The informal exchange market in Cuba has experienced strong turbulence in recent months. April 2024 marked a high point in the devaluation of the Cuban peso.
According to the Observatory of Currencies and Finance (OMFi), the US dollar reached an unprecedented high of 380 Cuban pesos (CUP), while the euro and the freely convertible currency (MLC) traded at 390 CUP and 295 CUP respectively.
The escalation in informal exchange rates represents the largest monthly depreciation of the Cuban peso so far this year, which accelerated the speed of devaluation compared to the first three months of 2024.
In percentage terms, the Cuban peso depreciated more than 13% in relation to the dollar and the euro and more than 5% against the MLC.
“Since September 2023, a percentage increase of more than double digits has not been seen in the informal market rate,” states the most recent OMFi report. «During April, on three occasions the rate rose 5 CUP in a single day in relation to the dollar and twice it did so in relation to the euro. The value does not exceed in absolute terms, but rather coincides with the historical maximum rate change in a single day in 2022 and 2023.
The causes of the depreciation of the CUP in April
According to OMFi analysts, the accelerated depreciation of the Cuban peso is due to four interrelated factors that are part of the economic and financial crisis that the country is experiencing. Namely: growing inflation, stagnation in production and exports, high fiscal deficit and emigration.
Official data from the National Office of Statistics and Information (ONEI) show that inflation doubled in the first quarter of 2024 compared to the last quarter of 2023 and went from growing at an average monthly rate of 1.6% to 3.5%. %.
«With the seasonally adjusted consumer price index (CPI), it was found that in the fourth quarter of 2023 prices rose by 5% while in the first quarter of 2024 they grew by 10.7%. That is, official data show that the speed of inflation has doubled,” says the OMFi report.
In the first quarter of 2024, the food, transportation and alcoholic beverages categories recorded the most significant increases, with inflation rates considerably higher than the general CPI.
Among the causes of the devaluation of the Cuban peso, it is also notable that the growth of tourism has slowed down, that exports of goods have remained below expectations and that the sugar harvest continues to fail to stabilize production.
Added to the above is that at the end of February the imbalance in the State budget accumulated more than 20 billion pesos financed with monetary issuance without productive support.
The monetary issue without the corresponding support in goods and services increases the amount of money in circulation, but without being accompanied by an increase in production. As a result, there is a mismatch between supply and demand, which puts upward pressure on the prices of goods and services; that is, it generates inflation.
The migration wave is also an aggravating factor that shows no signs of attenuating since June 2023 and that leads to additional demand for foreign currency in the informal market.
It also “undermines the productive activity of state companies, slows down the growth of the private sector, affects the functioning of procedures and the operation of public sector offices and constitutes a drain on human capital with notable detrimental effects on education, public services, Health and research activities, among other essential sectors to sustain the capacity to produce goods and services,” the report mentions.
Possibles scenarios
OMFi models predict that the depreciation trend could continue in May and predict that the informal exchange rate could be around 417-427 CUP per dollar, 422-433 CUP per euro and 316-324 CUP per MLC at the end of month. However, they also suggest that a decrease in the pace of peso devaluation is likely in the coming months.
The growing dollarization of the economy and the deterioration of the national currency due to factors such as the pandemic, economic sanctions and macroeconomic imbalances have been a constant in the exchange crisis of recent years. The magnitude of the depreciation observed in April 2024 has raised alarm bells and generated concern among economic analysts.
“The trajectory of the rate in the remainder of 2024 will not be linear,” warns the OMFi. “Announcements or shocks of various kinds could produce changes in expectations and alter the short-term trajectory of the supply and demand of currencies.”
In summary, the Cuban peso has accelerated its devaluation in 2024 in a more constant manner and without major fluctuations and has maintained an upward trend without significant temporary corrections.
The Central Bank of Cuba has not modified the official exchange rates of 24 CUP and 120 CUP per dollar, despite talking about possible interventions in the exchange market. The difference between the official rate and that of the informal market continues to increase.
