Cuba’s Monetary Reform: Surgery or Sedatives?

Pavel Vidal. Photo:


Echoes from the 28th annual conference of the Association for the Study of the Cuban Economy, Miami, that took place from July 26th until July 28th.

Vicente Morin Aguado

HAVANA TIMES — Pavel Vidal Alejandro, professor at the Pontifical Xavierian University in Cali, Colombia, and former professor and researcher at Havana University and Center for the Study of the Cuban Economy, responded to some of my questions about Cuba’s inevitable currency unification process: “Ten years ago, I would have told you that a gradual process was needed, but it’s been such a long time that now it needs to be done as soon as possible.”

HT: The government of the hour always takes the blame, but has Cuba really had the conditions it needs to get this reform process off the ground?

PVA: Maintaining this current situation is very expensive, inefficiency becomes eternal, statistics are distorted, there are no incentives for foreign investment. The dilemma lies between the foolproof benefits in the medium/long term and the immediate shock to the economy once it is implemented, which might even make it collapse.

HT: Let me ask again, could it have happened, and can it happen?

PVA: The government is analyzing when the best time will be, they need financial resources to cushion the impact. There may be many reasons for this: Cuba’s international reserves are suspiciously low as facts suggest, a powerful moneylender, let’s say the International Monetary Fund (IMF) or the World Bank, are institutions which the Cuban government refuses to belong to. Likewise, the state budget has a deficit of 12% of the national Gross Domestic Product (GDP), an extremely high figure which reduces the possibilities of this option.

HT: Clearly, the much-needed moneylender implies a political decision, far-removed from university classrooms, but if “currency unification” is carried out, the exchange rate is what really concerns ordinary Cubans. Some economists mention two exchange rates, one for the public sector and another for the population, our interviewee dares to give some more precise figures.

PVA: There will definitely only be one exchange rate because we need to finally do away with the two that currently exist in all of their variants. It will be the closest to the highest rate prior to unification, between 20 and 24 pesos in Cuba.

HT: You said before that it should be a speedy change now. What do you mean by this exactly?

PVA: Speedy won’t be months either, but I imagine in maybe three years, with the feasible fiscal instruments, credits, subsidies necessary to soften the blow.

HT: Speaking about this blow to the economy, do you mean the initial dire consequences?

PVA: “Yes, there will be unemployment, labor will have to move from the inefficient public sector, which will have to shut down, towards emerging sectors, the growth of which needs to be encouraged. For example, investments in export sectors, which will have incentive then, and not to mention the important private sector, which is the only sector to grow and create jobs in recent years.”

HT: Contrary to the sound advice given by people who have certainly burnt the midnight oil studying the economy, Cuba’s current government (which was installed by the previous government) has shown that it is inconsistent, according to recent contradictory measures, bringing private enterprises to a halt, even passing a controversial article in the new draft constitution. Months ago, a Vietnamese delegation headed by the First Secretary of the Communist Party of this Asian country came to Cuba, leading us to speculate about whether the Vietnamese experience will serve as inspiration for Cuba.

PVA: They have been thinking about Vietnam because it shares some similarities, such as getting rid of the rations booklet, a public sector undergoing reforms and especially the decision to hold onto its political regime. Nevertheless, there are significant differences between both countries too.”

HT:  Important decisions normally hide an interpretation that is never made public knowledge, which is capable of voiding any analysis no matter how well it is argued. Do you have something to say about this, a lurking suspicion?

PVA: Everything depends on whether those in power decide to carry out a deep reforms process, a structural process we say in economics, which is capable of really changing the country. This would imply closing down inefficient companies, which will be tough but consistent with better economic management, moving labor from the public sector to emerging sectors, like I’ve already mentioned, and allowing comprehensive management and/or investment in activities that generate exports, improving efficient companies and giving the economy wings to really fly, among other things.

HT: And the other possibility?

It could be a fictitious reform, where they only change the exchange rate, just the common denominator which people are already applying on the street, without really changing anything, just making it look like they are changing things.

HT: The final handshake with Pavel Vidal Alejandro, in the conference room at the Miami Downtown Hilton Hotel during the recently concluded 28th annual conference of the Association for the Study of the Cuban Economy (ASCE), (July 26-28), leaves us with doubts on the ruling government’s unofficial policy in our country.

Vicente Morin Aguado  [email protected]

7 thoughts on “Cuba’s Monetary Reform: Surgery or Sedatives?

  • Nice analysis Bob!

