Cuba’s Central Bank (BCC) announced on April 10, 2023 that it was repealing Resolution 176 from June 2021 that banned banks and non-bank financial institutions from accepting USD in cash. Some of the reasons the BCC gave to justify the measure was the end of the COVID-19 pandemic, revival of the tourism sector and the presence of foreign visitors in the country.
According to the BCC announcement, “financial and banking institutions will now accept cash deposits in US dollars for bank accounts.”
The Government had justified this ban in force since 2021, with “the obstacles placed by the US economic embargo for the national banking system to deposit abroad the USD they collect in the country.” However, the reasons this government institution used to accept cash deposits in USD again have nothing to do with reasons they initially gave to suspend these operations almost two years ago.
The decision has caused a stir and there is a lot of speculation about other possible reasons that might have encouraged the State’s financial institutions to accept cash deposits in USD.
Is the policy meant to stimulate an inflow of USD in cash to the island? Will it increase the value of other foreign currencies on the black market? Will informal selling of USD, by transfer and in cash, be affected? These are some of the most common questions people are asking.
Different Cuban experts shared five hypotheses with elTOQUE about what might have influenced this decision and help us to understand their possible impact on the domestic market.
1. The existence of a mechanism to pay in USD on the international market
Cuban economist Pavel Vidal points out the possibility that the BCC has found a channel or mechanism to deposit USD in a bank or has found a way to pay in cash with this currency, which will allow it to navigate official policy against accepting USD in cash out of fear of financial sanctions and the problems implied with putting them on the international market.
2. Remittances received in USD via Western Union
The hypothesis thrown about the most on social media, which Vidal also shares, is linked to Western Union (WU) restoring its services in Cuba. The company could deliver remittances in USD in cash due to potential risks with depositing this money in MLC magnetic card accounts for shopping in Cuba’s dollarized stores. “Maybe there was a conversation or understanding with the US Government that would allow for these operations,” the economist explains.
Despite WU’s publicized return, and as statistics monitored by El Toque show thus far, this company’s services haven’t translated into a significant increase in foreign currency circulating on the country’s black market.
In this regard, economist Omar Everleny says that it’s possible WU is looking for a way to encourage money transfers in foreign currency from the US to Cuba at a time when the archipelago’s economy is going through one of its roughest moments in recent history. According to Everleny, the proposal hits the mark and is pragmatic, as remittances are a main source of revenue for the country and WU restoring its services, in addition to its ability to bring in remittances in USD, would allow people to have a more trustworthy alternative to send money to Cuba.
Ricardo Torres, a professor at the American University in Washington, agrees with the above. Torres believes that sending remittances in USD via WU could significantly increase the appeal of using the services of this provider, which has a formal agreement with the Cuban authorities.
3. Cuba’s Central Bank has a new president
Vidal suggests that the measure may also respond to the strategy proposed by the BCC’s new presidency, taken on by Joaquin Alonso Vazquez in February 2023.
4. Economic policy
A fourth hypothesis to explain the BCC’s recent decision centers around national economic policy, Vidal says. “Amidst a landscape of constant inflation which hasn’t dropped as a result of Government measures, they decided it would be more practical to encourage dollarization, instead of looking for ways to halt inflation, to encourage trade and business in Cuba,” the expert says.
Ricardo Torres has a similar idea, as he says the Government’s decision “is a first step to normalize what reality has been over the past four years: the partial dollarization of the Cuban economy.“ According to Torres, this measure reflects the Government’s understanding that they need to recover the position of financial entities and banks within the USD transaction market in Cuba. “If they accept that dollarization will hold an important place in the Cuban economy for an extended period of time, it makes sense for them to try and normalize the practice,“ Ricardo stresses.
According to Torres, we have to remember “that dollarization has been a key factor in Venezuela’s relative success at stopping their economy from sinking further and mitigating shortages. With all of the problems it has, Venezuela’s situation has definitely changed and this is linked to them accepting the dollarization of a part of their economy. In a nutshell, the measure seeks to accept a reality in the Cuban economy and can provide options to navigate an economic crisis of great dimensions, with tangible and direct results for the Cuban people,” he explains.
