Dollar Stores in Cuba: Some Economic Assessments

The newly opened store at 3_^rd and 70_^th streets in Havana, where products can only be purchased with international credit and debit cards, the “Clásica” card, or cash in US Dollars (USD) or Euros (EUR), has sparked in the population a wave of criticism, concerns, and doubts. Of course, this is understandable - it is inherently abnormal in any economy and inevitably exacerbates social injustice and economic inequality.

A wise man once said: “History repeats itself, first as tragedy, then as farce.” These foreign currency stores, and the many more that will continue to open in the coming months—the Ministry of Domestic Trade (MINCIN) has already announced the opening of more than 50 dollar stores soon—do more than confirm the truth of the wise man's words.  They reveal that what appears to be new is often just rebranded cargo from the past with minor adjustments.

Let us examine some realities and conjectures about these stores from an economic perspective rather than a social one—without underestimating the importance of the latter.

How the Clásica Card Came to Be

When foreign currency collection stores were introduced in 1993, they predominantly accepted USD. They gave change and handled small transaction with coins minted in Cuba. Initially, these came from a system designed for international tourism, but they were later replaced by coins associated with the Cuban convertible peso (CUC).

Then, authorities concluded that it would be better not to accumulate so many USD at each point of sale, but rather to collect that currency from the population before they used it for purchases. This led to the introduction of the Cuban convertible peso (CUC), which was essentially backed by foreign currency because it entered circulation by replacing each dollar collected through the banking system and retail chains.

Later, workers received small incentive pay in CUCs that were not backed by foreign currency. Instead, they represented the foreign currency earnings of their government employers—whether from exports or sales made to retail stores to replace imports.

In 2004, the government removed foreign currencies from retail circulation, and closed government enterprise foreign currency accounts. This might have seemed normal—as in other countries—where only the national currency circulates. However, Cuba had two national currencies: the CUP and the CUC.

The most alarming part was that all those foreign currencies, held by the government enterprises and suddenly converted into CUC or CUP, fueled the false idea that they could be used for any grand government project—whether it be the Battle of Ideas, the Energy Revolution, etc.—and that in short order the government would achieve substantial savings from investing those captured foreign currencies in these types of projects. Moreover, the government concurrently issued an incalculable amount of CUC without any foreign currency backing. This was the principal cause of the economic turmoil that awaited the country.

To make matters worse, the banking system began offering higher interest rates for CUC deposits than for USD deposits, encouraging savers to exchange their USD/EUR for CUC for the higher returns. This set the stage for those individuals to eventually lose their foreign currency savings, when the government devalued the CUC.

Years later, as stores that sold products in CUCs struggled with product shortages, the government introduced MLC (moneda libremente convertible) accounts and cards, which were also pegged to the USD and supposedly were freely convertible to foreign currencies. Although the CUC was still in circulation, the MLC system created an apparent foreign currency balance with greater purchasing power than the then discredited national currency (CUC), although the latter was still called “convertible.” Now, at last, suppliers could be paid, and the population could buy products received from those foreign suppliers. A fresh start!

It is important to note that MLC accounts and cards were introduced before the so-called monetary unification in 2021. And even after that misnamed unification, MLC accounts and stores remained in place. The population then had to decide whether to extend their bank deposits in CUC or withdraw them at the original rate of 24 CUP per 1 CUC, and later on at the rate of 120 CUP after a further governmental devaluation of the national currency, again resulting in a significant loss of savings for the public.

Predictably, the emergence of COVID-19, intensified U.S. sanctions, the decline in tourism revenue, and other factors forced the government to take emergency measures, once again making foreign currencies “disappear”—whether from banks, recorded as MLC balances in personal accounts, or as state enterprise balances supposedly backed by external liquidity (CL).

Since it failed to create a CUP that could trade against foreign currencies, as in 1993, the country again entered a desperate situation seeking to capture it by increasing sales of products in foreign currency in well-stocked stores.  But now the rules changed again so that the MLC accounts of the citizens and the accounts of the foreign enterprises could not be used to purchase fuel or goods in the new well-stocked stores. This latest government action reflects not only desperation but also a lack of seriousness, credibility, and commitment.

The recent decision to prohibit fuel purchases with MLC cards at gas stations—allowing only USD—was evidence of a new confiscation from the population. While it is understandable that foreign currency is needed to purchase fuel abroad, no authority has explained why MLC cards, which citizens acquired by depositing their own foreign currency into the national banking system, are no longer equivalent to the foreign currency deposited. In other words: Where is the foreign currency that people deposited in banks? Are the MLC balances held by the public so high that the government cannot gradually restore them with the profits from new government stores?

In a short time period, the Cuban public has suffered two major losses of savings. Now, the government wants people to believe that this will not happen again with the current “solution”: the new Clásica card. But who can guarantee that something similar will not happen again when financial pressure mounts? Correction—when it mounts even further. Because the pressure has never really eased…

Not surprisingly the population—fearing a repeat of past experiences—has deposited funds into the Clásica card “little by little,” in order to risk as little as possible. And the government has responded by charging a fee of one USD per deposit, meaning that the smaller the deposit made by the Cuban citizen, the higher the percentage paid as a deposit fee.

The Need for Stores in USD

As I have discussed in other articles, monetary unification could not work. And not because it was done at the wrong time, but because fixed exchange rates, by not reflecting the economic realities of each moment, quickly become outdated. The market seeks alternative solutions, causing the official exchange rate to diverge increasingly from the unofficial one. As many economists pointed out before 2021, that in order to unify the currencies and establish a single exchange rate, many other structural economic reforms need to be carried out first.

