Cuba’s Monetary Unification: a Turn for the Better or for the Worse?

22 thoughts on “Cuba’s Monetary Unification: a Turn for the Better or for the Worse?”

• The Cuban government can’t manage to deliver reliable broadband internet to the island, yet you advocate shifting to an electronic banking system???

  Oh, that will work out well!

• Read again my post. What I meant is that the ORIGINAL exchange rate of the CUC against the USD was ARBITRARILY set and the rate has not changed for almost 20 years, That rate COULD have been set to an arbitrary value and the ONLY effect is the amount of CUC they needed to print.

  Also, you are wrong on the whole print CUC thing. The BEST solution for the Cuban government is to modernize their banking system and move the bulk of the economy to electronic money (aka debit cards) as soon as they can. This alone will reduce considerably the amount of physical money in circulation and gives an important blow to the black market, since all transactions could be traced and most of the activities properly taxed.

  I also have little faith that the change is going to be smooth. That short time-line implies a more dangerous route than my suggestion, most likely involving reevaluation of the CUP vs the CUC by reducing the gap in the exchange rate (lets say from 25:1 to 12:1) in several steps or by introducing a completely new currency and replacing both CUP and CUC.

  Either way is dangerous and a miscalculation could have potential catastrophic consequences for the country, and the endemic corruption only makes things harder.

• ac wrote: “I’m not suggesting to print more CUC, …it means that you need to print more CUC”

  Elsewhere you suggested giving Cuban workers a pay raise, which also means printing more CUCs.

  So it’s agreed then: the Cuban government will be printing lots more CUCs. That means inflation is inevitable, because the economy will not be growing enough to add the necessary GDP to support more CUCs at the current value.

  I have very little faith the change will be handled well or honestly. It will be designed by those in power to benefit those in power. That means the Cuban people will get screwed. Again.

• The disparity between the have and have nots in Cuba, is highlighted by the virtually impossible current currency system duplication. I am Canadian, and I have taken a long and in depth study and interest in Cuba, the history, the physical country, the fascinating and sometimes political moves, and most of all the amazing, tenacious, amiable, warm and kind loving people. I recently paid for a house there which I gave as a surprise to a family whom I have met and truly admire. That little gesture did more for me than it did for them I feel. It seems that in my time there, people in Cuba who have a contact offshore, in Miami or Europe or Canada or elsewhere, seem to live on one standard. They for example, can acquire by gift or by gosh, a few thousand dollars a year in CUC’s while their Cuban neighbors without the foreign relationships are forced to live on the Cuban wages in Cuban pesos. Comparing these two life and living standard realities in Cuba is like comparing an elephant to a blueberry. They are not even on the same planet. The idea of consumer goods that are desirable such as better clothing, imported food stuffs or mechanical things like bikes and tv’s all being sold in Cucs, just further widens the spread between the two neighbors above described….the pure Cuban and the one with the offshore help. By merging these currencies, they will hit it in the middle, they must, and this will be a formidable challenge resembling a highwire act, with considerable risk. At the end of the day the macroeconomic reality is that a one currency system will flatten out a little of the disadvantage which the current system provides, by virtually making CUCS unavailable for the average Cuban working for pesos nacionales and confronted with the huge 25:1 currency exchange value. Prices of goods will adapt, but the switch-up of these currencies into one
  will be a formidable challenge. The government will, through it’s handling of this move by it’s federal owned banking system, must make sure that there is no hard cost or front end load to the consumer, such as a fee for converting Cucs or Pesos in a bank account into the new currency. The conversion needs to be seemless, smooth, and at no cost to the depositor of funds in Cuban banks.
  The primary reflection of how this transaction will be the real estate market. Since the 2012 legal provision to allow for selling and buying of homes, the price of houses has been sneaking up, cautiously, but visibly. When the new currency becomes reality, the largest priced items in Cuba, the house market, will flutter and spurt for awhile, while minds adjust to the new currency, and while people holding their breath get to observe how this will impact the national economy and markets and prices as a whole. Theoretically there should be little shift or movement in the stability ( or instability) of the economy, but in reality, it you want to see how much milk in in the coconut, you must wait for it to fall from the tree. I feel that the currency unification is long overdue. It will be interesting to see if the CUC will ever float as a legitimate international currency, and if so how the world markets will react. It would be great to be able to buy the new Cuban Peso here at a Canadian bank, as we do other foreign currencies, without the hassle of the black market tactics tourists endure who visit there and need to switch currency both on entering and leaving the country, with the Cuban government clipping them at both ends.
  As for the average Cuban, well, with one currency, it will be easier to define those inequities in existence. As long at the Cuban currency is kept off the international markets, Americans will continue to pay a bonus of 10% to switch their money, unless they convert first to the Euro or Canadian Dollar. Changes continue to be made in Cuba. Canadians for the most part, see Cuba remaining a socialist or communist country. Most Cubans I have met from one end to the other of the island, seem to want a better life, but they want to keep the fruits of the revolution, the free education, the free medicare, and the discipline in the country that part of it at least, which is responsible for civil law an order not achieved elsewhere in Central and South Latin America. They just want to seemingly live in peace, with a positive attitude with respects to their futures and those of their children. Canadians love Cuba, unconditionally and every year we continue to increase our support there, as friendships build, and bonds become secure between the two peoples. A person from the country in Cuba, is a particularly good fit with the average Cuban. Canada is distinctly different from the USA politically, and our soft and kind international profile, seems not to be a threat to Cuba, and our trade and friendship as a nation has continued all throughout the revolution, the pressure to desist from American governments, notwithstanding. Viva Cuba. Viva los Pesos Nuevos. VIva Nuestro Amistad Tambien….para Siempre! Stephen (esteban) Davie

