Dollarization of Cuba (III)
After analyzing the serious monetary distortion in Cuba and international experiences with dollarization in the previous two installments, it is time to address how to effectively implement dollarization in Cuba. This analysis will focus on the preliminary steps and reforms necessary before adopting the dollar as the official currency, detail a concrete plan for adopting the dollar on the island, examine how such a transition would bring financial stability, and conclude with a proposal for designing a competitive financial system in a dollarized Cuba.
Essential reforms prior to dollarization
Before taking the step toward official dollarization, Cuba must undertake a series of fiscal, legal, and institutional reforms that lay the foundations for a stable and open economy. Dollarization is not a panacea in itself; it requires an environment conducive to the successful adoption of the dollar. Among the most important prior reforms are the following:
The Cuban government must eliminate monetary financing of the deficit and balance its budget before dollarizing. This involves cutting spending, reducing subsidies, and increasing revenues, while prohibiting the central bank from financing the Treasury.
Institutional reforms are needed to guarantee private property, contractual freedom, and the rule of law. This includes recognizing private enterprise, ensuring judicial autonomy, and eliminating bureaucratic obstacles.
Dollarization in Cuba requires price liberalization and the elimination of controls and subsidies. Prices must reflect supply and demand to encourage production and imports.
Cuba needs to unify the exchange rate, stop printing pesos, and accumulate foreign exchange reserves before dollarization. The Central Bank should act only as an exchange administrator and freeze monetary expansion.
These reforms—fiscal discipline, legal certainty, free price formation, and monetary reform—will create the basic conditions for adopting the dollar to be beneficial and not just a palliative measure. Several economists warn that dollarization without fundamental structural changes will not solve the root problem, which is Cuba's statist and unproductive economic model. Therefore, it must be emphasized that dollarization must be accompanied by broader economic opening. Only then can the new strong currency take root in an environment of economic freedoms and fiscal responsibility.
Plan to implement the adoption of the dollar in Cuba
Assuming that the preliminary reforms have been initiated, the next step is to draw up a clear and feasible plan to adopt the US dollar as the official currency in Cuba. This plan must decide on key practical issues: Will there be an official exchange of pesos for dollars, or will the peso be allowed to float until it disappears? How will existing exchange restrictions be eliminated? How will the Cuban economy be integrated into the dollar financial circuit? The following is a proposed roadmap with the main actions to implement dollarization:
Announcement and legal framework for dollarization: The transitional government should begin with an official statement of intent: publicly announce the decision to recognize the US dollar as legal tender in Cuba as of a specific date. This announcement should be accompanied by a legal framework (decree or law) establishing the principles of the transition: for example, that as of “D-Day,” the dollar will be the official unit of account for all transactions, contracts, and accounting records in the country. This law should also repeal the mandatory use of the Cuban peso, allowing all economic actors to freely hold and use foreign currency (something that, although legal since the 1990s, still had practical restrictions). It is important that the announcement inspires confidence and credibility: it must be clear that there will be no turning back on the decision and that the state will support the process. Likewise, it will be communicated how the transition period before D-Day will be managed.
Immediate elimination of exchange restrictions: immediately thereafter, all currency exchange restrictions and state control over the foreign exchange market must be abolished. This implies legalizing the free exchange of pesos and dollars at market prices. If there were previously limits or licenses for exchanging money, they are now null and void. Cubans, both citizens and businesses, must be free to go to banks, exchange houses, or financial markets to buy or sell dollars without administrative obstacles. The exchange rate will be determined by supply and demand, eliminating the duality of official and informal rates. In practice, this will recognize the real exchange rate already established by the black market (currently well above the official rate). During this pre-dollarization period, the peso will fluctuate freely; it may continue to lose value, but this will simply reflect the reality prior to setting the conversion rate. The objective of this measure is to make the value of the peso transparent and reduce excess liquidity: it is expected that many economic agents will begin to voluntarily dollarize their balance sheets, exchanging pesos for dollars, which would reduce the money supply in circulation before the final exchange.
Define the conversion rate and the exchange of pesos (if any): a crucial point is to decide whether there will be an official exchange of Cuban pesos for dollars and at what exchange rate. There are two possible approaches:
Total or partial official exchange: set an official conversion rate (e.g., X pesos per USD 1) and offer the population the opportunity to exchange their pesos in cash and bank deposits for government dollars at that value. The government would need sufficient foreign exchange to partially back the swap. Given Cuba's precarious reserve levels, it would probably be necessary to seek external support (e.g., international organizations or friendly countries) to obtain funds. Analysts had already proposed this idea years ago. In a democratic transition scenario, it is not out of the question to obtain international loans or aid to finance this initial swap, as the resulting stability would benefit everyone. The swap could have limits per person to protect small savers and prevent large cash hoarders—often the result of illicit activities or privileges—from benefiting excessively.
