This Friday the Cuban government decided to suspend “temporarily” the acceptance of USD in cash on the island, a measure that it considered “indispensable” given the difficulties caused by the United States’ policy towards Cuba, and in particular the embargo/blockade.
The Central Bank of Cuba (BCC) assured that it was due to the obstacles faced by the national banking system when depositing abroad the cash in USD collected in the country. Likewise, that the measure “has nothing to do with operations carried out by transfers or cash deposits of other freely convertible currencies accepted in Cuba, which may continue to be carried out without any limitation.”
As announced, it will come into effect as of June 21, and implies that “as of that date, individuals and legal entities, both Cuban and foreign, will not be able to make deposits or any other transaction in USD in cash in Cuban banking and financial institutions.”
But in a matter of hours, it has unleashed a series of concerns and questions, both on social networks and outside of them. OnCuba has therefore wanted to reproduce immediate reactions from economists from different fields and generations, in its effort to contribute to the informed and serene debate on the numerous issues/problems of the national reality.
Dollars vs. euros is just one of them.
I believe that the announced measures have two main motivations. In the first place, they are explained by the escalation of U.S. sanctions on the Cuban financial system. This had already happened in the early 2000s with the start of the million-dollar fines to foreign banks that had ties with Cuba that violated United States laws, and that is why in 2004 the tax was imposed.
Now the tax is not used to discourage the entry of physical dollars, but it is forbidden as of June 21 to deposit them in banks and the population is asked to bring cash in other currencies or use the banking channels to send money to Cuba.
One difference is that in 2004 the economy was de-dollarizing, but now the economy is re-dollarizing. That implies that as of June 21 there are state markets (the so-called stores in freely convertible currency) that sell in dollars, but banks and exchange houses do not accept dollars in cash. This will generate large financial costs that families will have to bear, especially associated with sending remittances.
In second place, banks collect in the short term a percentage of the dollars that are in the street, at a time when there are great liquidity problems in foreign exchange to buy food, medicine and supplies. Even though the Central Bank does not say that this is the motivation for the measure, obviously this favorable effect on the banks’ currency liquidity must have been considered.
I do not believe that the reason for the measure is to influence the exchange rate of the peso in the informal market. Rather, it generates more uncertainty and may depreciate it more, especially in relation to the euro.
Dollars are not going to evaporate and the informal market knows it.
The suspension of cash deposits of USD in the accounts that back the cards in freely convertible currency could have three direct impacts: modification of relative prices, greater loss of confidence in the Cuban peso and expansion of the informal market.
The measure tends to increase the relative price of the euro against the USD and the CUP in the informal market. A devaluation of the USD equates to an increase in the prices of products in stores in freely convertible currency.
For the holder of 1 USD, with which now 0.83 euros can be bought (this is an example), the relative devaluation of the USD would mean that with 1 USD he could buy 0.80 euros; in other words, the acquisition of the same product in freely convertible currency becomes more expensive, even if it maintains its nominal price.
In an economy where the official rate is not relevant for individuals, where confidence in the local currency is low, and where the foreign currency market continues to grow, having foreign currency as a means of exchange and savings is very important.
The measure “dethrones a king” (USD) to establish another, most likely the euro. And if the State does not take care of the exchange between these currencies and the exchange between them and the CUP, the informal market would take care of it. The current USD is not going to evaporate.
Additionally, the measure would seem to consider a scenario of substantial USD deposits before June 21, which could devalue the CUP even more in the short term in the informal market, but it is not clear if such a scenario would materialize.
In the longer term, the USD and CUP could be devalued against the euro. The measure would also hamper the financing conditions for the national private sector, including agricultural production, amid the delicate process of recovery from the current crisis.
Tamarys Lien Bahamonde
Cuba announced on Friday night, during the Mesa Redonda television program, that as of June 21, and as a temporary measure, individuals will not be able to make deposits in USD. Until now, the USD has operated as an exchange currency in the Cuban economy, and since the monetary unification reforms were announced in 2020, it has systematically increased its exchange rate in the informal market, exerting substantial inflationary pressure on the economy. I can add very little to what my colleagues have already said, so I will only present my ideas briefly.
The disparity of the official exchange rate against that of the informal market — the latter much higher —, together with the fact that the government does not sell dollars — a measure that was justified by the scarcity of that currency in the national coffers — caused the displacement from the dollar market to the informal market, which then began to move a considerable amount of that currency. For logical reasons, a significant proportion of these USD never entered the Central Bank and were constantly involved in buying and selling operations in the informal market.
This measure is expected, possibly, to increase the liquidity of the BCC in the short term. Announcing that the deadline for USD deposits is June 21 forces dollar holders to deposit them in an expedited manner. In the same way, the effect on the depreciation of the Cuban peso cannot be predicted at this time. The market’s natural tendency to seek alternatives, as well as the limited options that the measure is leaving, will force the operations in USD to shift to other foreign currencies. Some talk about the euro, and there is reason to believe that the favorite candidate may be the European currency.
In any case, the cost of remittances will be affected by market exchange rates that will add to the existing transfer costs, already very high. The dilemma for those who send USD will be between sending dollars in cash and that the recipient in Cuba bears the costs of the change, or sending euros and the sender bears the costs in their country of origin. The other option would be to transfer the dollars directly and bear the high transfer costs. As Pavel Vidal explained, the cost of the blockade is being transferred to the Cuban family.