However, Tamaris Lien Bahamonde, a Political Scientist from the University of Delaware, explains that the measure of accepting USD in Cuban banks means “a standstill in terms of economic policy because they are following the same steps they applied in the ‘90s, when the original mission of the Economic Reforms was to correct distorsions introduced with those policies, and these corrections came way too late.”
“They haven’t diverged from their course at all, it’s a great big circle to end up in the same place,” she stresses. According to Bahamonde, the mission of the Tarea Ordenamiento (Economic Reforms), which was to recover the Cuban pesos value, is now very hard to achieve given the subordinate role the peso will have as long as the dollarized MLC stores exist. The expert believes that while this measure responds to a real and pressing need for the Cuban State to collect USD, there is a worse situation right now that came with the Currency Law, which will increase financial and structural distorsions in the Cuban economy.
5. Counteracting the black market in foreign currency
Pavel Vidal believes another possible reason the State adopted this measure was so they could reduce activity on the illicit market in foreign currency and promote more secure and transparent transactions, which is something any central bank would seek to do.
Renowned Cuban economist Pedro Monreal believes that the measure seeks to “launder” the illicit market in foreign exchange and encourage the partial dollarization of the Cuban economy, whichis the result of the growing use of USD in private transactions
Mauricio de Miranda, an economist and professor at the Xavierian University in Cali, agrees with this and says the measure is a constructive rectification of the previous mistake to ban the use of USD, which boosted the illicit market in foreign exchange.
However, De Miranda also points out that partial dollarization of the Cuban economy is still the heart of the problem, because it will keep the peso in a constant devaluation cycle (as it lacks unlimited liberating force and legal tender in the country). Plus, an illicit market in foreign currency will last as long as the official exchange rate continues to be far-removed from the reality of supply and demand.
A Timeline of the Cuban Government’s latest USD-related measures
October 15, 2019: The Cuban Government announces 77 stores in magnetic currency (MLC) will initally open, where only electrical appliances will be sold,—according to official discourse. In order to buy products in these stores, Cubans need to open bank accounts in foreign currency, which are accessible with a debit card. These bank accounts – which are still in operation – receive funds from foreign transfers, transfers from other foreign currency accounts or transfers between the same kind of account. Initially, they could also receive cash deposits in US dollars, Euros, Pound Sterling, Canadian dollars, Swiss francs, Mexican pesos, Danish, Norwegian and Swedish currency and Japanese yen. These accounts have never accepted deposits in national currencies. The opening of these stores and the appearance of the MLC marks the beginning of the latest dollarization of the Cuban economy.
July 16, 2020: The Cuban Government announces the elimination of the 10% tax on operations in cash US dollars. The measure had been implemented in 2004 to discourage dollars in cash entering the Cuban bank and financial system. That year, many foreign banks stopped Cuba from making dollar deposits, under pressure from the US.
June 10, 2021: The Cuban Central Bank announces the temporary suspension of cash bank deposits in USD. People had ten days to deposit funds in this currency into their Cuban MLC accounts. Operations carried out by transfer and cash deposits of other currencies accepted in Cuba weren’t affected or limited in any way. The possession of US dollars wasn’t penalized like it was in the ‘90s either.
August 4, 2022: The Cuban Central Bank abandons the official exchange rate of 1 USD to 24 Cuban pesos and steps away from currency reunification, two pillars of the exchange reform that began in January 2021. The Central Bank fixed a rate of 120 pesos for 1 USD.
August 23, 2022: The Cuban Government begins selling USD when available to individuals using the 120 peso to 1 USD rate, with a difference between buying and selling prices due to commercial margins imposed by banks. However, a purchase limit was set at 100 USD per day per person.
April 10, 2023: The Cuban Central Bank announced that it was repealing Resolution 176 from June 10, 2021 that banned banks and non-bank financial institutions from accepting USD in cash. Some of the reasons the BCC gave to justify the measure was the end of the COVID-19 pandemic, revival of the tourism sector and the presence of foreign visitors in the country. These reasons have nothing to do with the reasons they initially gave to suspend these operations almost two years ago.
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