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The Cuban Government Bans Deposits in Dollars at the Country's Banks. What Is It Up To?

A flood of dollars, reduced financial risk, or the generation of a smokescreen? DIARIO DE CUBA asked economists Carmelo Mesa-Lago, Pavel Vidal, Mauricio de Miranda and Elías Amor about the government’s new measure.

 Graffiti in Havana.
Graffiti in Havana. Diario de Cuba

After the surprise sparked by the announcement of the suspension of the acceptance of dollars (cash) by the state's banking system, many Cubans are wondering why the island nation's government decided to impose this measure , and what its aim is.
Some have speculated that it could be a strategy to lower the price of the dollar on the informal market, where the US currency was going for 70 Cuban pesos, while others believe that the real motivation is to funnel more foreign currency into the state's coffers in a short period of time. The government, meanwhile, claimed that its objective was to protect the national economy.

Given the uncertainty generated by the Central Bank's announcement, DIARIO DE CUBA asked economists Carmelo Mesa-Lago, Mauricio de Miranda, Elías Amor and Pavel Vidal about the motivations that could be behind the government's measure.

Carmelo Mesa Lago, Emeritus Professor at the University of Pittsburgh, stressed that the result of the measure will be that "the Government will receive a flood of dollars, which will grant it a temporary respite." Central Bank officials "have denied that this is true," but "without citing why."

The academic pointed out that among the benefits the Cuban regime will obtain through the measure, "mostly in the very short term, is a flood of deposits in dollars for 11 days [until June 21, after which the measure takes effect], but also in the medium term, by earning exchange commissions, and, perhaps, even in the long term, evading or reducing the sanctions of the US Government on Cuban transactions with foreign banks."

Mesa-Lago warned that "the measure will not avert rampant inflation , which is estimated between 500% and 900% this year, or the devaluation of the Cuban peso, as it will only change it from the dollar to the Euro."

According to Pavel Vidal, a former analyst at the Central Bank of Cuba, and now a professor at the Universidad Pontificia Javeriana in Cali, the measure seeks to "reduce financial risk at Cuban banks," since "the International Financial Bank (BFI) and other institutions on the island were placed on the lists of entities blocked by the State Department, and US sanctions were being ratcheted up in the financial sphere."

"Against this backdrop, Cuban banks struggled more to deposit the cash dollars they have in their vaults on the international financial market," the economist explained.

"Another advantage of the measure, although it is not officially mentioned, is that it temporarily boosts foreign currency liquidity in banks at a time when the country is undergoing a tremendous balance-of-payments crisis. The dollars that go from the street to the banks facilitate, if only partially, the importation of food, medicine and other supplies," he added.

However, Vidal pointed out that "the measure is controversial, and may denote a lack of foresight and a coherent strategy to deal with the crisis, which generates uncertainty and mistrust about the handling of monetary policy."

"Why was the dollar tax eliminated in July 2020 if the escalation of financial sanctions was already known about then, and there was no indication of a possible change in US policy towards Cuba?" the economist asked.

"The measure is also worrisome because it increases the cost of sending remittances, and because of the difficulties it could generate for the operation of the tourism industry. Does the banks' reduced financial risk, as they have cash in dollars, outweigh the impact of the measure on remittances and tourism?" he asked.

For his part, Mauricio de Miranda, a professor at the Universidad Javeriana in Cali, stated that, although "the Government's argument is the defense of the Cuban economy, due to the cost entailed by US prohibitions on the use of its currency (...) this prohibition has existed for a long time, and Cuba still operated with dollars, even though it had to change them to other currencies."

"The measure's rapid implementation indicates an emergency situation," such that he believes "it is the need to collect the greatest possible volume of existing dollars outside the banking channels" that prompted the government to apply it. "I don't see what other reasons could explain such urgency."

De Miranda also said that the authorities' decision did not seem "sensible," and described it as yet another " 'sudden swerve' in a short period of time."

"If the Cuban Government wants foreign currency to flow into banks, it needs to improve its credibility through the necessary economic reform," he added.

"In any case, this measure does not constitute a solution to the problems of the Cuban economy. The real problems are the inability to produce goods and services, and the economy’s extreme vulnerability at this time," he concluded.

Elías Amor, an economist and president of the Unión Liberal Cubana, stated that "the regime had planned these measures for a long time (...) because it knew that two events were going to take place that would impact its international image in a very negative way," alluding to the regime’s condemnation in the European Parliament, and the negotiation of its debt with the Paris Club.

Thus, the measures are nothing more than an attempt "to mitigate the negative consequences on Havana produced by these two events," he said.

"The measures were launched, and they have not stopped talking them about ever since, despite their limited significance and effects, which will be easy to overcome, with people quickly forgetting the other two issues that are very important to destabilize the regime and force it to negotiate," Amor argued.

"On these issues, Castroism is giving lessons in effective propaganda strategy to whomever wants to learn, without a doubt," he concluded.

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