Cuba’s Monetary Unification Reaches Critical Stage

By Renato Recio (Progreso Weekly)

pesos-cubanosHAVANA TIMES — Recent explanations by two renowned Cuban economists about the acute problem of monetary duality have disclosed some facts not usually understood by the general public that allow a clearer view of what to expect in the process of currency unification.

An interview in the magazine Bohemia with Economics Science Ph.D. Vilma Hidalgo and an article by Dr. José Luis Rodríguez published in Cuba Contemporánea have contributed to a greater understanding by the public at large.

Both economists agree in one way or another that the expectations people have about monetary duality tend to be higher than what really can be expected, because most of the people associate the dual currency with an unequal distribution of income and the rise in the cost of living. Thus, they feel that merely by eliminating the dual currency such negative effects will go away.

But, as Rodríguez says, all that monetary unification will do is create the conditions to improve economic activities and their measurement. Overcoming the problems that affect the production of goods and services and the population’s income and well-being will be possible only with a profound structural change in the economy.

In other words, the profound structural change would be limited, or ineffective or nonexistent if not done in harmony with monetary unification.

The great invisible cost of duality

There are other costs of the monetary duality that are less visible to those who are not economists, Hidalgo says, but they are very important and are mentioned in the official note that announced the start of this process. They are related to measurement of the economic actions and the efficiency of the business sector.

We need to remember that the regime of monetary duality was established in Cuba as a transitory measure during the acute economic crisis created by the collapse of the socialist countries in Europe. Suddenly, Cuba found itself without a large majority of its markets, which resulted in a complete and lethal U.S. blockade against the island.

The shortage of hard currency became so acute that the country found itself on the brink of collapse when currency duality facilitated foreign investments and encouraged the arrival of remittances.

Dr. Hidalgo considers that the duality was functional for a situation where the domestic currency experienced a dizzying loss of purchasing power under the conditions of the crisis and needed to slip into a new international context.

On the other hand, she points out, by avoiding drastic measures such as the usual “shock therapies,” the social guarantees were largely maintained and the high human cost of mass unemployment was avoided.

But the benefits that duality provided in the early years began to fade as time went by. The existence of two currencies linked by a rate of exchange that overvalued the Cuban peso (CUC) with reference to the U.S. dollar has greatly hindered its very concept and the appreciation of the economic results.

Let us remember that, for the companies that deal in hard currency, the government has maintained and exchange rate of 1 CUP = $1 = 1 CUC, while the rate for ordinary people has been kept for years at 25 CUP = 1 CUC.

In this sense, Rodríguez explains, when integrating the two currencies in the balance sheet of a company, products with a high level of imported components appear as profitable when the external cost is calculated in CUP.

Conversely, exportable products are seen as not profitable when the external cost is calculated in the same currency. In the end, that rate of official exchange tends to encourage imports and discourage exports, which ends up worsening the trade deficit.

Rodríguez provides the following example: “An efficient and competitive Cuban furniture manufacturer offers a hotel a table for 100 CUP. The hotel owner makes a comparison and learns that an imported table of the same quality will cost him 50 dollars. At the exchange rate of 1 to 1, the imported table is a better deal because the price is lower. But the same table, if imported at the rate of 10 = 1, would be too expensive (500 CUP) so the hotelier would opt for the Cuban-made table, thus boosting the national economy.”

Adjustment in exchange rate is a first step

The logic of the experts indicates that an adjustment in the rate of exchange for businesses must be one of the first steps in the process of unification. Supposedly, a business rate of exchange will benefit the competitiveness of Cuban enterprise and will alter the dynamics of the domestic prices after the devaluation.

This second probability implies foresight to the risk of an inflationary spiral. Such a risk could not be avoided, considering that there’s already a latent inflationary pressure, with a liquidity of nearly 40 percent in the hands of the population.

Rodríguez believes that, after first devaluing the official rate of exchange that today rules business operations, a convergence will eventually be achieved with the CADECA rate, a complex adjustment that might take three or more years.

“The speed and the way in which the devaluation of the official rate of exchange is done are extremely important,” he says. “In a socialist society, you mustn’t have a sudden devaluation, with the negative effects that are typical of neoliberal policies.”

Rates of exchange of up to 10 CUP = 1 CUC in the sale of agricultural products to the tourism sector have been tried in Cuba since 2011. The sugar industry utilizes a system of multiple rates of exchange, and the companies involved in the ongoing experiment are working with rates of 10 CUP = 1 CUC.

