A partial ‘dollarization’ continues in Cuba

By Progreso Semanal Last updated Jun 10, 2020

HAVANA – Resolution 73 of the Central Bank of Cuba, published on May 22 in the Official Gazette, provides for an expansion of the use of freely convertible currencies (MLC) in Cuba by natural persons. The measure points to a greater, but partial, dollarization of the Cuban economy due to the lack of liquidity in foreign currency needed for the country’s current operations, and the negative impacts this represents.

According to the new resolution, it is now possible:

For individuals to use the US Dollar for retail operations.

To use the US dollar for imports made by natural persons through entities authorized by the Minister of Foreign Trade and Foreign Investment.

To authorize entities requesting a specific license from the Central Bank to open bank accounts using US dollars and proceed with payment and collection operations.

For natural persons, including those who do not reside in the country, to open bank accounts with US dollars in Cuban banks.

To carry out transactions using magnetic cards with accounts of natural persons using U.S. dollars. These transactions can be carried out in this currency, or in Cuban pesos (CUP) and in convertible pesos (CUC), and by way of ATMs, sales terminals and other payment outlets.

To receive funds in convertible currency accounts via bank transfers from abroad in any MLC (US dollars, euros, British pounds, Canadian dollars, Swiss francs, Mexican pesos, Danish kroner, Norwegian kroner, Swedish kroner and Japanese yen).

To receive remittances in these accounts through FINCIMIEX S.A. (the financial entity for the Cuban Export-Import Corporation).

To make cash deposits from any MLC into these accounts. The 10 percent tax will still be applied to the US dollar.

For natural persons to pay in US dollars from these accounts to importing state entities authorized to conduct retail sales and import merchandise.

That all operations established for CUC and CUP cards may be carried out from these accounts by natural persons.

“The new Central Bank Resolution enshrines what’s been happening since November of last year when stores were opened for the sale of some products exclusively in MLC, and all that this implied in the dynamics of opening accounts with foreign currencies in Cuban banks, the creation of specific credit cards for that purpose, and new facilities for the use of these currencies in the accounts of Cuban citizens residing in the country,” explained Cuban economist Ricardo Torres, a regular Progreso Weekly contributor.

Resolution 275 had authorized the receipt of MLC in Cuban bank accounts of natural persons residing in the country starting in 2019. Replaced now with Resolution 73, no distinction is made between resident and non-resident Cuban natural persons. The allowance of non resident Cuban natural persons to open bank accounts in Cuba with U.S. dollars was confirmed via tweet from the Ministry of Internal Commerce.

With this provision the fact that retail trade and payment for certain services to importing state companies is legal within the Cuban territory is unified under the same legal norm. In Torres’s words, “This leaves open the possibility that other categories of products and services will be incorporated in the future which may be paid in these currencies.”

For University of Havana economics professor Henry Colina, Resolution 75 “also points to the short-term liquidity shortage in the country. Because the efforts to import many products must have increased significantly. Although the price of fuel and food has decreased, we realize that the final bill is large. There is a need for short-term currencies, and this measure aims to regulate those currencies that are already in the country’s economy, not just dollars.”

Betsy Anaya Cruz, a PhD in economics and director of the Center for the Study of the Cuban Economy, adds that “issuing cards for the purchase of certain goods had a positive effect in terms of foreign exchange collection, although not in terms of monetary policy. The reason for extending this possibility now to Cuban citizens living outside the country is precisely because of the chronic shortage of foreign currency that the country has, which puts the development process under strain and the need to expand exports.”

Oscar Fernandez, another Progreso Weekly contributor and a PhD in economics, believes that this measure can stimulate the sending of remittances to Cuba through formal channels, since the use that natural persons can give to that money within the country is expanded. “It is the only way that the state has to replenish what it offers in the network of retail stores, because it does not have dollars to buy them,” he says. He explains that in practice this resolution, by expanding the use of US dollars, reduces the importance of the Cuban convertible peso.

Paying at Caribe Stores with cards backed by the dollar was something that could already be done before this Resolution. What fundamentally changes now is the possibility for Cuban natural persons not residing in the country to also use them. This measure also “draws attention to this possibility that already existed, and that is why I believe that it would work as an incentive to send remittances through official channels,” adds Fernandez.

The handling of these currencies in cash is also being controlled by the use of magnetic cards in all permitted monetary and financial operations. Although the informal currency market works in parallel with official mechanisms, for the moment these measures could impact the increase in the value of the dollar and the respective devaluation of the CUC, without there being a clear, stable and direct exchange rate between the dollar and the Cuban peso.

Certainly, the country was already traversing a crisis in its balance of payments. Cuba has a very strong dependence on its external sector, and is highly dependent on the import of a small group of goods and services. Other factors, such as the low diversification of the export portfolio and the low level of foreign investments made, were already having a negative impact, according to Ms. Anaya.

The situation, made worse by COVID-19, has affected the main sources of income in Cuba, such as tourism. In this sense, Anaya estimates that “a good part of tourists traveling to Cuba when the borders are re-opened, in spite of its limitations, will be the Cubans who live out of the country, who come to visit their family, and perhaps that tourist sector will be the least affected in the future.” From that point of view, this measure could work best in a scenario where these Cuban visitors can open bank accounts in Cuba and use their money through the country’s formal channels.

“There are still many questions and few answers about how we are going to get out of this difficult situation — and as part of a world system,” she adds.

So the exceptional situation caused by the Coronavirus has worsened an economic crisis that already existed. Now the need for foreign currencies that cross all economic sectors is more evident, so this and other measures seek to expand the availability of these currencies in the country.