At the beginning of June 2022, the Office of Foreign Assets Control (OFAC) of the Department of Treasury published updated its Cuba-related regulations. The Cuban Assets Control Regulations were amended to implement in part the policy measures announced by the Biden administration in May. The new regulations authorize remittances to Cuban nationals by any person subject to U.S. jurisdiction, including Americans of no Cuban origin, more widely known as donative remittances. Limits on the amount that can be sent by family or others have also been lifted. In addition, the measures authorize group people-to-people educational travel to Cuba, including for professional meetings and conferences.
Lifting limits on family remittances and re-authorizing donative remittances are perhaps the most important and immediate steps to ease the humanitarian crisis on the island. These measures should be implemented expeditiously.
WOLA has collaborated with Cuban economists Ricardo Torres and David Pajón to provide clarity on how these new measures on remittances by the Biden administration might be implemented, the challenges facing existing mechanisms, and their impact on the Cuban people and the country’s economy as a whole.
NEW MEASURES AND IMPLEMENTATION ON REMITTANCES
How do the new measures impact Cuban families, the private sector and civil society?
David Pajón: The four points initially announced—processing visas in Havana, increasing travel categories and flight destinations, eliminating restrictions on family remittances and donations, and supporting entrepreneurs—all represent positive changes for the Cuban people and for the private sector in particular.
The reactivation of the family reunification parole program may have benefits beyond the humanitarian and stabilization of orderly migratory flows. If visas are processed for the general public, the possibility of access to U.S. markets, training options, interaction with donors and to generate alliances expands significantly.
More travel destinations help to mitigate geographic disparities, bringing aid and demand closer to families and entrepreneurs outside of Havana, and reducing costs for travelers. Travel also facilitates the delivery of cash and in-kind resources directly to people. Also, given the requirements set for U.S. citizens to be able to travel, their visits to Cuba imply an interaction with entrepreneurs, which leads to new potential sources of revenue for this sector.
It is to be expected that remittance flows will follow their usual patterns and be oriented towards entrepreneurship, especially in a regulatory context that encourages the expansion of the private sector as never before.
As for support for entrepreneurs, the concept sounds great, but it must be put into practice. Currently, the Cuban private sector presents numerous challenges associated with the absence of international collection and payment mechanisms in Cuba and abroad; exclusion by banking and financial institutions abroad, barriers in access to credit mechanisms, etc. Any opening with a practical application in this sense will be welcome. There is a whole field here to explore new ideas, such as using the Internet, Financial Technology companies (Fintechs) and online options as support, which could be used as a workaround for the challenges of the regulatory mechanisms and the obsolescence of the local banking and financial system.
What are the channels currently available to send remittances? What are the challenges these present?
Ricardo Torres: The Cuban government has established new entities to engage in the processing of remittances, but an agreement must exist between those entities and the relevant parties in the U.S., like Western Union. There are clear uncertainties at the moment. It is impossible to know whether the newly created Cuban entities will be included in the State Department’s “List of Restricted Entities” sometime in the future, despite indications from the Biden administration that government entities might be accepted if they are no longer tied to the Cuban Armed Forces.
Another controversial issue is the currency used to deliver remittances in Cuba. The Cuban Convertible Peso no longer exists, and the official exchange rate between the Cuban Peso (CUP) and the U.S. dollar (USD) is well below the market rate. An alternative is sending the money directly to bank accounts denominated in USD in Cuba, but users may face restrictions accessing those funds or using them.
The main challenge is to get entities from both countries to work together in a predictable environment so that they can commit to a serious negotiation leading to a lasting solution. This is important to create an atmosphere of transparency and predictability. Developing direct channels to transfer money between Cuba and the United States is desirable because it may contribute to reducing costs and uncertainty.
David Pajón: I believe that the most convenient option will be to use banks such as Banco Metropolitano, Banco de Crédito y Comercio and Banco Popular de Ahorro. These are not subject to restrictions such as those faced by state company FINCIMEX. They are current recipients of remittance flows in foreign currency from several private platforms located abroad. There could be an opportunity for these to be the destination platforms based on a recent proposal from the U.S. after alleged consent by American authorities.
The establishment of correspondent banking agreements would be ideal, as it would eliminate intermediaries and costs.
In the absence of formal mechanisms to send remittances, is crypto a viable option? What do you see as a solution?
