By Emilio Morales
The inflation in Cuba has taken a speed that seems unstoppable. The exchange rate of the dollar has already reached 200 CUP, according to El Toque. This vertiginous escalation that has had the increase in the exchange rate in the informal market is the vivid reflection of the deep crisis that the country is going through at the moment. A year ago, the exchange rate of the dollar in the informal market was 1USD x 65CUP.
Figure 1. Exchange rate in the informal market, October 5/2022.
Source: El Toque (www.eltoque.com)
The measures implemented by the government team headed by Miguel Díaz-Canel in the last two years in the financial sector and the retail sector have been disastrous, first the MLC stores[1], then the implementation of the Monetary Ordering Task[2] and now the exchange market[3]. The three measures have become a deadly cocktail that have given the death blow to the moribund Cuban economy. Economy Minister Alejandro Gil has become the killer who has given the coup de grace to the inefficient and weighted socialist state enterprise.
The magical effect of MLC stores
The MLC stores introduced a new currency in the Cuban financial field when the Cuban Government had been studying for more than ten years the task of how to eliminate the monetary duality that existed at that time and that was one of the main evils that afflicted the country's economy.
MLC stores introduced the magic of having three economies competing with each other in dysfunctional ways: the centralized state economy, the military-run monopoly capitalist economy, and the black market economy. All three were tied to the consequences of partisan decisions, a drag that has always kept the country's economy from functioning. This partly explains the insignificance of whether or not this was a good time to eliminate monetary duality, which had actually become a market of monetary triplicity, since the market was operating with three types of currency: CUC, CUP and dollars[4].
It should be remembered that the MLC stores were an imposition of GAESA, by order of the late General Luis Alberto Rodríguez López-Calleja on the bureaucratic apparatus of the Government of Miguel Díaz-Canel and Minister Alejandro Gil, who appeared on Cuban television on several occasions to justify this crazy measure.
The Ordering Task, the Trojan Horse of the Cuban financial system
Then came the Task Ordering, a very harsh shock therapy that was implemented at the worst time that the country was experiencing from the political, economic and social point of view in more than six decades of totalitarian system. With an economy in bankruptcy and destroyed by the inefficiency of the centralized economy model, with a deep liquidity crisis, a considerable drop in its export levels of products and services, also hit by the devastating effects of the Covid-19 pandemic, which had caused remittances in cash and goods to decline by 36.8% and 78.6% respectively[5], as well as tourism in 76.04%[6].
The Ordering Task did not provide positive elements that would improve the economy, since the measure left out three elements that are key for this measure to be successful: 1) liberation of the productive forces; 2) price release; (3) establishment of a free enterprise market governed by supply and demand. On the other hand, the reform of the monetary order has kept intact both the monopoly of the military over the most lucrative items of the island's economy (dollarized market), as well as the centralization of the economy with its vast network of subsidized and inefficient state enterprises[7].
Another of the negative aspects of the Ordering Task was the fictitious increase in wages. The Cuban government set the minimum wage at 2,100 Cuban pesos (CUP), about 87 dollars at the expected exchange rate of 24CUP x 1USD, while pensions will range between 1,528 (64 dollars) and 1,733 CUP (72 dollars). This fictitious rise in wages lacked productive support, it was not supported by a structural reform of the economy that would liberate the productive forces and increase the productivity of labor. The Task of Ordering then became a true Trojan Horse that would eventually collapse the Cuban financial system and eventually create the conditions for the breakdown of the regime.
Along with the rise in wages, the government also raised the prices of products and services. Electricity, for example, rose 400%. The spiral of devaluation of the CUP quickly began. The currency began to be quoted in the informal market twice as much as in banks and exchange houses (CADECA).
On the other hand, the Ordering Task did not eliminate monetary duality. The country continued to operate with three markets and two currencies. The state market managed in CUP, the dollarized market in almost 95% controlled by GAESA and the informal market that operates in dollars and pesos. In practice, the economy maintained the old scheme that the state poorly pays its workers in CUP, but monopolizes and imposes a dollarized market that is maintained and financed from abroad, through tourism and remittances.
The Ordering Task had a strong impact on the self-employed. Between the rise in prices of inputs, the cap on wrecks imposed by the Government on the sales prices of the non-state sector, the high fines and the demonization of entrepreneurs in the press, everything indicated that we were witnessing the mass annihilation of self-employment.
The Task Order became the burial of the fastest growing and best performing workforce that the country had in the last six years. In a short time, the greatest achievement achieved by the Task of Ordering was citizen protest[8]. This was one of the main triggers generated by the historic protests that broke out in more than 60 cities on July 11, 2021.
