Return to the US Dollar in Cuba: What about the CUC?

We look at the uncertainties in Cuba with the official reinsertion of the US dollar in the consumer economy.

By Oscar Fernandez Estrada  (Progreso Semanal)

HAVANA TIMES – The bulls are loose. Days after the decision to dollarize segments of Cuba’s durable goods market, the CUC (Cuba’s convertible currency) depreciated by 10 to 20 percent, according to the Revolico* Stock Exchange and based on expectations and speculation. Privately imported products the government sells in USD lowered their prices slightly — around 15 percent. The illegal private financial houses that control a part of the exchange and credit operations are balancing their act. The second economy enlists its adaptation strategies.

The State has touched a central variable and the actors quickly begin to reorganize their game under the new rules.

That ‘Cuba is not moving towards the dollarization of its economy’ was this time decreed and dictated to reality, and propagated, as on other occasions, by the voices responsible for protecting vulnerable ears from these types of circumstances. Meanwhile, the obsolete facts are rushing, in their demystifying and direct eagerness, to place the names where euphemisms were once coined.

For a ‘full’ dollarization to occur, for example, like in Ecuador, the government would have to decree the cancellation of the national currency and adopt a foreign one as the only means of legal tender within the country. I doubt this will happen. However, in Cuba, it is known as a ‘partial’ dollarization where individuals keep physical currency together with the national kind in financial assets or bank deposits denominated in foreign currency.

This process was reinforced about five years ago when the authorities announced that monetary unification was coming. Whenever the adoption — or the simple announcement — of a new measure that might change the macroeconomic order, fearful agents react immediately. The first provision they make is to try to protect the future value of their monetary wealth by replacing their savings in local currency with foreign currency. Then they worry about protecting bulky monetary transactions and start trading in high-value assets such as real estate and cars. That has been Cuba’s reality for the past five years.

Add to that the creation of ideal conditions for the circulation and use of US dollars in the informal circuits of the economy. For supplies we find cash remittances, currency from tourism and foreign investment towards the people associated with them, the savings of returning Cubans, and others. For the demand there are furtive importers known as mules, private business owners who remit their profits, Cubans who travel abroad, definitive emigrants, and the new currency stores that have come into circulation. As a foreign exchange market, in addition to state commercial banking, private exchange agents operate who take advantage by taxing the dollars found in cash, and the unstable availability of foreign exchange in the banks, who profit by buying and selling currencies and who speculate freely.

Spinning out of control

Dollarization could go beyond what the authorities expect. The natural scenario is that the dollar continues to replace part of the function of the domestic currencies. As more transactions can be made with the foreign currency, it increases the security it offers to its bearers, and the public will use it more and more for its exchanges and monetary reserves.

All the CUC (convertible Cuban pesos) and CUP (Cuban pesos) that circulate within the population, with the exception of those that are usually spent on supplies that the State controls, can become potential claimants of dollars. As a trend, private sellers will try to get most of their income in foreign exchange and buyers will have to make do with solutions to deal with it. It could generate a dangerous spiral that feeds on its own movement, until it reaches an undesirable situation, already experienced at the beginning of the 1990s: that the dollar is imposed as the currency to deal with leaving behind the country’s own currency.

It is a stressful moment. The government must maneuver with talent and speed. If it does not intervene quickly to neutralize the situation, the depreciation of the CUC in the second economy will increase tensions in the first. Currency deposits now obtain a greater exchange rate in CUC for their dollars increasing their purchasing power in stores. Since some of these actors are trained to detect or generate imbalances in formal markets, they could go after certain products, some of which are already missing, according to a recent note from the Ministry of Internal Trade. Ensuring stable supplies in the non-dollarized economy will be among the most important quagmires to be overcome by the authorities.

The government has before it a crucial dilemma: to adopt stabilizing actions to avoid an escalation in the depreciation of the CUC in the informal markets and prevent more serious monetary imbalances from precipitating; or to let the depreciation run, and that the market adjustments provide a balance of reference in the event of an official devaluation that brings us closer to exchange rate unification. I vote to guarantee the greatest possible monetary stability; I vote for gradualness.

The key piece on the board is a guarantee of convertibility of the CUC to USD in the state banking system. Only an uninterrupted supply of dollars from the government can relieve pressures in the informal market. An eventual elimination of the 10% tax of paper dollars would lighten the way.

And though this surcharge fulfilled the function of sharing a portion of the high costs of transferring physical dollars abroad by the government, its removal makes sense in the current situation. Its abolition should stimulate an increase in the entry of dollars into the system, but instead of requiring transfers, they could be offered in support of the CUC through the following window.

To complement the move, we would have to find a way to encourage the sending of remittances via the banking system rather than in cash as it predominates today. A small bonus could be applied in CUC for each dollar that is remitted electronically, which would also function as an official devaluation in this area, which could indirectly control the stability of the informal market exchange rates. We must also dust off the debate on the exchange rate regime, which has long been anchored on the fixed exchange rate paradigm.

But this can only be sustained if we agree to remove all internal ties that obstruct the development of productive forces. Heading the list of reforms would be decentralization of state enterprises, and the institutionalization of the private sector.

*Revolico is a free classified service that functions as a digital bazaar for a broad range of goods and services, with headings like Housing, For Sale and Classes.



One thought on “Return to the US Dollar in Cuba: What about the CUC?

  • Can I ship a barrel of food goods and clothes into my friends in Cuba ? And what company and what price ?

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *

Photo of the Day

Photo of the Day
Picture 1 of 1

Vedado, Havana, Cuba. By Arlene Greaves (Trinidad and Tobago). Camera: Nikon D3300

Submit your pictures to our Photo of the Day section
You don’t have to be a professional photographer, just send an image (in black and white or color), with a photo caption indicating where it was taken (city and country), type of camera or cell you used, and a small description about it.
Note: it is better for our format if you send horizontal orientation pictures. Even square will work but vertical is a problem.
Send your picture with your name and birth country, or where you reside, to this email address: [email protected]