Economist Oscar Fernández chats with us about Cuba's new "dollar stores" and gives a historic overview of the nation's two —now, three— currencies.
cuba dollar
The libreta (ration card) is making a comeback given limited availability of food and basic goods during the pandemic.

On the July 16th edition of the weekly Mesa Redonda TV program, Cuban officials announced the incentivizing of the circulation of dollars into the economy, meant to mitigate a shortage of hard currency and the effects of an imminent financial crisis.  Economist Pavel Vidal predicts a 10% drop in GDP in 2020, based on declines in tourism during the Trump administration and exacerbated by the pandemic, and on the effects of US sanctions in Venezuela.

Gone are the days of the government dolling out harsh punishments, even imprisonment, for carrying USD.

The series of new measures include the introduction of special “dollar stores,” an increase in domestic agricultural production to reduce dependency on imports, wholesale stores for owners of cafés, restaurants and other businesses, and long-awaited expansions for small- and medium-sized businesses.

Gone are the days of the government dolling out harsh punishments, even imprisonment, for carrying USD. (In a recent essay, Carlos Lechuga recalls an aunt who found herself illegally in possession of fifty US dollars, and swallowed the bill before it was confiscated.) Cubans are now encouraged to deposit dollars into Cuban bank accounts and use debit cards to make purchases at 72 new well-stocked foreign-currency-only stores (tiendas de Moneda Libremente Convertible, or MLC). 

The 72 new government-run stores feature 47 products deemed “high-end.” Among the offerings are products that had disappeared from Cuban shelves for months, such as shampoo, meat, pastas and grains.

The government-run stores feature 47 products deemed “high-end.” Among the offerings are products that had disappeared from Cuban shelves for months, such as shampoo, meat, pastas and grains. Last week they appeared practically overnight in these new tiendas, leading to outcries on social media speculating about government hoarding and opacity, as well as intentionally appealing to a higher social strata, while Cubans without access to dollars saw only a slight increase in their food rations.

Over the coming months, Startup Cuba will address several of these measures and their potential impacts.

Minister of the Economy Alejandro Gil Fernández also announced the end of the long-standing 10% tax on US dollars, when they are deposited into Cuban bank accounts, effective this past July 20. 

Unifying the two monedas is quite complex, and personally, I don’t think that it will happen anytime soon, at least not in the next three or four years. First we need to improve the economy.

Oscar Fernández Estrada, Cuban economist

Over the coming months, Startup Cuba will address several of these measures and their potential impacts. This week we’re covering the new dollar stores and where they fit into the puzzle of procuring food and basic goods in Cuba. We also sat down with economist Oscar Fernández Estrada to discuss the how, when, and why of Cuba’s two, now three, currencies.

Cuban Currencies: Startup Cuba Chats with Oscar Fernández Estrada

Startup Cuba: Oscar, can you walk us through how Cuba arrived at a dual currency system, with both the peso cubano (CUP) and the peso cubano convertible (CUC) in use, and now to the insertion of foreign currency into Cuba’s formal economy?

Oscar: This has its origins in the 1990s, with the economic crisis triggered by the fall of the Soviet Union, which led to an 85% drop in foreign trade. At the time, there were tremendous gaps in productivity, and the government policy was essentially to subsidize widespread unemployment; as factories stopped producing, the state continued to pay workers. However, while the peso cubano (CUP) continued in circulation, there was an abrupt contraction in the supply of goods available for purchase. This led to what we call a repressed inflation, and conditions were apt for people to seek another way to procure goods, leading to what economists call the Secondary Market [sometimes known as the Black Market]. 

Prices increased drastically, and the value of the CUP plummeted in the early 1990s in these informal markets. Wary about the stability of the CUP, from 1990-1993, Cubans began to use another form of currency to pay for goods through the secondary market USD. 

A bodega (ration store) in Old Havana.

The Cuban government caught on and adopted the use of dollars in 1994, and then introduced another currency that was roughly pegged to the dollar, called the peso cubano convertible (CUC) in 1995. The state began selling goods and services in these currencies at special stores, initially for tourism and for luxury items. Now CUC are widespread and both currencies are used by nearly all Cubans. And thus the dual economy began, with the USD and the CUC coexisting for nearly a decade until 2004. 

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Cuba cannot use USD in international transactions because of the US embargo, and the US government began to crack down on banks in 2004. In response, Cuba decided to “de-dollarize” from one day to the next. Around 2008, the CUC lost its value against the dollar, leading to a devaluation that the state avoided fully confronting given potential social costs, leading to major distortions. The exchange rate has been around 1 CUC : 25 CUP for the past several years; 1 CUC is approximately equivalent to 1 USD. 

“The logical thing now would be for the state, which now will have more dollars, to begin to pay a portion of workers’ salaries in dollars.