• I do not contradict myself in any way. All currencies are by definition worthless paper since the gold standard was abandoned.
  US economic output in services, produced goods, foodstuffs, … is more than large enough to sustain its value. The debt may be an issue.
  Cuba’s two currencies are indeed not allowed to float freely against the international currencies. The market is 100% controlled and even the CUC can not be freely exported. No international transactions are done in CUC or CUP. They are both “funny money” of the regime. They have no set value in the markets even against one another.
  My argument is 100% valid as Cuba can do whatever it wants with the CUC and CUP, but only an completely insane and arbitrary revaluation of the CUC can generate more income as the Cubans that get remittances tan get less CUC’s. Anything else the Castro regime does will cost them.
  If the decrease the value of the CUC in CUP more CUC’s will be bought by the population and the regime will either have to increase CUC prices or lose currency reserves.
  If Cuba has to start paying CUC salaries to all, CUC prices will have to be inflated throughout the economy. Unless the CUC is then devalued against foreign currency tourism and trade will become extremely expensive. All you need for an inflationary spiral.
  Try all you may: the underlying economy of Cuba can not and has never been able to pay for a decent standard of living for all Cubans since Castro seized power.
  First he seized internal wealth to finance his ideas. When that ran out he imposed the currency reform. Then the regime got up to 35% of GDP from the soviets. The impact of the loss of these artificial earnings became clear when the “special period” started. Now some additional income from indentured labor, remittances, tourism, …. have been shown not to be able to sustain the Cuban people even not with the Venezuelan subsidies.
  You so called analysis is completely oblivious to the basis of all economies: you have to create economic wealth to be able to spend it.

• Griffin you are correct. As inflation increases, the black market exchange of USD to local currency and vice versa
  will emerge replacing the Castro’s CADECA as the primary source of CUP for Cubans who hold dollars received from remittances or tourists. Witness was is happening in Venezuela as proof. As the government receives less USD to purchase imports, hard currency foods and goods will grow scarce in stores (again see Venezuela). Unless worker production increases to justify salary increases, simply printing more CUP will trigger the slippery slope of inflation driven by increased demand for fewer imports. If the Castros knew how to increase production they would have already done that. Unfortunately, there is NO way to avoid an economic disaster here.

• I’m not suggesting to print more CUC, what I’m saying is that CUC had (and still has) an arbitrary exchange respect to the dollar and that as long as said value is kept constant (as has been in the last 20 years), the specific conversion rate doesn’t matter. At worst, it means that you need to print more CUC to collect the same amount of USD, but thats about it.

  As for your scenario a few corrections.

