Cuba’s Mad Array of Exchange Rates

Vicente Morín Aguado

HAVANA TIMES — True monetary unification will be difficult to achieve in Cuba. The steps taken so far, coupled with what we know about how the Party-State operates, suggest we will continue to see the opportunistic use of multiple exchange rates, a possibility created by the monopoly that the State maintains over all economic sectors (one of the so-called “advantages” of socialism).

The government has declared that the two-currency system will come to a definitive end in 2016. With evident discretion, the press has not offered the slightest foretaste of this controversial process, considered the toughest step in the implementation schedule of the Guidelines of the Party Congress, roadmap of the reform process now and underway, euphemistically referred to as the “updating of Cuba’s economic model.”

Let us go straight to the heart of the matter, skipping over some details (as the Cuban economy is like Frankenstein’s monster, witch patches have been applied in the course of years, following nights of intense and uncontrollable fevers).

At one point, the novelty of applying two sets of prices to different products was approved. Articles purchased at hard-currency stores are sold in CUC, using the 1 CUC (Cuban Convertible Peso, or “dollar”, in street parlance) to 25 CUP (Cuban peso) exchange rate. Now, a television set valued at 300 CUC can be purchased at 7,500 CUP. It’s clear nothing has changed for the majority of Cuba’s tormented buyers.

In addition, dealings where a 1 CUC – 10 CUP exchange rate applies are authorized between State companies and between State companies and self-employed parties or cooperatives. This exchange rate is used to revalue State funds within the monetary unification process underway.

Also and not less significantly, at the Mariel Special Development Zone, Cuban monopolistic employers will pay workers on the basis of a 1 CUC – 10 CUP exchange rate and will consider the US dollar to be on a par with the CUC. This, in fact, introduces yet another exchange rate to Cuba’s national economy, that of 1 USD – 1 CUC.

What’s more, the population legally acquires 1 CUC at 25 CUP and sells it at 24 CUP, and informally accepts rates of 1 CUC – 23 CUP and even 1 CUC – 20 CUP, when transactions are carried out at State stores which had been authorized to receive only CUP for their products or services till now.

Both legally and de facto, Cuba has a system of multiple exchange rates which are likely to persist in the foreseeable future, given the customary trial-and-error (if not downright improvisational) methods inherent to the governing elite that is today leading the reform process, “slowly but surely”, intent of finally delivering the earthly paradise of communism promised so many years ago.

Following the decision to eliminate the existing two-currency system (at least in its most visible expression), playing around with exchange rates and applying specific rates in some cases, has till now been presented as a temporary solution, but it could well become a recurrent method of the bureaucracy that holds the fate of the country in its hands.

Two economists who have for years been linked to the spheres where Cuba’s national economic decisions are made, Pavel Vidal Alejandro and Omar Everleny Perez, leave us with the following warning: “The era of multiple exchange rates as an effective option in the design of exchange policy designs, has been left behind internationally owing to their proven inefficiency and their high costs.”

The quote is taken from the first, 2014 issue of Cuba’s Espacio Laical (“Secular Space”) magazine. The authors describe Argentina’s and Venezuela’s negative experiences with multiple exchange rates, and wish that, in Cuba, such decisions “are only a transitory mechanism, in anticipation of a definitive convergence with a single exchange rate for everyone.”

The backdrop to this is acceptance of the market, whose unavoidable presence is the great dilemma communists face when they design domestic economies. A single currency is needed for the optimal flow of monetary and market relations, and it is the one common denominator of all economic activity.

To date, we continue to regret that Cuba’s revolutionary leadership has not undertaken a profound and sincere self-criticism with respect to its economic experiments, all of which bear the eloquent stamp of negative results.

Once again, the specter of appearances comes along to becloud reality. We may finally end up with a single currency in our pockets and several to gage the real workings of the economy.

We may only get half of the way there, swimming euphorically towards a beach whose sands await the steps of homo erectus, and perhaps even homo sapiens.
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11 thoughts on “Cuba’s Mad Array of Exchange Rates

  • Yes. they make sense. A lot more than your words.

  • You have all your right to discuss whatever you want to discuss Sir, but do they make sense?

  • I agree completely with Cubaqus. As the tourist and Cuban nationals economy rarely intersected the possibility of tourists benefiting from the state subsidies was remote to say the least when the CUC was introduced.

    Tourists would be guided to particular health facilities where they actually pay extortionist rates and not the ones used by Cuban nationals, the same applies to hotels and all other tourist sites. During all my travels in Cuba I have never seen a foreigner in the queue for bread rolls or in the ration book shops. So the myth of the need for a dual currency to “protect” the subsidies of Cuban nationals carries absolutely no economic or financial merit other than forcing foreigners to “hand over” their hard currency.

  • You boast of a lot of “studies”. I can’t express myself of your educational level one way or the other. What I do can is express – from my own experience in international trade, international trade finance, international insurance, teaching applied economics … – that your comments don’t make sense.

    As far as transport in Cuba goes: the total destruction of the system is in no way the result of the CUC. It is indeed the result of bad management, lack of investment and shortsightedness of the Castro regime. No money generated in CUC in the tourist sectors was invested in national transport.

