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Photo: elTOQUE.

Can Buyers Lower the Price of the Dollar in Cuba?

20 / mayo / 2024

The exchange rate never gets boring. Especially, the Informal Market Reference Rate published by the independent Cuban media elTOQUE, which is always the subject of attacks and conspiracies.

One of the main criticisms of the El Toque rate relates to the influence of the publication on the market. For example, can users who are well-acquainted with the rate’s algorithm use it to their advantage and artificially influence the foreign exchange market? Or put another way, can the seller of dollars set whatever price they want in the currency market?

The intuitive answer refers to the most basic foundation of economic science, supply, and demand.

Hence, it makes sense to believe that if the seller’s prices go too high and demand cannot or does not want to pay the price, then the market price will adjust to the maximum that the demand is willing to pay.

Violating the Law

But reality doesn’t always work this way, nor does theory. If increasing prices reduces demand such that suppliers are forced to lower prices again, it is because buyers prefer to reduce their acquisition in the face of new prices. In other words, they have the option to choose whether to purchase or not and choose not to do so until the price drops.

To understand a situation like the one above, economic theory studies how susceptible the quantity demanded is to price changes. This sensitivity is called the “elasticity” of demand.

Studies on demand elasticity illustrate how, even if the price of certain goods changes, the demand can decrease slightly, drastically, or remain the same. Therefore, these studies help understand the diversity of behaviors that can occur in the market.

One of the extreme cases is “inelastic goods,” which are essentials that do not have a substitute in consumers’ preferences. As a result, their prices can increase even though consumption does not decrease.

Examples vary by context but could include gasoline for consumers who need to buy a certain amount to go to work, having no choice but to pay for it.

The definition of an “inelastic good” leads to the question of whether the demand for the dollar in Cuba behaves like that of such a good. If the demand for the dollar in Cuba is inelastic, any price alteration in the currency caused by publications speculating or simply reflecting economic dynamics would maintain a demand for the dollar in equal quantities and at higher prices. Therefore, whether sellers can decide on high prices is not an indisputable fact but depends on the dollar’s demand elasticity.

Low Sensitivity in the Market

The dollar is a good whose demand is concentrated among people who use it to buy foreign currencies within the country, import consumer goods, cover travel expenses abroad, and convert personal savings or private sector business profits into foreign currencies.

Of the dollar buyers, it is most likely that only those who use currencies to purchase consumer goods sold in foreign currencies (dollars and euros, not MLC) will reduce (at a given time) their purchase volume. In contrast, those who expect to leave the country will not stop their purchasing because the dollar price goes up. Private businesses, needing foreign currency, can incorporate the exchange rate increase into their prices to guarantee profits, so this demand segment will not decrease either.

The above indicates that the part of the currency demand representing at least 1 billion dollars annually remains independent of the exchange rate. (Only concerning private imports and the dollarization of business profits).

Therefore, the demand for the dollar is not entirely insensitive to price changes; that is, it is not completely inelastic. This means that although the price of the dollar increases, part of the demand will decrease and affect the total demand. However, there are reasons to believe that a significant part of the demand will remain, indicating that the demand for the dollar is not very sensitive to price changes. In general, it is considered quite inelastic.

As a result, the relationship between dollar buyers and sellers is not equal. Sellers have more negotiating power than buyers because they have more capacity to impose conditions, namely the price. Likewise, the low sensitivity of dollar demand to prices can result in market segmentation based on prices after a reduction in demand.

In other words, the informal currency market has conditions of precariousness, insecurity, little accessible information, and territoriality that can generate a realistic phenomenon. Namely, isolated sellers offering small quantities of their dollars to buyers who cannot pay higher prices.

Essentially, it is the existence of two markets: one where large quantities of dollaras are sold to private businesses and future emigrants, and another smaller one where occasional and urgent sellers and small buyers converge.

Adding to this is that the private importing sector can increase its imports and thus fill the “vacant space” left by dollar buyers who cannot pay higher prices. The situation is conditioned by the decline in the trade balance of state and military companies and the rise of private imports, which pressures the authorities to facilitate the private activity in question, acting as an incentive for more non-state foreign trade.

It’s Bitter, But It’s Our Market

Although the above is just one scenario of several specific cases observed in the currency market, it is an economic reality corresponding to a market structure little studied and used to analyze the Cuban context, undersupply, or better said, scarcity.

In “normal” markets, that is, where supply can meet demand without an excess of products, where goods can be substituted by similar ones, and where no seller has more power than another, the law of supply and demand really operates as people usually imagine. In these markets, supply and demand are on equal terms, allowing the principle to function effectively.

In contrast, in conditions of scarcity, especially of an essential good without a substitute, suppliers impose on consumers. Because scarcity as a market structure is the dictatorship of those who sell over those who buy.

Insufficient supply places buyers at a disadvantage, unprotected against sellers, who, in turn, only do what is done in the market, profit.

Sellers do not have to act as Samaritans; it is not a viable option. The only real solution is a dollar supply sufficient to meet the market’s needs sustainably. When the market is adequately supplied, it will be possible to speak of supply and demand regulating each other as traditionally understood.

If the economic policy of the Cuban Government does not change, the only thing that could limit the dollar’s price would be the amount of Cuban pesos available in circulation.

This article was translated into English from the original in Spanish.

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