The Cuban government’s recent announcement of price caps on six essential products has sparked a debate about its impact on exchange rates in the informal market.
The measure, which seeks to curb runaway inflation that reached 31% in May, includes products such as chicken, oil, pasta, powdered milk, detergent and sausages.
According to the newly released information, the maximum retail prices for these products will be set as follows: chicken (thighs and drumsticks) at 680 pesos per kilogram, powdered milk at 1,675 pesos per kilogram, pasta at 835 pesos per kilogram, sausages at 1,045 pesos per kilogram, powdered detergent at 630 pesos per kilogram, and soybean oil at 990 pesos per kilogram.
Now, could the imposition of these maximum prices have several effects on the exchange rates of the Cuban informal market?
How will it affect the price of the dollar and the euro?
Price caps can lead to shortages of products in the market, as importers and producers may not find it profitable to sell at the fixed prices.
This shortage could increase the demand for imported products, which increases the demand for foreign currency needed to make these imports, putting upward pressure on the value of the dollar and other currencies in the informal market.
In addition, price controls can further incentivize the informal economy, where products are sold at unregulated market prices. Actors in this economy will need foreign currency to replenish their supplies, which further increases demand in the informal foreign exchange market.
This phenomenon fosters an inflationary cycle and a growing demand for foreign currency. If price caps are not sustainable, MSMEs and other suppliers may choose to reduce supply, which could lead to a black market for these products at much higher prices. This increase in black market prices fuels inflation, increasing the need for more foreign currency to import goods at increasing prices.
The Deputy Minister of Finance, Lourdes Rodríguez, stressed that the measure is temporary and is part of an effort to curb the rise in prices in the economy. However, she indicated that the country’s pricing policy is moving towards a “decentralization of prices,” seeking to eventually regulate them by the laws of the market, that is, by supply and demand.
SMEs and the exchange rate
On many occasions, Cubans have expressed opinions on social media regarding the fact that it is precisely the SMEs that, with their actions, establish the prices of the dollar and the euro in Cuba.
Beyond supporting this statement, these companies today play a fundamental role in the Cuban economy, and we cannot ignore their influence on the behavior of the informal currency market.
Undoubtedly, price caps on essential products can have a significant impact on exchange rates in the Cuban informal market.
In the short term, they may reduce demand for foreign currency, but in the medium and long term, they are likely to increase pressure on foreign currency due to product shortages, inflation and the incentive for the informal economy. Authorities and economic actors will need to closely monitor the effects of this measure in order to adjust policies as necessary.
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