The new foreign exchange market, the euthanasia of the Cuban economy
With the market cut off by MLC stores and the devastating impact of the implementation of tarea Orden, the Cuban regime gave the coup de grace to the economy with the implementation of the new exchange market.
The announcement of the implementation of an exchange market, made by Economy Minister Alejandro Gil in recent days, sent a message that the regime intended to combat the informal market and tried to capture foreign currency to invest in the development of the country. The measure itself was nothing more than a sign of the regime's desperation to capture foreign currency in the face of the inefficiency of the model to produce and export. It was a late, desperate and misguided last-minute response to try to cushion the bankruptcy in which the country finds itself, given its lack of liquidity, the decline in exports and the lack of international credits due to the non-payment to creditors of the external debt.
The controversial foreign exchange market was foolishly launched with a one-way offer: the state bought foreign currency, not sold it. Automatically, with this action, the Cuban regime put in one fell swoop in the hands of the black market the control of the exchange in the country's finances. The measure, far from weakening the black market, strengthened it.
The response of the market was not long in coming: there were no queues or crowds of people in the banks and exchange houses to go and sell their currencies to the State[9].
For the population, the impact of this measure had immediate repercussions. Workers' wages lost their face value by 400% in one fell swoop. Pensioners were left totally unprotected. The rise in the prices of products skyrocketed both in the informal market and in the market of MLC stores. The measure generated more frustration in the population, and escalated the increase in citizen protests, corroborating the feeling that the country is heading for anarchy.
With this measure, another financial nonsense is implemented by creating a second exchange corridor, since state and foreign companies operating in the country would continue to operate with the official rate of 1USD x 24CUP, which definitively buried the network of inefficient and subsidized state enterprises. With this measure, Alejandro Gil applies a kind of euthanasia to the socialist state enterprise. For foreign companies it was another low blow, which added to the financial corralito to which they have been subjected for three years, plus the shock that gave them the implementation of the Task Ordering.
As a result of this measure, many workers have abandoned their jobs to devote themselves fully to surviving in the informal market, or have simply sold their belongings to undertake the departure of the country via Nicaragua in search of the American dream. Tens of thousands of self-employed people have closed their businesses, victims of inflation and these crazy financial measures implemented in the last two years. In this regard, the National Office of the Tax Administration (ONAT) reported that at the end of August more than 328,200 self-employed had not made payments for taxes on personal income and on the sale of services that are made once a year[10]. Undoubtedly a very clear sign that a good part of these self-employed have left the country and others have had to close their businesses.
With the announcement of the implementation of the new exchange market, the rise of the exchange in the informal market rose to 130CUP X 1USD. This forced the government to announce that it would sell foreign currency to the population. However, this sale would be very restricted. In their announcement they made it clear that no person, Cuban or foreign, will be able to buy more than 100 dollars, euros or other foreign currency in the day; nor could it do so at airports or anywhere other than the 37 CADECA branches that had been enabled throughout the country for the operation, and, finally, the sale would be limited to the amount of currency that each establishment, in a particular way, managed to enter on the day by way of exchange[11].
This correction made in the race to try to amend the failed launch of the new foreign exchange market triggered the exchange rate in the informal market to 145CUP X 1USD. In just 20 days, the government, with its clumsy measure, caused an earthquake to occur in the country's financial market. The value of the exchange of pesos for dollars increased by 20.83% and prices soared in both the informal market and the dollarized retail market[12]. On October 5, the exchange rate in the informal market of one dollar reached 200CUP.
Figure 2. Exchange rate in the informal market, 1990-2022.
Source: El Toque (www.eltoque.com)
This result indicates that the exchange rate in the informal market is already almost double that reached in the "Special Period". In other words, the mediocre management of Miguel Díaz-Canel and Economy Minister Alejandro Gil have led the country's economy to total bankruptcy reaching the highest inflation rate in 63 years of socialist economy.
Conclusions
A few weeks ago, Steve Hanke, an expert professor of Applied Economics at Johns Hopkins University, ranked Cuba as the country with the second highest inflation in the world[13], reporting in his report that inflation on the island had risen by 135%. In reality, inflation has already risen by 700%. Today, Cubans are 700 times poorer than when the Ordination Task began.
Seeing this reality, it is predictable that inflation will continue to rise in the coming months, given that the country is drowning in its external debt, the lack of liquidity, the low exports of its main exportable lines, the slow recovery of tourism and the decrease in its foreign exchange reserves abroad. For the month of December, we are not surprised if the exchange rate reaches 300CUP for a dollar.
