The depreciation of the Cuban peso against the US dollar in the informal foreign exchange market was moderated, especially in October 2023, after showing high volatility and acceleration in the previous months.
According to the latest report from the Observatory of Currencies and Finance of Cuba (OMFi), prepared by economist Pavel Vidal, the dollar remained stable at the rate of 250 Cuban pesos (CUP) for 32 consecutive days, from September 19 to October 20.
Something similar happened with the euro, which has remained fixed at 260 CUP for 23 days since October 4. However, in the last days of October, the Cuban peso fell again against the two currencies, reaching new historical records. The dollar was quoted up to 255 CUP and the euro at 265 CUP, the highest value recorded so far in the informal market, surpassing the highest predicted by OMFi statistical models.
With these latest moves, so far in 2023, the Cuban peso has accumulated a depreciation of close to 50% against the dollar and the euro in the unofficial foreign exchange market. The gap between the informal exchange rate and the official exchange rate set by the Central Bank of Cuba reached 2.1 times, which shows the magnitude of the distortion of relative prices in the Cuban economy.
OMFi experts explain that the calm exchange in October responds to a greater balance between the supply and demand of dollars and euros during the month, after in August and September there was a sharp decrease in the supply, causing a sudden drop in the Cuban peso in the market balance.
Some OMFi forecast models see that in November there may be a slight additional depreciation of the peso, between 1% and 2.5%, which will put the dollar in a range between 262 CUP and 265 CUP, while other models consider a moderate appreciation of the peso possible next month if the current balance between supply and demand for foreign currency is maintained.
Food inflation forces prices to rise
Behind the rapid decline of the Cuban peso in the last year and a half is the high level of inflation recorded on the island, which is concentrated especially in the price of food.
Data have recently been published that confirm the decline in imports and national food production, putting strong upward pressure on prices and the informal exchange rate.
According to ECLAC, in the first half of 2023, Cuba’s total imports decreased by 35% compared to the same period last year. For its part, the National Office of Statistics and Information (ONEI) reported a strong contraction in 2022 in root crops (-18%), vegetables (-22%), rice (-66%), beans (-46%), and corn (-39%) compared to the 2019 level, which directly affects the increase in the price of these products.
Crops such as corn and some vegetables are key to the production of pork and eggs, two of the foods most in demand by Cuban consumers. In fact, according to price data from elTOQUE between July 2021 and July 2023, the price of pork increased by 274% and the price of the tray of 30 eggs by 700%.
Against this backdrop, experts agree that correcting economic imbalances and overcoming the crisis will require not only a macroeconomic stabilization program but also structural reforms that reactivate national production and import substitution, especially in the agricultural sector.
The cash dollar remains the preferred currency
Another relevant aspect pointed out in the latest OMFi report is that, despite greater exchange rate calm, the freely convertible currency (MLC) or dollar in bank accounts continued to decline in October against the US dollar in cash. .
Although the MLC appreciated by 6.8% against the Cuban peso, it depreciated by 4.5% against the greenback. This proves that Cubans clearly continue to prefer the physical dollar over the MLC.
It should be noted that the Government of Cuba established a fixed rate of 120 Cuban pesos per dollar for MLC accounts, much lower than the 250 pesos where the dollar is quoted in cash. However, restrictions on cash withdrawals in that currency make the greenback even more desirable.
In recent months, an informal market also briefly emerged between the Cuban peso in cash and that deposited in bank accounts, due to the limits on the use of money imposed by the Central Bank of Cuba. However, according to OMFi, this market has failed to improve, and the gap between the two pesos has narrowed, proving that this is a temporary adjustment.
Prospects for a slower depreciation
Looking to the coming months, experts consider that, although the macroeconomic factors that support the depreciation of the Cuban peso remain, it is likely that the pace or speed of depreciation will moderate in 2024.
This is because the absence of mechanisms to index salaries to inflation in Cuba causes an excessive monetary issue and a fiscal deficit that gradually loses its effect on demand and exchange pressures. . In turn, the decline in national production limited the impact on the supply side.
In other words, the accumulated deterioration of the purchasing power of salaries, pensions, and the amount of money in circulation will contain the pressures of inflation and the informal exchange. But the lack of supply will continue to push prices and maintain a moderate decline.
Thus, it is likely that after the strong acceleration in 2022 and 2023, the informal money market will enter a more stable dynamic in the coming years, with a slight decrease and oscillation in both directions, while the Cuban economy is trying to implement reforms that correct severe imbalances.