The Hunt for Hard Currency Never Ends

While a Cuban farmer plows the land with oxen, the Cuban government is hoping to be able to sell the farmers tractors. (CC)

14ymedio biggerElías Amor Bravo, Economist, January 26, 2021 — The emergence of retail stores that only accept freely convertible currency — known in Cuba as MLC stores — and a system governing exports by private entrepreneurs are two recent developments that have attracted attention from analysts and observers of the Cuban economy due to their significant short, medium and long-term repercussions. These instruments share many common elements but that are hard to find in other countries, two features which accentuate the unusual nature of Cuba’s communist economic model.

The two actions arose out of the communist regime’s need to find a stable source of hard currency at a time when tourism, exports of goods and services, foreign investment, Venezuelan petroleum and even remittances are down as a consequence of the economic crisis brought on by Covid-19. Cuba’s eternal economic dependency on other countries, which goes back to the Soviet era, has only gotten worse and the state seems incapable of finding a solution in the current era of globalization.

Little more can be said about the MLC stores other than they have met expectations. Through clever design they have become an instrument for funneling remittances from overseas while at the same time diminishing the activity of so-called “mules,” which had reached spectacular proportions in recent years.

Shopping at these stores requires a customer to use a debit card. So far, nothing unusual about that. The problem is that the card has to be linked to a checking account at a state bank. Again, nothing strange. The symbolic importance, however, is that the funds in the account must be dollars or other hard currency because prices for merchandise at these stores are denominated in foreign currency, not in the country’s own legal tender.

The shortages some of these establishments have experienced in recent days is further confirmation of the policy failures of Cuba’s communist system. It is unfathomable that stores that stock their shelves with merchandise purchased with the same currency with which the items are sold (and at substantial markups to boot) cannot continuously restock their shelves and avoid these uncomfortable shortages, endless queues and uncertainties, not to mention ever higher prices?

Shortages are an impediment to increasing sales. If there is no revenue, profits fall and less merchandise can be purchased, which again creates shortages in spite of stable demand. The eternal, vicious cycle of the Cuban economy.

When these stores were announced by the economics minister almost two years ago, the idea was that they would sell only “high-end” products. But reality is stubborn. What MLC stores sell is practically everything that is hard to find in the rest of the country’s retail sector.

Management at these stores is provided by corporations linked to the army and state security apparatus, which supply the government with the hard currency required to meet its needs. These entities are not displaying the expected level of responsibility when it comes to paying suppliers or to logistics and supply management. What is even worse is that they are not providing the hard currency the regime needs to, for example, pay its debts to foreign creditors.

It is very likely that, once tourism picks up again, these stores will be phased out. Authorities have acknowledged on several occasions that their existence is not compatible with “revolutionary” values but that they are currently the only option for controlling the flow of hard currency coming into the country, largely in the form of remittances. Except in some tourist resorts and other places geared to short-term travelers, no other country in the world has a retail model similar to it. The brutal segmentation caused by MLC stores in the Cuban consumer market could be a harbinger of social disruption, especially for those without access to foreign exchange, which are most people.

Though the system set up to handle exports by private entrepreneurs is a different phenomenon, it shares the same objective as the MLC stores: providing the regime with hard currency. In this case it involves a government intermediary, an agency “specializing” in foreign trade, which helps the entrepreneur manage his foreign trade operations in exchange for a fixed percentage of sales. Certainly, there are such export promotion agencies in other countries but they do not charge for their services. They are funded through taxation and certainly do not assume the role they have in the Cuban system: negotiating with the foreign buyer.

In this way the regime prohibits a private entrepreneur from freely exporting his goods to a foreign business, Spanish or Italian, by forcing him to go through a government middleman. In order to be able to export, the entrepreneur must also agree to become part of a “map” drawn up by government bureaucrats which, you can bet, favors those entrepreneurs who agree to its conditions.

This statutory intrusion into a free market economic activity such as foreign trade is justified on the basis of maintaining quality, solvency and company size. In the reality of global economics, small and medium-sized companies export by tapping into international supply chains without the need for state involvement. This means that, in the short term, some of these private Cuban exporters might experience strong revenue growth, something the regime does not allow because of its obsession with maintaining control over the economy.

Unlike MLC stores, which will probably be phased out once tourism revives or foreign investment picks up, the system of private sector exports appears to have a level of permanence and continuity within the regime’s economic framework. It is all a matter of whether enough goods can be produced for export and producers can maintain a steady supply. And this depends on whether prices for exported goods are remunerative and levels of profitability in the Cuban economy improve, which should be easy. International buyers will also be able to determine if the prices for Cuban exports are competitive with respect to those from other countries, assuming the currency exchange rate is correct.

Though neither the MLC stores nor the system governing exports by private entrepreneurs are part of the series of recent currency reform measures, they are both undoubtedly related to them. If the dollar-to-peso exchange rate gradually rises, as is already happening in the informal market, it wil be very difficult for Cubans who do not get dollars from overseas to access hard currency, open bank accounts or obtain debit cards for MLC stores.

On the other hand, exporters that carry out their activities continuously and retain 80% of their foreign exchange earnings as authorized by the regime will receive increasing infusions of hard currency. The regime is already doing this for the chain of stores in the Logistics Business Group of the Ministry of Agriculture (Gelma). The funds will be used to acquire tools and supplies for their MLC stores following the model mentioned above. There is even talk of them selling tractors. Will they manage to get there?


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