It was the first years of the 1990s and Cuba entered the so-called Special Period in Peace Time. To resist and get out of the deep crisis, Cuban authorities, especially Fidel Castro, announced that investments in certain strategic sectors, including tourism and biotechnology, would be prioritized.
But both required a significant investment and would delay in making profits. A way to attract foreign currencies faster had to be sought. And that’s when there appeared, in 1993, the decriminalization of the possession of foreign currencies and the authorization for the population to acquire in foreign currency stores the necessary products that were already missing in the circuit of stores selling in national currency (CUP). It was explained that there were many people who had foreign currency and that what was already a reality was simply being legalized. But neither was the motivation to raise foreign currency from family remittances a secret.
At the same time, the Exchange Houses, known as CADECAs, were especially established so that a part of the population could exchange the foreign currencies it had been sent, acquire CUP and thus combat the black foreign currency market. At that time, it was not necessary to exchange them in the CADECAs for CUC to make purchases in the foreign currency stores. In retail stores the dollar circulated freely, and later even the euro in some tourist destinations. During that time, the possibility of opening foreign currency accounts in Cuban banks was also authorized.
In Cuba there was a referent for the existence of foreign currency stores, in which only foreign visitors could buy: stores in hotels known as Caracol stores, although there were others such as Cubalse. Also before the 1990s there were tickets that made it possible to buy in those stores. They had different colors: there were brown ones, which foreign students received in Cuba, or red ones for those who were authorized to be abroad for missions or studying, among others. They were exchanged at some banks, especially at the International Financial Bank (BFI): foreign currency was exchanged for those bonds.
From the beginning, high prices were set for the products sold in those stores in relation to the purchase price from suppliers. It was claimed that it was a necessary measure in difficult times, although it was recognized that social differences were created between those who had access to family remittances and those who did not. It was also argued that prices would be high as a form of foreign currency collection, which would be taken―through prices―from the pockets of the few who had access to them, but distributing the high profit for the benefit of all the people through social programs and other means of redistribution of wealth.
In other words, a setback or a gap in the interpretation of social justice had to be admitted, which was compensated for by a strong and rapid entry of fresh and necessary foreign exchange. This measure had support from the population, since the most favored ones with family remittances (the minority) would help the population without access to foreign exchange (the majority).
I stress the word “collection” because it became the main goal. The stores began to be called “currency collection stores.” After converting Cubalse stores specializing in serving foreigners―diplomats, tourists and others―into spaces for any client, and also extending the scope and corporate purpose of the CIMEX Corporation, the Armed Forces (FAR) business system created its own network of stores. They were named TRD or Currency Collection Stores. Consequently, all the foreign currency stores in the country became known as TRDs, not only those that had that name and belonged to the FAR Business System.
In the academic or technical, and even popular discussion, much was debated that if prices were lowered―that is, if the more than 240% price rates were reduced―, more would be sold or the population would be helped more; other possible economic measures about these stores were also discussed. Selling more has not been the significance, rather it has been collecting more for each unit of product sold―although it is also fair to recognize that some time ago lower coefficients have been applied for some essential products such as chicken.
And if these stores are also almost monopolistic because although they belong to different business groups, they all finally belong to the State, and especially to GAESA, they are required to set prices through the Ministry of Finance and Prices, well then less incentives are available to lower prices, since the population is almost forced to buy their products in those stores, at whatever price, unless it is something expendable, because they cannot be acquired in other circuits.
Hence also the prohibition of private workers selling their imported products, or that joint ventures or foreign companies obtain licenses for retail sales. Competition would emerge and it would be impossible to apply, on purchase prices, coefficients that would exceed by far the 240%.
But based on that same primary conception, the intrinsic contradictions of these foreign currency collection stores have been seen:
- On the one hand, the high prices, since supposedly a few “privileged” persons would buy there. That was the case at the beginning, but as time went by, a part of the workers started getting incentives in CUC. However, most of the time only basic needs can be met in those stores. That is, the entire population, in one way or another, acquires its products there and before benefiting from the subsequent redistribution of wealth, it must initially disburse resources and pay high prices, even to acquire many basic need products. First contradiction: the social programs, partly carried out with the help of the collected foreign currencies vs. meeting the basic needs of almost the entire population. There is a high percentage of Cubans who, in one way or another, have access to foreign currencies. Hence the desire of the TRD chain to become the neighborhood store, even with the small kiosk and easily accessible for basic need products.
