Five factors must be met, including “unrestricted access to dollars, euros and other international currencies”

14ymedio, Madrid, 10 January 2025 — Given Cuba’s economic conditions, it is difficult for the proposal to establish a floating exchange rate announced by Prime Minister Manuel Marrero, before Parliament last December, to achieve the purpose of “ordering” the exchange rate system, today mostly in the hands of the irregular market. This is, broadly speaking, what emerges from the report by Cuban economist Pavel Vidal, published this Friday in El Toque by the Cuban Observatory of Currencies and Finances (OMFi).
The specialist, a professor at the Pontifical Javeriana University of Cali (Colombia), doubts the viability of the measure “in the context of the current economic crisis” and questions whether the informal foreign exchange market will disappear with it. As he warns, “the formalization of the foreign exchange market does not mean that the Government can manipulate the exchange rate arbitrarily.” If it did, if the State “tried to artificially influence the exchange rate, especially in the sense of an appreciation, a severe blow to the credibility of the system would be generated, affecting its operability and sustainability, and the objective would not be achieved” of having a substitute for the irregular market.
To begin with, on day zero, Vidal analyzes, “it is most likely that a rate close to that of the informal market will be established to attract the actors who operate in it” – 335 pesos for 1 dollar this Friday. What will be the criteria and sources of information to move the exchange rate daily, he wonders, answering: “In market economies, competition between banks and exchange houses allows supply and demand movements to be reflected in real time, but in Cuba, where the monopoly of the formal foreign exchange market will remain in the hands of the State, clear and transparent rules of the formula that will be used to adjust the daily rate are required.”
The economist doubts the feasibility of the measure “in the context of the current economic crisis” and questions whether the informal foreign exchange market will disappear
Another unresolved question is whether they will allow micro, small and medium-sized enterprises (MSMEs) to participate in the new foreign exchange market – on which the Government has not pronounced – which would be, for the professor of Economics, “a significant change with respect to the current system and crucial to achieve the formalization of their operations.”
For the floating exchange rate to be successful, in short, there would have to be five factors that are difficult to achieve on the Island. The first, a better macroeconomic scenario. “Given that recent exchange rate policy announcements have not been accompanied by the presentation of a macroeconomic stabilization program, nor is there a political will to implement weighty structural reforms, it is unlikely that there is a comfortable scenario for the replacement of the informal foreign exchange market,” says Vidal.
The expert recalls precisely that if the Cuban Government managed, in the mid-1990s, during the Special Period, to replace the informal foreign exchange market with transactions in the Cadeca exchange houses, it was because “in parallel there was a significant fiscal adjustment, and important structural reforms introduced at the time, such as the opening to remittances, self-employment and foreign investments,” in addition to “a reform of the banking and financial system.”
On this point, he also says that “no significant improvements in international conditions are expected that may favor the performance of the Cuban economy,” and that, on the contrary, the imminent Administration of Donald Trump in the United States augurs “a new escalation of economic sanctions that further worsen balance of payments restrictions and external financial conditions.”
“Cuba is not a member of the main international multilateral financial institutions nor does it have funding to implement the exchange rate reform,” adds the economist. “Participation in the BRICS [emerging economies] is not known to have an impact on a relaxation of external financial conditions for the Cuban economy for the time being.”
“Cuba is not a member of the main international multilateral financial institutions nor does it have funding to implement the exchange rate reform,” adds the economist
A second factor to take into account is that the informal foreign exchange market in Cuba “has been consolidated in this decade as a mechanism that allows meeting the demand for foreign exchange that the official market cannot satisfy.” A feasible objective, Vidal proposes, “would be to try to transfer the supply and demand of foreign exchange from the population and private companies to exchange houses and banks by offering security, a flexible and realistic exchange rate,” and access to “unrestricted dollars, euros and other international currencies.”
However, Vidal doubts that this will be the case. On the contrary, “it is very likely that the Government will mistake the functions of a formalized foreign exchange market and try to use it as a mechanism for collecting and displacing the uses of foreign exchange.”
A third aspect that is not met on the Island, one that would be “essential to manage the floating of the exchange rate with technical and economic criteria,” is the autonomy of the Central Bank, since “political interference could negatively affect the coherence of the movements of the formal rate.”
As a fourth success factor, the implementation of a floating exchange rate is “in principle, a positive measure,” he insists, and he explains that it should be given as part of “a comprehensive strategy that focuses on exchange rate unification and the convertibility of the national currency.” And he warns: “Isolated and fragmented measures are not enough in any area, and the exchange rate system is not the exception.”
It is also essential that, in addition to the floating exchange rate in the Cadeca exchange houses and banks for operations with the population, “it is essential to correct the official exchange rate [24 pesos for 1 dollar] that applies to state-owned companies.” Many of these, describes the expert, operate as “zombi companies,” “surviving thanks to subsidies and the overvaluation of the official exchange rate” without generating wealth.
The fifth and last aspect that Vidal puts on the table is the weak logistical and technological capacity of the country. “Without an efficient infrastructure, operational limitations will continue to divert users to the informal market,” concludes the professor.
Translated by Regina Anavy
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