However, in an economic environment such as ours, where even the price of tomatoes is controlled, it is difficult have a currency that fluctuates according to economic conditions. Let us remember that a currency’s exchange rate is like its price, and there has been no expectation that this price would be liberalized by the government. Ultimately, within the socialist sphere, only China and Vietnam have successfully maintained a single currency, but these are countries with strong market economies.

Therefore, although I appreciate my fellow economists who call for a single currency in Cuba or for a real currency unification, this cannot work without first implementing deeper economic changes. In the absence of other essential reforms, stores operating in foreign currency and within a dual monetary system are the means to maintain product availability in the market. This is because the national currency provided in those transactions cannot be exchanged back into USD or EUR, making it impossible for these stores to resupply themselves.

In other words, without: 

• the economy having a much larger market sector or a greater liberalization of productive forces;
• in the absence of a currency exchange mechanism for all economic actors in the society for both selling and buying foreign currency;
• and a more realistic exchange rate; 

stores in USD are a necessary short term evil. They are needed to capture foreign currency to both restock and to use profits for the benefit of the entire society.

It is true that dual circulation and dual exchange rates created many problems in the past: issues in measuring efficiency, lack of control over real costs, etc. But the solution has been worse because the system has shifted from two exchange rates (1:1 and 24:1) to three (24:1, 120:1, and at a time when the informal market rates exceeds 320:1).

Does this mean that the new USD stores are like those that emerged in 1993? Not at all. The existing mechanism distributes the profit from each transaction very unfairly so that the local producers and governmental enterprises do not receive foreign currency necessary to continue production and store restocking. In the past, by applying a high markup (2.4 or higher) to set retail prices while paying national producers in foreign currency only the product cost plus 10%, stores became mere channels for capturing foreign currency for state coffers, ignoring the primary needs of the national economy.  Those needs are as follows:

• Stimulating the national business sector by allowing it to freely negotiate prices with store chains.
• Allowing businesses to offer better wages and incentives for their workers based on sales to government stores calculated in foreign currency.  This would make it possible for these workers—not just those persons receiving remittances from abroad—to purchase products with their wages. Even if the entire population did not have access to these markets, it would still incentivize more businesses to strive to be competitive against imports, gradually increasing the number of people with access to foreign currency.
• Allowing businesses to make productive investments, modernizing infrastructure using profits obtained from foreign currency sales to stores.
• Gradually transitioning from a deficit-ridden CUP economy to one with a healthier currency (the name is irrelevant), paving the way for real monetary unification in the future, instead of permanently entrenching dual monetary circulation.

The new USD stores may be temporarily necessary, but not with the same objectives of the past.  They are a farcical adaptation.  That is particularly so since, in the past, most stores were owned by the Council of State, whereas now almost all belong to the Business Administration Group (GAE) of the Cuban military.

Methods for Funding Clásica Cards

What stands out the most about the new Clásica cards is how they are funded. The issue of cash deposits in USD is already a “classic” topic. It is never clear whether the country will be able to deposit the funds that back those cards in foreign banks or, if it cannot, if will ban receipt of foreign currencies or impose taxes to discourage their capture by the population. The policy approach iis impacted by U.S. sanctions and is not a subject of discussion in this article.

The government allows the funding of the Clásica card through online payments (the transmitters of which periodically end up on U.S. blacklists, forcing their constant migration from one web platform to another) or through deposits via CADECA (the government currency exchanges).  The card may also be funded through international transfers. Remarkably, the only bank authorized to accept international transfers to fund USD balances is BANDEC. 

Why are other banks not entitled to accept international transfers and credit accounts in USD? Is it because the GAE has its accounts, with the exception of some at Banco Financiero Internacional (BFI), exclusively at BANDEC? Does this mean that if I have an account at BANDEC and receive a remittance from my family abroad, I can shop with the USD Clásica card, but if my account is at another Cuban bank and receive a remittance from abroad in foreign currency, I am limited to using the MLC card and cannot shop with the far more valuable USD Clásica card? Havana, the most populous city in Cuba, features Banco Metropolitano, the bank with the highest number of users, not BANDEC. 

The absurdities keep piling up, and no one provides a convincing explanation for these decisions.

Resolution 56 of MINCIN (December 2024)

In a recent article, I shared my hypothesis that the most likely explanation is that this is a method to eliminate competition from MIPYMEs (privately owned enterprises) in order to boost sales of state-run foreign currency store chains. Not long after its publication, the emergence of new stores seems to confirm that my assumption was correct. This is the only way to maintain the large 2.4 type markups of the government store chains, which are higher than the mark ups of MIPYMEs, so that the sales of the government store chains do not stagnate.

A social media user stated that he preferred state-owned store chains rather than private sector stores because the profits from the former would go into state coffers for social programs and to fund government expenses for the benefit of the population. I respect this view and would agree—if stores operated in an even playing field.

But even if most of the population shared that social awareness, people must meet their personal needs, and they primarily allocate their resources to whoever sells them the best quality products at the best possible price. Trying to ignore this reality is neither economically sound in general nor beneficial for individuals in particular.

Although I intended to address this issue solely from an economic perspective, I conclude with a reflection that goes beyond that realm. Recently, several articles by prominent journalists in the Cuban press have highlighted the lack of communication regarding the operation of these new foreign currency stores.

It is understandable that government officials do not want to admit their mistakes. It is difficult for them to acknowledge that the 2021 monetary unification was a total failure. But failing to explain policies to the public, failing to justify measures, and not trying to convince people about measures taken leads to a loss of political trust. Add to this the loss of confidence in the currency and in the economic measures implemented by the government in recent years.  And, add to this, the disrepute created by the constant back-and-forth in policy changes - constantly claiming to support the national currency when reality and the objective need of the population for foreign exchange say otherwise. Our compatriots are not ignorant.