  First, I’m not advocating for an uncontrolled inflation, quite the opposite, by using my suggested mechanism, the government will have absolute control every stage of the process, and thats why I said that the safest bet is an iterative process until the consumer prize index gets to the desired levels.

  Second, the government has absolute control of how much money people can change. If things get out of control they can stop the exchanges to foreign currency at any time, and the black market simply can’t take over the operation (well they can, but people foolish enough to attempt that will end bankrupt). Not that it matters, since changing your money to any other currency will NOT change the fact that it will keep losing value relative to the peso.

  Finally, even if you change everything to foreign currency, you still have to buy virtually EVERYTHING in whatever Cuban currency remains, meaning that you must change back part of the money (after paying the exchange tax in both directions) making the point moot for 99.9% of the Cuban people. And the few millionaires in a position to take advantage of this aren’t rich enough that huge reserves of foreign currency are needed.

  The bottom line is that the unification SHOULD be a zero sum game; thats why they don’t need huge amounts of foreign reserves for correction. A significant divergence in either direction means a catastrophic failure and will have consequences.

• You wrote:

  “And yes, the CUC to USD ratio is arbitrary as well. If the goal is to get hard currency at any cost, the actual rate doesn’t matter, at worst they only need to print more CUC, thats all.”

  There’s the danger. By printing more CUC, and by giving workers raises as you suggest, the inflation rate will soar. When that happens, Cubans will not want to hold onto CUCs which lose value each day. Instead they will trade them for US dollars as quickly as they can, either legally or through the black market. As you noted, unprofitable businesses will go out of business, lowering local production. With the heavy hand of state regulations crushing individual enterprise, it is unrealistic to expect the domestic economy will rise up to fill the demand.

  You believe the change can happen safely if well planned and managed. When has the Cuban economy ever been well planned and managed? Never before, and certainly not now when the ruling clique fears the future like never before and when the rewards for corruption are greater than ever. Times of great change are moments of risk and opportunity. Those in positions of influence & power will arrange things to safeguard their own wealth and power. The Cuban people will get screwed. Again.

  As a result, the Cubans can expect more corruption, shortages, inflation and higher unemployment.

• I think you are talking of market in the vernacular sense while I’m using the technical term. There are SIX distinct markets operating currently in Cuba defined by the currency, exchange rate and access to subsidies, of whom people only have access to three (heavily subsidized market -aka libreta de abastecimiento, CUP market and CUC market at CADECA exchange rate).

  And read again my post, I’m simply trying to set correct the value of the CUP until it reach the arbitrary CADECA rate; at that point either currency can be removed without fuss. Yes, that means that you will pay $20 for a pound of tomatoes instead of just $5, but again, you can’t import it at .25 USD anyways. Besides, people’s salary will increase roughly in the same proportion, so it won’t be any social disaster and it will serve to normalize the income between the public sector and the self employed.

• LOL, your own opening argument contradicts itself. The real value of the production is irrelevant, what matters is the perception of said value, otherwise the valor of the USD would have plummeted after they outsourced most of their production to China

  The specific issue is that both Cuban currencies do NOT float freely against the rest of the currencies so its VALUE is arbitrarily set by decree. Neither is a freely convertible currency so your argument does not apply.

  Also, the price of the imports is irrelevant as long as the exports can keep it up or international credit covers the deficit.

  And my analysis is correct; you are simply ignoring that I was talking of the situation AFTER the currency unification and an hypothetical situation where Cuban production sells at the SAME price of the imports in THE SAME national market.

  No, you are wrong. tourism WILL generate little cash after the unification when they will be forced to pay their employees in the same currency they offer their services, but up to NOW they have been a huge source of foreign currency for the government, while the foreign remittances is pure gain and BOTH have helped to create SOME reserves they can use to CUSHION the impact of the unification.

  And notice that I said cushion the effects. That means enough foreign currency to use to CORRECT any short term imbalance, not that they can live eternally from that.

• Yes, the difference is that in the case of Cuba, the exchange rates of the currencies is not allowed to float freely, so whatever they decree is what it is.

  And yes, the CUC to USD ratio is arbitrary as well. If the goal is to get hard currency at any cost, the actual rate doesn’t matter, at worst they only need to print more CUC, thats all.

