14ymedio, Havana, 14 August 2023 — Two weeks ago, Maritza, a retiree living in Central Havana, took her flat-screen TV to a neighbor who repairs household appliances “on the side.” The young man told her that he would have to replace a part and the cost would be 4,000 Cuban pesos, or twenty dollars, based on the exchange rate that day.
The time to pick up her TV is fast approaching. The woman has only the foreign currency her son sent her because she has not received her pension, which is paid in pesos. She believes the repairman should now charge her less because the national currency has been devalued and the agreed-upon 4,000 pesos is now worth only seventeen dollars.
The rise of the dollar on the island’s unofficial currency market has not abated. Just two months ago, with the Cuban peso again in free fall, the exchange rate was at 200 to the dollar. As of Sunday, it was at 245 while one euro — the second most coveted currency in Cuba — was at 250 pesos.
These numbers put the official exchange rate, stuck at 120 pesos to the dollar since August 2022, at a stark disadvantage, and are a testament to the disconnect between the real economy and the official one. But they are also a source of headaches in the daily lives of Cuban consumers, who no longer know what to expect any time they close a deal.
Miguel’s situation is different but similar. Several weeks ago, a family hired him to do some carpentry work for a price that was, at the time, equivalent to fifty euros. The job consisted of installing some shelves over the toilet and a few varnished, bevelled planks to hold cleaning supplies. It was a relatively simple job but one that, as is often the case, was taking him longer than expected.
The client called him over the weekend to ask how much longer it would take and Miguel asked if they already had the money. “Yes, we have the 50 euros,” the client said. Those were the magic words Miguel needed to hear. He doubled down and quickly finished the job. From the time of his bid until today, the value of the euro has increased astronomically and being able to get one’s hands on it has become vital.
“1,500 to 265. Central Habana,” reads one of the many notices for buying and selling dollars in Cuba. The price is exceptionally high, but the seller reacts to the criticism with cynicism. “If you don’t like it, keep being broke and living in this beautiful country,” he says bluntly. “I sell dollars for 240 or 250. The buyers keep them for a few days then quietly resell them for much more. That’s why I sell them like this. Right now it sounds to me like a carton of eggs for 2,200,” he says with irritation.
Irony is the dominant attitude among those who compete by offering a smaller quantity at a lower exchange rate versus those who say they are waiting for the price to rise to 300, or even 500, because Cubans no longer know what to expect.
According to economist Steve Hanke, professor of Applied Economics at Johns Hopkins University, the Cuban peso has fallen more than 70% since January 1, 2022. It ranks fourth among countries whose currencies have lost the most purchasing power. Only Zimbabwe, Venezuela and Syria’s currencies have lost more. It began to worsen right after Cuba currency did away with it dual currency system in January 2021.
At the time the official exchange rate was fixed at 24 pesos to the dollar, a rate that economists described as completely divorced from reality. It did not take long for them to be proven right. On the street, the dollar quickly rose to 80 or 90 pesos. In August 2022, the Central Bank of Cuba revised the rate for individuals and wholesalers to 120 pesos to the dollar.
In reaction to the changes, the U.S. dollar rose to 200 pesos in October of that year but fell back down somewhat, settling to between 170 and 190 pesos. Then the government announced that Cuban banks would accept dollar deposits in cash, a measure that reactivated the dollarization of the economy, a process which, in theory, currency unification was supposed to end.
Cuban fiscal and monetary policy has been consistently erratic, with course corrections being made time and again, leading to inflation and a collapse in the value of the national currency. The most recent experiment — the so-called bancarización* — aims to strong-arm the public into a greater reliance on digital banking operations for which the country is ill-prepared.
This weekend, Cuban economist Pavel Vidal, a professor at the Javeriana University in Cali, Colombia and an expert on the Central Bank of Cuba, published an article in which he briefly explained how the demand for money — an instrument about which, in his opinion, the island’s officials are unaware given the political misunderstanding that is steadily aggravating the nation’s economic crisis — actually works. He offers a revealing fact: money in circulation in Cuba increased at a rate of 10% per year between 2000 and 2017, but between 2020 and 2022 it did so by 86% a year.
Runaway inflation and the decline the unofficial exchange rate is increasing the need for larger sums of money to pay for goods and services, and to buy foreign currency. Although real GDP and the number of transactions have fallen, prices have increased several times over and more money is required.
“If the Central Bank wants to help decrease the demand for money, it would first have to stop runaway inflation,” says Vidal. In his opinion, the solutions would be to “stop monetizing excessive fiscal deficits.” In other words, raise the price of money by increasing interest rates.
“But no. The preferences is still for administrative measures. No matter how much they say or write, I don’t know how many documents state the opposite,” he complains. He believes the banking reform plan requires a level of trust that Cubans do not have in their system. “Not long ago (in 2021), families saw 80% of their bank accounts’ values evaporate as a result of the currency unification… Since the 1990s the Cuban government has not been able to provide a convertible national currency with a single exchange rate appropriate to the economic and financial reality of the country.”
An analysis like this rings true for Cubans like Luis, a self-employed taxi driver who “only” charges 4,500 pesos to drive lifelong customers from the center of Havana to the airport. “I’m going to stop making trips like these,” he says. “It makes more sense to go just from the airport to the city because, for that, I get paid in hard currency.”
*Translator’s note: A term coined by Cuban officials in reference to recent government efforts to reduce the role of cash in the nation’s economy and expand the use of digital payment apps.
COLLABORATE WITH OUR WORK: The 14ymedio team is committed to practicing serious journalism that reflects Cuba’s reality in all its depth. Thank you for joining us on this long journey. We invite you to continue supporting us by becoming a member of 14ymedio now. Together we can continue transforming journalism in Cuba.