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Recently, the 10% surcharge in Cuba on cash payments made in USD was abandoned. This measure was introduced in line with resolution 80 of the Central Bank of Cuba (BCC) dated October 23, 2004 alongside the requirement to use the Cuban Convertible Peso (CUC) in shops.

Holding and using foreign currency was authorised in Cuba in 1993. After that, in addition to the shops that already existed for tourists, other outlets started to open selling their products (clothes, food, furniture, household appliances) in US dollars (USD). These stores were intended to bring in foreign currency, which would help guarantee a minimum vitality for the economy, allowing the population's standard of living, which had declined considerably since the beginning of the special period, to begin to rise without giving up on the social achievements of the Revolution in education, health, culture, sports, etc.

As a result of the increase in tourism in Cuba, as well as the remittances received by Cubans from abroad, the volume of foreign currency in circulation that the country received had risen steadily every year and, while not matching other countries in the region, the amounts were nevertheless considerable.[1]

With this backdrop, in 2004 the US Federal Reserve investigated the Swiss wealth management firm, UBS, with the aim of finding out the transactions that led to $650m US dollars in new $100 notes with serial numbers which linked them back to UBS in Iraq despite US attacks on the country. During this investigation, the Federal Reserve uncovered that the UBS Group, as well as with Iraq, had engaged in cash transactions with Cuba and other countries sanctioned under US law.

In Cuba, the UBS currency deposits reportedly amounted to US$3.9 billion through 1900 transactions between 1996 and 2003

With this information, the renowned Florida Republican congresswoman Iliana Ros-Lehtinen (the she-wolf) began to orchestrate a vigorous propaganda campaign with help from across the media, claiming there was no doubt that the circulating currency was a result of international drug money being laundered in Cuba with the help of revolutionary movements in Latin America. Republican Congressman Lincoln Díaz-Balart, another well-known enemy of Cuba, quickly jumped on the campaign bandwagon. In their initial public statements, the two Congress members demanded both that the UBS Group be heavily fined, and also that measures be taken so that Cuba could not make USD cash deposits in international banks.

Obviously, this campaign was for people who were not well informed, as is almost always the case in the news about Cuba published in the United States. In the 2004 Organization of American States (OAS) report, it was calculated that in the 2001 – 2003 period alone, Cuba had received some US$3.5bn in remittances, which were effectively cash deposits due to the banking restrictions of the blockade [embargo] itself imposed during that time. If we add to this figure the cash in USD that was received from tourists, it is clear that theUS$3.9bn in cash deposited by Cuba in the UBS Group AG between 1996 - 2003 represented only a part of the totally legal income that entered the country in that period, making it categorically clear that there was no basis in reality to claim that this money came from drug trafficking.

In the end, the UBS Group AG was fined US$100mn, and the bank unsurprisingly stopped doing business with Cuba.

In late September 2004, Commander-in-Chief Fidel Castro Ruz called the Central Bank of Cuba (BCC) one morning to inquire about the main events that had occurred in the financial field. It was Fidel's practice, at that time, to make these calls.

On the call that day, he was told what had happened to the UBS Group AG and the campaign that Ros-Lehtinen had begun to orchestrate with the aim of ensuring at all costs that the US prevented Cuba from making USD currency deposits in international banks.

Cash dollars, as you can easily imagine, cannot be used in large foreign trade operations required by the country to maintain its vitality. This currency needed to be sent abroad and deposited in a bank, then credited to the accounts held by Cuban banks through which payments could be administered. Such currency export operations are not without risk and are costly even under normal conditions, so with the background of the UBS Group AG and the aforementioned propaganda campaign, it was bound to result in fewer ways to send cash in USD to international banks and at higher costs.

When this comment reached Fidel, he immediately asked what could be done in this situation, and he was told that at first sight it would be advisable to bar US dollars in cash transactions in the country's shops, force foreign currencies to be exchanged for Cuban convertible pesos (CUC), of which there were sufficient cash reserves and to, in some way, impose a surcharge on the use of cash dollars that both Cubans and foreigners may want to exchange for CUC.

Fidel’s first reaction was positive, and he instructed that urgent action be taken in this regard, clarifying from the outset that it should not be seen as a “fine” or “penalty” but rather as a tax or surcharge, which was perfectly appropriate.

The next day he called again asking only about this one issue. It was explained to him that with these measures, in addition to changing the composition of the foreign currency entering the country, some considerable financial benefits would be derived.

