Cuba’s Monetary Unification: a Turn for the Better or for the Worse?

Haroldo Dilla Alfonso*  (Photos: Juan Suarez)

HAVANA TIMES —The announcement that the Cuban government plans on eliminating Cuba’s two-currency monetary system has awakened numerous concerns among common citizens and analysts. This was to be expected, for, even if we assume the simplest and most vulgar point of view on Cuban reality, it is clear that this is a serious issue that is going to change many of the rules of the game on the island’s playing field.

We should not imagine that the world is going to change after the two peso currencies are fused into one, but neither should we underestimate the significance of the measure.

I think that one of the most interesting things we find in the First Report of the Cuban Civil Society Consulting Group recently published by Cubaencuentro – I haven’t been able to find out who these people are – is the statement that some believe Cuban society is changing for the better and others for the worse. Ignoring such changes condemns us to idly imagine a society which is disappearing more and more every day.

The two-currency system was an emergency measure implemented by Cuba’s political class during the worst moments of the stifling economic crisis it brought about. It was also a monetary scheme suited to the economic system Fidel Castro then envisaged: a dual economy with a dollarized, dynamic sector, and a weak, Cuban-peso sector sustained by infusions from the first via payment balances.

It was the system that the military conspired against with its company streamlining campaign throughout the 90s and what former vice-president Carlos Lage promoted with unbridled Fidelista fervor until his political decapitation some years back.

The two-currency system has been maintained, and not without reason. Future studies will reveal to what extent the existence of the two currencies and parallel economies, and the diffuse border between the two which always provided those who crossed it with differential profits, has been a key factor in the original accumulation of Cuba’s emerging bourgeoisie, a class which today is nestled in the folds of the country’s political elite, the black market and foreign investment.

Currently, however, the two-currency system proves unworkable in terms of affording Cuba the quota of technical rationality and transparency its system requires.

If the so-called “updating process” aspires to a minimum of coherence and is at all serious in its efforts at restoring capitalism (be it the Chinese, Russian or Antarctic variety), then, it has no choice but to re-establish the one-currency system.

I don’t know how it’s going to do it, something which should not be surprising (as I am not an economist). However it is likely Cuban government officials also don’t have a clear idea of how to go about it. To date, very little has been explained, and there isn’t even a rough chronogram, which suggests the whole process will advance as slowly as all of Raul’s reforms.

A single currency is not going to give people greater access to the market; it is only going to eliminate all legal barriers blocking such access. That could well give rise to frustrations similar to those experienced by Cubans upon realizing that having a passport doesn’t automatically get anyone on a plane.

This monetary unification, to be sure, is going to have an unquestionable impact on Cuban society, for, what we are talking about are the direct effects on the prices of merchandise sold in Cuban pesos, which, in turn, conditions the prices of other things, including labor power.

We can also predict that, in the short term, money laundering operations will emerge (be it in the form of bank deposits or real estate purchases) in response to subtle government threats regarding settling scores with those who have accumulated ill-gotten money.

If that were the case, we would be seeing a number of collateral phenomena involving the black market, concealed practices and repression which have already become part of Cuban culture.

In short, this is an issue to follow, as the Cuban president likes to say, patiently but surely. So, let us take a seat, put away some bills as numismatic memorabilia and reflect on what is to happen in a society where, for the longest time, something new is always going on…for better or for worse.
(*) A Havana Times translaton of the original published in Spanish by Cubaencuentro.

22 thoughts on “Cuba’s Monetary Unification: a Turn for the Better or for the Worse?

  • November 6, 2013 at 10:12 pm

    The Cuban government can’t manage to deliver reliable broadband internet to the island, yet you advocate shifting to an electronic banking system???

    Oh, that will work out well!

  • November 6, 2013 at 1:26 pm

    Read again my post. What I meant is that the ORIGINAL exchange rate of the CUC against the USD was ARBITRARILY set and the rate has not changed for almost 20 years, That rate COULD have been set to an arbitrary value and the ONLY effect is the amount of CUC they needed to print.

    Also, you are wrong on the whole print CUC thing. The BEST solution for the Cuban government is to modernize their banking system and move the bulk of the economy to electronic money (aka debit cards) as soon as they can. This alone will reduce considerably the amount of physical money in circulation and gives an important blow to the black market, since all transactions could be traced and most of the activities properly taxed.

    I also have little faith that the change is going to be smooth. That short time-line implies a more dangerous route than my suggestion, most likely involving reevaluation of the CUP vs the CUC by reducing the gap in the exchange rate (lets say from 25:1 to 12:1) in several steps or by introducing a completely new currency and replacing both CUP and CUC.

    Either way is dangerous and a miscalculation could have potential catastrophic consequences for the country, and the endemic corruption only makes things harder.

  • November 5, 2013 at 12:30 pm

    ac wrote: “I’m not suggesting to print more CUC, …it means that you need to print more CUC”

    Elsewhere you suggested giving Cuban workers a pay raise, which also means printing more CUCs.

    So it’s agreed then: the Cuban government will be printing lots more CUCs. That means inflation is inevitable, because the economy will not be growing enough to add the necessary GDP to support more CUCs at the current value.

    I have very little faith the change will be handled well or honestly. It will be designed by those in power to benefit those in power. That means the Cuban people will get screwed. Again.

