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 “right” always think they are “right”….I’m not so sure

  • Are you SURE?

  • Couple of points

    1. You communists have been waiting for the “inevitable” collapse of capitalism in one form or another since the dawn of the Soviet Union…..and you’ll keep waiting. So don’t hold your breath. Castro made the same wrong bet back in 59′ Just look at China. They embraced a hyper Capitalist model and have become a global economic powerhouse, albeit an authoritarian oligarchy (Communist in name only) They don’t seem to be betting on it’s collapse. And what has poor Cuba’s economic model given them. Misery and hunger!

    3. “US economy on a long slow slide into Oblivion”? As the worlds largest economy we have weathered depressions and recessions and always come out on top. Indeed today’s numbers from Wall street look very promising.

    2. “The Cubans need to wait..” It’s not the Cuban’s who are looking to “wait it out’ as you say, but the Castro’s, and the Communist elite who are desperately looking for ways to stave off total collapse and somehow cling to power. I think it’s quite telling that 1 in 6 Cubans reside outside their county of birth.

    4. “Cuba’s state socialism (Communism or Castro fascism) was and is intended for conditions in a poor country” Well, Cuba was not poor when Castro came to power. The Cuban revolution, as has been said by some “..was born with a silver spoon in it’s mouth. ‘As Theodore Draper quotes Anial Escalante, (before he was purged by Castro) one of the leading communists reality, Cuba was not one of the countries with the lowest standard of living of the masses in America, but on the contrary, one of the highest standards of living…” (quoted in Draper’s Castro’s Revolution: Myths and Realities; New York, 1962, p. 22″

    It’s a shame Castro has destroyed the country as he has. In fact I think it’s quite telling that after 50+ years the Cuban government still refers to itself as a revolutionary government. You see revolutions, executions and destruction, on the way to power are quite easy to do, but the actual running the country is quite something else indeed.

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