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Posted October 27, 2004 by publisher in Business In Cuba

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Communist Cuba’s taking the US dollar out of circulation will net it some needed liquidity while the move’s timing seeks to cash in on international political prime time: the looming US presidential vote, analysts said.

President Fidel Castro, 78, in his first public appearance since breaking an arm and a leg in a fall last week, announced late Monday transactions in US dollars would be banned from November 8 as a response to “mafia-like” US moves on restricting remittances destined for Cuba.

But he did not mention that ending the free circulation of the dollar on the island—legal since 1993—could come as an economic band-aid for a cash-strapped and isolated government that buys its imported oil and food in hard currency on world markets.

“The explanation they give is neither convincing nor clear. It is an official excuse for an urgent need for dollars,” said Uva de Aragon, Associate Director of the Cuban Research Institute at Florida International University in Miami.

“Ten years of dollarization had opened a little space for Cubans, as they say over there, to get by or do a little business. And this puts an end to all that,” she said.

“In the short run it is going to help the Cuban government, but in the long run it is going to have negative effects for the people and possibly for the government.”

The US dollar no longer will be able to be used as local currency in transactions and was to be substituted for by the local “convertible peso.” It is worth one dollar inside Cuba, but has no value on world markets.

Cubans whose relatives send then a total of more than 800 million dollars every year, as well as tourists—stars of Cuba’s main hard-currency earning industry worth two billion-dollars—will have to make purchases in Cuba in convertible pesos. Hard currencies go to the government.

For John Kavulich of the New York-based US Cuba Trade and Economic Council, a non-partisan information clearinghouse on Cuba and business, the currency rule changes “may gain them some short term liquidity. But the question than is what does the government do with it?”

“Commercial and economic models are only functioning because of the largesse of third parties ... China has given grants, substantial financing, payment terms, commercial economic and financial assistance. And of course (ally and oil supplier) Venezuela, that is well known. Their indebtedness to Venezuela may exceed one billion dollars,” Kavulich said.

Cuba has “tied it to the US presidential election, which is unfortunate. Because commercially economically and politically, it does make sense for government to say we don’t want a third country currency as the preferred medium for exchange in their country.

“It makes sense ... But in Cuba’s case, their decisions always have this overt political context that relates to the United States. And to say that actions by the US government are THE reason for this decision is misleading at best,” Kavulich said.

Cuban citizens will still be able to possess a certain amount of US dollars, but using them in commercial transactions or in retail will be banned, a Cuban central bank statement said.

If they want to shop at special stores that sell goods for foreign currencies, they will have to convert their dollars to convertible pesos at a rate of one for one. But there will be a 10-percent tax imposed on each transaction involving US dollars.

“Cubans are going to have a lot of reservations about exchanging their money. A lot of people are saving up to leave, or to do something, and the 10 percent tax is going to keep some people from exchanging all their dollars,” said de Aragon.

“The black market will be back. Things are getting more and more complicated, more and more closed off.”

Kavulich underscored the importance of the political timing of the Cuban announcement, just ahead of the November 2 US presidential vote, taking effect just after it. He said Cuba may hope for a Kerry win which might lead to reversal of restrictions imposed by US President George W. Bush on Cuban-American travel, remittance and expenditure restrictions.

“We think that this move is yet another indicator that Castro is refusing to do what’s best for his own people. It shows that he’s cynically trying to preserve a bankrupt regime at his people’s expense,” State Department spokesman Adam Ereli said.

“We see it as a confiscatory measure that demonstrates that President (George W.) Bush’s policy is working. It’s squeezing the regime and causing them to take extreme measures that underscore its own inherent weaknesses,” Ereli added.

In 1993, in the midst of economic free-fall on the heels of the collapse of the communist bloc, Cuba legalized free circulation of the dollar. Havana then in 1995 created the “convertible peso” to fill the gap between supply and demand for greenbacks on the island, a mechanism that until now funneled some—but not all—local greenbacks into government hands.

  1. Follow up post #1 added on February 14, 2005 by jizzface with 2 total posts

    How reliable is this information?  Also do you have any thing more up to date.  The information above is from 2004.  In the time that passed what has come of it in Cuba and how has it altered everyday life?

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