Devaluation Scare in Cuba Is Creating Angst

By Rachel D. Rojas (Progreso Weekly)

HAVANA TIMES – The worst that could happen to any currency is the announcement of its expiration, without a given date when it will end. On the first day of one of these months, Cuba’s convertible pesos (CUC) will stop circulating in Cuba.

The truth is that the fundamental damage has nothing to do with the currency. It is the people who, without having access to the dollars with which almost all basic necessities are bought today, do not know what to do with the colored papers with which they are paid.

Since October 2019, many stores around the Island were opened using magnetic US dollar account cards. At the end of December of that year there were some 80 stores throughout the national territory with plans to expand that number, but only for “medium or high-end items that natural persons were importing.” The objective, said First Vice Minister Alejandro Gil at the time, was “to capture the foreign exchange and retain it for economic and social development.” Adding: “It is a measure that does not [negatively] affect anyone and benefits everyone.”

A little later, in July of this year, in the midst of the health crisis generated by the Coronavirus, the sale of food and cleaning products was added to this modality. This time Gil called the measure a “necessary but not desirable option.”

Diaz Canel explains the situation

President Miguel Díaz-Canel later explained that “there has been a contraction in production with a logical effect on the supply of goods and services, a shortage in trade networks, a repressed inflation evidenced by the queues, inadequacies in the production of food and growth in the effects on workers due to the pandemic.”

The disastrous result was not long in coming: low food production and that of hygiene products offered in CUCs (or CUPs) have almost entirely ended up in stores which sell in US dollars, which can only be accessed by a small part of the population. Something that we were told would not happen, when the first dollar stores opened, that the establishments dealing in CUC would continue to sell the products.

Meanwhile, the authorities themselves continue to penalize the informal purchase and sale of dollars or other foreign currency. However, they haven’t established a legal way and an official rate to obtain them in the national territory. Shampoo, toilet paper, oil or milk are now practically unattainable for the most Cuban citizens who do not receive remittances.

The equitable distribution of the resources captured by the country, the increase in the capacity to produce nationally, the decrease in imports and the investment in better systems of transportation, health and education are not objectives that can be achieved overnight. But the deprivations that citizens now face in accessing any product or service in a foreign currency does move much faster than the aforementioned.

The CUC continues to devaluate on the street

“The dollar on the street now goes for between 1.50 and 1.60. Try to figure out how much that represents in the national currency and that will give you an idea of what it will cost,” explained an official from the transit office in Havana to his coworker.

“But what is the cost to the state?”

“Ah, I don’t know about the state.”

Indeed, no one yet knows what the official exchange rate is between the dollar and the regular pesos (CUP). And therefore, there is no legal way for people, who do not receive dollars from other countries, to acquire them. But the informal foreign exchange market has continued to function. Its exchange rates have increased in line with the country’s inflation and monetary insecurity.

The monetary unification was first announced in July by President Miguel Díaz-Canel as part of the strategy to face the current economic crisis. A month later a series of related notices began to appear in state media creating the idea of an eminent decision to come regarding unification. People rushed to banks to exchange their CUC to CUP, leading to another reason for crowds amid the pandemic.

Mixed signals doesn’t calm the waters

But it was not until September that the Central Bank announced that the beginning of monetary unification would not take place immediately. And it was not until October that authorities at the top referred to the issue on the television program, Mesa Redonda. Still today, it is difficult to stop the rumors about the future price of necessary products, and a higher cost of living in general.

Díaz-Canel said on TV that, although it is not possible to say at this time how long it will last, “we can say that the strategy is not to dollarize our economy and what we are defending with the monetary order is to operate with one currency.” The measures have been unforeseen, he said, taking into account the complex and strong economic contraction internationally.

Cuban economist and professor Ricardo Torres says that “dollarization is an inevitable consequence of the severe crisis in the balance of payments. The recurrence of these crises should serve to establish that they are essentially due to structural problems, and that the Cuban economic model does not have the cushion to act on these failures.”

While the Bank reiterated its commitment not to affect the cash held by the population, nor the balances of their accounts, the also necessary devaluation of the CUP has already been announced by Marino Murillo, head of the country’s implementation of guidelines for the monetary rearrangement. Therefore, it is to be expected that, once the process is deployed, savings in CUP, and all the income derived from non-state activity, will be affected.

They say its temporary but…

Economist Oscar Fernández explains that the monetary duality will not disappear “as long as an internal portion of dollarized goods and services persists, which sends signs of consolidation and expansion.” Among these signs is the increase in supply, now also of food, hygiene products, and hardware stores. Also the telecommunications monopoly in the country, ETECSA, announced the sale of equipment in dollars. In addition, little by little and without much diffusion, other establishments in CUC have been closing to reopen only offering their products in foreign currency.

In a recently published Progreso article, Ricardo Torres and Michel Seguí explain the causes of the increase in demand for foreign exchange in the informal market, and the need to restore “the capacity of the financial system to offer convertibility to national currencies through the official exchange market to which families and private producers have access.” This is, they say, a “necessary condition” to reduce this informal market, which is by nature inequitable and unfair.

And they add: “What is clear is that two currencies without convertibility is an absurdity that does not pass muster. The criminalization of informal operations does not solve a problem that, again, is economic.”

Read more from Cuba here.