  There are two main advantages to peg the CUC to the USD, on one hand it simplify the maths for visitors (their biggest source of visitors is Canada and potentially US) while more importantly it makes possible to assess the relative value of the CUC against the rest of the currencies. For the second argument, any currency would do but the USD is more stable and less prone to large fluctuations, so it makes sense to use it as reference.

  The downside is that the USD loses its value over time due to inflation. In the 20 years since the creation of the CUC, the USD lost ~40% of its initial value and that was automatically transferred to the CUC, and eventually to the CUP due to the fixed conversion rates. The side effect, of course is that Cuba has been without any fiscal policy whatsoever all this time.

• You are correct that the dual currency system was in part a trick to hide the real weakness of the CUP. Its introduction was a dogmatic face saver for the regime. Its unrealistic value – the face saving part – is what now come back to haunt the regime. It indeed can’t keep up the charade as it costs the regime – even with the high prices in CUC – to keep the system going.
  Some planner may have thought that Cuba would rise again after the spacial period and that the increase in output would slowly vindicate the 20+ exchange rate and might even one day lead to a 1 to 1 ratio.
  If anyone indeed thought that he should be shot.
  Economic output in Cuba fell in mainly because of a refusal to change and stupid economic mismanagement.
  Blame Chavez in part for the mess because he gave the regime a lifeline and an opportunity not to change when it basically had to. In the 1990’s a change would have been a lot easier as the regime has created an ever bigger mess over the last 20 years.

• You don’t get it. The CUP is kept artificially high.
  The real value of what Cuba produces is the issue. Not some “desired level” of the CUC. For a freely convertible currency those are the rules. If the amount of money circulating in an economy does not reflect the real value of the economy – output of good and services – that money will devalue.
  The cost of imports does matter. The need of imports is great and the ability to import is small and limited by the real earnings of the economy.
  Your assertion that an increase in the cost of import would lead to increase in national production is completely erroneous. Cuba has been facing a high cost of imports – see the example of food – and production has not increased because the economic system is counterproductive for that. Without a change in regime and economic policy there will be no real growth in national production. There is no national capital base to invest and foreign investors are on the sidelines waiting for real change that would bring certainty and a stable local market.
  As far as tourism industry goes: that relies heavily on imports and generates very little free cash. Remittances also are not limitless as lots of Cubans abroad don’t earn a lot of money.
  You really should take a course in basic economy.

• The markets are separated by the regime. They are separated by price and availability of goods. The black market is the connecting “market”.
  None of the three Cuban markets is a real market. The are the result of the mismanagement of the economy – including agriculture – by the regime and its desire to survive by “soaking up” the remittances though high prices in their monopoly on the sale of imported goods.
  Your idea of devaluing the CUP even further will create a social disaster. It can only be “devalued” against the CUC. So that is a non starter. You are basically saying the opposite. You want to flood the market with CUP by creating an inflation of giant proportion for products priced in CUP as more CUP hit the market.
  Your idea of holding the exchange rate to the CUC steady would mean that lots more CUC’s would be bought that would be chasing the same limited number of products the regime has the hard currency to import. That would lead to more scarcity on the CUC market, increasing prices in the shops or in the black market where goods snapped up by speculators will be ending up.
  You are oblivious to the basic problem: as a country Cuba does not create a lot of “economic wealth”. It is a failed economic state. The regime has always relied on subsidies to fill that wealth gap. The Soviet Union filled it to the extent of 35% of GDP. The “special period” was in reality a return to the real economy. Now the Venezuelan subsidies fill part of the hole.
  The regime responded by allowing remittances and setting up a dollar shop system selling essential goods. In 1994 in Oriente and Pinar the dollar was sold for 130 CUP. In a move to soak up all dollars at once and to hide the real problem by setting up a “funny money” with a more “social” exchange rate. To compensate prices in the dollar shops rose. The regime imposes a 240% tax on these goods. The whole operation just resulted in even bigger problems in the long run.
  Now they are stuck. Cuba is a bankrupt country. It has billions of dollars in outstanding debt that it doesn’t pay and current hard currency income is not sufficient to pay for the imports the country needs.
  Cuba is like Zimbabwe. There the quick road was chosen by dollarizing the economy by doing away with local currency. As neither the CUC or the CUP have any real value it would eradicate the problem and Cuba would hold in dollars what it really has as reserves. that would be an immense social disaster throwing most of Cubans in abject poverty out of which – with adequate economic reforms – some would rise. With Cuba’s aging population lots would be left behind and lots of people in exile would not be able to send enough money to ensure a decent life. Without a major international aid plan this can’t be done. No country will help Cuba.
  The only other way is to reform the economy allowing freedom of enterprise, encouraging – rather than discouraging – international investment, freeing up markets in Cuba and ending the regime.
  That would bring US and international investment in creating jobs and salaries.
  This regime created the problem and it can’t solve it.
  It has to go.

