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Will Cuba's dollar ban
backfire?
By Daniel Altman International
Herald Tribune,Thursday, October 28,
2004.
Cuba's decision this week to strip the
American dollar of its legal tender status
may cause more problems than it solves for
the country's already enfeebled economy.
President Fidel Castro of Cuba appeared
on television Tuesday in a cast to say Cuba
would end circulation of the U.S. dollar,
after the United States moved to tighten
sanctions against his government and stem
the flow of remittances and tourist dollars
to Cuba.
News reports also indicated that the country's
government decided it needed more dollars
to buy oil, so it has essentially forced
Cubans to turn in their greenbacks. But
by doing so, the government may have hobbled
the economy.
Cuba has been operating an officially sanctioned
dual-currency system, with the dollar and
its own peso, since 1993. The U.S. State
Department estimated in August that remittances
from abroad - of which a hefty but unmeasured
share are in dollars - may account for as
much as 3 percent of Cuba's national income.
The government has banned the dollar from
use in everyday transactions, though it
will allow Cubans to convert dollars to
pesos for a 10 percent fee. Together, these
measures could amount to a massive monetary
tightening, probably the last thing Cuba
needs.
To Cubans, every dollar is now worth 90
percent, give or take, of what it was before
the announcement. To some, who can smuggle
their dollars out of the country to buy
things or give to relatives, dollars may
still hold close to their full value.
But to others, who do not live near a bank
and may have to make do with a black market
exchange rate, the dollars will be worth
less than 90 cents. And some Cubans may
decide to hoard dollars, in hopes that the
government will lift the restriction in
the future. The upshot is clear: Cuba's
money supply will shrink.
A shrinking money supply usually means
one thing: interest rates will rise. Cuba
already holds some of the worst credit ratings
in the world, so interest rates are already
high. Yet whether in formal or informal
markets, credit will become still scarcer.
The effects might not be so dramatic as
in a market economy, but some spending by
consumers and companies will be discouraged.
Cuba's income may have shrunk, too. Cuban-Americans
may now decide to send their remittances
as euros rather than dollars. But even though
they will help their relatives and friends
avoid the 10 percent conversion fee, they
themselves will still have to pay a commission
in order to buy the euros - probably 2 to
4 percent. As a result, the size of the
remittances may decline slightly. The same
may go for money spent by tourists; if American
visitors have to pay commissions before
visiting Cuba, they may take less money
with them.
These effects will only aggravate the main
effect of the rise in oil prices on the
Cuban economy. Cuba imports about 80,000
barrels of oil a day, according to a report
by Reuters from earlier this year, though
estimates from the United States government
reach as high as 110,000 barrels a day.
So a $20 rise in the price of a barrel of
oil costs the government about $600 million
a year, or roughly 2 percent of national
income. That money could have been spent
on other things, inside the Cuban economy,
but instead it is disappearing overseas.
Copyright
© 2004 The International Herald Tribune
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