HAVANA. The bulls were released. After the first days of announcing the decision by the authorities to dollarize segments of the durable goods market, the CUC in the Stock Exchange of Revolico depreciates 10-20 percent based on expectations and speculation. Private importers of products that the State has just sold in USD lower their prices slightly, also around 15 percent. The private financial houses – legal – that control a part of the exchange and credit operations refine their accounts. The second economy enlists its adaptation strategies. The State has touched a central variable and the actors quickly begin to reorganize their game under the new rules.
That "Cuba is not moving towards the dollarization of its economy" was this time the decree issued to reality, and propagated, as on other occasions, by the voices responsible for protecting vulnerable ears from rough terms. Meanwhile, the obsolete facts are rushing, in their demystifying and direct eagerness, to place the names where euphemisms were intended to be coined.
For a "full" dollarization to occur, say the "Ecuadorian", the government would have to decree the cancellation of the national currency and adopt a foreign as the only means of legal tender within the country. It does not seem that this will happen. However, it is known as “partial” dollarization to a plot like that of Cuba, in which individuals, together with the national currency, keep both physical money and financial assets or bank deposits denominated in foreign currency.
This process was reinforced about five years ago, when the authorities announced the proximity of monetary unification. Whenever the adoption – or the mere announcement – of a measure poses a risk of disruption of the macroeconomic order, fearful agents react immediately. The first provision they make is to try to protect the future value of their monetary wealth by replacing their savings in local currency with foreign currency. Then they worry about protecting bulky monetary transactions and start trading in high-value assets such as real estate and cars. That has been the reality of Cuba in the last five years.
In addition, certain ideal conditions for the circulation and use of US dollars in the informal circuits of the economy are added. For the offer we find cash remittances, foreign exchange that spill tourism and foreign investment towards the people associated with them, savings of returning Cubans, bank sales. Due to the demand, furtive importers identified as “mules”, private business owners who remit their profits, temporary Cuban travelers, definitive emigrants, and the plaintiffs of the new currency stores have just been added. As a foreign exchange market, in addition to the state commercial banking, private exchange agents operate, who take advantage of the lien to the dollars in cash and the unstable availability of foreign exchange in the banks to make profitable their operations of purchase and sale of currencies and to speculate freely.
It may sting and spread
Dollarization could go beyond what the authorities assume. The natural scenario is that the dollar continues to take away part of its functions from domestic currencies. As more transactions can be made with the foreign currency, it increases the security it offers to its bearers, and the public will be betting more and more of its exchanges and its monetary reserves.
All CUC and CUP that circulate in the segment of the population, with the exception of those that are usually spent on the offers that the State controls, can become potential claimants of dollars. As a trend, private sellers will try to get most of their income in foreign exchange and buyers will have to arrange solutions to deal with it. A dangerous spiral could be generated that feeds on its own movement, until it reaches an undesirable situation, already experienced at the beginning of the 1990s: that the dollar is imposed as a general unit of account and emptied of functions to the currencies of House.
The moment is pure stress. The State has to maneuver with talent and speed. If it does not intervene quickly with a neutralizing action, the depreciation of the CUC in the second economy will increase tensions in the first. Currency depositors now obtain a greater amount of CUC in exchange for their dollars and increase their purchasing power in traditional TRDs and stores in Cuban pesos. Since some of these actors are trained to detect or generate imbalances in formal markets, they could attack certain products, some of which are already missing, according to a recent note from the Ministry of Internal Trade. Ensuring stable supplies in the non-dollarized economy will be among the most important quagmires to be overcome by the authorities.
The government has before it a crucial dilemma: to adopt stabilizing actions to avoid an escalation in the depreciation of the CUC in the informal markets and prevent more serious monetary imbalances from precipitating; or to let the depreciation run, and that the market adjustment provides a balance of reference in the event of an official devaluation that brings us closer to exchange rate unification. I vote to guarantee the greatest possible monetary stability; I vote for gradualness.
The key piece of the board is the guarantee of convertibility of the CUC to USD in the state banking system. Only an uninterrupted supply of dollars from the State can relieve pressures in the informal market. An eventual elimination of the lien would lighten the way.
Although this surcharge fulfilled the function of sharing a portion of the high costs that it means for the State to transfer physical dollars abroad, it is no longer adapted to the current context. Its abolition should stimulate an increase in the entry of dollars into the system, but instead of requiring transfers, they could be offered in support of the CUC through the following window. To complement the move, we would have to find a way to encourage the sending of remittances by bank rather than cash as it predominates today. A small bonus could be applied in CUC for each dollar that is remitted electronically, which would also function as an official devaluation in this segment, which could indirectly control the stability of the informal market exchange rates. We must also dust off the debate on the exchange rate regime, which has long been anchored to the fixed exchange rate paradigm.
But all this would only be sustained if the real conviction of removing all internal bonds that obstruct the development of productive forces were agreed upon. The decentralization reform of the state enterprise and the institutionalization of the private sector top the list of pending.
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