- On the other, the interest of collecting: the more, the better. In addition, the prohibition of selling or marketing different products or services because the inequality in the population would supposedly increase must be taken into account. That is, inequality as something less problematic if a part of the population could buy beef, beer, cars and another not; but inequality would be inadmissible if the former could stay in hotels, buy cars or have cell phones, and the latter could not. It doesn’t matter if the level of collection is affected by the restrictive measures, and in passing laws are violated if the population cannot have access in their own country to services and products offered to foreigners, in the same currency allowed for all or “decriminalized.”
Over time, even when everyone who has resources can already buy a cell phone―in fact, there are already more cell phone numbers than landlines―how much money did the state-run communications enterprise stop earning all that time? This is also valid for other products and services previously prohibited. Many of these contradictions still exist. Even new ones have emerged:
- With the crisis that ensued after the 2000s and the lack of foreign exchange, there is a need to create mechanisms to authorize purchases through imports to better control the scarce foreign currencies and limit imports to what is strictly necessary. For the above, and to improve the discipline of payments and reduce the possibility of re-incurring in non-payment of contracted commercial debts, the Foreign Currency Approval Committees and their contract approvals under different acronyms (NA – Approval Number; or IP – Permanent Instruction) emerged. Then came the CL (Letter, or Control, or Liquidity Capacity?), FP (Private Funds) and other acronyms for import approvals under the umbrella of the foreign currencies of the central state coffer. They may seem like provisional schemes to stop immediate crises until normalcy returns.
But there have been, for too many years already, many of these acronyms, misunderstood by any economist and by new and inexperienced foreign exporters in the local market. What contradiction is there at this point with the TRDs? We will explain it by recalling the Guidelines, the approved plans, the different calls, etc., in which it is always stated that the main interest is to encourage exports and replace imports to face the shortage of foreign exchange.
The national industry―be it 100% Cuban or mixed capital―has a hard time getting the CLs it needs, but the TRDs get them to import the same products that can be produced by the national industry: beers, soft drinks, mayonnaise or others from the food or light industry.
In the beginning, the TRDs not only became a way for the population to meet their needs, but they were stimulating the national industry. The latter saw the possibility of selling their production in foreign currencies without complicating themselves with expensive and difficult export mechanisms. This helped replace imports. Even CIMEX was helping to finance the purchase of raw materials for certain national industries, collecting financing with the result of final sales through its stores―for example, La Conchita canned products factory.
The emergence of the CL mechanism made this beneficial practice impossible, and not just financing. An agile mechanism has not been created to assign or transfer CL approved for the TRDs in favor of the national industry, so they can acquire raw material for their productions. If the priority is collection, it can be assumed that more would be collected if the product sold were domestically produced instead of imported. Are imports really more beneficial for the country’s balance of payments than national production? Is replacing imports no longer the real priority? Has it then been an empty phrase?
The Cuban financial crisis has made importers increasingly require that foreign exporters extend commercial credit to pay in installments of up to 360 days from the date of shipment. Faced with a greater credit risk and a longer financing term, import prices increase. This cost overrun is included in the calculation base when applying the coefficient for each product (the famous 2.40, or other) and obtaining the final sale price in stores. Although the population continues to pay in cash, it increasingly pays more for the products it acquires because the TRDs pay their imports in an increasingly postponed and, therefore, more expensive way, although it is recognized that the purchasing power of Cubans is not very high.
The new emigration law of 2013 gave many citizens the possibility of traveling abroad and returning with imported products. Many times to meet their own needs, but almost always with a surplus put up for sale (the traveler gets a profit that covers the costs of the trip). Even though Customs establishes controls―product charges, limits on values, tariffs, etc.―to curb imports with a commercial character, this practice acquired increasing scope. And then the population discovered that individuals, who purchase only 1/2 products of each type, in a non-wholesale way, have to pay a round trip ticket, stay in hostels, sustenance for a few days, packaging, transportation in grouped containers and other costs. In the end, they managed to sell equipment such as TV sets, refrigerators, motorcycles, etc., putting the TRDs in check by selling their products cheaper than state stores.
The obvious question was how is that possible, if the TRDs bought whole containers, which they can buy (in theory) directly from manufacturers. Many times there is no need to travel for periodic purchases: boats, entire containers or cheaper freight for their merchandise can be hired. And the conclusions were also obvious: either the importers are not efficient at buying or corruption or other vices in the purchasing mechanism were high. Or the coefficient to calculate the final sale price is very high and should be revised. Or the final buyers are paying for the high term of payment for the imports. Or a mixture of all the above, along with other reasons. In the end, products stagnated in stores and were not sold with good turnover.
The establishment of homogeneous coefficients to calculate prices and the consequent sale at high prices did not always result in higher revenues when the objective was just that. As is known, profits are not only obtained from the difference in prices between purchase and sale.
