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.
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.
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.
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.