By Cuba Encuentro

Photo: Juan Suarez

Important points about currency reform include the devaluation which will produce inflation, and the end of government subsidies that will inevitably lead to jobs lost.

By Cubaencuentro

HAVANA TIMES – The Cuban government announced that on January 1, currency reform begins. Something the country has been anxiously awaiting. Unifying its dual currency system will try to make its centrally planned economy more dynamic, writes Marc Frank, from Reuters.

These reforms were first adopted during a Communist Party congress a decade ago. At that time, it was moving towards a market-driven system and closer links with the international economy. However, the reforms were put on the backburner as a result of internal divisions and bureaucracy.

How does Cuba’s system work?

For almost three decades, two national currencies circulate in Cuba: the peso and convertible peso (CUC). Both had the official exchange rate of 1:1 USD. Neither are traded outside out of the country.

However, there are different exchange rates: 1:1 for state-led companies, 24 pesos for 1 CUC for the general population. Additionally, different joint venture companies, wages in the Mariel Special Development Zone and in transactions between farmers and hotels, had still other rates in between the other two.

Cuba created the system as part of a series of measures to open up its economy after the Soviet Union collapsed.

While the system helped Cuba overcome the impact of the USSR’s collapse, it also ended up covering up the real economic situation.

What changes now?

The CUC will be cut out of the economy. President Miguel Diaz-Canel said that he would leave the peso at one fixed rate, 24 CUP : 1 USD, getting rid of more favorable exchange rates in the peso’s first official devaluation ever since the Cuban Revolution in 1959.

Bye bye CUC hello USD!

The Cuban government opened up a series of stores that sell consumer goods in US dollars. However, they can only be purchased with a debit card in USD. The government doesn’t sell dollars at any price.  This puts Cubans without family abroad to top up their accounts at a disadvantage for obtaining basic food and hygiene products. The other option is to buy dollars illegally on the street where the peso has already suffered at least a 50% devaluation.

The government is saying that this is a temporary measure, but partial dollarization of the economy will also bring a certain stability to families who receive remittances. However, most Cubans are suffering severe shortages that continue in state-run stores selling in pesos.

Meanwhile, state-led and private companies can now hold accounts in hard currency with 80% of their profits from exports, instead of handing this over to the State.

Shock therapy?

The devaluation will cause inflation, while ending subsidies will inevitably lead to jobs lost. However, the Cuban government says that it is hoping to avoid any “shock therapy” in the national economy, where the State sets most prices and wages.

Economists are expecting three-figure inflation, and the Government has said that the initial devaluation will go hand-in-hand with a fivefold increase of average state wages and pensions, when most State-controlled prices will also go up.

However, the wage hike doesn’t apply to workers in the private sector, but they will face the same price increases.

In the meantime, the government has said that state-led companies will no longer be subsidized, as a rule of thumb.

The government also said residents will have 180 days to change their convertible pesos once the CUC is cut out of circulation.

Why now?

Cuba is looking to reverse its worst economic crisis since the collapse of the USSR with growth falling by over 8% this year, especially in trade and productivity.

The country depends on imports of over 50% of its food and fuel supply, as well as agricultural supplies and pharmaceuticals. However, a combination of US sanctions, local economic blunders and the pandemic hampered the government’s ability to get a hold of foreign currency.

Cuba’s debt to its’ creditors has rapidly increased in recent years. LIkewise, no respite in shortages of basic products, from food and personal hygiene items to medicines and fuel.

Read more from Cuba here on Havana Times.


2 thoughts on “Cuba, Currency and Exchange Rates

  • A devaluation in the Cuban peso since the Revolution in 1959 and the elimination of the current currency CUC will occur January 1 2021. The Cuban government has been very hesitant to bring in this economic “shock”, and it is and will be an extreme shock though the communist elites through their propaganda machine will hype up all the abstract positives of such a move while the majority of the population must live with the concrete consequences.

    What will be the consequences of this currency change? Economics 101 helps to understand and decipher the impact such a move has on the general economy and to the citizens who have to live the economic experiment.

    With devaluation exports will be cheaper for foreign customers. Great, if Cuba had a viable manufacturing economy or a viable exporter of home grown products this would certainly contribute to enhance the government revenues but, unfortunately, Cuba presently exports little.

    What Cuba does very well is export tourism. That means of revenue however has always been a mainstay of the economy and with the present pandemic revenues are down and will be so for some time.

    On the other hand, imports will be more expensive and Cuba does import a the majority of its products and has to pay in American dollars which it has few. As the article asserts: “The country depends on imports of over 50% of its food and fuel supply, as well as agricultural supplies and pharmaceuticals.”

    In the short term, devaluation of the Cuban currency tends to cause inflation. Cubaencuentro states: “The devaluation will cause inflation, while ending subsidies will inevitably lead to jobs lost.”

    So, with the Cuban currency valued less within its borders and outside and the cost of buying essentials for the majority of Cubans to increase, though Canel-Diaz has stated no Cuban will suffer (?) – how can they not, when creating cost push inflation causes more economic harm to any viable economy.

    Further, Cubaencuentro writes: “ . . . the Government has said that the initial devaluation will go hand-in-hand with a fivefold increase of average state wages and pensions, when most State-controlled prices will also go up.”

    Why “a fivefold increase of average state wages”? What happens in the case inflation rises beyond a fivefold increase? Wages in Cuba have been abysmally poor and stagnant for years. Devaluation will cause a drop in real wages since devaluation causes inflation and if the inflation rate is higher than the five fold wage increase, guess who suffers economically?

    The currency concept change is a good one and long overdue. Here is hoping that the Cuban communist government follows proven worldly basic economics so that the majority of Cubans can prosper and not have a continuation of pseudo economic controlled policies rigged to benefit only those in political power.

  • How will this affect those who work at resorts and how will this affect tourists?

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