Repainting Havana

By on 18/04/2018
Havana’s streets show the marks of over half a century of under-investment (Image courtesy: Eva Blue/Unsplash).

The Cuban economy, like the country’s capital city, is in urgent need of a thorough refurbishment. And this week, the national assembly will elect a new leader – ending the 60-year Castro era, and opening up new possibilities for economic reform. Gavin O’Toole reviews the country’s financial system, the essential wiring for growth

“Cubans want greater access to international markets for the benefit and development of their economy – but they need help and support with that,” says Alastair Tyler.

The International Director of the London Institute of Banking and Finance (LIBF) is speaking about a remarkable capacity-building programme for professionals on the Caribbean island, which remains frozen out of financial markets by a crippling US embargo. In Tyler’s view, Cuba’s leaders are increasingly interested in accessing foreign financial expertise as they prepare for an historic transition away from the generation of leaders that fought in the 1959 revolution.

In March Cubans went to the polls to elect a national assembly, which itself is scheduled to pick the country’s next president this week. As President Raúl Castro steps back after 10 years in power, his successor will be under pressure to improve living standards as the cash-strapped socialist economy struggles with restrictions on imports and indebtedness.

Access to capital

A key priority of Cuban policymakers is how to re-enter financial markets in order to attract desperately needed capital. Tyler says the Cubans he’s met are keen to overcome limitations deriving from their complex relationship with the US, which has made it difficult to develop links abroad.

The UK government-funded LIBF programme, whose most recent classes were held in January, is designed to help Cuban officials build their skills and develop plans for their country to attract investment and raise finance. The course is the outcome of a 2016 visit to Cuba by then-foreign secretary Philip Hammond – itself the product of relationships developed by the British Embassy in Havana and the UK’s Foreign and Commonwealth Office (FCO) – and Tyler says its students were obviously enthused by the agenda. “I have been teaching for 25 years in banking and finance, and I think their attitude and level of engagement surpassed anything that I had seen previously – which was really quite humbling and inspiring,” he says

Reintegration with the financial system

Growth in per capita GDP and household consumption in Cuba have stalled since 2006, worsened by falling commodity prices and the loss of cheap oil from ailing ally Venezuela. Cuba has struggled with low aggregate investment, resulting in a deteriorating infrastructure. While there is significant investor interest in the country, and the pace has picked up – in 2017 it secured commitments of US$2.3bn (UK£1.7bn, €1.9bn) – investors face many policy obstacles, as the investment director of Cuba’s Ministry of Foreign Trade and Investment, Déborah Rivas Saavedra, recently admitted.

Against this backdrop, Cuba needs to ease the burden of foreign debts, thought to be about $18bn – some 20% of GDP. The country remains in default and has gradually been restructuring, reaching an accord in 2015 with Paris Club creditors in which they forgave $8.5bn of debt. In January, London Club creditors reportedly offered “very significant” debt relief: Cuba is currently in default, and the creditors hope that the country may start making repayments again if the size of the debt and the monthly costs are reduced.

Ditching the debt

Dr Mario González-Corzo of Lehman College, at the City University of New York (CUNY), argues that this debt issue must be addressed before the country can move on. “Reintegration into the world financial system and the multilateral banks is critical for the Cuban economy for many reasons, but there is one big elephant in the room – which is the debt,” he says. “For years and years, the Cubans have said that third world countries – particularly those in the Western hemisphere – were suffering from the excessive burden of debt. And now it has come to light that Cuba has a higher debt burden than any other place in the Western hemisphere.”

Economists suggest that a first step to boosting investment would be for Cuba to regain access to the funds and technical advice of international financial institutions (IFIs) such as the International Monetary Fund (IMF), World Bank and Inter-American Development Bank (IDB). However, the hostility of Washington complicates Cuba’s ability to replicate the steps similar ‘transition’ economies such as Vietnam and China took to re-enter the multilateral fold.

LIBF international director Alastair Tyler (seated second from left) with the class of Cuban banking professionals undertaking the LIBF course in Havana (Image courtesy: LIBF).

US hostility

Dr Lorenzo Pérez, a former IMF deputy director and ex-president of the Association for the Study of the Cuban Economy, says US antipathy should not be an insurmountable hurdle. “I am sure [the Cubans] have suspicions about the power of the United States within the IMF, and the US does have power; it would be naive to deny that,” he comments. “But the amount of technical help that Cuba could get from the IMF or the World Bank is enormous. Cuba could join the IMF with a majority of the vote [of IMF member nations]. The US government does not have the power to preclude this, and most member countries are in favour of Cuba joining.”

There are also domestic obstacles to Cuba rejoining the IFIs – in particular the multilateral banks’ transparency requirements. Havana has not released any data on its international capital accounts or foreign debt in years, and is averse to scrutiny.

CUNY’s González-Corzo believes reintegration is ultimately a question of political will, requiring a willingness to conform to international norms. “Many people will say that the US embargo is the reason why the banking system is so primitive; I disagree,” he says. “It is true that the embargo has an effect: it is designed to limit their access to international financing ­– but I think the reason is more internal than external.”

