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By Oscar Fernandez Estrada  (Progreso Weekly)

HAVANA TIMES – There has been a sudden avalanche of information in recent weeks, suggesting the proximity of a monetary reform in Cuba. It has unleashed a kind of collective nervousness capable of relegating the main focus of concern from the pandemic.

In the midst of such an intense environment, very little has been officially revealed. In reality, only the ratification of what does not require further confirmation. First, the currency / exchange duality is too stubborn an inertia to aspire to reverse the model’s dysfunctionalities. Secondly, it faces a decision of domestic economic policy that, like others, does not depend on any US government willingness.  

Thirdly, it should have advanced several years ago when it was started and stopped for unexplained reasons. And lastly, the current conditions for doing so are terrible. However, delaying it even longer would not bring any truce, in fact, quite the opposite.

That the monetary reunification process would begin in Cuba was the news of the day back on October 22, 2013. Granma newspaper published an official government timetable for its execution.  Four months later, on March 6, 2014, the Official Gazette published resolutions of the Ministry of Finance and Prices establishing the accounting standards and methodologies for setting wholesale and retail prices for legal entities.

But afterwards, for reasons not explained to the public, the process quietly stopped, and the issue disappeared from the press. It was diluted between [the promise of] bonanza and suspicions of normalization [of relations with the United States].

That same alarm is sounding again. On this occasion, there has been no official press release, but on July 16 of this year, President Díaz-Canel affirmed that the monetary unification would be implemented as part of the strategy against the current economic crisis.

First Granma stoked the fire

One month later Granma reported of an unusual dialogue between experts from the Central Bank on the origins and consequences of the dual currency / exchange rate. Immediately, Cuban television and other state media, deployed an intense campaign of related content suggesting the imminence of the process.

Likewise, the public, fed by social networks and expected reactions, began to transform the currencies of their assets. And a new reason to get in lines blossomed, this time at the banks.

Cash and bank balances will not be affected

Then the Central Bank of Cuba recently affirmed that the beginning of the monetary unification will not take place immediately. Something very positive given the epidemiological situation that Havana and other provinces are currently experiencing. The Bank also reiterated its commitment that cash held by account holders, or the balances in their bank accounts, will not be affected when the process begins.

Once they decide to open this complex reunification process fully, three major changes will have to take place: 1) definitively eliminate the CUC (the Cuban convertible currency) from circulation, both for businesses and the general population; 2) devalue the official exchange rate of the CUP against the US dollar, either gradually or radically, whether it eliminates the exchange rate multiplicity or maintains it for a time; 3) radically modify price levels, wages and pensions, in a kind of resetting of almost the entire economy.

All of these are essential actions whose short-term social costs will have to be effectively resolved. The price reform could include eliminating subsidies for products contained in the ration booklet. Similarly, salary reform should include the elimination of institutional perks, which have developed over the years. Organizations and companies, used them to discretionally ‘compensate’ for inconsistencies in remuneration systems.

However, even when applying the most ambitious program, the monetary duality will not disappear while a portion of goods and services in dollars persists, which actually appears to be gaining momentum.

The trend appears to be more sales in dollars

It’s striking how stores selling automotive parts and electrical appliances in dollars, now offer food, toiletries, hardware, and other goods. For example, ETECSA (Cuba’s telecommunications provider) has announced the sale of equipment in dollars. The Ministry of Agriculture business group announced the upcoming sale of farm supplies and tools in dollars. This trend is likely to be reinforced.

At this point, it is interesting that in the “Synthesis of the Economic-Social Strategy to boost the economy and face the global crisis caused by COVID-19” published a few days ago, there are no significant references to the issue of monetary rearrangement.

Therefore, the imminent process probably won’t complete the monetary reunification, even if it implies a significant general reform.

The problems won’t vanish with a currency unification

Reform of the Private and Cooperative Sector -expansion of permitted activities and formalization of MSMEs-, must precede any reunification measure. The consolidation of productive or service options must be guaranteed before layoffs in the State sector resulting from the devaluation. Licensing should remain open now to provide short-term options for entrepreneurs and employees inactive during these months. Nonetheless, the limited institutional capacity to carry out several complex processes at the same time could cause setbacks. Especially with the pandemic as a backdrop.

Monetary reform by itself is not going to remove the obstacles we face today for development of the productive forces. Because duality contains only part of the distortions. The interlocking of the operating model, and therefore the poor productive response, is associated with the prevailing incentive system. The visible and comprehensive currency-exchange distortions are one problem of this incentive system, but not the most important.

The system has a diffused targeting problem that needs to be solved. Strengthening the control actions on the rigorous statutes of legality — still rampant in absurd prohibitions that the Ministry of Economy and Planning itself struggles to correct — leads down a path opposite to the productive leap that is required.