  • November 3, 2013 at 3:40 am

    The disparity between the have and have nots in Cuba, is highlighted by the virtually impossible current currency system duplication. I am Canadian, and I have taken a long and in depth study and interest in Cuba, the history, the physical country, the fascinating and sometimes political moves, and most of all the amazing, tenacious, amiable, warm and kind loving people. I recently paid for a house there which I gave as a surprise to a family whom I have met and truly admire. That little gesture did more for me than it did for them I feel. It seems that in my time there, people in Cuba who have a contact offshore, in Miami or Europe or Canada or elsewhere, seem to live on one standard. They for example, can acquire by gift or by gosh, a few thousand dollars a year in CUC’s while their Cuban neighbors without the foreign relationships are forced to live on the Cuban wages in Cuban pesos. Comparing these two life and living standard realities in Cuba is like comparing an elephant to a blueberry. They are not even on the same planet. The idea of consumer goods that are desirable such as better clothing, imported food stuffs or mechanical things like bikes and tv’s all being sold in Cucs, just further widens the spread between the two neighbors above described….the pure Cuban and the one with the offshore help. By merging these currencies, they will hit it in the middle, they must, and this will be a formidable challenge resembling a highwire act, with considerable risk. At the end of the day the macroeconomic reality is that a one currency system will flatten out a little of the disadvantage which the current system provides, by virtually making CUCS unavailable for the average Cuban working for pesos nacionales and confronted with the huge 25:1 currency exchange value. Prices of goods will adapt, but the switch-up of these currencies into one
    will be a formidable challenge. The government will, through it’s handling of this move by it’s federal owned banking system, must make sure that there is no hard cost or front end load to the consumer, such as a fee for converting Cucs or Pesos in a bank account into the new currency. The conversion needs to be seemless, smooth, and at no cost to the depositor of funds in Cuban banks.
    The primary reflection of how this transaction will be the real estate market. Since the 2012 legal provision to allow for selling and buying of homes, the price of houses has been sneaking up, cautiously, but visibly. When the new currency becomes reality, the largest priced items in Cuba, the house market, will flutter and spurt for awhile, while minds adjust to the new currency, and while people holding their breath get to observe how this will impact the national economy and markets and prices as a whole. Theoretically there should be little shift or movement in the stability ( or instability) of the economy, but in reality, it you want to see how much milk in in the coconut, you must wait for it to fall from the tree. I feel that the currency unification is long overdue. It will be interesting to see if the CUC will ever float as a legitimate international currency, and if so how the world markets will react. It would be great to be able to buy the new Cuban Peso here at a Canadian bank, as we do other foreign currencies, without the hassle of the black market tactics tourists endure who visit there and need to switch currency both on entering and leaving the country, with the Cuban government clipping them at both ends.
    As for the average Cuban, well, with one currency, it will be easier to define those inequities in existence. As long at the Cuban currency is kept off the international markets, Americans will continue to pay a bonus of 10% to switch their money, unless they convert first to the Euro or Canadian Dollar. Changes continue to be made in Cuba. Canadians for the most part, see Cuba remaining a socialist or communist country. Most Cubans I have met from one end to the other of the island, seem to want a better life, but they want to keep the fruits of the revolution, the free education, the free medicare, and the discipline in the country that part of it at least, which is responsible for civil law an order not achieved elsewhere in Central and South Latin America. They just want to seemingly live in peace, with a positive attitude with respects to their futures and those of their children. Canadians love Cuba, unconditionally and every year we continue to increase our support there, as friendships build, and bonds become secure between the two peoples. A person from the country in Cuba, is a particularly good fit with the average Cuban. Canada is distinctly different from the USA politically, and our soft and kind international profile, seems not to be a threat to Cuba, and our trade and friendship as a nation has continued all throughout the revolution, the pressure to desist from American governments, notwithstanding. Viva Cuba. Viva los Pesos Nuevos. VIva Nuestro Amistad Tambien….para Siempre! Stephen (esteban) Davie

  • November 2, 2013 at 8:18 am

    I do not contradict myself in any way. All currencies are by definition worthless paper since the gold standard was abandoned.
    US economic output in services, produced goods, foodstuffs, … is more than large enough to sustain its value. The debt may be an issue.
    Cuba’s two currencies are indeed not allowed to float freely against the international currencies. The market is 100% controlled and even the CUC can not be freely exported. No international transactions are done in CUC or CUP. They are both “funny money” of the regime. They have no set value in the markets even against one another.
    My argument is 100% valid as Cuba can do whatever it wants with the CUC and CUP, but only an completely insane and arbitrary revaluation of the CUC can generate more income as the Cubans that get remittances tan get less CUC’s. Anything else the Castro regime does will cost them.
    If the decrease the value of the CUC in CUP more CUC’s will be bought by the population and the regime will either have to increase CUC prices or lose currency reserves.
    If Cuba has to start paying CUC salaries to all, CUC prices will have to be inflated throughout the economy. Unless the CUC is then devalued against foreign currency tourism and trade will become extremely expensive. All you need for an inflationary spiral.
    Try all you may: the underlying economy of Cuba can not and has never been able to pay for a decent standard of living for all Cubans since Castro seized power.
    First he seized internal wealth to finance his ideas. When that ran out he imposed the currency reform. Then the regime got up to 35% of GDP from the soviets. The impact of the loss of these artificial earnings became clear when the “special period” started. Now some additional income from indentured labor, remittances, tourism, …. have been shown not to be able to sustain the Cuban people even not with the Venezuelan subsidies.
    You so called analysis is completely oblivious to the basis of all economies: you have to create economic wealth to be able to spend it.

  • November 1, 2013 at 10:34 am

    Griffin you are correct. As inflation increases, the black market exchange of USD to local currency and vice versa
    will emerge replacing the Castro’s CADECA as the primary source of CUP for Cubans who hold dollars received from remittances or tourists. Witness was is happening in Venezuela as proof. As the government receives less USD to purchase imports, hard currency foods and goods will grow scarce in stores (again see Venezuela). Unless worker production increases to justify salary increases, simply printing more CUP will trigger the slippery slope of inflation driven by increased demand for fewer imports. If the Castros knew how to increase production they would have already done that. Unfortunately, there is NO way to avoid an economic disaster here.

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