition to possibly violating the country’s exchange control regulations, is almost equivalent to handing over Cuban banking to its virtual disappearance, or recognizing that there is no solution, because without an external transfer service, clients avoid having foreign currency balances (or the equivalent) in their internal bank accounts, and without foreign currency there can be no modernization of banking, nor various internal payments between Cuban enterprises, in addition to how this all affects the national economy.
Beyond the difficulty of opening accounts abroad for Cuban state-owned enterprises, this “solution” is only viable for exporting enterprises. Non-exporting enterprises are also forced to seek “alternative solutions.” Which one? Well, among Cuban enterprises, the seller asks the buyer to pay the total invoice or a significant part of it to an account abroad; either in the name of the seller or in the name of a third party.
I am not against “alternative solutions” that seek to resolve the obstacles and find some way out of the problems. What no one can agree on is accepting that there is no other choice but to resort to these solutions. Because the resources do not enter the country; because there are risks of significant losses; because the national financial system is affected and, above all, because many national enterprises will not find a solution this way, or will find it only partially, with enormous loss of time and additional administrative procedures, slowing down their collection cycles and their production.
There is no economy that can withstand this collapse of its banking and financial system. In the Cuban case, this has lasted for more than four years in its intensive phase, although it did not emerge after 2021.
If banks do not execute simple transfers, its impossible to dream of other banking instruments: guarantees, loans with disbursements abroad, use of bills of exchange, forwards, letters of credit and others, leaving Cuban businesses in a very disadvantageous situation, not only to grow, but to maintain the production rates of the past.
Is it impossible to reopen USD accounts for enterprises, state-owned and FGNE, or new types of accounts, from scratch (for those who already have them, without external support), and with these new balances, nourished by new exports, or by income from Classic and similar cards, begin to make transfers abroad? And to re-boost internal payments between Cuban enterprises, with money with real external liquidity…? Or, to transfer, month by month and even if the process takes more than a year, balances from old USD accounts to new USD accounts with external backing?
Individuals have almost stopped depositing funds in foreign currency into Cuban banks. Enterprises are going the same way. If solutions are not sought to the problems of bank transfers abroad, fewer and fewer resources in foreign currency will enter the country, and significant drops in many economic indicators will continue to be observed. What greater “distortion” than this one that has been observed in recent years in the banking system?
If the credibility of the Cuban banking system is not recovered, it is impossible to aspire to the country moving forward. If it does not have blood, the economic system will not work, no matter how hard it is tried. We have already been dragging on two years of economic recession and 2025 looks like a twin of 2024, despite the official discourse.
