Tuesday, December 28, 2010

Why remittances are now cheaper

Something has seemed not quite right to me about the stories regarding Western Union, remittances, and the supposed elimination of Cuba’s ten percent surcharge on dollar-to-peso exchanges.

The surcharge was imposed, Cuban officials have explained many times, in response to U.S. financial sanctions that hinder Cuba’s cashing-in of accumulated dollar reserves in third-country banks. Those sanctions always seemed absurd to me, considering that for many years the dollar was used in Cuba by travelers from all around the world, and it was used in the course of legal travel and remittances by Americans. During those years, i.e. from the opening to tourism in the early 1990’s until 2004, Cuba naturally accumulated large amounts of dollars in cash. The convertible peso existed then but was barely used.

The surcharge, Cuba explained, was to create an incentive for travelers to use other currencies than the dollar, and to compensate for the extra trouble of exchanging dollars in the international financial system.

As for the current stories, some have intimated that the surcharge has been dropped. From what I gather, that is not the case – it is being maintained, but it applies now and has always applied to cash exchanges only. Since Western Union is now paying out remittances in convertible pesos, and since Western Union is apparently purchasing the convertible pesos through some kind of normal bank transfer that is not a cash transaction, there is no surcharge. (This 2006 Bush Administration action [pdf] that allowed remittances to be provided to Cubans in any currency but their own, is now apparently inoperative.)

So this is good for those who send and receive remittances; they no longer lose ten percent of their money through the surcharge.

It’s bad for Americans who exchange dollars in cash in Cuba; they will continue to pay the surcharge.

It’s probably good for Western Union’s business and bad for that of the “mules” who carry money directly to Cuba. The mules continue to provide door-to-door service, but now have a ten percent price disadvantage.

Since the remittances are cheaper, their volume will probably increase, which benefits Cuban receivers and, in some measure, the Cuban government. The Cuban government will also benefit from a cash flow acceleration, as the Western Union remittances are converted to Cuban pesos as they are sent, not when the receiver decides.

In the spirit of the season, pro-embargo advocates look at this latter impact and not at the benefits to Cubans who will buy more food or clothing for their families. They call it, with typical exaggeration, a “$1 billion bailout” engineered by the U.S. government, which is easier than blaming Cuban Americans themselves for wanting to help their loved ones.

Merry Christmas!

Here’s more from BBC Spanish and AP.


Phil Peters said...

From a reader's e-mail:

I find it ridiculous that some people called the change a "bailout" by the US government to the Cuban government. Because of the change, the only losers are the mules who will see their business declining. As for the Cuban government (neither a winner nor a loser I would say), it will not take the 10% cut in CADECA as much as before as money through Western Union will increase, but it will benefit from increased transactions in CUC-only stores. The indisputable winners here are ordinary Cubans who will get more money in their pockets and formal money-transfer service companies. Why it took so long to do this is beyond me.

Anonymous said...

Dear Mr. Peters,

If Cuban Americans can send unlimited quantities of dollars to Cuba and if the ten percent tax on dollars has been circumvented, what obstacle remains that will prevent that will prevent them from investing in the rebirth of the private sector in Cuba?

Of course for joint ventures, Cuban law seems to require slave labor since Acorec hires Cuban Nationals and pays them in pesos while requiring payment in convertible currency thus confiscating 96% of the value of the employees salary.

But the new Guidelines make no mention of ACOREC in the process of hiring employees, so apparently this obstacle is non existent?

The sole remaining bottlenecks for such investments is the non creation of a wholesale market for private sector input.

What sense does it make for the US to favor a higher amounts of dollars going into Cuba by easing restriction on travel and remittances while continuing to enforce an embargo on exports?

All we are doing is worsening our balance of payment deficits by sending larger quantities of dollars to Cuba that will then be spent in third countries.

Even if someone favors keeping the embargo on the Cuban government, the only rational way of going about is is placing limits on the Cuban exports of goods and services, not on what we could sell to them to get our dollars back.

So why, in this situation, doesn't the US government authorize the exportation to Cuba of technology and inputs necessary for the rebirth of its private sector?

This would serve several objectives.

First it would help decrease the balance of payment deficit of the US.

Second it would help to stimulate the creation of a private sector in Cuba which could provide employment for opposition sympathizers.

Third, it would provide Cuban Americans with a presence and influence in Cuba and help to reenforce the role of Cuban Civil society.

It would also help to begin to bridge the gap between Cubans living abroad and in the island.

Of course, to maximize the potential impact of such a measure, it should be complemented with the establishment of regular maritime links between the mainland US and Cuba.

This would be most beneficial if it included small ferries between Key West, New Orleans and Havana.

This would not only allow a cheaper and convenient way to transport merchandize and provide advantages for US trade because of its nearness to the Cuban market and because of its reduced transportation costs but it would also cheapen the cost for Cuban American travel to Cuba and thus increase its volume of travel to the island and its influence over the Cuban population.

Along with this should come the authorization of the opening of a US bank office in Havana to allow the Cuban government to pay for its importation of goods from the US in cash when they leave US ports.

It is time we followed an intelligent foreign policy with Cuba that would simultaneously allow us to influence over the Cuban democratic transition, to better relations between both government and people's and to further US economic interests.

The present obsolete policy does not allow us any of these advantages.

Of course, with Republican gains in the House and Liliana Ross Lehtinen's promotion to head the commission on foregn relations, Congressional assent to such changes become extremely difficult if not impossible during the next two years.

But the executive branch should investigate how much wiggle room it possesses within the existing legal framework to solve the existing contradictions and to follow a new Cuba related foreign policy more favorable to US interests instead of to a small minority of obsolete right wing circles in southern Florida.

Pantaleon Paticruzado

Phil Peters said...

Anon, fine by me. Go tell it to Obama.

As for joint ventures, as I understand it the idea does not involve hiring, it involves contracting. So the employment agency ACOREC would not be involved.