REMITTANCES AND SANCTIONS ON CUBA
Luis R. Luis
Remittances from Cuban Americans are the lifeblood of both families in Cuba and its dollar-stretched government. This is especially true with the pandemic decimating tourism and weakening dollar receipts from medical services hit by feeble economic conditions in countries with Cuban medical missions, Venezuela, Angola and Algeria the most important among them. Remittances in 2020 at even a minimum estimate of $2.5 billion exceeded either tourism receipts or hard-currency payments derived from medical services.
Remittances are very resilient as migrants strive to support their family come hell or high water. The World Bank recently reported that remittance flows to low and middle-income countries contrary to expectations remained strong during the COVID-19 crisis in 2020 down only 2.6% from 2019. Cuba will have become an exception driven by Cuban financial restrictions and to some extent by tighter U.S. sanctions announced in October 2020.
Remittances are being digitalized worldwide. The old rule as explained by a Mexican official long ago was that money moves as people move. Most transfers now take place electronically. Currency still moves swiftly in countries with sizable black markets such as Cuba. The curtailment of flights because of the pandemic and U.S. air transport sanctions restrained travel and physical cash flows. In a normal country this would readily be replaced by digital flows with little change in the level of remittances.
Cuban government requirements that digital payments be channeled through state financial entities and converted to a special hard-currency account plus the restriction of use only in high-price state stores mean that Cuban families effectively receive in merchandise as little as one-half of the dollar value sent by relatives. The government in turn easily absorbs around 40% of remittances by way of state bank fees and excess markup in hard currency stores.
The high implicit taxation of remittances makes Cuba unique among low and middle-income countries. As an example remittances to neighboring countries such as the Dominican Republic, El Salvador, Honduras, Jamaica and Mexico are free of restrictions. Cuban financial control has increased with the establishment of hard-currency stores in late 2019. No wonder remittance flows to Cuba decline sharply while elsewhere they suffer little from the effects of the pandemic. Remitting and receiving families are well aware proceeds are being ripped-off.
High implicit taxation in Cuba means that remittances will flow towards untaxed or unregulated channels. Remittances will move underground or to transfers in kind by way of merchandise shipments. Adding pain to families the Cuban government in June 2021 banned the deposit of dollar currency in the banking system, raising costs to families that now need to exchange dollars into euros, Canadian dollars and other hard currencies for deposit.
What can be done to improve the flow of dollars to families and thus also help the struggling economy? The obvious answer is to lower the implicit tax on remittances created by state controls and obligatory dollar stores. The ideal way to achieve this is to open the foreign exchange market in Cuba. The government could license private and public exchange houses to operate, legalizing the black market where currently bid-offer spreads for the dollar and euro versus the CUP exceed 20%. There initially would be a floating exchange rate and a likely appreciation of the peso versus black market quotes. Private citizens, entrepreneurs and state companies as well as the central bank could participate in this market. With dollars flowing freely there is a weak argument for U.S. restrictions on Western Union and other digital services providers.
I do not expect the Cuban government to implement this measure even though families and the economy will have much to gain from a boost in dollar remittances, access to foreign exchange and better liquidity. The 2019 Cuban constitution does not restrict the creation of a foreign exchange market. Yet the government is unwilling to yield control over dollar flows and unwind the ripping of remittances through the state financial network and dollar stores. There is strong opposition within the communist party and government to free the foreign exchange market. Furthermore, the authorities tighten control on foreign exchange amidst a dollar crunch even as it discourages remittances. The government will have to overcome reform fear and allow the establishment of independent foreign exchange brokers as well as maintaining balanced monetary and fiscal policies that support peso stability.
The Biden administration and many Cuban Americans with relatives in the island favor lifting U.S. restrictions on remittances. This is now a central element of the embargo and one that could be lifted rapidly by administrative decision, but it requires unlikely action by the government of Cuba.
Short of liberalization by Havana the Biden administration does not have markedly attractive alternatives. Lifting sanctions on transactions with entities that provide the military with some 40% of remittance proceeds is difficult more so after increased repression in the island as President Biden has stated. Allowing shipments of household goods as well as food and medicines to relatives as remittances in-kind is a feasible alternative. These are temporarily allowed in Cuba as duty-free imports carried by travelers. Yet, in-kind remittances are costly for families and a far less effective help to the population than cash transfers that boost retail activity.
Meanwhile remittances from the U.S. will surely flow through channels in third countries, draining resources sent to families in transaction costs and particularly in fees and high markups levied by the Cuban government. Remittances are slowed by the pandemic, sanctions and not least by restrictions on money flows in Cuba.