July 17, 2020 / 12:21 AM / a month ago

Cuba broadens use of dollars, eliminates 10% tax on greenback

HAVANA (Reuters) - Cuba said on Thursday it will allow some stores to sell food, personal hygiene and other consumer goods in U.S. dollars and will eliminate a 10% tax on the greenback, an effort to rake in more hard currency to purchase goods abroad.

It is one of a list of reforms the Communist government said it would detail and implement in the coming months such as the expansion of the private sector that Economy Minister Alejandro Gil termed necessary to face an “exceptional situation,” during an evening broadcast on state television.

Cuba, which monopolizes retail and foreign trade, faced a liquidity crisis even before the coronavirus pandemic shuttered tourism and hit other revenue earners with the implosion of ally Venezuela’s economy and the tightening of the decades-old U.S. trade embargo under President Donald Trump.

Pandemic fallout has worsened shortages of food, medicine and other goods and long lines at retail outlets.

Cuba’s economy is forecast to decline nearly 10% this year after stagnating in 2019.

The government opened around 80 “dollar stores” late last year selling items such as home appliances, motor bikes and car parts that it buys abroad in tradable currencies. It added used cars earlier this year.

There are currently two currencies, the peso and the convertible peso, which is valued at 24 pesos, circulating in Cuba. Possession of the dollar and other tradable currencies is legal, but they have not been deemed legal tender for purchases for years.

Cubans who patronize the dollar stores need a dollar-denominated bank card from an account opened with tradable currencies, such as the dollar or euro. Tradable currencies may be obtained through offshore remittances or other means such as exchanging local pesos on the street.

The government claims the convertible peso is equal to the dollar, but imported goods, when available, have huge mark-ups as they are purchased in tradable currencies. The peso and convertible peso have no value abroad.

Pavel Vidal, a former Cuban central bank economist who teaches at Colombia’s Universidad Javeriana Cali, said Cuba was returning to a strategy that worked in the 1990s after the fall of the Soviet Union left its local currency useless and it allowed dollars to circulate freely.

“It is an option that may partially work in the short term, but it generates segmentations, more distortions and does not guarantee inclusive and sustainable economic growth in the long term,” he said.

Reporting by Marc Frank; Additional reporting by Sarah Marsh and Nelson Acosta; Editing by Leslie Adler

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