Cuba, Dollarization and Changes to Official Discourse

By Amaury Valdivia  (El Toque)

HAVANA TIMES – Even though it isn’t one of the most common games on the island, Cubans have seen enough movies to know how to play poker. Especially the definitive moment in the game, which has become emblematic on the screen, when two players are at a heads over a gamble and waiting to see who wins. As a rule, one of them ends up making a mistake because they were either being too naive or overconfident.

In terms of the Cuban government’s dual currency – partially “triad”, right now -, it has taken on the role of the loser.

The government’s bet had been simple up until this Thursday. Back in October 2019, vice-president of the Council of Ministers, Alejandro Gil Fernandez, explained the decision to sell electrical appliances and spare car parts using cards in dollars, announcing: “We have no intention of getting rid of national currencies nor of increasing sales in dollars or any other currency in the rest of the retail sector. The intention is to get a hold of foreign currency and keep it in the country.”

Shortly afterwards, in January 2020, Gil, the minister of Economy and Planning too, also considered it appropriate to add to that idea with the note that new stores were targeting “a very specific segment of the market, with medium and high-end products on sale, which weren’t being sold up until then.”

Listening to his words, such stores would be exceptions within the country’s retail sector; exceptions where illegal activity wouldn’t be allowed, as “there will be strict surveillance to ensure there would be no reselling and speculation” (said vice-president Salvador Valdes Mesa, on the Mesa Redonda program in October 2019).

Then, in early January 2020, COVID-19 (which still hadn’t been baptized so) was just a bout of the flu that had been recorded in one of China’s interior cities and, with everything going on and problems suffered the previous year, the Cuban economy was hoping to take a breather with a good “peak season” of international tourism and an increase in traditional exports, such as tobacco and rum.

Quoting the Economic Commission for Latin America, Gil Fernandez stressed that estimated growth of the island’s gross domestic product (GDP) should surpass 0.5%, four tenths above the regional average. While the majority of products sold in foreign currency stores had disappeared from their counterparts in CUC/CUP stores – something authorities has assured wouldn’t happen -, the reality is that this network operated without any problems.

Six months later, it’s a whole ‘nother story

It isn’t a matter about the number of stores that are selling in this new way – in fact, they aren’t so few like CIMEX and Tiendas Caribe board members insisted, nor are there as many as outspoken dissidents are claiming -, but a matter of what products are being sold on their shelves. There is a large gap between air-conditioning units and packets of detergent, regardless of whether the latter can be considered a “medium and high end” product, and profits are meant to finance social projects.

These 72 “dollar” stores, belonging to the CIMEX and Caribe chains, mark a new break in the collective psyche of the island’s social web, which is particularly unfavorable in times of crisis.

Could this decision have been avoided?

In a distant past that was July 2008, economist Pavel Vidal Alejandro reflected upon the impact of the country’s dual currency, which was a part of an “economic policy driven by discretion.” However, the researcher was optimistic, as “there seems to be a consensus in considering it the cause of more problems than benefits [and] with regard to what needs transforming to get rid of it.”

Vidal and many of his colleagues were aware of the obstacles that would need to be overcome along the road to currency unification. One of the most significant included conversion against the dollar and the use of this in international business deals.

Back then, sanctions imposed by the US Department of the Treasury on the Union Bank of Switzerland were still fresh in their minds, which was forced to pay out over 100 million USD in mid-2004 for having accepted transactions in dollars from “enemy countries” such as Cuba. Ten years later, the same sanction was applied to BNP Paribas, one of the European Union’s leading banks, for the same reason, resulting in the highest sanction in the history of finance: a fine of 8.834 billion USD paid out to the US Government.

The 10% tax, that was meant to disincentivize the arrival of green US bills to the island, managed its purpose in the beginning: “Before the measure, 80% of cash flow from abroad was in dollars; one year later, this had fallen to 30% and especially more Euros were coming in,” Vidal remembered.

Experts agreed that the following steps should be geared towards gradually fading out CUC from the exchange table, while pay scales were being reorganized and the exchange rate for Cuban pesos within the business sector would be devalued (in 2020, 1 CUP is still equal to 1 USD, in theory).

“We are going to stick with the CUP,” vice-president of the Council of Ministers, Marino Murillo Jorge would announce emphatically, five years later at the National Assembly, confirming that the issue was still at the top of the State’s agenda. It was a cliche that had been appearing in official discourse since the 6th Communist Party Congress, in April 2011, and continues today.

Very little has changed, in reality. Not even the new Foreign investment law that was passed and took effect in 2014, or the expansion of the self-employment sector, have managed to create the “right context” – in the government’s opinion – for Cuba’s dual currency system to disappear. On the contrary. Over the past five years, the practice of circulating CUC notes has continued, in spite of the constant depletion of foreign currency reserves due to a lack of productivity and harsher blockade sanctions.

A high point in this political rashness was the pay-rise announcement in June 2019, just a few weeks after the waiver on Title III of the Helms-Burton Act had been lifted, and in the middle of severe shortages of basic goods. When that happened, economist Pedro Monreal believed it “highly unlikely that nationally produced food products would increase in the remainding six months of 2019, at the level needed to meet rising demands linked to pay-rises and higher pensions.”

Those 7.7 billion pesos added to family budgets between July and December, caused greater tensions for the country’s accounting headache, and led to prices gradually going up on the black market, which then went through the roof as soon as the pandemic started.

To be fair, this isn’t just a problem in Cuba. A report issued by the World Bank, in June, foresees that “the global Economy could shrink by up to 8% this year, to then recover just over 1% in 2021.”

The director of the World Bank’s Prospects Group, Ayshan Kose, has pointed out that “there aren’t any records of corrections made so suddenly and drastically in global growth forecasts, like the ones seen currently.” The closest reference in history to a similar phenomenon would be the “Long Depression” in 1873, which marked the end of British supremacy and consolidated the US as the greatest economic power.

A shared evil isn’t much consolation, though. Especially for Cuba, which will need to not only deal with its own demons, but with a likely 9% drop in the European Union’s GDP, which is the main market for its exports and the greatest source of tourists for its resorts.

Historians will have to analyze how differently things can be done to prevent the economic situation from becoming as tough as it was in the mid-1990s. However, journalists will have to ask – now – if bets on recovery were based on naivety or overconfidence.

It would be hard to say that the cards dealt justified reforms being put off for so long, or insisting that a decision like using dollars for the sale of packages of chicken and detergent, wouldn’t be needed.