The Foreign Exchange Market: Recovery and Sovereignty

Is it necessary to recover the official foreign exchange market in our country? What benefits would it bring to our economy? Why has it been so difficult to achieve? What are the main challenges for its reopening? What role does a digital media outlet like El Toque play in this scenario?

With these questions, the program Cuadrando la Caja, from Cuban Television, recently addressed one of the most debated topics in Cuba today.

"An open economy like ours depends heavily on its external relations, and the mechanism to connect the internal economy with the external one is through the exchange of national currency for foreign currency, something that is normally done through the institutions of the financial system," explained Ian Pedro Carbonell, Director of Macroeconomic Policies at the Central Bank of Cuba (BCC).

He highlighted the importance of having an official exchange market, which gives convertibility to the national currency and, therefore, allows companies and all economic actors to close their production cycles legally and develop their activities in the best possible way.

"It is very difficult to regulate an economy like ours without a functioning exchange market, and, above all, one that reflects reality," concurred Dr. Ayuban Gutiérrez, professor at the University of Havana and First Vice President of the National Association of Economists and Accountants of Cuba (ANEC), during the debate.

On how the issue impacts Cubans, Carlos Miguel Pérez, president of the private MSME Dofleini, explained that by working with a currency that fluctuates constantly, economic actors, to protect themselves, almost always increase their prices a bit more, due to the possibility of the dollar's value increasing in a matter of days.

"Many entrepreneurs need inputs in foreign currency, and they transfer this instability and volatility of the dollar to prices," he said. "This is a first distortion that this issue is bringing." The second is that long-term contracts become extremely complicated, because it is practically impossible to foresee, over the course of a year, how much the currency could fluctuate.

The problem even affects exports, he added, causing the official reference rate (120 pesos equivalent to one dollar), so distant from the one operating in practice, to make exporting unattractive for many economic actors.

"This generates a vicious cycle because, if we don't export, foreign currency does not enter the country."

Contrary to what might be thought, that for non-state actors the issue is less complicated, given the possibility of resorting to an informal foreign exchange market and moving their prices according to its behavior, he recalled that doing so means a violation of the law.

"The fact of having to resort to an informal market turns you into a delinquent, it doesn't make it simpler. And I don't think anyone in Cuba likes being a delinquent," he emphasized.

Why Has It Been Difficult?

If there is a consensus on the need for an effective exchange market in the country, why has its implementation been so difficult?

The Director of Macroeconomic Policies of the BCC recalled that the national financial system did it for many years, starting in the 1990s.

However, he acknowledged that it is not a simple task, due to external conditions and the accumulation of internal imbalances that the Cuban economy has gone through recently, such as the COVID-19 pandemic or the increase in sanctions by various US governments.

"All this configures a very complex scenario, in which it is difficult to defend an exchange rate by constantly injecting foreign currency to maintain its price."

He commented that the decision announced by the Cuban government, to move towards a flexible exchange regime, allows at least the recovery of that official market, so that those companies and all economic actors who are carrying out legitimate productive activities do not have to go to an illegal market to close their production cycle.

That should be the first step: to recover the intermediation role of the financial system through the exchange market, of connecting all the country's economic activity with the exterior. And, furthermore, to promote other issues, such as having a rate attractive enough so that people who receive remittances can exchange them for pesos or that people who receive income in foreign currency have a safe place to exchange it, he detailed.

On how to achieve it, the specialist confessed that it is a very big challenge in a context marked by the decrease in GDP, exports, and even by a level of dollarization of the economy, which generates a superior demand for foreign currency.

For the First Vice President of the ANEC, it is a process that will be reached gradually, and he explained that, in other countries, the problem has been solved by negotiating with the International Monetary Fund and asking for a stabilization amount.

He commented that, in Cuba's case, however, access to any financial mechanism is difficult; "therefore, there is no other option but to try to start moving the machinery of the Cuban economy with our own efforts."

"If you asked me what is ideal, I would say 600 million dollars for three years, and we would have the capacity to defend an exchange rate with all the benefits that this implies. But that is not possible under these conditions."

The specialist insisted on learning the lessons from what has happened at other times in our history. "In the nineties we did important things, we managed to stabilize the exchange issue."

Faced with the complexity of an issue that runs through the life of the country, the Director of Macroeconomic Policies of the BCC stated that, in an initial stage, the important thing is to be able to participate in that exchange market that already exists today, but with an illegal character, because it occurs outside the institutions of the banking and financial system.

"The first thing is that our banking institutions can carry out purchase and sale operations of foreign currency for national currency, and that these real operations determine where the exchange rate is."

That would be the beginning to reach a new step in which, with the support of other fiscal measures, we try to guarantee stability in that exchange rate, and that it can become a price anchor for the economy, and serve as an element to control inflation.

"Broadly speaking, those are the objectives, but it is a long path and not without risks and difficulties that must be traveled," he affirmed.

A Market Tainted by Subversion

In this context, the panelists questioned the reference rate of the informal market that the digital media outlet El Toque has been publishing for years, and which, for lack of other options, many people have ended up assuming as valid.

In this regard, the Director of Macroeconomic Policies of the BCC expressed that the definitive solution is to have a functioning official exchange market that gives convertibility to the national currency.

"When people manage to satisfy their needs in the official space, they don't need to look for other references."

That is the mandate that all institutions, including the BCC, have from the Government Program, to be able to build this exchange market, and to prevent platforms openly hostile to the Cuban Revolution from positioning themselves as expectation setters. "That level of influence over the country's economic activity is dangerous," he warned.

Carlos Miguel Pérez, for his part, expressed that a true exchange market has to function on real operations, and not on purchase intentions that could be manipulated, as has happened with El Toque.

The challenge is to have a banking system capable of adapting to this new world, he said, but he assured that in Cuba we have the talent to do it and to make much more efficient methods transparent.

In this sense, Ayuban Gutiérrez stated that El Toque has publicly declared that among its objectives is to subvert the Revolution.

"That is something that is not up for discussion. No patriotic citizen sides with those who attack your country," he argued, and affirmed that the enemy is not overlooked, but combated.

In this case, he explained that this combat would be in the creation of an official exchange market.

Even though this will not be a magic formula to solve all the problems affecting the lives of Cubans, he insisted that, to create the bases for economic recovery, it is necessary to stabilize the exchange rate situation.

Although some tasks demand time, he commented that "as a professor, I like to say that the long term starts today."