Where has this measure come from and what impact will it have?
HAVANA TIMES – The decision to suspend cash deposits in dollars (described as a temporary measure) comes from, according to the Cuban government, the problems Cuba has to use this money abroad due to reinforced US sanctions, Deutsche Welle (DW) reports.
There is speculation that the intention is to slow down the illicit market, based on the assumption that many people would deposit their dollars before the regulation would come into effect on June 21st. Or it was a way to collect foreign currency fast, which is urgently needed.
“I believe this measure seeks to reduce the financial risk of Cuban banks, first and foremost. The International Finance Bank and other Cuban finance institutions have entered the list of institutions blocked by the US State Department, and US sanctions in the financial sector have been getting tougher. Within this landscape, Cuban banks have had greater problems depositing USD in cash, which they had in their safes, on the international financial market,” economist Pavel Vidal explained to DW, who has a P.h.D from Havana University and is an associate professor of economics at the Javeriana University in Cali, Colombia.
However, he says that “while the government has made no mention of this, another advantage of the measure is that it temporarily increases foreign currency liquidity in banks at a time when the country is experiencing a great crisis in balance of payment. Dollars circulating on the street that then end up in banks help imports of food, medicines and other supplies, even if it’s only in part.”
The Euro gets stronger in Cuba
Gunther Neubert, the director of the German Economic Delegation in Cuba, spoke to DW and stressed that Cuba urgently needs more foreign currency liquidity in order to pay its suppliers, of food too. “Cuba imports approximately 80% of the food it needs, and the vast majority of suppliers aren’t accepting USD as payment because of US sanctions,” he says. He adds that this measure might increase the arrival of other currencises on the island. “Cubans will depend upon receiving other currencies now, like euros or Swiss francs, instead of USD, which will make these other currencies stronger,” he points out.
Can we sketch out the euroization process of the economy? “Not necessarily, but the Euro will become more important, at least in the short and medium-term,” Neubert says.
In the meantime, Vidal believes that it is likely that “private illegal markets become euroized, even if it doesn’t happen in the entire economy, as the government continues to prefer USD to operate institutionally within the island.” He points out the disproportionate increase in the European currency rate over the past week in Cuba’s informal markets.
“More volatile exchange rates also reflect the uncertainty that exists with monetary policy and the future of the economy,” the Cuban economist explains. Vidal worked as an analyst in the Monetary Policy Division at Cuba’s Central Bank, between 1999 and 2006. In his opinion, the lack of a coherent strategy to tackle the crisis is clear. “This is because the government has been promoting dollarization ever since 2019, and in 2020, it took off the 10% tax on operations in cash USD, which had been implemented in 2004, to encourage the entry of euros and other currencies instead of USD. So, why did they decided to write off the USD tax in July 2020, if they already knew that financial sanctions were being hiked up and there were no signs that US policy towards Cuba would change?”
According to Pavel Vidal, the financial risk of dealing in USD has now been transferred to families. In fact, the price of converting USD remittances into other currencies, which can be deposited in banks or topped up on debit cards that are used to buy in the stores with prices in USD, will now be paid by individuals. These transactions make paying with USD more expensive for the general population. They also represent “an additional problem, at a time when the country needs to take care of foreign revenue coming in, as they are key in getting Cuba out of its recession and its balance of payment crisis,” the academic warns.
Gunther Neubert, the head of the German Economic Delagation in Cuba believes the country really needs is to revive productivity and to expand value chains. “They need to try and produce more in the country, but they need investments to do this. Investments need to come from abroad. This is the only way to reduce food imports in the long-term and to create products for export, that allow them to get foreign currency,” he says.
This is crucial he notes, because the tourism industry (which was responsible for most foreign currency revenue) won’t get back on its feet in the short-term, even when tourists who are no longer coming from Europe or Canada are being replaced by tourists from Russia and China.
The measure that has just come into effect in Cuba will not facilitate things in the tourism sector either. However, in Neubert’s opinion, this won’t have a direct impact on investments. “Framework conditions are what matter the most to foreign investors, who can transfer their earnings abroad,” he explains.
However, uncertainty about the real impact of the measure and how long it will last are still up in the air, against the bleak backdrop of a profound crisis that is ravaging Cuba.