Dollarization without exchange (de facto conversion): After the announced date, the peso would cease to be legal tender and would be valued solely on the market, without official conversion. This means that everyone converts their pesos into dollars at the price they can get. This approach, applied in countries with hyperinflation, involves abandoning the national currency without formal compensation due to its zero value. The advantage is that it does not require reserves or external borrowing, as the market assumes the conversion. However, peso holders could lose almost all their purchasing power overnight, generating social unrest.
An intermediate alternative is to make a partial exchange: for example, converting only a fraction of bank deposits at a fixed rate and leaving the rest to the market, or exchanging up to a certain amount per person. Whichever method is chosen, it is essential that the conversion rate set is realistic. Attempting to overvalue the peso (setting too few pesos per dollar) would only lead to dollar shortages and a black market, while undervaluing it excessively would be unnecessarily detrimental to peso holders. The most prudent approach is to base the official exchange rate on the free market rate close to the date of dollarization (for example, if 1 USD = 300 CUP on the market, use something close to 300). The goal is to definitively close the chapter on the peso with an orderly process, compensating citizens as much as possible, but without compromising the solvency of the new monetary regime.
Conversion of wages, prices, and contracts: on D-day (the date of official adoption of the dollar), all wages, prices, bank accounts, and contracts in national currency will be expressed in dollars. This requires a great deal of administrative work: every public and private entity must recalculate its payroll and prices in dollars according to the adopted conversion rate. This may involve additional adjustments—for example, if the exchange rate is very high, some public salaries could be extremely low in dollar terms and may require temporary supplements or adjustments to ensure a minimum living wage. However, it is preferable to address such support transparently in the budget rather than distorting the general exchange rate. All existing contracts (rents, debts, etc.) agreed in CUP will be automatically redenominated to USD at the established rate. Prices of goods and services will be completely liberalized in dollars from that moment on; the state should refrain from controlling them. Free competition and private imports will help stabilize these prices in the new dollarized environment.
Withdrawal of the Cuban peso and adaptation of the payment system: with the official introduction of the dollar, the old Cuban peso must be withdrawn from circulation. In the days following D-Day, banks and commercial entities will collect any remaining CUP banknotes and coins (either by exchanging them if there is an official conversion, or simply by refusing to accept them if there is no conversion). Eventually, the CUP will cease to exist legally. During a brief transition period, stores and businesses could be allowed to accept payments in pesos at the exchange rate of the day to facilitate those who were unable to exchange them beforehand, but this should last as little as possible. On the other hand, the banking and payment system must be reconfigured to dollars: ATMs will dispense dollars (or perhaps convertible pesos as smaller denomination bills if it is preferred not to handle loose change in cents, although cents and US$1 coins may well be used). The provision of sufficient cash in dollars must be managed, and the use of electronic means of payment in USD (cards, transfers) must be encouraged to minimize frequent exchange problems. All national accounting will be converted to dollars: from government accounts to economic statistics and corporate balance sheets. In short, the Cuban economy will be “renamed” in the new currency.
Trade and financial opening to the outside world: in parallel with the monetary steps, the plan must include the opening of Cuba to international trade and investment, which are essential for bringing the necessary dollars into the economy. Dollarization without opening up would condemn the country to permanent foreign currency shortages. Therefore, exports, tourism, and foreign direct investment will be facilitated: excessive tariffs, bureaucracy, and obstacles to exporters and importers will be removed, and guarantees will be offered to foreign investors (legal certainty, possibility of repatriating profits, etc.). The goal is for Cuba to generate its own dollars through its products, services, and attractions, rather than relying solely on remittances or loans. With a reliable currency and no controls, sectors such as tourism, export-oriented agribusiness, biotechnology, and mining could take off, attracting fresh capital. This inflow of foreign currency will be both the cause and effect of successful dollarization: as more dollars enter the country due to the opening up of the economy, the dollarized economy is nourished and grows; and as it is dollarized with stability, it becomes more attractive to invest and trade with the island.
Transparency and communication during the transition: A final component of the plan is to keep the population informed at every stage, with full transparency on the measures taken. Credibility is crucial: Cubans must trust that their dollar savings will be safe, that there will be no surprises in terms of confiscation (as happened with the CUC in the past), and that the government will act responsibly. To this end, the transition authorities could invite international observers or external experts to endorse the process, provide regular reports on the progress of the currency conversion, and establish citizen service channels to answer questions (e.g., what to do with damaged banknotes, how will debts in pesos be handled, etc.). Clear communication will mitigate rumors and prevent panic. In addition, it must be made clear that no new local currency will be introduced in the short term after dollarization—the commitment is long-term. Only after many years of stability and growth could the creation of a currency of its own be considered, but that is another story and, if done, would be under very different circumstances.
With this plan, Cuba would make the transition to the dollar in an orderly manner and with as little trauma as possible. Many transactions on the island already take place in dollars or foreign currency, but formalizing and fully liberalizing their use will eliminate the dualities and arbitrage that currently punish the majority. It is worth emphasizing that, for the plan to succeed, the aforementioned reforms (fiscal, institutional) must be implemented at the same time. Dollarization will not be effective if the state continues to spend irresponsibly or if private initiative remains stifled. When both fronts advance together—fiscal/structural stabilization and currency change—a positive synergy toward stability and growth is created.
