Cuba will allow bank deposits in dollars again, but effects are unclear, experts say

In measure that acknowledges that the U.S. dollar is king in its black market, the Cuban government has reversed itself and will once again allow its nationals to deposit dollars in their bank accounts, just two years after it had banned them, the Cuban Central Bank said.

The Central Bank issued a regulation Monday allowing cash deposits in dollars, citing some economic improvements after the COVID-19 pandemic. The Central Bank had suspended such deposits and stopped selling dollars in June 2021, blaming U.S. financial sanctions for the difficulties the government faces in moving dollars abroad.

But that move redirected dollar currency exchanges to the black market, and the price of dollars skyrocketed. When the government announced it would again start selling limited quantities of dollars to the population in August last year, it did so at a price five times higher than what used to be the official rate for several years, 24 Cuban pesos for one dollar.

The price of the dollar on the black market is around 185 Cuban pesos.

While U.S. sanctions are still in place, the Monday announcement seems directed at capturing even more of the dollars circulating in the black market, experts say.

“Moving forward with partial institutional dollarization facilitates the entry of remittances through formal channels, provides liquidity to commercial banks, and also closes off spaces for the informal currency market,” said Pavel Vidal, a Cuban-born economist who teaches at the Universidad Javeriana in Colombia.

“The government has realized that promoting dollarization is easier in the short term than assuming the political cost of applying austerity measures, raising taxes, reducing spending and closing state companies,” he said, adding that the strategy does not address crucial issues like sustainable growth or growing inequalities in the country.

The announcement adds to the financial chaos surrounding economic reforms in the past few years.

“The relationship of the Cuban financial system with the U.S. dollar is schizophrenic; it is difficult to understand its logic,” Vidal said.

To counter the effects of U.S. sanctions under the Trump administration, Cuban authorities again reintroduced the dollar in the country in 2019 when it started selling home appliances in that currency in government stores. The dollar was for decades forbidden in Cuba, then briefly allowed in the 1990s, during the economic crisis known as the Special Period, then banned again in the early 2000s

When the pandemic hit in 2020, the government embraced the dollarization of the economy even further, opening dollar stores to sell food and basic necessities, a largely unpopular decision that stirred criticism and discontent.

A currency unification in early 2021 was supposed to eliminate the dual currency system in place at the time — which featured a weaker local currency, the peso, and a stronger one, the Cuban Convertible Peso — and start introducing some order to the financial system. But after its flawed implementation, prices skyrocketed, and inflation ballooned just at the time the country was stripped of many of its revenue sources, like tourism.

When the government announced in 2021 that it would stop allowing bank deposits in “convertible hard currency,” or MLC in Spanish, it left open the possibility of making deposits in other foreign currencies. Soon, the MLC became its own type of denomination, akin to a virtual convertible hard currency. The dollar stores morphed into MLC stores, and even fewer Cubans had access to them.

Experts believe the Monday announcement will make it easier for Cubans who couldn’t do so before to open bank accounts in MLC if they receive dollars through remittances from abroad. In theory, even Cubans who don’t get remittances could also buy dollars with their local pesos in the black market or the official currency exchange facilities and then deposit the dollars in the MLC bank accounts.

In practice, however, the dollar and the products in government stores are so expensive that state workers, pensioners and other vulnerable groups will still be disadvantaged. And many limitations exist to getting the money out of those hard currency accounts. That sometimes includes even having to write letters to the bank to justify the need for the money, one Cuban private entrepreneur told the Miami Herald.

It is also unclear how the measure will affect small private companies that have been allowed to import and export using state companies as intermediaries.

The private entrepreneur, who asked not to be named to discuss his business model candidly, said his main concern was finding ways to move the money abroad to pay providers and creditors when U.S. financial sanctions discourage banks in third countries from providing services to Cubans on the island. He said he didn’t know how making dollar deposits in Cuban banks would help him overcome such a challenge.

“Dollar liquidity and hard currency scarcity is the number one economic challenge in Cuba today because it affects the entire population directly and exacerbates virtually every other economic problem like inflation and empty store shelves,” said Matthew Aho, a Miami-based sanctions specialist with Akerman, a firm that represents companies doing business with Cuba.

“The decision to accept U.S. dollar deposits means very little if Cuban banks don’t also expand access to hard currencies for depositors who need to pay for goods or services from abroad. However, if this is just a first step toward liberalizing access to foreign currencies throughout the Cuban banking sector, then it would be a game changer for Cuban entrepreneurs and private businesses, whose lack of foreign currency is their biggest impediment to growth,” he added. “Only time will tell.”