The economist Pavel Vidal explained this Monday why the dollar reached 150 pesos in the informal marketnews that reminded many Cubans of the hard times of the 90s.
Vidal said in The touch that this news “takes us back to 1993, when the worst moments of the Special Period were lived through. Now, as before, the exchange rate is a reflection of the contraction in national productive activity, scarcity, monetary imbalances, despair and the confusion”.
“150 is reached following a rather hectic month in the informal exchange market, which coincides with the decision of the Central Bank of Cuba (BCC) to intervene in this market from August 4. In August, the average value of the rate The CUP/USD exchange rate increased by 18.6 pesos and the maximum value of August (145) exceeded the maximum value of July by 27 CUP. Something similar happened with the exchange rate in relation to the MLC (banking dollar).”
For the economist, “the big mistake has been the decision to pursue a net purchase of USD in the operations of the CADECAs and the banks. This implies taking USD out of a market in which there is no surplus of USD, there is a lack, and very clear has been its continued rise in the informal market for more than two years. Little tourism and fewer remittances are two fundamental factors in this imbalance”.
“The willingness of the financial system to buy more USD than they are going to sell is highly inflationary. In this way, the formal exchange market becomes a net issuer of CUPs, at a time when the economy is flooded with CUPs due to to the monetization of excessive fiscal deficits”.
“In addition, it pushes for a greater depreciation of the informal exchange rate (as indeed happened in August and continues in September) and this is transmitted to production costs and the final prices of products in consumer markets ( the so-called pass-through effect to inflation).
Pavel Vidal pointed out in The touch that “the desperation that the Cuban government has to obtain foreign currency to be able to pay for imports and support the reactivation of productive activity with USD is understandable. However, the exchange market is not the way. (…) To the extent that private companies, farmers and cooperatives (and other state and mixed economic actors, but operating under the conditions of this market) are included in this market, as announced, this would have a greater impact in the national productive activity.
“The way things are going, 120 may end up being the new 24. It is true that residents and tourists prefer to buy and sell foreign currency in secure facilities and within the law, but everything has a limit. To the extent that the expansion continues of the gap between the official rate of 120 and the informal rate (around 150), the informal market is going to regain prominence”.
The economist affirmed that “it is necessary to accelerate and deepen the structural reforms. Given the magnitude of the current crisis, the transformations that a decade or two ago might seem advanced, today are not enough and are late. Given the postponement time and once more of the changes in the model of bureaucratic socialism and the persistent commitment to the monopoly of the state company, the way out of the current crisis cannot be achieved with isolated and partial measures”.
“The current crisis has left new marks on the productive system that compromise its ability to return to pre-pandemic levels, in a scenario in which there has also been no change in the sanctions policy under the Biden Administration. The increased decapitalization of industries and infrastructure (very visible these weeks in the electricity system) and the reduction of the labor force, due to record emigration, limit the productive potential that can be aspired to.The fiscal deficit, inflation and acute imbalances in balance of payment demand a far-reaching macroeconomic stabilization plan. It will cost to regain confidence, certainty and hope”.
“The informal market exchange rate reflects all these structural and circumstantial factors. It has also moved due to expectations and confusion generated by economic policy announcements,” added Pavel Vidal in The touch.
According to the aforementioned source, the dollar and the euro are at 150 pesos in the informal market this Tuesday, September 6, 2022, while the MLC (Freely Convertible Currencies) are at 152 pesos.