The inflation of the Cuban economy has entered a spiral of escalation that does not seem to be stopped in the short term. As shortages of basic necessities such as food and medicine continue to deepen, the prices of these products in the informal market will continue to escalate and the CUP will continue to be further devalued.
Undoubtedly, this situation affects the recovery process of the tourism market and the attraction of foreign investment. If before implementing this measure the arrival of foreign investments to Cuba was almost zero, now it will be worse. For Cuba's marginalized private sector, it has been a devastating blow. Already tens of thousands of self-employed people have had to close their businesses and another tens of thousands of entrepreneurs have decided to leave the country. The country continues to decapitalize in its workforce.
The negative impact of all these crazy measures has further accentuated the perception that Cuba is a high-risk market. In itself, the current situation of foreign investors on the island is chaotic and tense. Many do not know what to do in the face of the millionaire debt that the regime has with them and that they have not paid for years, plus the serious difficulties they have to repatriate the little capital they can obtain in these precarious and prolonged circumstances. Those who already have a contract to invest do not decide to do so given the magnitude of the multisystem crisis in which the country is trapped. Those already in the market are trading at a loss and try to produce as little as possible to justify holding on and not losing the investment[14].
In crises like these, when there are no resources left to justify the facts, someone has to bear the blame for this disaster, and Raúl Castro at this point, in the twilight of his life is not going to sacrifice himself for Miguel Díaz-Canel. At the end of the day, the facts and the results show that Díaz-Canel is not guaranteeing the continuity he promised, rather he is tearing it to pieces and by leaps and bounds. Not even the false and mythological guilt of the embargo saves him from this disaster. It is time for him to be removed from his post along with his team of inept and mediocre bureaucrats, who in just three years have checkmated the country's economy and impoverished its citizens 700 times more.
REFERENCES
[1] Banco Central de Cuba. “Gobierno cubano informa nuevas medidas para las ventas de mercancías en MLC”. Julio 2020. https://www.bc.gob.cu/noticia/gobierno-cubano-informa-nuevas-medidas-para-las-ventas-de-mercancias-en-mlc/783
[2] MINREX. “Inicia el 1ro de enero ordenamiento monetario y cambiario en Cuba”. Diciembre 2020. https://cubaminrex.cu/es/node/3910
[3] Granma. “Cuba inicia la compra de divisas por el Estado con nueva tasa de cambio”. Agosto 2022.
https://www.granma.cu/cuba/2022-08-03/informan-sobre-la-implementacion-del-mercado-cambiario-en-cuba
[4] HCG Business Intelligence Unit. “Eliminación de dualidad monetaria, ¿llega o no llega?”. THCG Business Report, Octubre 2020 Nº4, THCG & TECH.
[5] Morales, Emilio. “Remesas a Cuba caen estrepitosamente por COVID-19”. THCG Business Report, Diciembre 2020 Nº 5. THCG & TECH.
[6] Morales, Emilio. “Remesas a Cuba caen estrepitosamente por COVID-19”. THCG Business Report, Diciembre 2020 Nº 5. THCG & TECH.
[7] Morales, Emilio. “Tarea de ordenamiento: el Caballo de Troya que acelerará la transición”. THCG Business Report, Febrero 2021 Nº 1. THCG & TECH.
[8] Morales, Emilio. “El mejor logro de la Tarea de Ordenamiento: la protesta ciudadana”. THCG Business Report, Abril 2021 Nº 2. THCG & TECH.
[9] DDC. “'Es increíble la capacidad del Gobierno de persistir en el error': los economistas cubanos sobre la compra de divisas”. Agosto 2022. https://diariodecuba.com/economia/1659656076_41398.html
[10] DDC. “La ONAT de Cuba detecta 338.200 evasores fiscales y dice que va a por ellos”. Septiembre 2022. https://diariodecuba.com/economia/1662756583_42142.html
[11] CUBANET. “No venderán dólares, solo nos distraen con una cola más”. Agosto 2022. https://www.cubanet.org/opiniones/no-venderan-dolares-solo-nos-distraen-con-una-cola-mas/
[12] HCG Business Intelligence Unit. “Nuevo sistema cambiario, comienza la lucha por el poder”. THCG Business Report, Agosto 2022 Nº4, THCG & TECH.
[13] (4) Steve Hanke on Twitter: "Economic collapse knows no bounds in #Cuba's communist paradise. Cuba takes the 2nd place in this week's inflation roundup. On August 18, I measured #inflation in Cuba at a stunning 135%/yr. https://t.co/TOWV11TlS6" / Twitter
[14] HCG Business Intelligence Unit. “Invertir en Cuba: un suicidio seguro”. THCG Business Report, Agosto 2022 Nº4, THCG & TECH.