Dollars could continue to be bought and sold at that price that already exceeds 70 Cuban pesos — or another one that fits naturally — but this time from card to card. The market finds, like nature, a way out. It is not always optimal, but it will exist. It can be one or another. What happens is that in this case the dollars that would be moving are not physical — in cash — and at the end of the day the State has already collected them to carry out operations in the international market, which is important, and beware, also necessary.
For those who do not receive foreign currency and who today have to acquire it in the informal market and deposit it on the cards, this policy, although announced as temporary, could have even harsher impacts on their domestic economy. In the same way that there is a parallel market for dollars, there will be a parallel market for other currencies, for now scarcer than the dollar and, therefore, we could expect them to be as expensive or more than this. In the exchange of the euro for dollars the holder of euros has advantages. In the exchange of the Cuban peso for euros, to deposit them on the card in freely convertible currency, and that it is revalued in dollars on that card when making purchases of essential means of life in authorized stores, it is obvious that the holder of pesos loses, and lose twice. The Cuban peso, in short, has lost money functions that other currencies perform up to now, and it will not recover them in the short term.
The flexibility to adapt to changes in a country and a society is measured in times of crises. Crises expose vulnerabilities of systems and test their ability to overcome them. The Task of Reorganization is still adjusting the seams to the delicate national situation. Any public policy must consider its multiple impacts and who will bear the fundamental cost of the policy. Above all, policies must clearly define who your beneficiaries will be. Until now, the winner of the Task of Reorganization has not been the people, nor its most vulnerable components. At the risk of sounding like a broken record, I repeat to myself: the economy is not an abstract entity that has a life of its own in a social vacuum. It impacts us all, but not in the same way. Understanding where the impact will be greatest and applying complementary policies that help cushion its effect is essential in a society that is committed to social justice.
The blockade is a fixed cost in the Cuban economy. When policies are designed, it is known that it is there and that its effect is profound and difficult to manage. That is why policies must be thought of including the blockade as if it were the hurricane that devastates us every year. In other words, to speak only of the blockade and to ignore the elements of internal management in a Mesa Redonda television program where this measure is announced is to underestimate the critical capacity of the Cuban people.
That, together with the visible hurdles of the Task of Reorganization, reduces confidence in public policies and in government management. We are still waiting for the most urgent complementary measures that could help the adjustment: for example, the resizing of the state enterprise and the expansion of micro, small and medium-sized enterprises. All the measures announced in this regard are still timid and very limited. Time is of the essence in economics and politics, and it is not infinite.
I just finished watching the Mesa Redonda television program where the new measure was announced to suspend, as of June 21, deposits in USD in the Cuban banking system. The subject is still confusing, the arguments were incomplete and many are the questions. Given the level of pressure from the blockade, whose route in recent years has been to affect and restrict Cuba’s financial and commercial operations in the world (this is real and notable), it is logical that the island would seek to reduce the country’s operations in USD and to “migrate” to other currencies. This, of course, creates a great deal of immediate difficulties and uncertainties because the entire economy has to be calculated in another currency and probably in several currencies because there was no talk of a central alternative currency.
Up to what I heard, although not everything that should be explained was explained and some things that were said are not, in my opinion, exactly like that, the central argument is, consisting of the increasing difficulties to use the dollar through international banking by Cuban agents, no longer just by national banks and companies, even by national citizens. They have been flexible in the sense that, according to what they said, they will allow the people who have them, who travel abroad and therefore decide to take the dollars out of the country. And they will accept their value, as before, in stores in freely convertible currency through the famous cards, including deposits made until June 20.
What they are not going to do (and in this, in my opinion, they gave a very questionable explanation) is to allow the recovery of the physical dollars already deposited by the population, at least for the moment. There will come a complex process of adapting all operations, including remittances, to new currencies, surely with the predominance of the euro (outside of Cuba the different currencies can be bought and sold with relative ease), but now the existence of euros within Cuba must be very limited. It takes some time for this situation to change, an additional reason for the possible increase in the value of the euro (and others) in parallel markets.
On the other hand, there could be pressure against the value of the dollar in the parallel market due to its new relative uselessness in the domestic market and that the euro rises due to the migration to that currency, but this could be counteracted in the short term, in the next days, because the buyers of dollars will want to obtain them now to take them out of the country, where they obviously are worth their value. Or to treasure them as a form of savings for the future due, among other factors, to the lack of confidence in the national currency. They are two opposing forces that will have an impact on the parallel market in the coming days, and it will be necessary to see what is the result and the evolution. But in real terms, this does not stop either current inflation or the current devaluation of the Cuban peso. This will continue to be expressed in other currencies and, above all, in prices.
Details are still missing to have a more complete vision. You have to see the evolution of this matter and the movements in the parallel market; also the redefinition of official exchange rates, etc. For the state sector it is also an additional complication because it changes, once again, the monetary reference with all the accounting and operational difficulties that this implies.
An unanswered question is why this was not anticipated before: the causes and consequences of this situation are neither new nor secret. A positive factor is that it was guaranteed that it was a temporary measure to be modified when the circumstances that motivated it change.
In any case, it cannot be forgotten that the Cuban economy’s room for maneuver is very limited, that the blockade is ironclad and the impact of the pandemic is enormous, but that precisely because of all this, the comprehensive economic reform is increasingly necessary and urgent. All the keys to overcoming the current situation pass through it, even in the context of the extreme blockade and current extra-economic pressures.
We will continue the reflection on these points. This is just an initial reaction. Undoubtedly the situation is very complex and the economic crisis is deep, but there are always alternatives.
Note: The economists Pedro Monreal, Tamarys Bahamonde and Julio Carranza published these comments in personal spaces, they are reproduced here with the express authorization of each author.