HAVANA, April 16th The use of the United States dollar in the Cuban economy has an interesting path: it was allowed for a while, then it stopped working; after a period, it is accepted again, then it is prohibited, and so on…. As the saying goes: “one step forward and one backward.”
A lifesaver in the 1990s
It should be remembered that the dollarization process of the Cuban economy since its inception in 1993 served as a stabilization mechanism in the face of the impact of the external shock that caused the disappearance of ties with the former European socialist countries and the mainly USSR.
Since that year, the use of the dollar throughout the Cuban economy contributed directly to the consolidation of recovery trends in some areas, since it fostered a new source of income for the country, only surpassed by tourism at that time.
For example, the sales of the so-called Currency Recovery Stores (TRD) in dollars in 1993 represented 13.2% of the total exports of goods and services in Cuba, but in 2001 these already amounted to 23.2%. That is to say, it had a decisive participation for the State to fulfill its commitments in foreign currency.
The main component of the circulation of dollars in Cuba was family remittances, mostly from the United States. That allowed the growth of the retail market that operated in currencies that, according to estimates, were more than 3 billion dollars at its peak.
Dollarization: the positive side
The increase in transactions in dollars allowed the resuscitation of the production of several national industries, light, food, and packaging, among others.
Thus, the sales of domestic products in these stores increased from 170 million dollars in 1996 to more than 576.5 million in 2000, which made it possible for the presence of national products to go from 29% to 51.2% of total store sales.
For this reason, it was considered that dollarization had had a positive balance in the national economic performance.
But in 1995 a simile of the dollar began to be issued, which was the convertible peso (CUC), and this created certain conditions in the monetary order to start the de-dollarization process; that is, the beginning of the creation of conditions to replace the free circulation of the dollar.
The de-dollarization that was proposed at the end maintained a monetary system characterized by duality. In this sense, the possibility of being able to implement the full convertibility of the Cuban peso evidently required much more time, since the structural restrictions were maintained, that is, the structural imbalances of the Cuban economy.
And the CUC arrived
In 2004, Resolution 65 of the Central Bank of Cuba was approved, through which the mandatory use of the convertible peso was introduced in the transactions of Cuban enterprises. And on December 29, 2004, Resolution 92 was approved, which establishes even more rigid regulations in the management of foreign currency income by enterprises.
Subsequently, through Resolution 80 of 2004, the Central Bank of Cuba prohibited accepting the USD for cash payments, and it was replaced as of November 8 by the CUC, with which it had lived until then. The possession of dollars remained legal on the island.
The measure was a widespread application that affected shops, hotels and restaurants. The only exception was the tourist destinations, where the acceptance of euros was to be maintained, restricted to places where it was previously accepted, such as in Varadero. With this decision, the cycle of measures aimed at promoting the de-dollarization of the Cuban economy was completed.
On October 25, 2004, the ban on the circulation of the USD on the island was officially announced. As of November 8, 2004, only “convertible pesos,” which equaled the value of the dollar, could be used.
CUC without backing: a big problem
The elimination of the circulation of the dollar at that time left open essential questions, such as the fact that a dual monetary and economic system was maintained and that the exchange rate of 1 for 1 was an overvaluation of the exchange rate.
In addition, there was the anchor of the convertible peso to the dollar. But in the end, the conditions that were set for the issuance and circulation of the CUC were not respected, which was to maintain its value against the withdrawing USD.
It is not correct to say that dollarization ceased to exist when the CUC began to circulate because initially, it had its backing in dollars. What should not have happened was the issuance policy irresponsibly adopted by the Cuban government, since many times more CUCs were issued than real backing in dollars.
Its nominal value exceeded, according to specialists, more than four times its effective backing in foreign currency. This led to a shortage of supplies in CUC stores. Without foreign currency to back them, there were no imports because the debts to the suppliers of the stores were not paid.
And the MLC arrived
On February 6, 2020, in an official appearance by the Minister of the Economy in relation to the newly opened stores selling in freely convertible currency (MLC), he stated the following: “It is a measure that benefits all the people, independently that the fact that not all the people can have access to the freely convertible currency and buy these products in stores, but these currencies captured by the country, due to its socioeconomic system, are reverted to the benefit of the population.… It is a measure that does not affect anyone and benefits everyone.”
The MLC was the denomination that the Cuban government established to treat as “freely convertible currency”; what pundits began to call the “bank dollar.”