• AC says:

  “The CUP value is kept ARTIFICIALLY low.”

  Maybe. Some other Latin-American countries have pesos that are exchanged at far worse rates. The Dominican Peso is 42:1 to the USD, and Chile is 509:1 with the USD last I checked. In some other third world countries it’s even worse. Zimbabwe had to pull their currency altogether when exchange exceeded a trillion to one.

  “The CUC to USD conversion ratio is also completely arbitrary”

  Is it? It seems deliberately pegged to the USD for the express purpose of getting hard currency so they can buy things on the world market. USD is the accepted standard, so they want at the equivalent to it when they exchange all those $ billions in tourist cash.

• You don’t get it. The CUP value is kept ARTIFICIALLY low. What I suggest is to anchor the conversion and increase the inflation until the real value gets to the desired level and at that point it doesn’t matter which one you remove, the economy will be in equilibrium without any kind of risky shock therapy,

  As for the second point you are mistaken. The CUC to USD conversion ratio is also completely arbitrary since is not allowed to float at a market value either, but because of the side effects of the dual currency game, the CUC is grossly under-valued respect to the dollar (thanks to the normal inflation of the dollar that gets automatically transfered to the CUC that keeps anchored to the CUP at a fixed rate)

  Besides, the cost of imports doesn’t matter at all because current accounting practices mixes the CUC, CUP and USD at different rates making any profitability analysis an exercise of futility.

  Actually, an increase in cost of the imports most likely will lead to increments in their national production, since everyone and their cat will sell at a price competitive with the imports (that assuming that they will keep the subsidies to a minimum… that they most likely will).

  I agree that the risk is high, but is still doable without causing too much damage in the process but it depends exclusively on how they do it. As for your last point, you are wrong here. No matter what they do, they still have the tourism industry and the remittances providing a significant amount of hard currency, Thats more than enough to cushion the direct impart caused by the merge in the short time.

  The big shock is going to be the restructuring of the rest of the economy because once the dual mess is fixed, many industries are going to find themselves operating in the red and they will have no other choice than close them for good.

• Thats one of the reasons of the dual currency in the first place: it was a good trick to hide income differences and keep acting as if everything was normal.

  Obviously they can’t keep the charade forever and more or less everyone already know what is going to happen. But again, but thats exactly how things have been in the past 20 years, so thats not exactly a surprise to anyone.

• A small but significant aspect of the collapse of the CUC market into CUP prices is sticker shock. It is bad enough that a decent pair of addidas workout shoes that costs $80 at the outlets here in San Francisco costs 110 CUC at the Galleria mall store in Havana. At an exchange rate of 25 to 1, the new CUP price will be 2,750 CUP. The psychological gut punch should not be underestimated. The whole CUC market will see re-pricing with big numbers. To a doctor who makes a monthly salary of 600 Cuban pesos, the reality that he has to work nearly 5 months to buy a pair of running shoes will really hit home. Cuba may suddenly need one of those Ministry of Supreme Happiness just like that payaso Maduro created for Venezuela.

• Eliminating Dual Currencies in Cuba: Measured, but Necessary Risk

  http://thecubaneconomy.com/articles/2013/10/eliminating-dual-currencies-in-cuba-measured-but-necessary-risk/

  “The government announcement also fails to specify how it will adjust the exchange rate in the process. We anticipate an immediate and sharp rise in the black-market dollar; perhaps two or three times for what the dollar will officially sell at the state-run CADECA money-exchange houses.CADECA exchange rates currently value 25 Cuban pesos (CUC) for a single convertible peso (CUP). It is likely that in a few weeks the government will adjust this rate as a first step. That will be the first test of the impact this monetary policy will have in the marketplace and in everyday living. It will no doubt shape how the rest of the reforms unfold.

