Cuba: From "dollarization" to "euroization" or "peso reconsolidation"?

Latin American Politics and Society, Summer 2002 by Ritter, Archibald R M, Rowe, Nicholas

ABSTRACT

Since its "depenalization" in 1993, the U.S. dollar has become possibly a more significant component of Cuba's money supply than the old peso. What are the alternatives? The euro seems inappropriate, given the inevitability of eventual normalization of relations with the United States. More advantageous would be to restore the Cuban peso, though this would involve unifying the bifurcated economic structure and the dual monetary and exchange rate systems. The Cuban government has yet to announce its plans. This study argues that an appropriate mix of exchange rate, monetary, fiscal, and income or wage and salary policies should support a rehabilitation of the Cuban peso.

Cuba is the only country where people earn one currency - pesos from their work, but must have another - the dollar - to survive. Popular Cuban saying

I believe that in the future, it will never be necessary again to ban the possession of dollars or other foreign currencies, but its free circulation for the payment of many goods and services will only last for as long as the interests of the Revolution make it advisable. Therefore we are not concerned about the famous phrase "the dollarization of the economy." We know very well what we are doing.

-President Fidel Castro, June 2000

In August 1993, the government of Cuba "depenalized" the possession of U.S. dollars by Cuban citizens, following more than three decades in which holding U.S. dollars was illegal. It also permitted family remittances to be sent to Cuba from relatives in the "diaspora" and to be received by family members in Cuba. This resurrected the former underground market for dollar exchange, opened the floodgates for dollars from Cubans in exile, and rapidly expanded the dollar economy.

These changes, in turn, generated some indispensable positive effects on the economy in general, such as large increases in available foreign exchange from remittances and from tourism earnings. They also, however, contributed to a number of harmful economic and social consequences, which have not yet been managed effectively. Instead of confronting the difficult task of strengthening the use of the Cuban peso in the domestic economy, the government appears ready to continue with the U.S. dollar, after flirting with the idea of replacing it with the more politically acceptable euro.

The objective of this essay is to analyze the process of dollarization in the Cuban economy, focusing on the forces that have propelled it, its economic and social impact, and the official policy response so far. It assesses the desirability of substituting the euro for the dollar. Its basic argument is that a forced switch to the euro from the dollar would probably generate more problems than it would resolve, regardless of its political attractiveness to the Cuban leadership. A preferable objective would be to reestablish and reconsolidate the position of the peso in the Cuban economy. This study suggests a basic approach to that process.

The Cuban economy is "dollarized" in an informal but also quasiofficial manner. The country's stock of U.S. dollars is undoubtedly high, although its true magnitude is unknown. The dollar is a major "medium of exchange" and "unit of account." It also is probably the principal "store of value" for Cuban citizens, a refuge for financial savings amid the country's economic meltdown and the peso's loss of purchasing power. Dollars are required for some transactions by Cuban citizens with the government itself (exit permits, passports, medical tests for exit permits) and are the currency in which some taxes are levied. State enterprises, moreover, pay income supplements in U.S. dollars to approximately 1.08 million workers in a number of sectors of the Cuban economy (CEPAL 2000b, 8.).

Most Cubans hold dollars, along with pesos, for use in day-to-day transactions. Many individuals use one or the other interchangeably. The use of the dollar is therefore definitely more than informal. Also in circulation is a so-called convertible peso, issued by the Central Bank, which is also used interchangeably with the U.S. dollar. It is an attempt by the government, successful so far, to capture some of the seigniorage associated with the circulation of the U.S. dollar and accruing to the U.S. government. (In the mid-1990s, coupons, or bonos, also were distributed to workers in some sectors, such as sugar, permitting them to purchase imported products at prices below those in the dollar stores. The coupons therefore had a quasi-monetary function, though they were not part of the formal money supply.)

Cuba thus has, in effect, two general economies, a dollar economy and a peso economy, with significant segmentation and overlap between them. There are two exchange rates between the dollar and the peso, both essentially "official," but for different purposes and types of transactions. The "official" official rate, mainly for international trade, is fixed at par: US$1.00 = Cuban Peso 1.00. The quasi-official or "extraofficial" rate, which is the relevant rate for Cuban citizens, varied around US$1 = CUP 20-22 during the period 1998-2001.