Cuba and its Dual Currency
Julio De La Yncera
HAVANA TIMES, Jan 23 — One consequence of the Special Period crisis in Cuba was the creation of a dual currency.
There was always a national currency on the island. My parents told me that before the revolution, the Cuban “national” peso was equivalent in value to one US dollar.
This means that it was possible for the money earned by a Cuban worker to be exchanged directly into dollars, since the currencies were at parity.
Once the revolution was established, the conversion of pesos into dollars was eliminated. Many hotels created special shops where one could only buy goods with foreign currencies but not with Cuban pesos.
These small stores were aimed at tourists, but many of the products sold in these shops actually ended up in the hands of Cuban families.
Much later, in the 1980s, exchange centers for gold and other items of value were created where people could take their small family treasures and exchange them for checks in dollar amounts, which could then be used to acquire goods in hard-currency stores.
This was how many Cuban families were for the first time able to buy color TVs, VCRs or foreign clothes of better quality than those produced domestically.
Throughout this period the possession of dollars was illegal. The criminal code in Cuba at that time sanctioned the holding of dollars.
Because of the critical economic situation stemming from the collapse of the Eastern European socialist countries — which meant a loss of trade and assistance for the island — the Cuban elite decided to legalize the possession of dollars.
The main source of dollars for the population came from family members who lived outside of Cuba, in addition to the earnings generated by thousands of Cuban professionals who were (and still are) sent to other countries and paid part of their salary in dollars.
Initially, special stores stocked with better quality and more of a variety of goods accepted dollars as well as a new currency that was created: the CUC (the Cuban Convertible Peso). One CUC is roughly equivalent to one US dollar.
I suppose that the reason this second currency was created was to serve as a mechanism for the government to adjust the value of this currency and the Cuban national peso.
The situation is so fluid that at one point the exchange rate between one Cuban CUC was equal to 100 Cuban national pesos. This dual currency allowed (and continues to allow) changes in the value of money without altering wages.
Therefore, when the CUC increases in value against the Cuban national peso, this in effect produces inflation relative to the national currency.
Likewise, when the Cuban peso’s value rises with respect to the CUC, the Cuban peso becomes inflated (losses purchasing value).
This means that the value of the national currency is controlled through this monetary intermediary.
For the government, this currency proxy serves other functions. It separates the direct exchange value of the Cuban domestic peso from the US dollar.
Likewise, it becomes an immediate method of collecting all of the hard currency circulating inside or entering into the country, since restrictions prevent other forms of hard currency from being used for buying and selling.
This decreases the hard currency in circulation in the hands of citizens and immediately transfers it to the state treasury where it can be used for foreign trade. The other advantage is that the state can manipulate the Cuban peso’s value through this.
From the standpoint of ordinary Cuban citizens, this monetary intermediate becomes a new method of exploiting them.
Today 100 pesos can be exchanged for only 4 CUCs. Tomorrow, the government could alter its monetary policy to devalue the currency, making one CUC worth 4 centavos (four “cents,” or .04 of 1 CUC).
When citizens needs to buy staples, in many cases they can only use CUCs since the only stores where these goods are sold are where trade is exclusively in that currency.
Almost all products — including those produced in Cuba — end up in the CUC shops.
The CUC is one of the most unpopular measures that the revolution has taken in its half century of existence.
The vast majority of Cubans have expressed their displeasure with this monetary intermediary and have demanded the right to exchange Cuban pesos directly for dollars, or dollars for Cuban pesos.
I wonder, just as I’m sure others wonder, when the Cuban government will solve this problem of dual currency that it created?
Walter thank you for your response.
I think you are misunderstanding part of what I said above. I did not say to make 1 peso equal to 1 CUC that is clearly impossible.