Why would dollarization bring financial stability?
Once the dollar is adopted, Cuba can expect multiple financial stability benefits that are currently elusive. Let's analyze how the currency transition would help clean up and strengthen the economic system:
Dollarization would eliminate chronic inflation in Cuba by preventing inorganic money issuance. This would bring price stability, allowing for savings, credit, and long-term planning.
Dollarization sets a stable benchmark for economic values, restoring confidence among the population and investors. This reduces uncertainty, increases bank deposits, and generates funds for productive projects.
Dollarization eliminates internal exchange rate risk, allowing businesses and families to plan without fear of devaluation. Cuba, which imports 80% of its essential goods, benefits from dollar income and reserves, ensuring payments without fluctuations.
Dollarization imposes fiscal discipline on the Cuban government, forcing it to finance its expenditures with revenue, responsible borrowing, or foreign aid.
This reduces deficits and debt, improving state solvency and economic stability.
The dollarization of Cuba would attract foreign investment and reduce country risk by eliminating devaluation and inflation. It would facilitate the repatriation of profits, access to external credit, and the channeling of remittances into the formal financial system, boosting liquidity and domestic investment.
Before moving on to the final section, it is worth clarifying that the stability provided by dollarization does not mean that all economic problems will automatically disappear. While it is a necessary condition for cleaning up the economy, it is not sufficient on its own. It must be accompanied by policies that boost productivity and the supply of goods. The big difference is that, with monetary and financial stability, these productive policies have fertile ground to take effect. On the other hand, with hyperinflation and exchange rate chaos, no reform will bear fruit. Ultimately, dollarization provides the firm ground on which to rebuild the economy, but on that ground, it is necessary to build with hard work, investment, and good governance.
Toward a competitive financial system in a dollarized Cuba
Once the switch to the dollar has been achieved and basic stability has been attained, the next challenge—and our final proposal—is to design a modern, dynamic, and competitive financial system that will serve as an engine for prosperity in a dollarized Cuba. This implies definitively breaking the state banking monopoly, taking advantage of remittance flows from the diaspora, incorporating new technologies such as cryptocurrencies, and fostering competition and innovation among financial institutions. Below, we outline the characteristics of this proposed financial system:
We propose opening Cuban banking to private and foreign initiative, allowing the entry of private banks and the possible restructuring of state-owned banks. This will foster competition, improve financial services, and allow free choice of banks. The state will act as regulator.
Cuba should integrate remittances, which amount to nearly $2 billion annually, into the economy by allowing deposits in local banks and offering attractive savings instruments. This would encourage investment in local businesses and diaspora projects, turning remittances into a lever for development.
Cuba should regulate the use of cryptocurrencies such as Bitcoin and stablecoins, recognizing them as voluntary means of payment and investment assets. This would diversify financial options, attract foreign investment, and position Cuba as a technological leader in the Caribbean.
A robust financial ecosystem in a dollarized Cuba must include a diversity of financial institutions, from local cooperatives to fintechs and foreign insurers. Competition among these actors, together with the entry of foreign entities, will stimulate continuous improvement in services and fair interest rates. An independent regulatory body will oversee solvency and consumer protection.
The dollarization of the Cuban economy must include full exchange and financial freedom, allowing transactions in dollars without administrative controls and the free entry and exit of capital. This will encourage foreign investment and integrate Cuba into the global financial system, improving competitiveness.
Together, these measures paint a picture of a dollarized Cuba with a vibrant and pluralistic financial sector, very different from the current centralized and rickety system. The benefits of this model would be numerous: Cubans would have access to credit for entrepreneurship, agriculture, housing, and consumption, something that does not exist today; they could insure their risks (a crop, a car, their health) with reliable insurance companies; save dollars safely and earn interest instead of hiding foreign currency under the mattress; companies would have options for financing and growth; the diaspora would become a partner in development, not just a provider of subsistence remittances; and the state, no longer the sole owner of the banking system, would gain tax revenue from an expanding economy instead of trying to control every transaction.
Dollaring the island is not an end in itself, but a means to achieve stability and economic freedom after decades of failed interventionism. Dollarization must be accompanied by profound reforms that open up the economy and lay solid foundations. Once these tasks are accomplished, the adoption of the dollar can eradicate inflation, restore the value of savings and investment, and integrate Cuba into the global financial circuit. As Carlos A. Montaner says, “A devalued and ‘cheap’ currency is another way of masking poverty.” With a strong currency and a free financial system, Cuba would have the tools to overcome poverty instead of disguising it. Banking competition, capital inflows, and new financial technologies would provide Cubans with unprecedented choices and opportunities. Dollarizing the island means changing course: betting on stability, trust, and economic freedom as the foundations of a prosperous and truly free Cuba.