The Dollar Makes a Comeback in Cuba

“Authorizing operations in foreign currency at some retail markets and industries is like opening up a Pandora’s box and paving the way for a speedy redollarization of the rest of the economy,” economist Pavel Vidal believes.

By Cubaencuentro

HAVANA TIMES – From this week onwards, Cubans will be able to open bank accounts in US dollars at local banks so they are able to purchase electrical applicances, electric scooters and even place orders for special devices, with their debit card, AFP reports.

The government is marketing them and is looking to collect foreign currency and sidestep the embargo that the US has imposed since 1962. Here are some key points to help understand the measure:

What are they?

At the end of the month, a network of state-run stores selling in dollars and other foreign currencies will be set up, selling highly sought-after imports, such as electrical devices, modern electrical appliances, car parts and mopeds.

Payment will be made with debit cards that can receive transfers from abroad or other accounts (in dollars and other foreign currencies), commission-free.

Some specific products can also be imported via state-led companies (using the same bank account), without having to depend on the State’s central bank.

Why?

The government is looking to capture foreign currency, at a time when Donald Trump’s government is tightening down on the embargo, with measures that affect tourism, investments, remittances and fuel imports.

“The country needs foreign currency to finance” its “economic and social development”, Economy Minister, Alejandro Gil, explained.

Ruled by the Cuban Communist Party (PCC, the only party in the country), Cuba is looking to stop the capital flight of hundreds of millions of dollars, due to growing imports by individuals.

According to private consultancy firm Auge, Cubans spent an average of “20 million USD per month in the Colon Free Zone (Panama) alone.”

With the money they collect, the government will be able to tackle the lack of liquid cash in its economy, pay suppliers on time and purchase supplies the country needs.  At least that’s the objective.

How does this benefit the government and citizens?

“It’s expected to have positive effects in the short term,” says Cuban economist Pavel Vidal, from Universidad Javeriana in Cali, Colombia.

The government’s banks will be able to boost their liquid funds in dollars and other foreign currencies, and be able to ensure the supply of products that are in shortage on the retail market, without having to use the foreign currency that is meant for priority expenses.

In the meantime, Cubans will have access to products that they have only had access to on the black market and at competitive prices, while the local private sector (13% of the economy) will spend less on traveling abroad to stock up on supplies.

Will the economy become dollarized?

Gil rejects the idea that selling in foreign currency on the national market will lead to the dollarization of the Cuban economy, which had already turned to the US currency between 1993 and 2004 to offset the serious economic crisis in the ‘90s.

According to the minister, both national currencies: the Cuban peso (CUP) and the convertible peso (CUC, the equivalent of 24 Cuban pesos) will continue to circulate, and purchases in dollars will only be carried out electronically with cards.

However, economists stress that dollarization doesn’t depend on the medium of payment, but on the fact that the dollar is replacing some of the functions of national currencies.

“Authorizing operations in foreign currency at some retail markets and industries is like opening up a Pandora’s box and paving the way for a speedy redollarization of the rest of the economy,” Vidal believes.

What about currency unification?

Gil emphasized the fact that these measures will not stop the unification process of national currencies, which has been in the works since 2013, but will put the country in a “better position” to reach this goal, with stronger industry and retail markets.

Cuba’s dual-currency system goes hand in hand with preferential exchange rates for the state sector, which distorts the economy.

Vidal warns that, far from resolving “the (current) complex and distorted system of different exchange rates and the dual-currency system”, these new measures will “lead to not only two, but three currencies operating in the economy.”

“The announced redollarization of Cuba’s economy voids the unification of its currencies,” he believes.