Cuba’s Exchange Market Crisis and State Intervention (Part I)

A line outside a currency exchange (Cadeca) in Havana. (14ymedio)

14ymedio bigger14ymedio, Elías Amor Bravo, Economist, 17 October 2022 — The official voice of the party has finally spoken. Like Don Rafael del Junco in that radio serial of the great Félix B. Caignet that paralyzed the country for a long time, the official state newspaper Granma talked about the foreign exchange market in order to blame the informal market and inflation for everything bad. And it has done so with arguments that are more political than technical, with evidence that is more propaganda than scientific. Let’s take a look. What it has always done is nothing more and nothing less than what we could expect.

According to Granma’s official analysis, “in the nation’s current conditions, it’s essential to capture a greater number of currencies, formalizing their entry into the financial system, stabilizing the exchange rate and making it the only one, for both natural and legal persons.” [A ’natural person’ is an individual human being, while a ’legal person’ can be an entity.]

Wrong. A greater influx of foreign exchange doesn’t guarantee control of the financial system, nor will exchange rate stability be achieved. So what does Granma want? Let no one be mistaken: to fill the state coffers and then allocate these funds to the regime’s objectives, which, as we know, have little to do with ordinary Cubans.

This idea was what led Cuban Minister of Economy and Planning Gil two months ago, to improvise a new exchange rate for the purchase of foreign exchange by the State (1 USD per 120 CUP), as he said at that time, to establish an exchange market in the country aimed at “increasing foreign exchange income and gradually advancing in the recovery of the economy.” This is the first thing, of course. The second thing has already been seen. Quarterly GDP growth fell from 10.7% in the first quarter to 1.7% in the second, a full-fledged collapse of the economy, dragged down by the terrible results in agriculture, sugar and manufacturing.

The communists cannot understand, under such conditions, how in a very short time the official exchange rate collapsed compared to the informal market, which at one point reached 200 Cuban pesos/US dollar. There were many reasons for the failure, but it was clear that the simple sale of foreign exchange, limited in amount and only for natural persons, was not going to go very far, as in fact happened.

It is useless for Granma to launch all kinds of attacks against the informal market, which they describe as a “crooked and illegal” business. Although Granma doesn’t recognize it, the informal market has been the winner of this whole process, and unless the State represses or eliminates it, it will continue to be so. Basically because this market, unlike the state of Minister Gil, provides its services to the population without limits, regulations or ties. Granma says, belittling the agents of the informal market, that “it is the only exchange service that is now profitable and open at midnight outside the CADECA [the state exchange service], attending to the line and then selling places in line at 1,000 or 2,000 CUP, or even at dollars.”

Granma wants that personal effort to be done for free, and we could get there. Those people who sacrifice themselves in the lines don’t do it for pleasure but because they get a benefit from it. And it’s about time that this is recognized and accepted. If instead of dedicating themselves to discrediting the practices to which informal market operators are forced to serve the population, they tried to imitate them in the CADECAS or banks, things would be very different, but communist moral superiority prevents that from happening.

Granma doesn’t want to explain why people who really need the currency to have enough money for a freezer or an air conditioner end up resorting to the so-called CADECA resellers, “or buying the dollar at the astronomical exchange rate of 1 USD for 200 CUP, according to the values dictated by the informal and illegal market.” It’s very simple: because no one else offers this service. Specifically, the communist state.

And then, after all, they blame inflation, as if the lack of price control wasn’t the responsibility of a government unable to keep the monetary and fiscal figures in balance.

No one at Granma wants to recognize that the problem is that only a limited amount of foreign currency is authorized to be sold to the population, because the communist state wants to capture most of it for its own needs. That’s how it has always been and will always be. And based on these prologues, Granma says that “we should first talk and understand why it’s important to move towards the convertibility of the national currency and how the foreign exchange market is a step towards that end.”

Fortunately, it’s recognized that the official exchange market is like the tip of the iceberg, with its vitality depending on other measures that in practice allow the operation of a single exchange rate for all actors in society. Ian Pedro Carbonell of the Central Bank of Cuba (BCC), said it clearly: “There can be no fully efficient economic growth and development if the national currency is not convertible.” And it’s true, but the convertability of the national currency depends on the economy developing and being strong. So what came first, the chicken or the egg?

Leaving aside the dual exchange rate, which is an obstacle if the ultimate goal is to have a single and convertible exchange rate for all sectors of the economy, things have to be done very differently. Competition for foreign exchange between the productive and state sectors doesn’t exist in other countries of the world, where there is a sufficient supply of national currency, adjusted to the needs of the population. In Cuba, the state exercises excessive control over economic activity, and its priorities condition public policies. This doesn’t work.

State intervention in the currency exchange market is at the origin of the problems that the communists don’t want to accept. A national currency cannot be regulated with administrative mechanisms. The administrative distribution of the country’s scarce foreign exchange income ends up being an obstacle that causes the ups and downs observed in the informal market, where demand is higher than supply.

Acting in this way, interventionist and regulated, the state not only promotes an inefficient use of available currencies, but also increases the negative effects of inflation and the general shortage of goods and services.

The normal thing would be to liberalize, remove controls and avoid administrative distribution, giving agents capable of obtaining foreign currency the necessary skills to allow them to profit from the internal market. Economic agents who cannot obtain foreign currency with their operations can target those others who can, without the need for intermediary state agencies.

Gil’s measures have ended up causing the existence of two segments of the economy that operate at different exchange rates, without any communication and without trade relations between the two, since the state doesn’t have the slightest interest that this will happen. Consolidating a foreign exchange market will not be easy under current conditions. The necessary relationship between fiscal, monetary and exchange rate policy decisions is urgent and a priority. The blame for what happens should not be put on others.

Translated by Regina Anavy


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