Trying to unleash the productive forces under the restrictive current legal and political framework has been tried for decades. It does not produce results. It is time to question the ordinances. If the obstacles the president identified prove to be thorough, law and order in Cuba must incorporate two essential realities. An economy designed for control may produce control, but not development. Becoming an export economy is not possible on the basis of exhortation.

Farm production over the last five years is enough proof

If rigorous data is required to confirm these theses, we have the farm production of the last five years. It contains them both. This is the sector most served by the Party leadership and the Government, the most visited, the most controlled.

Without a total revolution in agriculture that dynamites policies, managers, institutions, incentives, management models, resource allocation mechanisms, marketing channels, verification methods, and even forms of property ownership if necessary, there will be no possible salvation. The same applies to the rest of the economy.

Read more articles about Cuba on Havana Times


4 thoughts on “Cuba’s Dual Currency Isn’t the Only Obstacle

  • Farm production in Cuba is no longer even a joke. As for ETECSA having a thirst for dollars, that reflects the Castros 27% shareholding. Raul needs some capitalist butter on his bread.

  • The creation of a stable currency is a necessity. Unfortunately, Cuba has already blundered the transition. Allowing use of the U.S. dollar in state sanctioned stores will, if it hasn’t already, result in dollars becoming the de-facto Cuban currency. This is simply because the Cuban government is incapable of establishing its own currency. Its guaranty (full faith and credit) has no value. It has expropriated assets once already.

    If the CUC is abolished, Cubans will then have a choice between pesos and dollars. Is there any doubt what people will chose?

    How many pesos will it take to buy a dollar? That number will float….either implicitly or explicitly…based on the perceived value of the peso. The peso’s value will depend on its stability. Unfortunately, the Cuban government does not have the resources to support the value of the peso. The Cuban government is itself bankrupt.

    Since the government will need to increase wages, pensions and prices, it will print more pesos….pesos that have no international value. There will be huge inflation in the price of peso denominated goods, while dollar prices will remain stable.

    This is necessary, but it will be horrible for the Cuban people. Few of them have easy access to dollars. The socialist dream is becoming a nightmare.

  • Is Fernandez Estrada an economist, a sociologist or both?

  • “Without a total revolution in agriculture that dynamites policies, managers, institutions, incentives, management models, resource allocation mechanisms, marketing channels, verification methods, and even forms of property ownership if necessary, there will be no possible salvation. The same applies to the rest of the economy.”

    In other words, recalibrate the entire Cuban economic system from the bottom up and top down. Everyone outside the totalitarian elite would agree with that fanciful proposition. How realistic is it? When is that proposition going to become a reality when the reigns of the entire economic system is in the hands of those elites who will not relent one inch because the current totalitarian system benefits only those in power and their communist friends.

    Yes, there are current changes taking place and there will be more future changes around the economic edges to please the nay – sayers and outside forces but substantial systematic, verifiable, realistic change as described in the quoted paragraph is not going to happen any time soon, if ever.

    In the meanwhile, the ordinary Cuban, the majority of the island’s inhabitants, either an entrepreneur, perhaps a pensioner, a wage earner toiling for the government, or any citizen without foreign friends and/or family, continue to bear the brunt of economic policies that causes citizens extreme hardship on a daily basis. How does Americanizing the currency going to help the citizen overcome the present unbearable line ups in front of stores, and the continued shortages of basic food irrespective of what money a Cuban has in their pocket? Americanizing the currency did not work in the past.

    For the ordinary Cuban on the street the current economic crisis is one of no meaningful work in order to earn a meaningful wage to be able to enter those newly created American dollar stores selling everything from car parts, electric appliances and now food, toiletries, hardware and other products.

    The Cuban pensioner having sacrificed the majority of his working life having contributed immensely to the development of his country is now barred from entering these newly created American dollar stores because of insufficient funds. How many Cuban pesos (moneda national) does it take to buy one American dollar? Certainly not near enough for that Cuban pensioner to enter a store and buy a tube of toothpaste.

    The article refers to the pandemic causing entrepreneurs and employees becoming “inactive during these months”. In other words, like the rest of the world the pandemic is causing unemployment in the economy. This is a fact. This is not only endemic in Cuba but elsewhere also. Most other world economies are providing assistance to bridge these unfortunate workers from losing their source of sustenance. It seems, according to the article, the Cuban government at the most inopportune and most inappropriate time are tinkering in the economy with a bold economic strategy of money maneuvers.

    Oscar Fernandez Estrada writes “…the limited institutional capacity to carry out several complex processes at the same time could cause setbacks. Especially with the pandemic as a backdrop.”

    Exactly. More economic setbacks on top of a fully blown viral pandemic is causing even more hardship for the majority of ordinary Cubans.

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