Banking sector challenges

One of those internal challenges lies in Cuba’s system of dual currencies. People are paid in Cuban pesos, but a more valuable ‘convertible peso’ pegged to the US dollar is used in tourism, business and trade. This has distorted prices and worsened inefficiencies; and whilst it is official policy to unify the currencies, Cuba’s leaders have long postponed the reform because of the implications for the conduct of fiscal, monetary and exchange-rate policies.

In the view of many economists, says Pérez, “the bulk of Cuba’s economy is controlled by state enterprises that benefit enormously from the exchange-rate system, with access to dollars at ridiculous rates. In short, the basic productive sector of the economy has been established with a large subsidy, and the suspicion is that the commercial banks do not really do serious risk analysis of their borrowers.”

Significant structural reform is required to modernise a financial system dominated by the Central Bank of Cuba (BCC), which operates as both regulator and shareholder of all commercial banks. Foreign banks do not operate in Cuba, with the sole exception of one US institution that provides banking for the Cuban embassy in Washington.

Proper regulation required

The BCC is not considered to be independent of government, and does not employ the tools commonly used in other economies to carry out monetary and exchange-rate policies. Banking remains largely cash-based, and interest rates for business loans, for example, are simply set by decree.

“While there seems to have been an attempt to create some kind of governance structure, it is far from international norms,” says González-Corzo. “The Cuban central bank say that they accept the Basel accords for capital requirements for financial institutions, but there is no way of clarifying that.”

Lending to state enterprises does not appear to be based on creditworthiness or due diligence, and there is an absence of risk-management. A lack of transparency in the provision of banking sector information is a key disincentive to investment; and in place of global accounting standards and disclosure requirements, Cuba operates a sui generis mix of domestic and international practices.

In part, this lack of transparency is rooted in a deliberate attempt to mask and protect the country’s finances from its enemies. “The Cubans, with some justification, claim: ‘We are under attack, victims of economic warfare, so we cannot let the public or the Americans know what international reserves we have’,” says Pérez. “But Cuba would benefit tremendously if it were to show a clean balance sheet at the central bank and take some international financial advice.”

Wider reforms

However, it is unlikely that financial reforms can be undertaken without wider changes in the economy: three-quarters of economic activity is conducted by the government through heavily subsidised state enterprises.

Small enterprises have been growing fast as a result of reforms since the 1990s, and half a million private businesses now employ a quarter of the workforce. However, while the aim of these reforms was primarily fiscal – to reduce public sector payrolls – they have not been matched by corresponding progress in other areas of public financial management, such as tax collection.

Economic development is stunted by limited credit, and attracting foreign investment and improving the microfinance market is seen as key to growth. Many Cubans who wish to start a small business must rely for seed funding on remittances from relatives in the US. And rules on private ownership present another major hurdle to attracting foreign investment and stimulating enterprise: Cubans are only permitted to own their residence and very small businesses, with all other property and enterprises controlled by the state.

Professional training in the financial system also needs to be improved, and Cuban officials openly admit that a lack of skills in commercial and private international law form an obstacle to investment. While many professionals gain experience at the government’s Havana International Bank (Havin) in London, observers say they have fallen behind global trends.

Cubans are permitted to open tiny restaurants in the informal economy, but substantive enterprises may not be privately owned

Signs of change

The LIBF has so far delivered classes for 30 professionals at the Cuban central bank’s national training centre in Havana on the principles of finance and risk, international regulation, compliance, and payments processes – helping to compensate for the lack of equivalent training in Cuba, where there are no master’s-level courses in banking.

If Cuba’s next leader does push forward economic reforms, the country’s finance professionals will need all the skills and expertise they can muster – and although some observers remain sceptical, there are undeniable signs of change.

In recent years Havana has paid more attention to resolving its debt problems and has toned down rhetoric demonising the IMF. In 2017 the BCC joined the Central American Bank for Economic Integration (CABEI) in Honduras, and the Inter-American Development Bank has discussed a roadmap for Cuba to join. Last year, the Andean Development Corporation (CAF) offered technical assistance to the University of Havana.

The LIBF programme is another sign of Cuban efforts to reach out, and the UK government has fostered wider bilateral co-operation in financial and professional services. Several Cuban students are now in the UK on Chevening scholarships, taking master’s degrees in banking.

Uncertain outlook

Cuba has also had limited contact with US banks, and in 2016 bankers, regulators and government officials from both countries met in a workshop in Havana organised by the Cuban Banking Study Group. Cuba will also host the biennial gathering of the Economic Commission for Latin America and the Caribbean (ECLAC) in May.

Nonetheless, seasoned observers believe that while there is an official recognition in Cuba of the need for reform, political leaders will be reluctant to abandon some long-standing policies that lie at the heart of the Cuban system – most obviously the controls on property ownership.

“The immense resources required to modernise an update the banking and financial system and integrate it technologically would require the political willingness to change the property structure of the country,” says González-Corzo, “and I think there is resistance to that.”

About Gavin O’Toole

Gavin O’Toole is a freelance writer and editor in London. He has written for leading newspapers, magazines, wire services and business schools about financial markets, business and regulation around the world. He has a particular interest in international relations, and a specialism in Latin American affairs. He has conducted research on this region’s political economy and has also published a number of books about its politics and natural environment. His latest title, Environmental Security in Latin America, will be published by Routledge in September 2017.

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