Let us assume the exchange rate is 25 Cuban pesos for 1 CUC, Then the solution I was proposing is to fix this rate. 25 pesos to 1 CUC and stop calling it CUC but making all CUC a higher currency denominations of the Cuban peso. By assimilating the CUC into the peso there is not need anymore to exchange money to pay for things at a store. People can pay with whatever currency they have. Obviously if they are using the lower denomination peso they will need a lot more of those. The same as when we need to pay for example 1000 dollars we will need 1000 bills of 1 dollar or just 10 of 100 dollars. The other similar solution is to print additional denominations for the Cuban peso for 100 pesos 200 pesos 500 pesos and 1000 pesos and totally eliminate the CUC by exchanging all that remains in public hands into pesos. This is exactly the same the difference is that on the other solution there was no need to print a new currency. I still think is necessary to have a higher denomination bills because the Cuban peso is so devalue that people will have to carry too much paper money to pay for simple things.
The real problem I see here is the actual devaluation of the Cuban peso against other currencies like euros or dollars.
Can that change?
Sure, but the country needs to get back into an economy that produces not one that fails. To get to that there is more privatization needed at even bigger scale than what they had allowed so far.
Julio,
Perhaps I should not have addressed my question to you. If I could, I would have put my question in Spanish. But since I was not trying to make it personal, but was addressing the problem which is real, let me try to clarify.
I said “in my discussions…” meaning my discussions with some Cubans, not all Cubans or the government. I then said “everyone agrees” meaning all those particular Cubans I had a chance to talk with about this matter over several years, both in Cuba and in the US. So, no, I am a US citizen and in no way represent the Cuban government. So I was not saying “nobody knows why it was created.” Quite the contrary, I was saying the various individuals I spoke to, representing their own thoughts, did not all agree amongst themselves about the history or solutions to this problem.
Sorry, but reading your response, I find your logic just as confusing as your suggestions about what to do with the dual money. If I understand what you suggest, are you saying make the national peso equal, one for one to the CUC? Obviously if the Cuban government tried to do that abruptly, they would probably bankrupt the country in a day or so.
Now, if you have a source to what some part of the Cuban government or a spokesperson or even a random economist in Cuba actually thinks about the history and proposals on this matter, then please tell us.
Meanwhile, I hope a solution is found and one that neither penalizes the average Cuban nor hurts the national economy. So far, it seems to me the reforms being tried could be working in that direction.
Walter, are you a spokesman for the Cuban government ?
“everyone agrees the dual currency has to go, but they don’t agree on why it was created”
You mean what is really there written?
That nobody knows why it was created?
Way to run a government!!!
And if everyone agrees that it has to go why it does not go?
So you suggest to dig the head on the sand and not talk about this because everyone really agrees but nobody in power does anything?
They need to figure out what problem they were trying to solve.
If the problem they are trying to solve is that people will need to use too much paper money to pay for things because of inflation then all they need to do is to absorb the CUC as a higher denomination of the Cuban Peso.
No fee should be charge for exchanging lower denomination pesos into higher denomination pesos. Just like when you get 20 pesos exchange into a bill of 20 pesos. You should be able to exchange then without any fee 25 pesos into one CUC or whatever rate they use. But once this is done the rate should not ever change. The same way 20 pesos always converts into a bill of 20 pesos.
With this solution the Cuban currency will be amplified into more bill types. This may conduce to the eventual disappearance of the lower denomination if they are not use in the economy.
Again Julio, I see nothing useful in this “criticism.” In my discussions with Cubans, everyone agrees the dual currency has to go, but they don’t agree on why it was created, not would they all agree with your attributing it solely to evil intent of the “the Cuban elite.”
You failed to mention that US dollars are not so easily exchanged in the large amounts trade and commerce requires when banks can be penalized millions of dollars by the US government. You also failed to mention that Cuba choose to link the CUC to the Euro in part to get off dollar dependency – again given that the US penalties have added expense to Cuban trade with not only US suppliers, but especially other countries attracting negative attention from the US.
Finally, what would you suggest? First do you suggest that it is possible for the Cuban government to conflate the currencies during the US antagonisms? And what would you suggest the world banking organizations should do? What would you propose and how would it work for average Cubans?
Pedro, I have asked many Americans and they have no knowledge of this so no it is not known to everyone. On the other hand maybe I should ask what you mean by everyone?
What is the point of this writing? It is merely stating information known to everyone.