    When tourists arrives new buses for their exclusive use were bought and their use paid for with hard currency / CUC. The same goes for all the rental cars with their – now defunct – distinctive black TUR plates.
    The tourist sector with its hotels, transport, food, … was segregated from the Cuban people. A phenomenon often referred to as “tourist apartheid”.
    That invalidates your previous statements.
    I understand the issues in the Cuban system a lot better than you as far as I am concerned as with other economists – MBA, MIM, PHD, ….. graduates – we often discuss the issues.

  • Yes Mr. Brrr, free flowing of CUP would have caused a free fall in this case. As a fellow Canadian who was born in China, I have seeing very system in the 80’s and it disappearance in earlier 90’s. It was a question that puzzled me for years till I went to my economic class in university.

    Personally I don’t think Cuba is ready to go back to the single currency system yet. But again, with more and more problem been created by the dual currency system, you never know when the scales will tip over to the other side…

  • Mr. Cubaqus,

    Please be aware that all argument I make are based on my years of studies in economic, international trade and international finance, etc.

    Why you say my arguments don’t make sense, is it because you have done enough studies on those topics or just because you don’t like my comments?

    Your argument: “…public transport in Cuba had crashed. Tourists used specially purchased buses, planes, rented cars and the special tourist intercity buses payable in CUC.”

    I can tell you that the phenomenon you see is the result of CUC not the cause. Furthermore, the fact that Cuban Public Transport System is in trouble, has nothing to do with CUC or CUP but its own economic structure. Which is an separate issue.

    I don’t even want to comment on the other argument you make, because it clearly shown lack of understanding on this issue.

  • I don’t agree that there was a real economic reason to have a dual system. There was a political one.
    25 to 1 is better than 140 to 1, indeed. But 140 to one was the market rate. 25 to 1 is an artificial rate. It has no economic basis.
    The fact that there is no real measure to value to CUP is the biggest problem for the process. Whatever rate the regime sets will be dictated by its own needs rather than a real economic value.
    From a purely economic point of view Cuba should have dollarized its economy. Its local currency is worthless. There is no real economy backing the currency. Dollarization was of course no option from a political point of view, but it would have cleaned up the monetary problem right away. Now the situation has been allowed to continue to fester and the real “reality call” will inevitably come.

    Moving to a CUP system will not hurt tourist income. Tourist will purchase lots of CUP’s instead of 25 times less CUC. Cuba will just be forced to create new currency notes with a larger denomination. In the end nearly all the dollars spent in Cuba by tourists will go to the regime directly or indirectly.
    Tourists tend to think in “home currency” terms.
    Cuba will not raise prices 25 times. A 1 to 1 with the dollar won’t happen.
    in a way: as both currencies are “funny money” that can only be used in Cuba who care what is written on the paper.
    What does matter is the news exchange rate. If any other than 25 CUP to the dollar is used then thing will start to hurt. Devaluing the CUP to its real value will erase purchasing power of Cuban salaries. Moving it up to 10 CUP to the dollar (as happened for the conversion of the salaries of workers in Mariel) will result in a steep drop of purchasing power for those receiving remittances and may bankrupt the Cuban system as – without price hikes in the dollar shops – it would be forced to sell goods to Cubans for a price 2.5 times lower than they currently do.

    in the final analysis the problem is that the Cuban economy is not productive and can not support a real currency.

  • You make some good points but take these remarks in to account:
    – the tourists actually did not use any of the subsidized services of the regime. Your example of transport is a good one: public transport in Cuba had crashed. Tourists used specially purchased buses, planes, rented cars and the special tourist intercity buses payable in CUC. As such your argument that the CUC was to avoid “leeching” on social services makes no sense. The exact same could have been achieved by selling these tourist services at high CUP prices.
    – a direct exchange system would not have destroyed any currency. In the period of the “free market” for dollars in Cuba – before an official exchange rate was set – dollars traded all over Cuba its value depending on supply and demand. In that period the government actually inadvertently succeeded in reducing money supply by “sucking up” a lot of CUP saving by trading dollars for use in the dollar shops converting massive amounts of CUP savings to dollars at inflated prices.
    As the CUP can not be traded freely outside Cuba there was no real risk.
    – Time to change and end the charade, indeed. And yes: the economic challenges are huge and the Cuban people will suffer.

  • I think you have a pretty good assessment of the situation August. For all its faults, the two currency system was still a much needed intermediary to mitigate the rampant discrepancy between the USD and the CUP. 25-1 is not good, but it’s an improvement over 140-1!

    The CUC part worked out rather well. It allowed for a lot more money to come into the local economy, it priced the tourism sector in a place that was relevant to world prices, and again brought in much needed hard currency. It’s the subsidized CUP that was left hurting. Tourists could (and still can) buy things in Cuban Pesos because they can just ask for CUP instead of CUC when they exchange their home currency. This lead to CUP prices getting raised until they was basically matched the exchange rate. Even five years ago I could buy things in CUP for a small fraction of what I’d have paid if I pulled CUC out of my pocket at the same vendor. By this year, most prices for things a tourist might be interested in were almost spot on the 25-1 exchange. When locals are being made to pay those prices too — well that’s a real problem, the local economy simply cannot support Canadian prices being paid for by Cuban wages.