The slow rotation of a product can result in six problems:
1) that the useful life of the product approaches its end and its sale price must be reduced or even terminated due to expiration or technological obsolescence;
2) it is necessary to have greater storage capacity and warehouses also cost resources;
3) the overcrowding of warehouses with idle or slow-moving merchandise prevents purchases of other goods in short supply;
4) greater likelihood of loss or theft, breakage and other losses;
5) need for greater working capital if the payment date for the merchandise acquired is close without being able to sell and collect;
6) the reduction of expected profit and efficiency in contracting due to the value of money over time.
Another of the current contradictions is the following: the country has a shortage of financial resources and therefore reduces all types of imports. Even in those for the TRDs, at times there’s a shortage of products in stores. The logic indicates that if the products in these stores are sold in cash, in CUC, are bought with deferred payment and high profits are obtained on the sales, with more reason it is necessary to sell more in this type of stores to raise more funds. Were stores not created, precisely in another time of crisis, to collect the necessary foreign exchange? Wasn’t the goal to sell to collect more? For some, the TRDs are no longer foreign exchange collectors, but instead they collect CUCs (local convertible pesos), while imports have to be paid in foreign exchange and there are not enough foreign currencies to purchase products for the TRDs.
So, is the TRDs’ activity no longer of benefit to the country or to its balance of payments in foreign currencies? With that coefficient of about 2.4 or more? That’s why it is logical that individuals continued to import merchandise from Panama, Haiti, Russia, or any other place to sell here because that way they would be taking a weight off the State by eliminating the “unpleasant” need for TRDs to import those products and pay for them in foreign exchange.
As for the CUC collected in the TRDs, it is assumed that a part came out of the foreign currencies’ exchange in the CADECAs, both from family remittances and the resources of foreign tourists, private workers, bonuses received by workers in foreign firms or embassies, the expenses of foreigners based in Cuba, etc. That is to say, it had a support in foreign currencies and the more was sold in CUC, the more foreign currencies the country obtained through the CADECAs, banks and family remittance dealers.
A counter argument is that there is a lot of CUCs on the street without backing in foreign currencies. The more sold in CUCs, the greater the need for foreign exchange that didn’t exist to pay for products marketed in the TRDs.
Could the amount of CUCs in circulation, not obtained from the sale of foreign currencies in the CADECAs or derived from foreign currency accounts of foreign entities or remittances from abroad, be calculated?
There may be two ways: 1) CUC purchases in CADECAs, with CUPs at a high exchange rate, at 25 per 1, and salaries are not at such high levels as to state that an excessive amount of them goes to this end; and 2) certain companies’ incentive schemes in CUC―but it is a scheme not present in all the country’s companies. The average is usually about 15.00 CUC per worker per month, of which a part is probably converted into CUP in the CADECAs, in addition to the fact that the funds usually come from the accounts of companies that generate profits in foreign currency or exporting or replacing imports.
Do these two reasons tense the sales scheme of the TRDs? Are there other reasons for issuing CUC without foreign exchange backing? If they do exist, and for that reason, there is a fear of making more imports without backing in foreign currencies, the causes of the printing of CUCs without backing should be eliminated. Or, ultimately, sales in TRDs should be reinstated in real hard currencies, USD and/or EUR.
Some control of the foreign currencies would be lost, such as that obtained when the mandatory circulation of the CUC in the TRDs was established. Returning to the circulation of the USD (the authorities don’t recognize that it is a dollarization, although partial) was preferable than hindering the trade of goods in the TRDs because, supposedly, there are no foreign currencies for imports. It could be said: what a contradiction! The collection in TRD stores in CUC must be limited because they collect less than they spend. On the other hand, the outflow of capital, especially dollars, by individuals to invest in other economies and market them in Cuba is increasing. These people benefit from their imports, but the population had to pay high prices, although below those of the State in their so-called collection stores.
If with a monetary and exchange duality that despite all the problems that it entails, at least avoid the of activity in foreign currencies “being contaminated” with the inflationary activity in CUP there are these contradictions and problems, what would happen when both currencies are unified? It’s not that I’m against monetary unification. The point is that, if done wrong, the solution can be worse than the problem. If even the simplest thing―to buy and sell in currencies with the same exchange rate, without competition and with high margins―does not work out well, what would be left for a poorly conceived monetary unification?
Finally, without a financial reform that is accompanied by a serious productive reform―that is, that encourages the production by all the country’s approved productive forms (state, private, cooperative)―it will be difficult to get out of the crisis Cuba is experiencing.
Authors
Omar Everleny,
omar