  • Remember Repatriado that the major portion of the sugar cane industry has already been shut down. Production is at only 15% of the 1989 level. I sometimes pass one of the old sugar factories from which anything of value was removed long ago, and now has broken windows, PCC slogans and an air of decay. BUT, there is still a guard at the gate!
    Without the sugar factories to visit, what would the aged First Vice-President Machado Ventura, do to occupy his time where else could he wear his blue hard hat for photo-ops on State TV?

  • Hi Manon, you remark the point very well when you affirm “They’re mixing up en economic reform with the monetary reform”

    This kind of monetary reform do not create value neither the idea of value that can create a big inflation, on the contrary, we will see how broke we are. In fact they do not have to eradicate CUC, they just have to fix the value of CUP and CUC in the same level with regard to the dollar, euros or sugar cane, whatever they want.

    That change will provoke an imbalance in the accounts books because the crazy dance of exchange rate they have being using to hide our deep financial problems, nothing that a good book keeper cannot repair in an afternoon.

    Please read my article about this topic here in HT

  • I totally agree with you “that economic forces must determine values in international trade on a long term basis and not government mandated values / exchange rates”, but to do that we first need to clean up our economy, the faster way to clean it is to shut down the unproductive companies, like Fidel brutally did with the sugar cane industry in the nineties, I do not support doing that because of the terrible social cost and the great inequality that create instantly, inequality that will only grow after that.

    The other way is a central bank controlling the exchange rates keeping the current value of our currency, like you well say we depend too much on importation of basics thing as food and medicines. Meanwhile the economy format must change, to avoid the centralization and the regulations than holds down people´s initiative, allowing, seriously, Cubans to invest in our own country and to release import/export now under governmental control.

  • I am confused at what the currently discussed “currency unification” really means.

    Is it merely doing away with the CUC and giving holders 24 or 25 CUP for what they are holding and nothing else? The key is if the existing policy of a CUC being fixed in value at US$1- is going to remain but only with a CUP being fixed in value at US 4 cents? This is only a cosmetic change as others have suggested. No reason to be concerned about the timing.

    Or, is doing away with the CUC mean abandonment of the fixed value to the US dollar so that the value of a CUP will be determined by the open market based on economic factors? That is a major change as most economists compute the economic value at half or less than the current fixed rate. That would mean that Cuba’s equivalent of exports, really foreign currency coming into the country, would cost half or less than before. Resorts would be cheaper for tourists. When Cuban recipients of remittances would change those into Cuban currency, they would get twice as much. But that would also mean that imports, a large part of the local food supply, would cost twice as much. That is a major economic disruption. However such disruption will be necessary at some time to allow the Cuban economy to actually function on market driven economic forces. History has proven and Venezuela currently demonstrates that economic forces must determine values in international trade on a long term basis and not government mandated values / exchange rates.

    I am beginning to surmise that the “currency unification” currently being discussed is the later situation above where Cuban currency abandons its direct linkage to the US dollar and is determined by economics. That is major disruption in the current Cuban economy, thus the reason such is being delayed.

  • I totally agree Repratriado. A dollar is a dollar is a CUC or (just to set an exchange rate) 25 CUP. Whether you pay 1 CUC or 25 CUP for a coffee (on a terrace) or 2 centavos or 1 CUP at a streetvendor, it’s still the same coffee for the same price.
    The only difference I see is that everyone would be able to buy everything (as long as they have the money ofcourse), without having to go to a bank first. Meaning luxury goods will be paid in the same currency as other stuff (no need to have CUC for some stuff and CUP for the rest – I don’t live in Cuba so I don’t know if it already is possible to pay the CUC price in CUP everywhere, some of the CUC stores I went to I did see signs you were allowed to pay in CUP as well, even did so myself sometimes)
    They’re mixing up en economic reform with the monetary reform. You could have this economic reform without having the monetary reform at the same time as well. Shady book keeping in companies, not informing the public about the economics of either companies or the government and stuff like that can happen as easily in a monetary system with one currency (hell, it probably would be easier, unless they use a fluctuating exchange rate between both currencies in todays book keeping)
    The monetary reform is nice and will make life easier.
    The economic reform (especially the shutting down of uneconomic companies or improvement of their management in such a way that they become profitable and a stable multiyear plan for foreign investors) is what Cuba really needs!

  • There are not reasons, beyond the political interest of maintaining the double currency like justification of how bad economy is and like hope of being able to make something to improve it, for not unifying the types of changes.

    Unification of currency doesn’t create unemployment, the companies broken today, will remain broken tomorrow, with the difference that finally we will know it, and the state budget, that is to say, the money of all, will continue, as today, maintaining those work positions, with its miserable wages and anything productive.

    The unification is itself an accountant event, neither create neither destroy wealth.

    The reasons for not unifying the currencies are totally of political convenience, not of economic order.

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