Hard-currency limits have little effect on government
By Paolo Spadoni | Special to the Sentinel
On June 30, the Bush administration implemented new restrictive measures against Cuba aimed to deny hard currency to the Castro government and stimulate a political transition in the communist island.
Mainly as a result of stiffened rules on remittances and family visits by Cuban-Americans, U.S. officials estimate that these measures, if properly enforced, could deprive the island of up to $150 million a year. Some Cuban exiles, in a more optimistic view, calculate that the reduction of U.S. financial flows in the Cuban economy could be between $200 million and $250 million a year.
Ironically, even if these estimates are confirmed, U.S. restrictions will simply hurt the Cuban population while having a very limited impact on hard-currency revenues to the Castro government. Here’s why:
The vast majority of hard currency channeled into Cuba through family visits and remittances gets spent in state-owned U.S. dollar stores. In selling products at these outlets, Cuban authorities apply an average markup of 240 percent, which means that an item that costs $1 to produce domestically (or import) would sell for $2.40. In 2003, sales in dollar stores for a total value of more than $1.35 billion generated about $800 million in net revenues to the Cuban government.
After Washington’s announcement of tightened rules on Cuba, Fidel Castro quickly raised prices in dollar stores as a way to offset an eventual decline of U.S. financial flows reaching the island. With an average price increase of 15.4 percent and, therefore, a higher markup, a potential drop of $200 million in sales at dollar stores would still guarantee more than $750 million in net profits to the Cuban government, less than $50 million below the 2003 levels. Under this scenario, while Cubans would receive less money from their relatives in the United States and buy the products they need at higher prices, net revenues to the government would be largely unaffected.
An additional move announced by official media in Havana in early March, instead, will help Cuba receive increasing amounts of hard currency from the United States for telecommunications services. The Cuban and the U.S. governments pay each other 60 cents for every minute of traffic originating in their respective territories. There are currently about 49 minutes of conversations originating in the United States (mostly Cuban-American calls) for every minute from the island. Thus, U.S.-based carriers end up paying Cuba as much as $80 million a year in settlement of charges under traffic agreements. Between 1995 and 2002, U.S. accumulated telecommunications payments to Cuba were $478 million, about 67 percent of the island’s total investments in its fixed-line telecom sector.
Starting the second half of this year, state-owned Empresa Nacional de Telecomunicaciones de Cuba SA (Etecsa), in which Telecom Italia has a 27 percent interest, will offer cell-phone service in pesos to up to 300,000 local residents. Cell phones, previously available at dollar prices only to tourists and other foreign visitors, will be distributed to Cubans through a joint venture between a Chinese company and the Swedish-based Ericsson group.
Why would the cash-strapped Cuban government offer mobile services in local pesos, which have no value outside the country? Where will it find the hard currency needed to develop a wireless network?
The peso-priced wireless system will be subsidized, for the most part, through expensive dollar charges applied to incoming calls from the United States, where many Cuban residents have relatives. While having a very limited range (similar to that of cordless phones), the new cell phones are set up to receive calls from abroad and will be offered only to Cubans who do not have a fixed-line phone. By raising the number of users receiving international calls, the Cuban government is planning to obtain the hard currency needed to modernize its telecommunications sector, increase the island’s telephone density, and provide a better service to the Cuban population.
In short, the aforementioned moves by Fidel Castro to raise prices in dollar stores and provide more Cubans with cellular phones will practically neutralize the economic impact of U.S. measures on hard-currency revenues to the Cuban government. The estimated decline of U.S. financial flows reaching the island will hit the wallets of ordinary Cubans while doing little to drain Fidel’s coffers.
Paolo Spadoni is a Ph.D. candidate in the Department of Political Science at the University of Florida. He has visited Cuba five times, conducting research on foreign investment in the island, U.S. sanctions, and U.S. financial flows in the Cuban economy. He wrote this commentary for the Orlando Sentinel.