Dr. Hidalgo, who also favors a convergence of both types of exchange, as economic conditions allow it, says that “hopefully those types of multiple exchanges will hold steady for a while, but with a more realistic rate of exchange in the business sector.”

In the end, in a relatively near future, the Central Bank of Cuba will issue a single currency capable of performing its duties as a unit of accounting and as a means to conduct transactions, which will also allow people to buy and sell goods in all establishments in the country.

 


8 thoughts on “Cuba’s Monetary Unification Reaches Critical Stage

  • “The techies are predicting near total automation of the work force by 2030…”

    Really? That’s your argument? You cite unnamed “techies” as your authority on economic history?

    Thanks for the laugh, John. I needed that.

  • Let me get this straight: Your bet is that in ten years the US goes begging and Cuba will finally be the utopia of your leftist wet dreams? A few points: Cuba has NEVER survived on its merits, especially since 1959. First came the billions in Soviet rubles and then the Venezuelan oil subsidy of more than 100,000 barrels daily. Oh, and did I mention the $6 billion in remittances and other family support each year that Cuba receives. Without these lifelines, Castro’s Cuba would have tanked long ago. American ingenuity will prevail as it always has and if not, I fear, our military will invade some deserving country and the war machine will tide us over. The stakes are too high for the entire world for the US to fail. Don’t start with the China crap either. Who buys their stuff? Americans. Where do the Chinese do their banking? America. If we go, they go to. Your attitude is a lot like the Tea Partiers in Congress. Since you can’t win over the world with your ‘commie’ ideology, your next best plan is to hope that the US fails and capitalism along with it.

  • As bad as the Cuban economy may be , it is sustainable even with the economic war being waged against it by the U.S.
    50+ years of the War On The People Of Cuba clearly shows this to be true.
    OTOH, the U.S. economy is on a long slow slide into oblivion as both globalization; the race to low wage countries by U.S. employers and the exponential/logarithmic pace of automation throw ever more people into unemployment and poverty .
    At what levels of unemployment does capitalism implode ?
    The techies are predicting near total automation of the work force by 2030 but it is ongoing NOW although the reporting on this is just now starting to be seen in the corporate media and if you pay attention to not just U.S. but worldwide unemployment trends due to these two factors ,you can see this unfolding .
    The Cubans need wait less than ten years for the U.S to go into crisis stage at which point the War On The People Of Cuba will be the last thing on the minds of the oligarchy as their ship sinks.
    Cuba’s state socialism was and is intended for conditions in a poor country and will survive this final crisis of world capitalism and once the WOTPOC is ended , Cuba may well make the transition to political democracy as well since the existential threat that the U.S. now represents will be gone.

  • Will the incompetent politicians who introduced the economic insanity of the dual currency ever accept responsibility and be held to account for the disastrous consequences of their actions?

    No. The same clique are now devising how to undue the mess they created. There can be no doubt their chief concern will be how to preserve the regime and it’s strangle hold on all political and economic power.

  • I suspect out of fear of censorship and/or reprisals, these Cuban economists are failing to acknowledge what the real reason was that the CUC was introduced to the Cuban economy. It was to take the badly-needed US dollars out of the hands of Cubans. Keep in mind that as a result of the fall of the Soviet Union, the Castros failed economic policies were laid bare and exposed for the first time. Without the annual subsidy of millions of Soviet rubles, the Castros were faced with feeding a country that could not feed itself. Fidel desperately opened the country to tourism and foreign investment to attract foreign currency. Cuban currency, then and now, is worthless outside of Cuba. The problem was only partially solved by the opening up of the country since a large portion of the needed foreign currency remained in the hands of the Cubans themselves and circulated in the black market. Fidel then introduced the CUC to ‘convert’ the remaining foreign currency, mainly US dollars, not held by the government into this new currency. The Cuban treasury would then be the sole repository of foreign currency in the economy therefore maximizing the buying power of the Castros to buy food and other imports. Despite the economic mumbo-jumbo, unless Cuban productivity improves, there will be no way to avoid the shock to the economy when the national currency is allowed to float against the USD/Euro in accordance to market demand. When the CUC is periodically devalued towards its ultimate elimination, the demand for goods and services sold in CUC will increase. This artificial ‘price-setting’ will trigger shortages, hoarding and inflation. Cubans holding CUC will scurry to exchange this currency for USD/Euros. Without a fixed CUP to CUC exchange rate, CUP holders will seek safety in exchanging the national currency directly to USD/Euros. Prior to the CUC, the exchange rate of CUP to USD reached 95:1 out of demand for foreign currency. It would appear that these pronouncements are intended to ‘calm the natives’ and have little to do with the reality of what is likely to come.

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