Torres: Cryptocurrencies are an emerging sector everywhere, and Cuba is fertile soil because of its primitive financial industry and the fact that it is a heavily sanctioned country. Crypto provides a way to evade sanctions and allows Cuban families to invest in small increments in a way that might protect them from inflation. Some cryptocurrencies are increasingly accepted as a means of payment, making it an alternative route to send money to people on the island. The problem with crypto is that few people have access to it and even fewer are familiar with its usage. More importantly, the crypto market has become unstable recently, making it an unreliable channel for many.
The more conventional channels still offer the best alternative for the average remitter, providing the new regulations are implemented in a way that generates transparency, security, and cost-effectiveness.
Pajón: Cryptocurrencies became an alternative during the economic crisis. It is a very valid option and it continues to be used as a bidirectional channel for transfers, in addition to its multiple innovative uses in Cuba that have opened numerous opportunities in terms of consumption, investment, and means of collection/payment for the private sector, among others. More than 200,000 Cubans were once involved in one of the investment funds that became popular in recent years. Although almost all of them collapsed, they brought crypto technology closer to many people, who subsequently gained in risk perception and diversified its uses.
It definitely constitutes a viable option, which has generated dynamic informal exchange markets, and the incorporation of formal crypto monetization mechanisms through various fintech companies.
There are limitations in terms of the use of the technology, which may segregate certain people, especially the elderly, although the same is true for certain remittance options outside the crypto arena. On the other hand, there are still relatively few players engaged in the formal monetization of cryptocurrencies towards the Cuban market. As these increase, it is expected that competition will favor cost reductions and the provision of various services that bring it closer to skeptical users or those not well versed in crypto technology.
How big are remittance flows to the island? How much of it comes from the U.S.?
Torres: There are estimates that indicate that Cuba received around $2-3 billion in 2019. The Havana Consulting Group provides similar estimates. These numbers matter. As an illustration, at $3 billion, remittances would be equivalent to 24 percent of Cuba’s exports in 2019. That puts them as the second most important source of foreign revenues after medical services and ahead of major industries like tourism or nickel mining. Likewise, if one accepts that remittances in kind were at the level of $2.5 to $3 billion in 2019, which would be actually higher than Cuba’s total imports of consumer goods that year. It helps explain why these flows are so important, and the extent to which the Cuban domestic market became so dependent on this money.
Since almost 85 percent of Cubans living overseas reside in the United States, one would assume that a similar proportion applies to remittances. In reality, it does not have to be that way. For instance, it is well-known that in the Cuban context, a large share of remittances goes through informal channels, such as people carrying money in their pockets. The flow of people greatly benefited from the availability of flights and the lower cost, especially for the community in South Florida.
How many families depend on remittances?
Torres: The informal nature of these flows makes it intrinsically difficult to have accurate estimates about the proportion of the Cuban population that receive or even depend on remittances to complement their consumption basket. An estimate by Manuel Orozco from Inter-American Dialogue indicates that 26 percent of Cuban households get money from relatives and friends living overseas. There are almost 4 million households in Cuba. If we combine the size of the flow and the reach within Cuba, it is safe to say that they play a vital role for the economy at large, but more importantly for the survival of many Cuban families. In some cases, it is the most important income source for retirees and the elderly.
Pajón: It would be difficult to offer a number. But there are studies that indicate that 77 percent of emigrants send occasional or permanent aid to family or friends living in Cuba, while one third of those residing in the country would receive such support. Other estimates suggest that cash or material support would have benefited more than 70 percent of Cuban families. In the context of the ongoing crisis—which began before the pandemic, and deepened during the worst moments of COVID-19 with ongoing effects until today—support from abroad makes a difference for the Cubans who receive it. Whether to guarantee general consumption of goods or to support enterprises, remittances play an important role at the individual and family level in coping with the crisis and trying to overcome it and prosper.
How do remittances relate to the growth of the private sector?
Torres: The expansion of the private sector and entrepreneurs, also known as “cuantapropistas”, provided yet another way for that money to make it into the Cuban economy. Until the 2011 launch of Raul Castro’s economic changes, most of that money went to consumption. That started changing when hundreds of thousands of Cuban embarked on the process of opening and growing their business. To be sure, most of those businesses are very small, and most do not really have significant growth potential. However, some do, especially those located in Havana and the other major touristic destinations. Besides, Cubans have engaged in new areas connected to Information Technology (IT), design and fashion, among others. In these sectors, there is evidence that supports the participation of foreign money, most likely from relatives and friends, in the growth of a certain type of business. For instance, another estimate highlighted that between 2012 and 2019, at least $7 billion had been invested in buying real estate on the island. Some of those transactions were related to buying a house as a second home and using some of those units as the base for a business in the absence of a well-developed commercial real-estate sector. Beyond that, anecdotal evidence suggests that remittances are used as seed capital by some businesses. Cuban entrepreneurs complain that the domestic banks are slow and bureaucratic at providing loans.