The sale of “medium and high” range food and toiletries products in freely convertible currency expanded as of July 20, 2020, in certain establishments and shopping centers belonging to Tiendas Caribe and Corporación Cimex stores.
At the Mesa Redonda TV program on July 16 of 2020, Ana María Ortega, general director of Tiendas Caribe, stated that of the more than 4,800 existing points of sale, only 72 would offer this service in MLC, implemented as part of the new measures to cope with the crisis.
Where could funds be obtained for these accounts?
Individuals’ bank accounts in USD could receive funds through:
- Foreign bank transfers from banks that have agreements with Cuban banks and in the currencies accepted by them, to which the exchange rate of the day will be applied for conversion to USD.
- Bank transfers from other foreign currency accounts opened in Cuban banks.
- Transfers of remittances received from abroad through FINCIMEX S.A., for clients of Banco Metropolitano (BANMET) and Banco Popular de Ahorro (BPA); remittances received by Western Union are excepted, which until now only delivered cash in CUC.
- USD cash deposits.
- Deposits in Euros, British Pounds, Canadian Dollars, Swiss Francs, Mexican Pesos, Danish Krone, Norwegian Krone, Swedish Kroner and Japanese Yen. The exchange rate of the day is applied to register them in the account in USD.
Goodbye to the CUC
At the end of 2020, Cuban President Miguel Díaz-Canel, accompanied by Raúl Castro, announced on Cuban Television that as of January 1, 2021, the Task of Reorganization would begin: monetary unification. Within six months the CUC disappeared.
But the announcement came at one of the most difficult moments for the Cuban economy, hit by the drop in tourism caused by the COVID-19 pandemic; the paralysis or slowdown of the rest of the economy for the same reason; the long crisis in Venezuela, and the tightening of the U.S. blockade, among other factors.
Cuba would thus try to initiate a process of monetary and exchange rate unification on January 1, 2021, with the exit from the circulation of the convertible peso (CUC) —equal to the dollar at the official bank rate —, which would leave as the country’s only official currency the Cuban peso (CUP), with a single conversion rate of 24 pesos per dollar.
Devaluation: blow to the CUP
The announcement of that rate constituted a severe official devaluation of the national currency, and the issue was a great concern for the population: their savings in CUP immediately lost value.
On June 21, 2021, cash dollars in Cuba were prohibited again. Resolution 176 of 2021 was applied, which prohibited the acceptance of the dollar in cash by banks and non-banking institutions in the country.
The argument wielded was that the bank vaults had too many dollars with which they could not operate, due to the difficulties imposed by the blockade. However, some time ago the sale of dollars in the CADECA exchange offices had been suspended because the country did not have dollars. What was the truth? At what time were these vaults filled?
And the dollar returned
Everyone knows that the use of the dollar in Cuban transactions should not have been prohibited. What should have been done was to give priority to the national currency, CUP; the currency in which the country’s wages are paid.
The Cuban economy is bankrupt and given that reality, it is very wise to allow the dollar again for bank deposits.
The current measure is adequate because at least it allows banking a great deal of the currency flow, provided there is a guarantee of its full liquidity; and that later it is not subject to “corralitos” that limit its use as “at sight deposits.”
However, now, as before, many people will maintain their skepticism, and others their mistrust regarding the management of economic policy and the country’s banks as safe and reliable entities.
Other necessary measures
The latest measure is still imprecise and incomplete since it was only announced that it is allowed to have MLC via USD deposits.
Other measures would be necessary for the current moment, among which Western Union payments in dollars or in national currency at an exchange rate higher than the official one would have to be considered; and allow the payment of dollars in cash in the new foreign retail stores that are being created in the country so that foreign suppliers quickly recover the capital that they will invest (this has happened recently in retail trade in Venezuela).
The country does not have time to overcome in the short-term the imbalances present in the national reality. The current macroeconomic indicators are very serious, but what is vital is to increase the national supply of goods and services.
More space must be given to the introduction of elements of the market economy so that competition exists, that monopolies of any kind end, and the institutional knots that strangle the Cuban business fabric are truly untied.
That there not be so much emphasis on “the Cuban state enterprise” and talk about the “Cuban enterprise,” regardless of whether it is state-owned or not. That harmony and linkages between them be promoted.
If a true comprehensive economic reform is not carried out, we will return to the removal and acceptance of the dollar in the economy, depending on the economic cycle in which we find ourselves.