The sudden and unexplained weakening of the U.S. dollar in Cuba recently may have been caused by the market foreseeing the Biden administration making a unilateral concession to the communist Castro regime. The State Department’s announcement on Tuesday of another capitulation to the Cuban dictatorship in the form of allowing Cuban “private” businesses to open bank accounts in the U.S. would flood the island with dollars (the lion share going to the Castro dictatorship’s coffers), hence increasing its supply and lowering its value.
Carlos Martinez explains this possible scenario in Cubanomics:
‘ElToque Knew!’
Throughout the last two weeks, the Cuban economist community has struggled to explain the reduction in the informal foreign exchange markets. Dr. Pavel Vidal attributes this change to an increased dollar supply and the reopening of Western Union services in Cuba, while others suggest government pressure on companies to lower prices.
Cuban officials accused ElToque of price manipulation and miscalculation of the currency exchange because of algorithmic errors. I won’t delve into the specifics of their calculation methods or whether we should trust them—we will discuss those details in future posts.
In this piece, I would like to offer an alternative, and possibly complementary, explanation for why the exchange spread between the official and informal markets has reduced. The reason may be disturbing for many. I will argue that market agents were predicting a policy shift by the Biden administration, which was reflected by changes in the exchange rate.
For those wary about the sudden decline of the exchange rate, it is notable that in two weeks, there has been a 19% reduction. We have observed previous cases of overshooting in Cuba’s informal currency market.
Many individuals claim that this behavior repeats once market agents reach a certain peak. This may be a characteristic associated with segmented markets and asymmetric information, which plagues Cuba’s economy.
In Cuba’s segmented and information-asymmetric economy, forming rational financial expectations is difficult. The absence of robust financial markets prevents proper connections between real and monetary assets, confining Cubans to trade in informal markets via platforms like Telegram, Facebook, or WhatsApp.
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