Cuba winds back economic clock

Fidel Castro's decision to ban all cash transactions in US dollars in Cuba has once more turned the spotlight on Cuba's ailing economy.

All conversions between the US dollar and Cuba's "convertible" peso will from 8 November be subject to a 10% tax. Cuban citizens, who receive money from overseas, and foreign visitors, who change dollars in Cuba, will be affected. Critics of the measure argue that it is a step backwards, reflecting the Cuban president's desire to increase his control of the economy and to clamp down on private enterprise. In a live television broadcast announcing the measure, President Castro's chief aide said it was necessary because of the United States' increasing "economic aggression". "The ten percent obligation applies exclusively to the dollar by virtue of the situation created by the new measures of the US government to suffocate our country," he said.

The Bush administration has taken an increasingly harsh line on Cuba in recent months. President Bush's government, which has been a strong supporter of the 40-year-old trade embargo on Cuba, introduced even tighter restrictions on Cuba in May.

Cubans living in the US are now limited to one visit to Cuba every three years and they can only send money to their immediate relatives. A leading expert on the Cuban economy says that Castro's tax plan smacks more of a desperate economic measure than a political gesture. "I think it is primarily an effort to raise some cash," says Jose Barrionuevo, head of strategy for Latin American emerging markets for Barclays Capital. "It underscores the fact that the economy is in very bad shape and the government is looking for sources of revenue."

The tax will hit the families of Cuban exiles hardest as they benefit from the money their displaced relatives send home. This money, known as remittances, can amount to as much as $1bn a year. Those remaining in Cuba will have to pay the tax. Their relatives abroad may choose to send money in other currencies which are not subject to the tax, such as euros, or increase their dollar payments to compensate. However, many of Cuban's poorest citizens could be worse off as a result. The tax will also affect the two million tourists who visit Cuba every year, particularly those Americans who continue to defy a ban on travel there.

Cuba's tourist industry has been one of its few economic success stories over the last ten years and, according to the UN Economic Commission for Latin America, is now worth $3bn to the country.

The tax is designed to provide much-needed revenue for Cuba's cash-strapped economy. Cuba badly needs dollars to pay for essential items such as food, fuel and medicine. Much of Cuba's basic infrastructure is in a state of disrepair. In recent weeks, Cuba has suffered its most serious power cuts in a decade and there have also been water shortages in parts of the island. Cuba's economy had staged a modest recovery during the mid 1990s as the collapse of the Soviet Union forced it to embrace foreign capital, decentralise trade and permit limited private enterprise. However, a decline in foreign tourism since 2002, periodic hurricanes and the increasing costs of importing oil have put a strain on the economy. It has however yet to be seen if the tax will provide a solution to the government's economic problems. The tax could fuel an active black market in currency trading, Mr Barrionuevo said. "The main impact could be that it will create a black market which you typically see in countries, like Venezuela, which have restrictions on capital," he says. Mr Barrioneuvo says the measure could be dropped if it has a damaging effect on economic activity. "It is intended to be a permanent measure but I am not sure it can last too long."