Oscar Fernández Estrada, Cuban economist

Startup Cuba: Former President Raúl Castro had expressed the desire to unify Cuba’s dual currency system before he left office. This didn’t happen, though rumors of its imminent implementation have been floating for years, with gradual steps taken toward that end. Some speculate that the pandemic will expedite the unification process. Will it?

Oscar: The introduction of CUC and the multiple exchange rates that operate across sectors within Cuba were seen as a temporary response to the economic crisis of the 1990s. Over time, the government has continued to use the two currencies. Unifying the two monedas is quite complex, and personally, I don’t think that it will happen anytime soon, at least not in the next three or four years. First we need to improve the economy. Potential devaluation is a major challenge, given the multiple exchange rates that exist.

The idea is to introduce a partial dollarization into the Cuban banking system, to capture the USD already circulating on the streets, and to incentivize the increased productivity and sale of domestic products to satisfy demand.

The idea is to introduce a partial dollarization into the Cuban banking system, to capture the USD already circulating on the streets, and to incentivize the increased productivity and sale of domestic products to satisfy demand.

The majority of workers in Cuba are paid in CUP, and some receive additional payments in CUC. This began in the 1990s, and incentives or bonuses were paid in USD at that time, later replaced by CUC. The logical thing now would be for the state, which now will have more dollars, to begin to pay a portion of workers’ salaries in dollars. Otherwise, people won’t have access to dollars unless they have other means of obtaining them, like operations catering to tourists, or from family overseas. 

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The Cuban state does not sell dollars, because there aren’t enough in reserve. This is an important point, because dollars won’t physically be in circulation, except for in the informal or secondary markets. In the state-owned stores that were recently opened, people need to first go to the bank and deposit US dollars, which are then put on a bank debit card that can be used in those stores. For better or worse, the government began this partial dollarization strategy with so-called luxury goods, which has been quite controversial given the scarcity of basic goods and hardware needed by the majority of the population.

Minister of the Economy Alejandro Gil Fernández also announced the end of the long-standing 10% tax on US dollars.

Startup Cuba: These days, there are many ways of finding food and goods besides the ration card, either through stores accepting CUC, or on the alternative market, including via Revolico (the Cuban version of craigslist), or using apps like Telegram or WhatsApp. Acquiring enough food, cleaning products, and other goods for an average household for one week could take days of queuing and trekking around town, a situation that’s been extensively chronicled during the pandemic on El Toque’s weekly podcast, El Enjambre (check out Episode 37: “Una Moneda Largamente Cuestionable”).

Oscar, how can the average Cuban support their family if they are solely government workers and don’t have any other source of income?

Oscar: The average monthly salary in Cuba is equivalent to USD 30. When people outside of Cuba wonder how it’s possible to survive on $30/month, they often make the mistake of coming at the question from a comparative standpoint with the rest of the world, rather than the Cuban context. In Cuba, multiple price structures coexist and make this possible. For instance, a month’s worth of food items such as rice, beans, and coffee are available through the libreta for less than 1 CUC. 

People whose monthly income is dependent on state employment may not have the possibility to go on vacation to a hotel, or even out to eat at a restaurant, but it is possible to get by.

Oscar Fernández Estrada, Cuban economist

More than 90% of Cubans own their own homes, so very few people need to pay rent, nor do they pay taxes unless they are cuentapropistas (entrepreneurs) or in other special cases. And many important services are free or extremely inexpensive, such as education and health. Even activities such as a trip to the ballet (about 2 CUP) or an ice cream at Coppelia (5 CUP) are highly subsidized. 

People whose monthly income [in CUP] is dependent on state employment may not have the possibility to go on vacation to a hotel, or even out to eat at a restaurant, but it is possible to get by. However, affording new shoes or clothing, or repairing broken appliances and other home improvements require additional income.

Some older Cubans are experiencing a sensation of déjà vu: During the Coronavirus pandemic, as food shortages in Cuba have become more acute, people queue for hours to procure whatever happens to be for sale. Now, many of the goods that Cubans are after are suddenly available in these new tiendas, if you’ve got dollars. 

Beyond remittances, new waves in tourism and expansion of the private sector catering to international visitors —including restaurant and paladar owners and people offering home rentals and experiences through Airbnb— has meant that some people receive more income in USD or CUC, leading to a burgeoning class stratification, and increased racial disparities in hiring.

These new class divides are evidenced in the extremely long lines of Cubans willing to buy these high-end goods that became available when the new MLC stores opened this past week, and by the recent revelation that as Cuba enters Phase 3 of reopening, more than half a million Cubans reportedly had made reservations for vacations at beachside resorts — though others have been quick to point out on social media that perhaps those Cubans are eager to spend down their domestic currency, fearing that in the future they’ll have nowhere to use it.

Correction August 2, 2020: An earlier version of this article stated that the Minister of the Economy Alejandro Gil Fernández announced the end of the long-standing 10% tax on exchanging US dollars, including for tourists. However, according to sources, the 10% tax will be eliminated only if Cubans deposit dollars directly into the banking system, not at exchange houses. 

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