    While the time has certainly come for the system to be revised, in the short term it’s going to hurt more than it will help no matter what direction they go. If they go to a straight CUP only system, they will see a steep drop in the income from tourism. People who are used to seeing a $5 price for something, are simply not going to pay $125 the next time, even if that’s really the same price after exchange. People working in the tourist sector will see their tips shrink substantially, as that $1CUC tip is more likely going to now be $5 CUP or less. $1, no matter what it’s actual value is, is that psychological barrier for discretionary spending and indiscriminate tipping. A buck is nothing, 25 bucks is a lot (even when it isn’t).

    They also still can’t let whatever version of the Peso they end up with float on the world market. As bad as things are now, they’d be seen as the good old days in comparison if they did. Even the special period would be looked upon fondly compared to how hooped they’d be with a free falling currency. Look at other Latin American currencies and realize how much worse things could be. Chilean Pesos, for example go for 590-1 vs the USD.

  • Here is my personal opinion on CUC and CUP issue. As someone who have seen how the 2 currency system worked in China and disappear in early 1990’s and somebody who had received fair amount of Classic Economic Education from various universities at different parts of the world.

    Unlike some of the commentators who believe CUC is a tool of oppression, I believe it had its meanings at the time when it was introduced.

    Here are some of them:

    1. when the subsidies and adds from the USSR stopped, in early 1990’s, the only reasonable source of Foreign Currency would be the Tourist from the West. However every consumer item in Cuba, at the time, due to its economic structures, was heavily subsidized. If they allowed tourist to use the same currency, then the government would actually be losing money to the much amplified buying power of the tourists. (Imaging a foreign tourist who spends 2 CUP, same as a Cuban National, to buy the same bus ticket, while everything used to run that bus was subsidized by the Cuban Government.) So the Cuban Government needed a way to make tourist to pay actual market price, while Cuban National to pay subsidized price. That’s why the 2 currency system was introduced.

    2. The other fundamental issue was the value of regular Cuban Peso. As a small economy that still under the embargo. Any direct exchange system would destroy its value and might trigger hyper-inflation. Especially as the time when USSR adds just stopped and Cuba had no other way to boost up its economy from foreign trad.

    CUC was introduced as “gate keeper” for CUP and a temporary methods before the CUP could stand on its own feet. So it was far from perfect and would, with passing of time, create its own problems.

    So is it time to change, I say yes. But the economic challenges are still HUGE. Also, you can be sure that no matter when the Cuban Government does, it can not make everyone happy!

  • Cuba’s “Mad Array of Exchange Rates” is the result the schizophrenic attitude to change of the Cuban regime.

    When the Soviet Subsidies ended the regime needed – desperately – a new source of foreign currency. Tourism looked the best bet. But in order to avoid “political contamination” an apartheid system had to be set up: a “dollar part” for tourists and a CUP for Cubans. Exchange rates (up to 140 CUP per dollar) and guards at hotels and restaurants were to ensure the tourists and Cubans never met.

    That went awfully wrong.

    As at the outset there were “dollar shops” and no official exchange rates you had widely varying prices for the dollar. From 140 CUP in remote Pinar del Rio to 100 in Havana, flush with dollars.

    Then the regime decided it had to eliminate the “humiliation” of using dollars. Remittances were now allowed. Dollars came in, but people tended to hoard them. Dollar bills under the mattresses of Cubans were of no use to the regime.

    In a move to “suck in” as many dollars as possible the dollar was replaced by the CUC. Dollars in the mattresses had to be converted to the new “funny money” to get goods that weren’t available with CUP.

    in the process an arbitrary value was set for the CUC versus the CUP.
    I have never read any true economic underpinning of this valuation.

    So now the Cuban regime is left with the mess it has created:
    – worthless CUP
    – a “funny money” that has no real economical underpinning but the preparedness of the regime to hand over goods (with a 240% markup) to the Cuban people at set prizes in that money

    Now these have to be “unified”. Big problem for the regime. Even with the high markups on the goods they sell they can’t generate the “hard currency” to buy the goods the Cuban people need.
    The whole “increase of money supply” thing is a joke. The money supply won’t change if CUC’s are exchange at the current rate to CUP;
    What will hit a lot harder – in perception not reality – is that it will now be clear that a Cuban has to work a week to buy a bottle of cooking oil.

    So that leaves us with the final questions:
    – at what rate CUC’s will be concerted to CUP. 25 as it is or 10 (used in Mariel port wages)?
    – once the conversion is done what will be the strategy of “valuing” the CUP against the Dollar and the Euro?

    If the Castro regime want to generate more foreign currency it will have to “revalue” the CUP against the dollar. Lets say from 25 CUP per dollar to 10.
    That will mean that it can expropriate in one go 60% of remittances pressurizing exiles to send more money – assuming national prices are held constant.

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