[Cuba] Cuba and the USD

mlebowit@sfu.ca

Points concerning the Cuban measures in relation to the US dollar
Michael A. Lebowitz (26 October 2004)

    * The measures announced by the Cuban government yesterday in relation 
to the use and circulation of the USD in Cuba are the latest in a series 
attempting to deal with the serious problems the Cuban economy faces. 
Previous measures related to the USD include (a) the removal of US coins 
from currency two years ago, (b) the removal of the USD last year for 
inter-firm transactions and restriction of these to the convertible Cuban 
peso (set = to the USD), and (c) the temporary closure in May of stores and 
the raising of prices in USD by 10-30% for consumer items. The latest 
decision removes the USD for use now in consumer purchases from businesses 
beginning 8 November and mandates that subsequent conversion from the USD 
(but no other currencies) into the convertible peso will carry a 10% tax 
(thus effectively lowering the value in Cuba of the USD relative to other 
hard currencies); this tax reflects the risk to Cuba of USD conversion in 
international transactions.
    * The basic economic factors underlying these measures include the 
increased cost of importing oil (which presumably is significantly higher 
than projected in the Cuban national budget), the decline in the USD 
relative to the Euro and other hard currencies, the continuing problems in 
production and export prices for sugar and the significant damage done to 
the Cuban economy as the result of hurricanes. These specifically-economic 
factors create a major problem in terms of the Cuban ability to import 
necessities. The immediate and most serious problem, however, is the effect 
of the Bush government measures to destroy the Cuban economy.
    * No actions undertaken by the Cuban government can be understood 
outside the context of the efforts of the US government to put an end once 
and for all to the Cuban Revolution. While the attempt to do away with this 
'affront' to US hegemony in the hemisphere has been a continuing policy of 
US governments since the Revolution, no US government has pursued this goal 
in as unrelenting a manner (regardless of the effects upon ordinary Cubans) 
and has declared publicly its intention to succeed as has the Bush 
government.  In the context of the continuing US blockade, the Helms-Burton 
Act, etc, last April the US government announced restrictions on visits by 
Cuban-Americans to their families in Cuba and restrictions on remittances 
to family members sent from the US. Both threatened significant reductions 
in the flow of USD to Cuba (and to Cuban family members), and these 
measures were the context for the Cuban response in May which increased the 
prices of imports. While these U.S. restrictions now in effect have been 
well-publicised (and are the source of discontent among some 
Cuban-Americans), they are part of a larger package which includes the fine 
of $100 million by the U.S. Federal Reserve in May of the largest bank in 
Switzerland (USB) for transferring US dollar notes to Cuba, establishment 
of a task force to restrict the flow of foreign currencies to Cuba and this 
week's crackdown (including the freezing of its US assets) on SERCUBA, a 
company that has facilitated the electronic transfer of funds by US 
residents to Cubans. The purpose of the Bush government in all this is 
clear: 'We are financially isolating SERCUBA to make it more difficult for 
the Cuban regime to obtain the hard currency it uses to oppress its own 
people and to prop up its government,' explained Juan Carlos Zarate, a US 
Treasury Department official on Monday.
    * Cuba's new response is dramatic: it will have far-reaching effects on 
daily life in Cuba, and the decision to pursue it now reveals how seriously 
the Cuban government views the situation. Removing the USD from use in 
consumer transactions with enterprises is consistent with the pattern of 
its previous measures--- the need to economise on the USD and to channel 
the USD money supply exclusively to use in international transactions; it 
is very rational in this respect to substitute the convertible peso (which 
already has been serving as a substitute in internal transactions alongside 
the USD) but which has no value externally. Most likely, the USD will 
continue to circulate within the domestic economy among individuals but the 
10% tax on conversions to the convertible peso after 8 November (and the 
possibility that this tax could be increased at a later date) should lead 
to a significant displacement of the USD from domestic circulation and its 
replacement by the convertible peso. Thus, the concentration of US dollars 
where they are most important to the Cuban economy will be the result of 
this response, and this shift should be concentrated in the period before 8 
November.
    * What will be the effect of the new Cuban measures upon Cubans? At 
this point we can only attempt to make some reasonable inferences. So long 
as issue of the convertible peso reflects foreign exchange supplies, 
insofar as the convertible peso is required for all purchases from Cuban 
state enterprises the convertible peso should substitute increasingly for 
the dollar in transactions and as a store of value. Although the dollar is 
not banned and, as noted, is likely to remain to some extent in circulation 
in personal transactions and in illegal exchanges (e.g., involving stolen 
supplies), to the extent that confidence in the convertible peso grows, a 
stable relationship in terms of its use should emerge. (The effective tax 
on the USD would encourage this.) Thus, all other things equal, the measure 
should be successful in establishing a new balance over time. However, the 
immediate effect of this transition from the USD to the convertible peso 
may be uncertainty and confusion--- which will be limited to the extent 
that the Cuban government is successful in assuring the Cuban people that 
the convertible peso will function as a secure store of value.
    * For most Cubans, demonstration that they can convert the national 
peso to the convertible peso as in the past (and at comparable rates) at 
the exchanges outside the agricultural markets will provide important 
assurance over time. For those Cubans fortunate enough to receive regular 
remittances from relatives abroad, it is likely that the combination of the 
US restrictions and the new Cuban government measures to restrict and tax 
the USD (and the encouragement that remittances be sent in other than USD) 
ultimately will lead to a significant shift to remittances in other hard 
currencies (e.g. Canadian dollars) which will increase the difficulty of US 
government monitoring. Those Cubans who will be most negatively affected 
will be people with large stocks of USD that they are hesitant to declare 
for fear that they will call attention to illegal activities; where they 
are unprepared to bring their supplies of USD to the banks for 
conversion--- and unable to quickly launder those supplies, they will 
suffer a 10% loss in USD wealth on 8 November. In this respect, the 
opportunity that the new measures provide for monitoring illegal activity 
(both in terms of second economy commodity chains which involve stolen 
state property and also foreign government interference) is obvious.
    * The transition to a new stable situation may not come easily, and 
there are many opportunities for disruption and uncertainty---both internal 
and external--- because of the particular impact of the new measures. For 
this reason, it is worth stressing the matter of timing. The acceleration 
of measures by the Bush government against Cuba reflects, in part, its 
attempt to win the electoral votes of Florida. The timing of the 
counter-measures by Cuba (and the short-run effects of these) may similarly 
reflect its way of communicating the destructive effects of the Bush 
policies to all US citizens (but especially Cuban-Americans).
    * Finally, although the new Cuban monetary measures may solve the 
immediate economic crisis that Cuba faces, so long as US policy continues 
as it is, these new measures in themselves do little to solve the serious 
economic problems noted above. Further, every Cuban knows that the 
re-election of Bush will encourage a further acceleration of the attack on 
the Cuban Revolution.

Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6

Currently based in Venezuela. Can be reached at
Residencias Anauco Suites
Departamento 601
Parque Central, Zona Postal 1010, Oficina 1
Caracas, Venezuela
(58-212) 573-4111
fax: (58-212) 573-7724

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