Cuban Government Taps Experts in an Effort to Halt Peso’s Downward Plunge

Monreal is proposing a two-level currency exchange market. One would involve business operations with banks and retail operations with Cadeca; another would be based on a flexible exchange rate model. (14ymedio)

14ymedio bigger14ymedio, Madrid, September 12, 2023 — Faced with the peso’s seemingly unstoppable free fall, the Cuban government is mobilizing its own economists by soliciting proposals from them. One such proposal, submitted by Joel Ernesto Marill Domenech, was published this week in Cubadebate. In a series of two articles, the official from the Ministry of Economy and Planning suggests a national currency whose value would float in a way similar to the euro. Independent economist Pedro Monreal describes this proposal as “not very viable” due to the fact that the country has no foreign exchange reserves or enough domestic production to underpin such a currency.

The article in the state-run newspaper contains a slew of comments from readers who have their own proposals, many of which involve closing the country’s hard-currency retail stores. Others involve contracts with the state that would allow small and medium-sized businesses to obtain the foreign currency they need to buy imports through the state-owned currency exchange Cadeca, alleviating them of the pressure the more expensive informal currency exchange market puts on them.

Monreal was not surprised by the flood of ideas. “The challenges facing the country’s exchange rate policy are anything but simple, though some social media commenters underestimate the complexities of the process,” he says. His own game plan would first involve  formalizing operations – something the government is already trying to do through a policy it is calling bancarización, which would phase out the use of cash and replace it with digital payment platforms – then stabilizing the exchange rate.

The first key point, “the most complex of all,” is that macroeconomic stability is essential and requires “a deep reduction in fiscal imbalances”

Under current conditions, he argues, a process like the one followed in the 1990s that relied on Cadeca is not useful since there are more economic actors on the scene today as well as more informal channels for sending remittances. This complicates any attempt to establish exchange rate policy. However, Marill Domenech outlines four key points to consider for achieving this goal. The first, “the most complex of all,” is that macroeconomic stability is indispensable and requires “a deep reduction in fiscal imbalances.”

Few commenters took note of proposals that called for economic adjustments that involved eliminating grants and subsidies as part of the “rationalization” of government spending. This would only be a short-term fix. Over the medium term the author proposes “more structural transformations in the size of the budget and increasing the effectiveness of public spending.” Additionally, he calls for increasing public revenue by raising taxes and tax rates as well as modernizing the National Office of Tax Administration to improve capital controls and reduce tax evasion.

He admits that fiscal adjustments and a comprehensive overhaul of tax policy are complex undertakings, especially in a socialist state that must — if it wants to continue protecting its most vulnerable citizens — “pass on its costs to those in the best position to assume them.”

The second feature, which is aimed at formalizing operations, involves regulations, guarantees, incentives and penalties that would encourage those now operating on the black market to move the legal one. “To this end, an essential incentive would be for the official market exchange rate to begin consistently reflecting objective market conditions and to modify its value according to the underlying trends therein,” he says.

The idea is create a market “that allows and encourages buyers and sellers to freely exchange their currencies on the newly formalized exchange market,” something the economist Pedro Monreal has called “whitening the informal hard currency market.” The exchange rate would “float in bands” within limits set by the Central Bank of Cuba, a model similar to that followed by the euro, which has set maximums and minimums within which the currency must trade. Regulators would intervene if the rate falls below or exceeds these limits “but the interventions of the monetary authority must be based on economic instruments and not on administrative control,” warns the author.

Monreal is proposing a two-tier exchange market. The first would involve business operations with banks and retail operations with Cadeca. The second would be based on a flexible exhange rate model

The last key component is communication and the ability to gain public trust, something very difficult to achieve in Cuba given the lack of transparency, widespread ignorance of basic economic principles and, most importantly, the decades-long experience of living with a currency that is worthless.

The proposal has not fallen on deaf ears. Monreal has taken up the gauntlet and joined the debate through his X (formerly Twitter) account. The economist, who currently lives overseas, points out that an exchange rate that floats within preset limits is needed in order to be able to devalue official rates. Also important is the ability to rely on foreign exchange reserves, an almost impossible option for a government that does not have them.

Instead, Monreal is proposing a two-tier exchange market. The first would involve business operations with banks and retail operations with Cadeca. The second would be based on a flexible exhange rate model. This would combine a fixed nominal rate that adjusts for factors such as inflation with a variable rate. He believes such a system would be more flexible, allowing for better control of any small devaluations that might occur.

Monreal does not buy into the idea that macroeconomic balance is a prerequisite since delaying action could be lethal. “The first step in the sequence should be to support the transformation of the small, private, commercial production component of the agricultural system into a more diversified private component with greater weight given to private companies in the form of capital investment,” he says.

In his opinion, the informal currency market in Cuba revolves around food consumption. “Without an increase in the national food supply, there will be no structural support for the national currency. Without that, you are basically pouring water into baskets,” he adds.

Be that as it may, the mere fact that reforms of this magnitude are being discussed on Cubadebate puts them on the table as valid concepts, which were almost banned here forty years ago. This is what those who have read the article are trying to digest. “The article is very good,” says one commenter. “In other words, it’s all been one long road towards capitalism. A fight between the state and the market. The market, 10; the state, 0. It’s a knockout.”


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