The Cuban Government’s measure to accept USD in cash at national banks and financial institutions again is in keeping with the government policy of collecting foreign currency no matter what. This isn’t surprising given the present crisis.
The Government can’t afford to ignore the informal market of goods and services that operates in USD when its monopoly economic apparatus is bleeding dry because of a lack of foreign currency. This is why they’ve adopted this measure, another one that seeks to get dollars that don’t come from private companies and citizens to end up in Cuban banks.
The policy’s effectiveness will depend on incentives given to citizens who possess USD to deposit some of them in the bank. Cuban bank institutions don’t provide traditional incentives for clients to keep their foreign currency in the bank, such as protecting the purchasing power of clients’ money if the exchange rate changes or offering interest to value the deposit (not to mention the ability to withdrawal money).
Up until now, the main incentive for Citizen X to go to the bank with foreign currency and make a deposit is because they need the magnetic MLC dollarized currency to buy products. [But since 2021 they couldn’t do so with cash USD.] However, now, the new regulation seems to be a shift in this direction.
Up until the publication of the new measure on April 10, 2023, anyone in possession of dollars who wanted MLC had the option of selling the former and then use the Cuban pesos (CUP) they’d get for them to buy MLC. It was way too tedious. You could also give 100 USD, for example, to a MLC seller (or a private remitter) and they would give you approximately 90 MLC for it. The USD-MLC relationship on the illicit market was unfavorable for USD (1 USD=0.90 MLC, in this case, which is one of the rates on illicit market).
With the new authorization of cash deposits in USD (which will become MLC when they enter the banking system), the relationship will now be 1×1, or closer to this.
The new measure offers owners of USD an incentive to abandon the exchange of USD for MLC on the illicit market and turn to official institutions instead, just like they did with the Euro. Although lines might make people change their minds and prefer to seek out a private remitter.
Once again, the Government is waging war on the illicit market to collect a foreign currency. Will it use it to continue to build its asymtomatic socialism? The exception though, is that it might be very useful for people who have USD. However, what do ordinary citizens get from the measure, if there’s barely anything in stores to buy?
Complements of the decision
What other incentives could the Government propose to collect more USD?
- Reduce the extinct supply of food in Cuban pesos and sell them in MLC instead; but what foods could you still buy in CUP? Not much.
- It seems there’s been a cautious opening to private importing – it’s a little less difficult to do now – of electric and hybrid cars. Making USD deposits would work for this new and potential market of people who want to buy vehicles and have USD. If you have USD and want a car, just make a deposit.
- Some SMEs engage in imports. Allowing them to make deposits (as a legal entity or via their owners as natural persons) would allow imports to grow, as well as commissions collected by the monopoly on foreign trade.
- There is a severe crisis in fuel sales for vehicles at the moment. If sales were to pass into MLC completely or partially – encouraging benefits -, they’d be “motivating” or forcing citizens with access to USD to increase their bank deposits in foreign currency. The above includes driving up demand for foreign currency for people who don’t have a direct source. There are no guarantees that a measure like this won’t bring about a social uprising as a result. It didn’t happen when staple foods began to be sold in the dollarized MLC. Even so, if fuel does become MLC-ized – which I hope isn’t the case – drivers will transfer fuel costs into the price of passenger fares, like they’ve always done. (The new measure eclipses the fuel crisis in public debate, which the Cuban Government has not bothered to speak about or give an explanation.)
New fuel crisis in Cuba hits private transport drivers
The abovementioned scenarios could compliment the new measure, in the meantime, they will force people who have USD to spend a little more. It would also be an “incentive” to drive up demand for USD and EUR on the illicit market, as a stepping stone, so citizens then make deposits.
In other words, allowing cash deposits in USD is giving Citizen X the chance to put money in the bank, but as the economy becomes more and dollarized, X will look for more USD or EUR to take to the bank. If the Government wants foreign currency, it’s in their best interests to also accept USD. It makes perfect sense.
In any case, only giving citizens access to a product via MLC, along with bank accounts opening for cash deposits in USD, is an excellent way for the Government to reach its goal. Pure marketing philosophy: connect the people’s need with what you want them to do. They have extensive experience in doing this.
The foreign currency market and landscape
In June 2021, the Cuban Government segmented the foreign currency market depending on the complex relationship between Cuban economic institutions and foreign currencies. Up until that point, people looking to emigrate to the United States via Nicaragua and people in need of MLC were trying to buy USD. This segmentation consisted of banning bank deposits in USD. People wanting MLC didn’t have to compete with people looking for foreign currency in cash to leave the country.
However, after the humanitarian visa came into force for Cubans in January 2023, the migration wave has slowed down and the statistics prove this. This market segmentation didn’t make any sense, it was an unnecessary restriction.
Meanwhile, the Biden Administration’s latest measures, which paved the way for remittance services restored via Western Union haven’t given any significant results up until now. This means that remittances continue to reach the island through different channels and that the Government still isn’t able to capture them in full. Authorizing cash deposits in USD to raise funds in this currency could be better than nothing. If remittances are entering the country in cash anyway, the mechanism needs to target them from this angle.
On the other hand, the threat of private remitters’ businesses disappearing might also mean that demand for foreign currency on the illicit market drops. This isn’t conclusive because the way the informal market behaves also depends on whether goods are dollarized further, as well as on migration, which will determine whether there is a greater demand for USD or not. Demand for foreign currency only varying slightly is a possibility: people who had traditionally bough EUR might now be indifferent when it comes to buying EUR or USD depending on what they can find; which would be a factor that drives up demand for USD. The agents that meet on the foreign currency market will ultimately have the last word.
If this current measure were permanent and not an attempt for the Government to seek out hard currency for a temporary situation, a more stable and transitive relationship would be established between USD-MLC-EUR. Dollarization would reach an orderly pace.
What about the rest of Cubans?
The implications of this step – allowing cash deposits in USD – going forwards, after a step backwards, doesn’t give any indication life will get better for the most forgotten of Cubans: ordinary Cubans without foreign remittances. Cubans who are called upon to vote for everyone and told to take to the street to beat dissidents. What do they get out of this?
We are looking at another policy that isn’t centered around getting to the heart of the Cuban economy’s problems that are reflected in its crisis of production. Prices of bread, transport, meat and rice won’t drop with this measure. The Government continues to make decisions in the circulation of currencies, but doesn’t create the conditions to approve measures that will have a positive impact on production. They continue to see how they can do business, to see how they can scrape by without having to give citizens significant spaces of power. They carry on without changing their economic model which serves their interests to stay in power, but doesn’t work to safeguard Cubans’ wellbeing.
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