Chronicle of a death foretold: Why Cuba withdrew the dollar
Campaign News | Wednesday, 1 December 2004
and reclaimed its financial sovereignty
By John Waller of the CSC and the Pastors for Peace
Its 6.30pm on October 25th - 5 days after Fidel fell and fractured his knee. A neighbour rushes in to the house in Pinar del Rio where I?m staying to announce that Fidel is on television and is talking about ending the use of the dollar in Cuba. Immediately the TV goes on. What is happening?
Flashback
May 2004. The US government fines the United Swiss Banks $100 million for trading in dollars supplied by Cuba, Iraq (before the war) and Iran. The Miami mafia demands that Bush cracks down harder on Cuba?s use of the dollar.
Cuba receives about $3 billion each year from tourists and remittances from Cubans living abroad. It is not allowed by the US government to purchase anything on the world market in dollars. So it has to transfer them into other currencies such as euros, which costs. Increasingly the US has been trying to stop these bank transactions. They have continued but when banks take risks they pass the risk onto the customer by charging more. Cuba was already paying several hundred million dollars a year for the privilege of changing dollars into something else. At best the costs were set to increase, at very worst there was a real chance that the banks would cave in and refuse to accept dollars from Cuba. In May Fidel had asked the Cuban Central Bank to come up with a counter strategy. This is what he and the bank?s president were now announcing.
The Announcement
As of November 8th the US dollar would no longer circulate in Cuba. Everything currently purchased in dollars in hotels, restaurants or state run shops, by Cubans or tourists, would now be purchased in Convertible Pesos. The convertible peso (disparagingly called the Chavito which is a traditional Cuban word for toy money) has been around since 1994. It is worth exactly a dollar in Cuba and nothing outside of Cuba. There was to be a 2 week grace period (later extended to 3) where Cubans, and tourists currently in Cuba, could convert all their dollars into convertible pesos at a rate of 1 to 1, or directly into ordinary Cuban pesos if they wished. (1 dollar buys 26 ordinary pesos). Cubans could also place their dollars into existing hard currency bank accounts or could open new bank accounts during the grace period. Any money so deposited could later be withdrawn as convertible pesos, or dollars 1 for 1 if the person say needed dollars to leave the country on either a permanent or temporary basis.
After the period of grace Cubans could continue to hold dollars, or any other currency, but they would no longer be able to buy anything from the state with them. They could continue to change their dollars into either local currency, or make bank deposits, but they would have to pay a 10% tax at the point of exchange. 10 dollars would only purchase 9 convertible pesos. Effectively the Cuban government was passing the risk premium charged by foreign banks onto the supplier of dollars.
What happened next?
Over the following two weeks 1,670,000 Cubans took their or their families dollars to the 1700 exchange points - banks, hotels, exchange houses and large shops. Mostly they changed into convertible pesos but there were also many changes directly into Cuban pesos, deposits in bank accounts and openings of new bank accounts. The queues were orderly and not too long, the glitches were few. The Central Bank ran a 16 line telephone help desk to deal with enquiries and get reports of problems, and used this to fine tune the process. Technically the changeover was brilliantly conceived and well executed but the principle success was a political one.
Putting one?s money in a bank is always a matter of trust. The Cuban nation was being asked to trust its revolution and its banking system, by handing over the world?s number one currency in exchange for a piece of paper that is worthless outside of Cuba. And Cubans know all about the collapse of Argentina?s currency 3 years ago. They were being asked to trust that it would not happen in Cuba. In their great majority they did, but of course not everybody. Some judged the risk unacceptable and will keep their dollars under the bed, changing them into convertible pesos when they need to buy something and paying the 10% tax. That remains their right. Perhaps some level of black market will remain. But as a phenomenon of mass circulation the dollar died a death in Cuba on November 8th.
What it means for tourists from Britain (and elsewhere)
It simplifies things. You don?t need to worry about getting dollars in advance. Like any other country you simply arrive and change your pounds in convertible pesos at the airport, or later if you wish in your hotel, at a bank, or at a Cadeca (exchange house). This will be at the prevalent rate of international exchange of the pound for the dollar. On November 8th 1 British pound was getting 1.8 convertible pesos. When you leave you can exchange back your pesos into pounds at the airport.
Or you can continue to use internationally recognised (but non US) credit and debit cards to make purchases in hotels and some other places. Or you can go to an ATM machine and withdraw your money directly from your account/credit card in convertible pesos. Visa is by far the most commonly accepted card for this in Cuba.
In some tourist places such as Varadero the direct use of euros as an option will continue and this may spread in the future.
The Problem
Hundreds of thousands of Cubans get remittances sent to them from family members abroad. If these family members live in Spain, Italy or wherever, there is no problem. The money can be sent as a direct bank transfer, or via a debit card withdrawal, or can be brought as cash. The problem is the remittances from the Cuban Americans. US banks are not allowed to make ordinary bank transfers to Cuba. This money arrives as US dollars - either brought in person, or sent via Western Union. Cuban Americans are allowed by the US government to send a maximum of $100 a month to just one direct family member. Western Union changes an extortionate fee for this service and insists (or rather the US government insists) that the withdrawal must be in US dollars (“so that Castro doesn?t get his hands on the money”). As of Nov 8th under either route the receiving Cuban family will have to pay the 10% tax to change their money into convertible pesos or to deposit it into an account.
Cubans were urged to contact their family abroad and explore the options for getting their money in the most cost effective way. Some may find family or friends in third countries whose bank accounts can be used to receive the money from the US and transfer it on to Cuba. Or when Cuban-Americans come on their visits to Cuba they may now arrive with fistfuls of Canadian dollars or euros.
The advantages for the Cuban government
1. Above all Cuba has taken a massive step to reclaim its financial sovereignty and to dramatically reduce the risks it ran in using US dollars.
2. It no longer has to waste hundreds of millions in currency transfers out of the dollar into other hard currencies.
3. In so far as it will still receive dollars from family remittances and the 5% or so of its tourists who come from the US, it will be receiving the 10% tax to cover its extra costs.
4. The opening of many new hard currency bank accounts has boosted Cuba?s reserves of hard currency.
5. The direct transfer of many dollars into Cuban pesos has temporarily at least strengthened the ordinary Cuban peso - which has now been stable at 26 to the dollar for three years.
6. Under the old system all the dollars ended up with the Cuban state once they had been used for purchases inside Cuba. Now the state gets them in advance and hands over the goods and services later. This is a major and continuing boost to Cuba?s cash flow.
7. For most tourists the new system will be simpler and better. People with euros, pounds, Canadian dollars or Swiss francs (which is over 80% of Cuba?s tourist market) can arrive with their own currency. The plan is to be extended soon to other currencies such as the yen, the Mexican peso, the Venezuelan bolivar and the Danish and Swedish krona.
The Future
Important though this step has been, it is clearly seen as a transition. The Cuban government’s clear intent is to one day, perhaps in 2-3 years, move to just one currency in circulation - the ordinary Cuban peso.
Only one question remains unanswered. When the “Dissidents” turn up at the US Interests Section in Havana to receive their pay from their masters - what currency will they be paid in?
