Saving in Cuban Pesos: A Strategy

Preparing for the end of the two-currency system

Fernando Ravsberg*

Following the government’s announcement that Cuba’s two-currency system would be eliminated, the demand for Cuban pesos, expected to be revalued, has gone up. Photo: Raquel Perez

HAVANA TIMES — During a Santeria festivity, a number of Cubans were debating about the consequences that the elimination of the two-currency system would have. One of them said to us: “I’m exchanging all of my savings for Cuban pesos, because that’s the currency they’re going to keep and the one that’s going to be revalued.”

The others agreed and several of them recommended I buy Cuban pesos, anticipating that Euros, US dollars and even the Cuban Convertible Peso will become devalued. The news is welcomed by most Cubans, who blame the loss of their purchasing power on the island’s two-currency system.

This trend is confirmed by statistics. According to some economists and researchers, the purchase of Cuban pesos skyrocketed in the days following the government’s official announcement. “Many millions of pesos above the average” were bought, they casually tell us.

In 1993, when Fidel Castro legalized the circulation of the US dollar in the country, Cubans began to look down on their own currency because, in addition to experiencing a drastic devaluation, it could not be used to buy products at hard-currency stores, where the articles they needed to meet their basic needs were sold.

Neither How Nor When

The Cuban government announced it would begin to re-establish a single-currency system but didn’t explain what steps it would take or when it would do so. Currently, two Cuban currencies are in circulation, but there are at least three different exchange rates that depend on the financial sector you move in.

Since the 90s, Cuban pesos can be used mainly to purchase rationed products and pay for services such as electricity and water. Photo: Raquel Perez

Cubans must pay 24 Cuban pesos (CUP) out of their pockets to get one Convertible Peso (CUC) at an exchange locale. State companies enjoy a parity of exchange between the two currencies and tourist companies exchange their money at a 1 to 7 rate to buy part of their supplies.

It is a veritable economic mess, in which highly profitable companies appear to be bankrupt and others that only have losses show enviable surpluses in their books. The double-currency system also gives rise to two, separate bookkeeping processes that enable corruption.

A Cuban economist gave BBC Mundo the example of a tourist hotel that takes in 5 million dollars and, when it exchanges at a State locale to pay its salaries, electricity or water bill, it gets back 5 million Cuban pesos, losing 24 times the real value of its income.

The Two-Currency System and Salaries

According to research, the purchasing power of Cubans has dropped by 35 % since 1990. In this time, salaries have doubled, but the cost of life has risen eightfold. Economists use the example of pizzas, “which used to cost 1.20 pesos. Today, you have to pay at least 10 pesos.”

Many blame this drastic change on the two-currency system, but researchers suggest that the real problem is people’s salaries. “If you were paid 14 thousand Cuban pesos a month, no one would complain, because you’d be able to buy everything you need with that amount of money.”

Despite rumors, no one in the government has publicly announced that the Cuban peso is to be revalued. Thus the so-called monetary unification could also maintain the current exchange rate of 24 to 1, which would not increase the purchasing power of the average salary.

Apparently, a transition rate for State companies will be put in place, but even such companies would need to adapt to the new exchange rate applicable to the rest of society at the end of this grace period…or go under for lack of profits.

Soon, Cubans will be able to purchase products at hard-currency stores using regular Cuban pesos – a first step towards ending Cuba’s two-currency monetary system. Photo: Raquel Perez

Why Two Currencies?

Cuba’s two-currency system was established in 1993 when the government, facing a financial crisis, announced that it would authorize the circulation of the US dollar. Up until that point, carrying dollars had been such a serious crime that many Cubans had to be released from prison, where they were serving sentences for trafficking hard currency.

Washington then began to clamp down on Cuban financial transactions, sanctioning the banks of third countries that accepted dollars from Cuba. In response, Castro substituted the dollar with the Cuban Convertible Pesos and applied a 10% penalty on all dollar exchanges.

Later, the Cuban peso was revalued (the exchange going from 150 to 1 to 24 to 1, the current rate). The current exchange rate, however, continues to be prohibitive for Cubans who, on exchanging their monthly salaries, obtain a measly 17 CUC, a sum that can be spent in a single purchase at a hard-currency store.

The experts approached agree that the re-establishment of a single currency monetary system will be beneficial in terms of certain macroeconomic processes, but that the purchasing power of the average Cuban will not improve, unless the peso is also revalued, prices are lowered or salaries substantially increase.
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(*) An HT translation of the original published in Spanish by BBC Mundo.



3 thoughts on “Saving in Cuban Pesos: A Strategy

  • There is another trend going on in Cuba. For those Cubans with the right connections and the salaries to warrant it, the trend is to open accounts in Europe or the US and to save money in accounts denominated in euros or US dollars. The thinking is that when the CUC is eliminated, the value of these foreign currencies against the CUP with go up to its natural exchange rate which in the case of the dollar has been as high as 95 cup to 1 dollar. Granma and other ‘official’ sources will not report on this trend as it works at cross-purpose to the health of the Cuban economy. As dollars/euros leave Cuba, the Castros have less hard currency to purchase imports. Cuban banks do not pay interest on most accounts opened by Cubans so these ‘savers’ are further incented to purchase investment instruments in foreign currencies. This trend, albeit a minor distraction, is another example of how failed Castro policies encourage the best and brightest to engage in activities at cross purpose to the health of the Cuban economy.

    Reply
  • I knew the two currency system was an economic mess, but I had no idea there were three different exchange rates. Such an insane arrangement institutionalizes corruption on massive scale. No wonder Cuba’s economy is a disaster!

    It also means that the powerful and well connected who have been profiting from this exchange rate bonanza will be reluctant to accept the elimination of the two currency system. Why would they want to shut down their gravy train?

    Considering Moses’ comment about well-connected Cubans opening foreign bank accounts, this suggests the corrupt Cuban officials who have been making a bundle on the exchange rate scam now see the writing on the wall and are making their escape plans.

    The rats are fleeing the sinking ship. How very typical.

    Reply
  • Meanwhile in Venezuela, Cuba’s dunce student Maduro has decreed that merchants are not allowed to raise prices. With inflation running at 54% and rampant shortages Maduro has declared inflation illegal. This is economic insanity.

    Maduro has his King Kanute moment.

    Reply

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