Points concerning the Cuban measures in relation to the US dollar

by Michael A. Lebowitz

* The measures announced by the Cuban government
yesterday in relation to the use and circulation of the
USD in Cuba are the latest in a series attempting to
deal with the serious problems the Cuban economy faces.

Previous measures related to the USD include (a) the
removal of US coins from currency two years ago, (b)
the removal of the USD last year for inter-firm
transactions and restriction of these to the
convertible Cuban peso (set = to the USD), and (c) the
temporary closure in May of stores and the raising of
prices in USD by 10-30% for consumer items.

The latest decision removes the USD for use now in
consumer purchases from businesses beginning 8 November
and mandates that subsequent conversion from the USD
(but no other currencies) into the convertible peso
will carry a 10% tax (thus effectively lowering the
value in Cuba of the USD relative to other hard
currencies); this tax reflects the risk to Cuba of USD
conversion in international transactions.

* The basic economic factors underlying these measures
include the increased cost of importing oil (which
presumably is significantly higher than projected in
the Cuban national budget), the decline in the USD
relative to the Euro and other hard currencies, the
continuing problems in production and export prices for
sugar and the significant damage done to the Cuban
economy as the result of hurricanes.

These specifically-economic factors create a major
problem in terms of the Cuban ability to import
necessities. The immediate and most serious problem,
however, is the effect of the Bush government measures
to destroy the Cuban economy.

* No actions undertaken by the Cuban government can be
understood outside the context of the efforts of the US
government to put an end once and for all to the Cuban
Revolution.

While the attempt to do away with this ’affront’ to US
hegemony in the hemisphere has been a continuing policy
of US governments since the Revolution, no US
government has pursued this goal in as unrelenting a
manner (regardless of the effects upon ordinary Cubans)
and has declared publicly its intention to succeed as
has the Bush government.

In the context of the continuing US blockade, the
Helms-Burton Act, etc, last April the US government
announced restrictions on visits by Cuban-Americans to
their families in Cuba and restrictions on remittances
to family members sent from the US.

Both threatened significant reductions in the flow of
USD to Cuba (and to Cuban family members), and these
measures were the context for the Cuban response in May
which increased the prices of imports.

While these U.S. restrictions now in effect have been
well-publicised (and are the source of discontent among
some Cuban-Americans), they are part of a larger
package which includes the fine of $100 million by the
U.S. Federal Reserve in May of the largest bank in
Switzerland (USB) for transferring US dollar notes to
Cuba, establishment of a task force to restrict the
flow of foreign currencies to Cuba and this week’s
crackdown (including the freezing of its US assets) on
SERCUBA, a company that has facilitated the electronic
transfer of funds by US residents to Cubans.

The purpose of the Bush government in all this is
clear: ’We are financially isolating SERCUBA to make it
more difficult for the Cuban regime to obtain the hard
currency it uses to oppress its own people and to prop
up its government,’ explained Juan Carlos Zarate, a US
Treasury Department official on Monday.

* Cuba’s new response is dramatic: it will have far-
reaching effects on daily life in Cuba, and the
decision to pursue it now reveals how seriously the
Cuban government views the situation.

Removing the USD from use in consumer transactions with
enterprises is consistent with the pattern of its
previous measures--- the need to economise on the USD
and to channel the USD money supply exclusively to use
in international transactions.

It is very rational in this respect to substitute the
convertible peso (which already has been serving as a
substitute in internal transactions alongside the USD)
but which has no value externally.

Most likely, the USD will continue to circulate within
the domestic economy among individuals but the 10% tax
on conversions to the convertible peso after 8 November
(and the possibility that this tax could be increased
at a later date) should lead to a significant
displacement of the USD from domestic circulation and
its replacement by the convertible peso.

Thus, the concentration of US dollars where they are
most important to the Cuban economy will be the result
of this response, and this shift should be concentrated
in the period before 8 November.

* What will be the effect of the new Cuban measures
upon Cubans? At this point we can only attempt to make
some reasonable inferences.

So long as issue of the convertible peso reflects
foreign exchange supplies, insofar as the convertible
peso is required for all purchases from Cuban state
enterprises the convertible peso should substitute
increasingly for the dollar in transactions and as a
store of value.

Although the dollar is not banned and, as noted, is
likely to remain to some extent in circulation in
personal transactions and in illegal exchanges (e.g.,
involving stolen supplies), to the extent that
confidence in the convertible peso grows, a stable
relationship in terms of its use should emerge. (The
effective tax on the USD would encourage this.) Thus,
all other things equal, the measure should be
successful in establishing a new balance over time.

However, the immediate effect of this transition from
the USD to the convertible peso may be uncertainty and
confusion--- which will be limited to the extent that
the Cuban government is successful in assuring the
Cuban people that the convertible peso will function as
a secure store of value.

* For most Cubans, demonstration that they can convert
the national peso to the convertible peso as in the
past (and at comparable rates) at the exchanges outside
the agricultural markets will provide important
assurance over time.

For those Cubans fortunate enough to receive regular
remittances from relatives abroad, it is likely that
the combination of the US restrictions and the new
Cuban government measures to restrict and tax the USD
(and the encouragement that remittances be sent in
other than USD) ultimately will lead to a significant
shift to remittances in other hard currencies (e.g.
Canadian dollars) which will increase the difficulty of
US government monitoring.

Those Cubans who will be most negatively affected will
be people with large stocks of USD that they are
hesitant to declare for fear that they will call
attention to illegal activities; where they are
unprepared to bring their supplies of USD to the banks
for conversion--- and unable to quickly launder those
supplies, they will suffer a 10% loss in USD wealth on
8 November.

In this respect, the opportunity that the new measures
provide for monitoring illegal activity (both in terms
of second economy commodity chains which involve stolen
state property and also foreign government
interference) is obvious.

* The transition to a new stable situation may not come
easily, and there are many opportunities for disruption
and uncertainty---both internal and external--- because
of the particular impact of the new measures. For this
reason, it is worth stressing the matter of timing. The
acceleration of measures by the Bush government against
Cuba reflects, in part, its attempt to win the
electoral votes of Florida.

The timing of the counter-measures by Cuba (and the
short-run effects of these) may similarly reflect its
way of communicating the destructive effects of the
Bush policies to all US citizens (but especially Cuban-
Americans).

* Finally, although the new Cuban monetary measures may
solve the immediate economic crisis that Cuba faces, so
long as US policy continues as it is, these new
measures in themselves do little to solve the serious
economic problems noted above. Further, every Cuban
knows that the re-election of Bush will encourage a
further acceleration of the attack on the Cuban
Revolution.

Michael A. Lebowitz
Professor Emeritus
Economics Department
Simon Fraser University
Burnaby, B.C., Canada V5A 1S6