Until then, as all the foreign exchange businesses in the country required cash dollars, 95% of the cash income was in US dollars.

Due to the conditions that had been created, tourists arriving in Cuba, mainly from Europe and Canada, exchanged their currencies for US dollars in their countries of origin when they visited Cuba, causing the loss of a considerable source of foreign currency. A currency fluctuation commission of between 2% and 6% of the exchange value is imposed worldwide for money exchange operations, and sometimes a fixed charge in the order of 5 to 10 USD per operation is also charged.

Cash in US dollars did not provide any income from exchange mechanisms as they were used directly in the commercial network within Cuba. By taking 3.25%, which has mostly been used as the exchange commission in Cuba, the exchange of that cash alone would produce more than 35 million USD of net income annually taking into account the previously mentioned remittance figures for the period 2001 - 2003, without considering the cash expenditure of tourists.

Furthermore, at that time operations with international magnetic bank cards had increased systematically. As the commercial invoicing for these operations was done in USD, no commission was charged for the exchange. When invoiced in CUC, this commission could also be applied to these operations, regardless of the foreign currency involved in the operation.

Finally, it is necessary to point out that by concentrating the handling of foreign currency in cash within a group of financial institutions specialized in these tasks, and getting the cash to banks in a few days, there were also logistical and financial advantages for the country.

The main income source in the medium term would obviously be through the surcharge. Although this income will fall over time as less cash in USD is in circulation, the target of this measure, it was expected that the end result would be achieved over several years, during which time the percentage established as a surcharge would provide substantial income.

With this information, Fidel immediately ordered the creation of a working group chaired by the Cuban Central Bank, with the participation of the other entities involved in foreign currency operations to prepare the necessary regulatory documents and mark out a plan with the measures required to introduce as soon as possible the CUC as the mandatory currency to be used in Cuba in operations that previously required the use of US dollars.

During Fidel's analysis of the proposals that were developed, he insisted at all times that the population should not be affected, that the USD held in bank accounts would not be subject to tax at any time and that, initially, it was necessary to set a time frame during which the USD people held could be exchanged at a rate of 1 : 1, without any exchange rate fee or commission. He also alerted that it should be made clear that the measure was only for USD in cash, and that all funds that arrived through the banks would not be subject to it.

Based on these guidelines, the working group was created and the required documents and plans were drawn up. Everything was prepared for October 23, 2004, when unfortunately, Fidel suffered an accident while attending an event in Santa Clara, which resulted in his needing surgery.

As soon as he came out of surgery, Fidel ordered that the proposed measures be announced on October 25, 2004 at a Mesa Redonda which he would attend. The Mesa Redonda was held at the Palace of the Revolution on that date. Starting on October 28 of that year, the transition stage began, during which the population could exchange the US dollars against the CUC on a 1:1 par.

As a result of these measures, the amount of US dollars that entered the country decreased rapidly, and from representing 95% of the cash income in 2003, that figure had fallen to 25% five years later.

The net income from currency exchange commissions increased annually in line with the increase in foreign currency that entered the country, both by way of remittances, and from tourist spending.

The almost 16 years in which the tax has been in force have undoubtedly provided positive results for the economy. The decision reported on July 16 2020 to eliminate it obviously responds to the current complex economic conditions, and these days, in contrast to when the measure was introduced, there is the advantage  that the amount of US dollars entering the country does not have the weight that it had back then.

Translated by Jackie Cannon.

References

1. Resolution 80, Central Bank of Cuba, 23 October 2004.
2. Remittances to Latin America and the Caribbean: Issues and perspectives on development, Report Commissioned by the Organization of American States Manuel Orozco, September 2004 Washington, DC
3. UBS Dealings in Iran, Cuba to Be Probed, The New York Sun, October 10 2005, https://www.nysun.com/business/ubs-dealings-in-iran-cuba-to-be-probed/21250/  downloaded 17 July 2020.
4. The road from Baghdad to Zurich, FINEXTRA, 29 November 2004, https://www.finextra.com/featurearticle/571/the-road-from-baghdad-to-zurich downloaded 17 July 2020.

[1] In the report commissioned by the Organization of American States (OAS), remittances to Cuba in 2003 were estimated at around 1.3 billion USD, while the Dominican Republic, Guatemala and El Salvador received around 2.2 billion USD and Mexico almost 14 billion USD.