What were the limits under the Trump administration and how did they impact Cuban families and cuentapropistas?
Torres: The Trump administration did not prohibit remittances. Instead, it established a limit of $1,000 per quarter, and prohibited transactions with a list of entities, including the Cuban companies in charge of processing and delivering the remittances—FINCIMEX and American International Services, for example—citing links to the Cuban military. This was the reason behind Western Union’s decision to suspend money transfers to Cuba. Those sanctions made the transaction more costly and riskier. The final blow came from the pandemic. As borders closed and air travel collapsed, that vital channel was no longer available and remittances are believed to have contracted by 30 to 40 percent since 2020.
Adding insult to injury, the Cuban economy was and continues to be in free fall as a result of the pandemic, exacerbating scarcity and amplifying the reduction in income. Even though most of the enthusiasm of the Obama years was gone by late 2019, and the private sector was not necessarily growing, those who wanted to support businesses and even start new ventures, faced significant restrictions in accessing foreign money. Money transfers not only decreased, but they also became more expensive.
Pajón: Considering the magnitude of remittances over the years and especially in the last decade (they may have amounted to some $4 billion in 2018) and the role they have played in financing private entrepreneurship, when you consider that about 50 percent of remittances to Cuba were used as seed capital in the private sector, which allowed it to experience a more than 4-fold growth in 10 years, they were a key source of support. The absence of effective domestic credit mechanisms, the collapse of travel flows, which was the usual vehicle for resources in cash and in kind, and the hardships experienced in the current crisis, which was especially magnified by the effects of the pandemic, effectively suppressed this avenue for the most vulnerable Cuban families. Beyond families, it constituted a negative shock that impacted one of the most stable sources of financing for the private sector at the worst moment in its recent history.
It should also be remembered that the State sector in Cuba is the exclusive provider of health and education services and guarantees various levels of social protection. As part of the remittance flows through formal channels are reduced, the fiscal budget to finance all these activities also decreases, causing a generalized impact that transcends the private sector and affects the entire population in general.
In the current situation of scarcity, it is impossible to satisfy many basic needs outside the informal or dollarized markets, with few formal channels available to the population to access the currency. Given the insufficient guarantees offered by the food products distributed through “la libreta” (rations book to subsidize basic staples), inflation, and the depleted purchasing power of salaries (about $40 on average in the State sector, considering the informal exchange rate), the ability to receive remittances makes an important difference for Cuban families and entrepreneurs. These flows not only contribute to basic consumption, but also to the reactivation of the private sector in the context of the greatest historical internal opening of the market, where the number of activities in which entrepreneurs can participate and the possibility of attaining formal business status have expanded significantly.
What still needs to be done to help Cuban families and the private sector on the island?
Torres: The answer really depends on one’s position on how best to bring about a positive development in Cuba. The United States has already used remittances as an instrument of pressure on other countries, not only with respect to Cuba. No one can rule out that it will be used again in the future.
Unfortunately, the main victim of the back-and-forth between the two countries is the Cuban people. Cuban-Americans have the right to help their relatives in Cuba, regardless of the political system on the island, although that is a personal decision. At the same time, the opening that occurred between 2014 and 2016, showed that a generation of Cuban entrepreneurs was ready to take advantage of those opportunities and develop viable businesses.
Something that would greatly benefit the Cuban private sector would be the possibility of selling goods and services in the U.S. market. It is not clear how the current jumble of regulations can stimulate such flows. Whether the growth of the private sector is a successful way to stimulate further change on the island is an issue that remains highly controversial. But the empowerment of entrepreneurs and the Cuban people in general will not come hand in hand with restrictions that make their life more difficult.
Ricardo Torres is a Cuban economist, and Research Fellow at the Center for Latin American and Latino Studies from American University in Washington, D.C. He was a professor at the Center for Cuban Economic Studies in the University of Havana (Centro de Estudios de la Economía Cubana) within the University of Havana.
David Jesus Pajón Espina graduated with a degree in Economics from the Faculty of Economics of the University of Havana in 2009. MA in Economics (remarks on economic policy). He is a professor, researcher and independent consultant based in Cuba. His fields of interest include: economic policy evaluation, reforms and the private sector in Cuba, tourism, trade of medical services, and cryptocurrencies in the Cuban environment.
This interview has been edited for length and clarity.