Inflation and dollarization hit the already destroyed Cuban economy

After postponing it for at least a decade, at the beginning of last year Cuba applied a plan to reorganize its finances in the midst of a harsh economic crisis: it unified the exchange rate and its hitherto dual-currency system, increased wages, made access more flexible to profits for workers and adjusted prices.

Now the authorities must deal with several enemies that unleashed those measures: rampant inflation accompanied by widespread shortages; a new dollarization of consumption and a gap between the official dollar and the parallel one that hits the population.

Many Cubans feel that their wages are not enough to cover basic needs and others lament the long lines, while the communist government publicly acknowledged the problem and experts called for action.

Inflation, the exchange rate gap and financial problems were a constant in several Latin American countries last year, but in Cuba the phenomenon is a novelty and revealed an inequality in consumption that is difficult for citizens to understand in a socialist country which for decades was based on a relatively equal distribution of goods.

“With my salary it is impossible to support my family, only with the help of him (his son) can I buy a toilet (soap and shampoo), detergent, meat that is currently 200 pesos a pound (US$ 8 a official exchange)”, commented Marcia Ochoa, a state worker who receives a monthly salary of 2,400 pesos, US$100 at the official exchange rate.

To complete her expenses, Ochoa, who lives with her elderly parents and her husband, relies on sending remittances from her son residing in the United States, an operation that became complicated after the administration of then-president Donald Trump in November 2020 increased sanctions against the island affecting transfers.

“My son deposited me (at Western Union). It cost him US$112 and I got here 100 convertible pesos or CUC (equivalent to US$100), I could go to a store, buy things and solve a lot of problems… today it’s a dilemma, he has to find a mechanism to command”, Ochoa added. Last month, for example, he received these currencies through informal means – people who bring them – and who gave him 70 Cuban pesos for each unit of the US bill.

This week the parallel dollar – the only one that citizens can buy since the State stopped selling it – rose to 100 Cuban pesos per unit while the official rate remains at 24.

Until January 1, 2021, Cuba had two currencies: the Cuban peso and the CUC -at parity with the dollar- which disappeared in an attempt by the government to regain control and give more clarity to the economy, discourage imports and eliminate subsidies to inefficient companies.

The unification also eliminated several exchange rates and left only one at 24 Cuban pesos per dollar. In addition, an increase in state wages was applied – a sector that employs 70% of the labor market – and the prices of services and basic goods that the State controls were adjusted.

And since the crisis caused by the pandemic and the US sanctions had already shown their impact on the generalized shortage, the government ordered the expansion of a network of shops in which payment is made in a virtual currency called the Freely Convertible Currency (MLC) equivalent to dollar and through which you can capture foreign currency.

But the scarcity is such that in any business, be it Cuban pesos or MLC, there are long lines every day.

“I was stopped for many hours, you have to wait for your turn to go through two little bottles, but it’s something,” said retired Julia Sardiñas, 65, while showing the inside of a white bag with oil containers. Each liter cost him 48 Cuban pesos, about US$2.

Sardiñas arrived at 6:00 in the morning and after waiting seven hours he was able to buy the authorized oils in a Cuban peso store. The delivery is controlled by scanning the identity card to avoid resale.

Along with the MLC stores and the Cuban peso stores, where products appear and disappear every day -soaps, toilet paper, beans or chicken-, the population obtains merchandise on the black market fed by people who hoard and then sell more expensive.

In recent weeks, for example, powdered milk was lacking in legal stores and those who needed the product came to pay 1,000 pesos per kilo (US$41 at the official exchange rate), a third of an average salary.

Dependent on income from tourism and remittances, sectors semi-paralyzed by the pandemic, the Cuban economy is unable to supply itself with basic products that it imports.

“There are many factors (for the increase in prices), but the main one is the fall in the supply of goods and services. If today you don’t have oil, you should think that in the next few days the price will go up,” said economist and professor Omar Everleny Pérez.

The government itself recognized that inflation is a serious problem.

According to the Minister of Economy and Planning, Alejandro Gil, the increase in prices reached 70% in 2021, a figure discussed by experts and reality.

A carton of eggs could be had at the beginning of last year for 150 Cuban pesos (US$6 at the official exchange rate) and today it costs 400 Cuban pesos (US$16 at the official price) in the informal market; A package of sausages could cost 40 Cuban pesos (US$1.50 at the official exchange rate) and is currently sold for 118 (almost US$5 at the official exchange rate) in legal stores, while pork went from about 40 Cuban pesos to 200 a pound (US$ 1.50 to US$ 8 at the official price).

“In the country it is the subject of most debate and concern… We are permanently looking for alternatives within the possibilities we have,” Gil said last week in a television appearance. For the minister, the basis of the problem is “a supply deficit” given the low national production, which in turn “brings with it speculation and resale.”

Even so, the official indicated that some prices such as electricity, communications or food from the supply book that each Cuban is guaranteed monthly -which although it has been cut in recent years benefits the most vulnerable- remained without increases since the rearrangement start.

Discomfort over inflation, salaries that lost their purchasing power and shortages were among the main complaints of thousands of people who took to the streets in July of last year.

For the experts, the proposed solutions would range from making the nascent private sector more flexible -for example, allowing them to import or export freely-, decentralization in the decisions of state companies to promote production, authorizations for the practice of professionals -and avoiding the growing migration-, to the operating permits of international retail chain stores given that the State has a monopoly on domestic trade.

“Strong and public action is required. A plan is needed. There must be a program to reactivate the economy. There are many short-term macroeconomic imbalances that are strangling part of the population and companies,” said Oscar Fernández, an economist and professor at the University of Havana.