  For instance, reducing the exchange rate to 1 CUC for 18 CUPs would lower the ceiling on the black market and avoid early speculation. At the same time, the move would increase workers’ purchasing power if prices set in dollars in state stores remain unchanged.

  In this regard, the 240% mark up that the government automatically places on consumer goods sold in the so-called ‘dollar stores’ (e.g., hard-currency CUC sales) will give the government some cushion in absorbing these costs because it is a handsome margin. Foregoing some state profit will increase consumer purchasing power for ordinary Cubans.”

• You make an interesting proposal.

  You recommend devaluing the CUP, but it has already been steadily losing value. Prices for basic goods are increasing in the shops. To accelerate that trend will put even more hardship on the Cuban people. And you suggest keeping the CUP:CUC exchange rate fixed. This would mean the CUC would have to fall relative to hard currency (dollars or euros). The CUC is artificially pegged to the US$ but it is highly overvalued. In a real market, the CUC would fall.

  The cost of imports would jump, but anybody with access to real dollars or imported foreign goods (ie. the military) would benefit. The black market, already big, would mushroom to such an extent that the legitimate market would collapse.

  And because the value of the CUC would fall against the dollar, the government would take in fewer dollars with which to pay for imports and debts. If Cuba can’t pay for food imports, the people will starve. That path never ends well for the government.

  Fidel painted the country into a corner when he introduced the dual currency system. It may be too late to find a viable exit that does not lead to an economic collapse worse than the Special Period.

• Is not that simple. This is not about the currency itself, is about the merging of the markets that currently operate in the different currencies with their own rules and more importantly, the weird interaction amongst them. Thats where the real challenge will be and from whatever resolution comes from that it will emerge the actual value of the new currency.

  As for who wins and who loses, it depends entirely of HOW they will implement the merging. A while back I explained in another article how “I” would do it if I were in the shoes of the Cuban government.

  My idea was to slowly devaluate the CUP while keeping the CUP:CUC rate constant by increasing wages to the public sector until the price index of products in CUP become equivalent to CUC at the given rate (and while at it, I’ would also tax explicitly the public sector the same way as the self employed even if it means adding/removing bogus amounts of money from their salary and remove the current two tier system).

  This approach has certain advantages, first and foremost it should be implemented in multiple iterations, so you can adjust as needed, second it involves minimal risks, since is not trying to set an arbitrary exchange rate with all risks it implies (too high and the people gets bankrupted, to low and they risk bankrupting the country) and finally it empowers the government itself by making their direct employees (most of the working population) benefit of the first wave of the inflation process.

  Sadly, it doesn’t look like they will follow that path; the alleged approved time-line is too short for this approach, so I’m expecting more of a shock and awe resolution.

  But rest assured, after the dust is settled is going to be as you said: the prices are going to be whatever the equivalent to the current price in CUC after the conversion, so most likely wealthy people will win and everyone else will be either roughly the same or worse (throw the government in the everyone else as well). But thats besides the point, regardless if the immediate winners and losers, the country itself will be in a position to actually make economic and fiscal policies and down the line the economy should regain some modicum of sanity; from that point things will hopefully get better for everyone.

  Also, count amongst the losers the Cubans sending and receiving remittances from abroad; Whatever else happens, is almost guaranteed that the real purchase power of the money sent will decrease drastically.

• At best nothing changes. the CUC disappears and CUC shops now have prices at in CUP 24 times higher. At worst people with CUC lose out as the CUC gets devalued before people can exchange it. The problem for the Cuban regime is that it then creates a lot of “purchasing power” for people holding CUP that would cost it more dearly than the income from the partial expropriation of the CUC holdings.
  In any case price inflation will result as local prices will be increased to reflect the end of the dual system. A 1/4 chicken will be the same CUP price in the farmers market as in the TRD (dollar shops).
  Most Cubans will lose.

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