* Cuban state banks say foreign exchange in short supply
* Money transfers and withdrawals affected
* Diplomats and businesses fear insolvency
By Marc Frank
HAVANA, April 22 (Reuters) - A cash crunch that began last year for Cuba appears to be getting worse as state-run banks insist they have little foreign currency for international money transfers or for significant withdrawals, western diplomats and businessmen said this week.
They said they feared the communist-led island could be near insolvency, but hoped the government could keep the country’s financial head above water and avoid the serious consequences of not being able to pay its bills.
In over a dozen off-the record interviews, they said the liquidity crisis, which began after three major hurricanes bit Cuba late last year, had become more critical in recent weeks.
At one bank this week, officials told an international business the bank had very little foreign currency and advised its expatriate employees be paid offshore as much as possible.
A commercial representative who asked not to be identified said a senior official at Banco Financiero Internacional recently told him that “businesses from our country would have to wait a minimum of another two months to get money out.”
He described small businesses as “desperate” and said bigger ones were using up what they had in stock and not bringing in new products.
The situation is complicated because the global financial crisis has dried up credit and caused recession in the home countries of foreign businesses, he said.
Government officials were not immediately available to discuss the liquidity squeeze and rarely comment on economic developments in the country.
Cuban bankers have been promising improvement, but prospects are not bright because most of Cuba’s primary sources of hard currency have been hit by falling prices and declining demand, said one businessman.
“First they said it would get better by March and now they say after the summer, but I see nothing to back that up in terms of their earning capacity, be it nickel prices, tourism, cigars or the international economic situation.”
“The government has avoided declaring insolvency by meeting debt payments to some foreign governments, allowing some companies to transfer funds and promising everyone else relief is on the way,” another economic attache said.
Insolvency would deal Cuba a hard blow because it would add to existing concerns about doing business on the Caribbean island and putting money in Cuban banks, the sources said.
Due to a 47-year-old U.S. trade embargo, Cuba is not a member of the International Monetary Fund, World Bank or other institution that might provide financial support.
Cuba has a dual monetary system under which a foreign exchange equivalent called the convertible peso (CUC) circulates along with the peso.
Foreign businesses operate within the country using the CUC, pegged at 1.08 to the dollar and 24 times the peso’s value, depositing them in state banks where they are available as foreign exchange for transfer or withdrawal.
Sources said authorities have not been forthcoming on why the crisis developed nor how serious it is, but Cuban economists said the country was headed for trouble even before the three hurricanes caused $10 billion in damages, and the international financial crisis exploded.
They described a perfect storm in which Cuba was hit by last year’s spike in fuel and food prices, stuck with big contracts signed in 2006-2007 to supply infrastructure projects and unable to make its state-run economy’s produce and react quickly to changing circumstances.
“Then the hurricanes hit and after that the international financial crisis and this year the global recession,” one local economist said.
President Raul Castro fired his economic cabinet in March and his new team has reportedly been busy trying to get control of the situation.
State companies were ordered to stop all imports, then told the ministries would decide what was indispensable, according to government sources. A major reorganization of how companies will finance their imports and other activities is also said to be under final consideration.
Cuba’s central bank has said that, starting May 7, it will limit cash withdrawals and deposits in Cuban bank accounts held by foreign companies and joint ventures, but it was not clear if that was a move to curb fraudulent foreign exchange activities or to address the scarcity of hard currency. (Editing by Jeff Franks)