NewsCuba Increases the Value of the Dollar Five Times: Why?

    Cuba Increases the Value of the Dollar Five Times: Why?

    As of this week, the Cuban government will begin to buy dollars at an exchange rate five times higher than the official rate in an attempt to cture more foreign exchange and combat the informal market. A complex measure that seeks to address one of the main imbalances of the serious economic crisis that the country is suffering, and that will also affect other currencies such as the euro.

    Individuals and small businesses will be able to exchange their dollars in cash at exchange houses and banks -all state-owned- at 120 Cuban pesos per greenback, although in practice they will receive 110 pesos if the commission charged for the exchange is subtracted.

    This exchange rate is above the official rate of 24 Cuban pesos per dollar that will be maintained for the accounting of state agencies or companies that have dollars and that are the productive base of the country.

    The euro will go from 24.40 pesos to 122which minus the commission will be 119 island bills for each community unit.

    Here are some keys about what the decision of the government of Miguel Díaz-Canel implies.

    A line in front of a bank in Havana, Cuba, this Thursday. Photo: AFP

    Why was this decision made?

    Although a closure of the exchange market in Cuba was never announced, on the island they stopped buying and selling dollars as of January 2021 due to a financial reform that eliminated the dual currency – until then, the convertible peso equivalent to the dollar circulated together with the Cuban peso – and the paralysis of tourism due to the Covid-19 pandemic and the arrival of fewer remittances as a result of US sanctions.

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    Although the State did not sell dollars and other foreign currencies to the population, the people went to the informal market to buy foreign currency to load debit cards with which food is bought in special stores on the island, emigrate or travel abroad to make purchases to resell -especially Mexico and Panama-, among other reasons.

    Until last week the rate in that parallel market was between 110 and 120 pesos per dollar.

    Also the government imports food, medicine and supplies that you must pay in dollars.

    For example, food is bought abroad for about 2,000 million dollars annually that the State then sells to the people in pesos and at a subsidized price.

    With a rate similar to that offered by the informal market, the government hopes that Cubans will go to the windows and the State will increase its dollar reserves. Nevertheless, some experts warn that it could have the opposite effect.

    Can dollars be bought and sold freely?

    not the ad does not mean that a free exchange system will be implemented since for now only dollars can be sold to exchange houses and banks.

    The measure indicates that the official exchange rate of 24 pesos per dollar will be maintained for the operations of state companies, their imports and exports.

    The figure of 120 Cuban pesos -110 in hand after deducting the commission- will fluctuate according to the international marketaccording to the Cuban authorities.

    Cubans or foreigners, non-agricultural cooperatives and small and medium-sized companies, will be able to attend the windows and will be charged an 8% commission if the money is in cash. If the exchange is by transfer, they will obtain 120 pesos.

    But some economists say the move could backfire.

    What are the risks?

    It is a recognition of the devaluation of the Cuban peso that had been hpening in the informal market,” he said in an interview with Associated Press the economist Pavel Vidal, professor and researcher at the Pontificia Universidad Javeriana Cali, in Colombia.

    From a positive perspective, Vidal indicated, remittances could now be sent through formal channels -no one wants to sell remittances at 24 pesos per dollar when they can obtain 120 in the informal market-, which could unlock a negotiation with the United States that had prohibited such shipments. during the term of Donald Trump and recently raised by Joe Biden.

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    For decades, Cubans received their remittances through Western Union, but Trump banned their operations, so people who sent money to their families on the island did so through mules or informally, in turn feeding the parallel market.

    However, Vidal emphasized, it is “a big mistake” to convert the foreign exchange market only into a mechanism for collecting foreign currency, since injects too many pesos into the financial circuit and it is the people who will pay the consequences when the inflation fed by that amount of currency.

    For his part, Cuban economist and professor Omar Everleny Pérez told AP that with the measure the government is putting a floor on the dollar at 120 pesos but it will not be able to make the informal market dispear since the great demand for dollars for emigration will continue and to stock up on goods that are not produced on the island, for which the parallel rate could rise even more.

    Source: AP

    Source: Clarin

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