Issue #13 De-Dollarization

For Cuba, it seems that the dollar may be more trouble than it’s worth.

Soon, greenbacks will not be accepted in hotels, restaurants, gas stations, or any other commercial outlet in Cuba.

Cuba is not abandoning its dual economy where some transactions occur in Cuban pesos, others in convertible foreign currency. Criminal penalties for possession of foreign currency, repealed in 1993, are not being reinstated. Cubans may continue to hold dollars in cash and in bank accounts.

But in an attempt to shift Cuba’s foreign exchange earnings to currencies other than the dollar, new monetary measures were decreed by the Central Bank and announced on television October 25 by President Fidel Castro. They can be summarized as follows:

• As of November 8, “all entities” in Cuba that accept payment in dollars, the decree says, will accept only the convertible peso, the Cuban currency that circulates in Cuba only and trades at par with the dollar.
• As of that day, a ten percent surcharge will be levied on the purchase of convertible pesos using U.S. dollars. No surcharge will be added when convertible pesos are purchased with other currencies.
• Dollar-denominated bank accounts will not be touched, and Cubans will pay no extra fee to withdraw dollars from their accounts. As of November 8 they will not be able to deposit new dollars in those accounts, but they may deposit Euros or other convertible currencies.

Why would a country so close to the United States — one that has opened itself to foreign trade, built a successful tourism industry and aspires to receive large numbers of American tourists, and received billions in foreign exchange through family remittances, mainly from Cuban-Americans — decide to discourage the use of dollars?

The reason, Castro explained in his televised remarks, is to respond to the “external economic aggression” of the Bush Administration — its new efforts to limit the flow of hard currency to Cuba, especially its enforcement actions against foreign banks that handle the cash in dollars that Cuba obtains from tourism, family visits, and remittances. He cited the U.S. fine levied against the Swiss bank UBS last May for violating its agreement with the Federal Reserve by supplying Cuba with fresh U.S. currency. (This action highlighted a contradiction in U.S. policy: Cuba can legally earn hundreds of millions each year from the United States through remittances and travel income, and the United States welcomes Cuba’s purchase of hundreds of millions of dollars’ worth of American agricultural products — yet U.S. sanctions enable officials to attack the normal movement of these funds through the international financial system.)

Castro also discussed at length allegations, made by Miami political figures and carried in Miami’s El Nuevo Herald, that Cuba is engaged in money laundering, drug trafficking, and other offenses. These “vulgar” and “impertinent” allegations, he said, translate into pressure on the Bush Administration to take action against Cuba in the international financial system. By last summer, according to Castro, “one began to perceive clearly that many banks were being pressured by U.S. authorities” to withhold financial services, jeopardizing Cuba’s ability to import. He cited an Administration promise, made October 9 to a Miami audience, to “investigate and identify new ways hard currency moves in and out of Cuba, and to stop it.” Months ago, Castro ordered a search for ways to reduce Cuba’s vulnerability to these pressures, and the result is today’s new action to de-dollarize the Cuban economy.

Is there more to the story? That might be our supposition if this new policy carried large and certain benefits, but we see none. For the Cuban government, it carries significant financial risk and it could backfire politically. It seems that on this occasion, the motives are as officials have stated them.

What will be the result of de-dollarization?

1. Clearly, it will not generate any growth in economic activity, and it will likely act as a drag on Cuba’s economy by making transactions more costly and cumbersome. This step has nothing to do with the big monetary policy issue that Cuba will one day confront: ending the dual currency and creating a truly convertible peso that works in domestic and international commerce.

2. Cuban consumers face a ten percent de facto devaluation of any dollar savings that they hold today and intend to use after November 8 in the state’s hard currency retail outlets — restaurants, gas stations and their adjacent stores, supermarkets, and malls that sell clothing, housewares, and major appliances.

3. That looming devaluation brings a short-term benefit to Cuba’s treasury. Cubans have every incentive to convert dollar holdings to convertible pesos in substantial amounts before November 8, when the ten percent premium takes effect. As they cash in their dollars, Cuba’s treasury gains hard currency liquidity, a welcome development with oil prices above $50 per barrel. Reports from Havana indicate that Cubans are already exchanging their dollars for convertible pesos in large amounts.

4. After November 8, the ten percent tax on dollar exchanges will earn new money for the Cuban government. But if the dollar’s reduced purchasing power reduces demand for goods in the state’s retail stores, then these new earnings will be offset. However, if Cubans abroad send remittances at a steady pace, and if they send them in currencies other than the dollar, neither of these effects will take place: the extra ten-percent exchange fee will not be collected, and it will not suppress consumer demand.

5. While families in the United States have a clear incentive to send remittances in non-dollar currencies, they may not be able to do so — at least not easily. The U.S. companies that wire money to Cuba may not be legally permitted to send Euros or other currencies. To send non-dollar remittances, families may have to work through third countries, at higher cost. The flow of remittances from the United States could grind to a halt as families assess the new situation, and the new Cuban policy could mean that they would not return to their previous level. Remittances have already been reduced by the Bush Administration’s actions: no money can be sent outside one’s immediate family (no aunts, uncles, cousins, etc.), and so few licenses for family visits have been granted that there has been a virtual moratorium on family visits since July, cutting off an avenue by which remittances are carried directly to Cuba.

Politically, Cuban authorities may hope that Cubans (in Cuba and perhaps also in Florida) blame President Bush for these new inconveniences. Last May, when Cuba’s first reaction to the Bush measures was to raise dollar store prices, people in Havana seemed to blame both governments for making their lives harder. It would be hard to fault them if they reached that same conclusion today.