The announcement by Cuban Prime Minister Manuel Marrero regarding the implementation of a daily floating exchange rate for the official currency market has raised concerns and expectations among the population.
Cuban economist Pavel Vidal, director of the Observatory of Currencies and Finances of Cuba (OMFi), an entity that provides information and analysis on the behavior of the foreign exchange market in Cuba and the evolution of financial indicators in the informal market, shared his thoughts on several questions that arose following the regime's announcement.
In statements to the independent media outlet elToque, which has been documenting the fluctuations in the prices of reference currencies in Cuba since 2019, Vidal anticipated what he believes may happen in Cuba.
What does the government propose with this measure?
The Government of Cuba plans to introduce a daily floating exchange rate system in 2025 for foreign currency trading operations in Casas de Cambio (CADECAS) and banks.
This change is unprecedented in the Cuban economy, which is marked by its centralized control.
According to Pavel Vidal, who is also a professor at the Javeriana University in Cali, Colombia, and a former official of the Central Bank of Cuba, this measure aims to formalize the currency market and reduce the influence of the informal foreign exchange market.
The formalization would provide greater security for users and more effective state control. However, there are numerous concerns regarding its sustainability, especially in a context of deep economic crisis and a lack of international reserves.
What will be the price of the dollar with a floating rate?
One of the main questions is how the government will define the initial rate, or "day zero rate."
According to Vidal, this will likely align with the value of the dollar in the informal market, which is currently around 320 Cuban pesos (CUP) per dollar.
However, the criteria for adjusting it daily have not been specified at this time, which creates considerable uncertainty.
The lack of transparency could undermine trust in the system, especially if there are attempts to manipulate the value of the peso to create an artificial sense of stability.
In other countries, floating rates are typically defined by the interaction between supply and demand in a competitive market, which is difficult to implement in the Cuban context due to state control.
Will the Cuban government be able to ensure the sustainability of a formalized foreign exchange market?
Initial advantages of the formal market
According to Vidal, this mechanism could initially encourage a shift in currency exchange operations from the informal market to the Casas de Cambio (CADECAS) and banks, as it would reduce the risks associated with the informal market, which is often prone to fraud.
Informal markets, the economist argues, are an alternative only when formal mechanisms are poorly designed or non-functional.
However, although initially the advantages of the formal market in Cuba may include greater security for citizens and more effective control of currency transactions by the State, doubts remain about its long-term sustainability.
Vidal points out several factors that could threaten the stability of that market:
-Lack of Central Bank autonomy: The lack of independence of the Central Bank would limit its ability to adjust the exchange rate based on "technical" criteria. For political reasons, the government might refrain from necessary devaluations to maintain economic balance, fearing that such decisions could lead to social unrest, especially during critical moments like energy crises.
-Use of foreign currency for purposes unrelated to the exchange market: There is a risk that the dollars and euros acquired by the CADECAS may be used to cover government debts or finance imports, deviating from the original purpose of the formal exchange market.
This would create an imbalance between the buying and selling of currencies, leading to a significant "depreciation" of the national currency.
The issuance of Cuban pesos to support these operations would be an additional factor contributing to economic destabilization.
-Inflationary impact: If the market is used as a means to attract foreign currency, it could become an inflationary mechanism, increasing inequality and poverty. The issuance of Cuban pesos to cover market operations would also contribute to greater inflation.
-Technological and operational limitations: The banking system and CADECA face significant deficiencies in infrastructure and technology, which could hinder the successful implementation of a formalized market. Moreover, the shortage of trained staff and the demand for financial services add complexity to the process.
What other aspects should be considered?
The system is designed for retail operations and will not affect the existing multiple exchange rates, such as the official rate of 24 pesos to the dollar, which will continue to apply to business and budget sectors.
However, there are questions about how Micro, Small, and Medium Enterprises (Mipymes) will participate and whether foreign exchange operations could extend to bank accounts, elements that would be innovative in the Cuban context.
In conclusion, the implementation of a floating exchange rate in the official currency market could represent a step forward in formalizing currency operations in Cuba. However, the structural challenges, lack of transparency, and the country's financial limitations raise serious concerns about its medium- and long-term sustainability.
The success of this measure will depend on the government's ability to ensure a transparent, technically sound system that is not subject to political interests, which in Cuba is utopian. Otherwise, the measure could exacerbate the economic and social issues faced by the Cuban population.
Although the announcement marks an unprecedented shift, the path to its effective implementation is fraught with questions that still need to be resolved.
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