From “dollarizing” to “euroising” the Cuban economy

Where does this measure come from and what impact will it have?

Will the euro replace the US dollar as Cuba’s preferred currency?

By Cubaencuentro

HAVANA TIMES – The decision to suspend dollar cash deposits (described as a temporary measure) stems, according to the Cuban government, from problems Cuba has in using this money abroad due to the strengthening of US sanctions, reports Deutsche Welle (DW).

There is speculation that the intention is to slow down the illicit market, assuming that many people would deposit their dollars before the regulations go into effect on June Or it was a way to quickly collect foreign currency, which is urgent.

“I think this measure aims above all to reduce the financial risk of Cuban banks. The International Financial Bank and other Cuban financial institutions have entered the list of institutions blocked by the US State Department, and US sanctions in the financial sector have become more severe. In this landscape, Cuban banks found it more difficult to deposit cash dollars, which they had in their safes, on the international financial market, ”economist Pavel Vidal told DW, holder of a doctorate from the University of Havana and associate professor of economics. at Javeriana University in Cali, Colombia.

However, he clarified that “although the government made no mention of it, another advantage of the measure is that it temporarily increases liquidity in foreign currency in banks at a time when the country is experiencing a major balance of financial crisis. payments. The dollars circulating in the streets which then end up in the banks help import food, medicine and other supplies, even if only in part.

The euro strengthens in Cuba

Gunther Neubert, the director of the German economic delegation in Cuba, spoke with DW and stressed that Cuba urgently needs more liquidity in foreign currency to pay its suppliers, also in food. “Cuba imports about 80% of the food it needs, and the vast majority of suppliers do not accept US dollars as a means of payment due to US sanctions,” he says. He adds that this measure could increase the arrival of other currencies on the island. “Cubans will now depend on receiving other currencies, like the euro or the Swiss franc, instead of the USD, which will make these other currencies stronger,” he said.

Can we outline the process of euroisation of the economy? “Not necessarily, but the euro will become more important, at least in the short to medium term,” Neubert said.

In the meantime, Vidal thinks it is likely that “private illegal markets will become Euroisy, even if this does not happen throughout the economy, as the government continues to prefer the USD to operate institutionally over it. within the island “. He points to the disproportionate increase in the European exchange rate over the past week in Cuba’s informal markets.

Growing uncertainty

“More volatile exchange rates also reflect the uncertainty that exists with monetary policy and the future of the economy,” says the Cuban economist. Vidal worked as an analyst in the Monetary Policy Division of the Central Bank of Cuba between 1999 and 2006. In his view, the lack of a coherent strategy to deal with the crisis is evident. “This is because the government has been promoting dollarization since 2019 and in 2020 it removed the 10% tax on cash transactions in USD, which was put in place in 2004, to encourage the entry of euros. and other currencies instead of the USD. So why did they decide to cancel the tax on the US dollar in July 2020, if they already knew that the financial penalties were increased and that they did not was there any sign that US policy towards Cuba would change? ”

According to Pavel Vidal, the financial risk of dealing in USD is now transferred to families. In fact, the price for converting USD remittances into other currencies, which can be deposited in banks or topped up on debit cards used to buy in stores with prices in USD, will now be paid by the details. These transactions make payment in USD more expensive for the general population. They also represent “an additional problem, at a time when the country must manage the inflow of foreign income, because they are essential to get Cuba out of its recession and its balance of payments crisis”, warns the academic.

Foreign investments

Gunther Neubert, the head of the German economic delegation in Cuba, believes the country really needs to boost productivity and expand value chains. “They have to try to produce more in the country, but they need investment to do so. Investments must come from abroad. This is the only way to reduce food imports in the long term and create products for export, which allow them to obtain foreign exchange, ”he said.

This is crucial, he notes, because the tourism industry (which was the source of most foreign exchange earnings) will not recover in the short term, even when tourists who do not come. more Europe or Canada are replaced by tourists from Russia and China.

The measure that has just entered into force in Cuba will not help matters in the tourism sector either. However, in Neubert’s opinion, this will not have a direct impact on investments. “The framework conditions are what matters most to foreign investors, who can transfer their earnings abroad,” he explains.

However, uncertainty as to the real impact of the measure and its duration still remains in the air, in the dark background of a deep crisis that is ravaging Cuba.

Read more about Cuba here on Havana Times.

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