Currency Reform Chaos, it’s Not the Cuban Blackbird’s Fault

By Mauricio De Miranda Parrondo (Joven Cuba)

HAVANA TIMES – An ad by the Cuban President and Government recently went viral, including several phrases from the Economy and Planning Minister, Alejandro Gil, made during the National Assembly session in December. This piece of propaganda says: “It isn’t true that the reason for inflation in Cuba is the wrongful design of currency reform and that the Government decided to implement it at the wrong time. It just isn’t true. This would have all existed with or without currency reform.”

He then goes on to say:

“We would still have shortages, a drop in the purchasing power of wages, higher prices without currency reform, and that’s because we have a production deficit. All of these phenomena, which is the basis of inflation, are not the result of Currency Reform, they happened regardless of currency reform, and we are the first ones to admit that there were problems in its design and a lot of problems with its implementation (…).”

Currency Reform or chaos?

Cuban leaders insist on defending what they call “currency reform,” at all costs, but in reality it was nothing but a 2,300% devaluation of the Cuban peso’s official exchange rate, to bury the dual-currency system that existed beforehand.

Currency reform needed many other things to have been done first, including: 1) getting rid of the dual-currency system to establish the Cuban peso’s full sovereignty in national transactions; 2) outline a relatively flexible exchange rate to contain certain external shocks; 3) get rid of more than one exchange rate, unifying them for all transactions with a financially solid rate based on market conditions; 4) adjusting prices, wages and pensions.

However, all of the above form part of the circulation cycle, so before going ahead with this course of action – which would imply a considerable issuance of cash because of how it was conceived, and this would have an impact on exchanger rates-; conditions need to be guaranteed to increase the production of goods and services with radical structural reform in the business sector, in property and the authorization of private ecconomic actitivies with very few restrictions.

Before promoting much-needed change in the financial system, conditions need to first be created for widespread growth of production, regardless of whether this happens in the public, private or cooperative sectors. In economic policy, the order of factors does change the result.

That said and casting aside sequential problems – which many economists have insisted on – the currency unification process that was adopted is far-off from constitutiong currency reform. In fact, we are seeing new chaos, which not only affects the financial system, but the entire economy.

It was decided that a fixed exchange rate of 24 Cuban pesos (CUP) for 1 US dollar (USD) would be adopted, which didn’t reflect market conditions, and was affected by a serious shortage of dollars linked to the collapse of the tourism industry and the chronic crisis of exports. Meanwhile, the illicit market quickly adjusted itself to the supply-demand relationship and the dollar was selling for 35-40 CUP since late 2020 and in early 2021. A year after this measure was adopted, the US dollar is now worth more than 70 CUP.

How can you carry out currency reform when neither the banking system or official bureaus de change are in a position to sell foreign currency? The only thing it’s really done is replace one kind of currency (the CUC) without any economic rationale for another (USD), which is less far-removed from reality than its predecessor, but still removed, which stops it from serving its function as a bridge between the domestic and international economy, nor does it contribute towards establishing proper relative prices.

As a result, relative prices which are set at the 24:1 exchange rate are not real and, therefore, a distortion continues that both affects the determination of production costs, domestic prices of goods that contain imported supplies, as well as export/import prices, and it prevents any real convertibility of Cuban currency. What good does introducing fictitious prices into an economy do? None. But when this fictitious price is in foreign currency, the connection between the national and global economies is seriously compromised.

Plus, as I’ve explained many times before, the existence of a larger gap between official and informal exchange rates (the latter being higher than the former) translates into an artificial overvaluation of national currency that affects the competitiveness of exports, making them more expensive, and making imports artificially cheaper too.

Furthermore, what the Cuban Government has called the “Reforms Process” came into effect at the same time as a partial dollarization of the economy, creating a market where freely convertible currencies could operate via bank deposits, most of which come from abroad.

While this market was reserved for “top range products” in this market, it slowly added food and a growing assortment of essentials which families need. That is to say, the case of the ‘90s has made a comeback, which led to the dual-currency system, divided markets and, at the end of the day, not only wreaked financial crisis, but also aggravated the national economic crisis.

Thus, the “Reforms Process” hasn’t led to currency unification, which was much needed and would have allowed the Cuban peso to be the only currency in circulation to carry out domestic transactions and, also, for it to be a convertible currency within the country, which could even be used in international economic transactions. On the contrary, foreign currency remain present in domestic transactions, which leads to perverse incentives for producers – including in the public sector – who prefer to direct their goods to these markets, with the excuse of compensating their costs in foreign currency.

On the other hand, readjusting prices, wages and pensions as part of the “Reforms Process” was done based on figures that have proven to be wrong. We’ve never discovered how the famous basic goods and services list was created, we don’t know what goods and services it included and the extent to which these determine the price of the basics.

In addition to obvious technical errors, there were also political errors, such as the case of retirement pensions being set below the minimum salary, without bearing in mind these retirees’ contribution to the national economy, the arts, culture, education, science, production, services, or defense, during the time they were active.

As a result of great price and wage distortions since the ‘60s, retirees received very low pensions, which weren’t adjusted with successive reforms in the retirement system. This is not only a political error, but also a great injustice to this group of people who are extremely vulnerable because of their age.

In the article “The Cuban Economy: between confusion and the pointless”, I explained that it made sense for prices to go up when a market is affected by severe shortages, that the money supply would be increased as a result of nominal increases in wages and pensions.

It’s clear that this price increase would have been less in an economic context different to the pandemic, but the paralysis of Cuba’s productive sector isn’t a temporary problem, but a structural one, and it’s linked to the clearly inefficient aspiration that the State is in a position to provide all of the goods and services society needs. Today, pressured by the situation, they seem to recognize that they can’t provide all of them, just the essential ones, but they’re also wrong about that.

I believe that they never should have turned to a dual-currency system in the Cuban economy. It wasn’t the right economic or political decision. However, once adopted, it should have been a temporary measure. Dollar circulation was the only temporary thing about it though, because it was then replaced by the so-called Convertible Peso (CUC), which wreaked even greater chaos in the Cuban financial system, with a convertible currency that slowly lost this condition as the issuer increased their supply without due support in dollars, which it was allegedly created from.

The dollarization of expenses, but not of wages, impoverished most Cuban families who lived off their income. This process of poverty has been ongoing for decades and needed to be taken care of with great structural reform.

It’s unacceptable that after currency and exchange rate unification became an “economic and social policy guideline” at the 6th PCC Congress in 2011 it wasn’t implemented before the 7th Congress (2016) and was only hastily and sloppily executed just three months before the 8th Congress (2021).

It is also unacceptable that the Communist Party and Government leadership continue to evade their responsibilities. While I believe the dual-currency system should have never existed in the first place, in 2011 and the years just after it, the country wasn’t in such a dire situation as it was after 2020, when in addition to the pandemic, the Trump Administration also stepped up its economic sanctions.

In regard to the latter, the Cuban Government not only lost out on the chance of improving its relationship with the US with the reestablishing a diplomatic connection between both countries at the end of the Obama Administration, but it also reacted negatively to the challenge Obama’s visit to Cuba posed, especially its reaction to his speech at the Alicia Alonso Grand Theater in Havana.

It’s not the toti/Cuban blackbird’s fault

In a country where the Government has every lever of the economy in its power, if the economy runs well then it’s a success for them, but if the economy is going badly then it’s their failure. That’s the reality.

The Cuban economy has been going badly for decades. The insistent appeal to the responsibility of US economic sanctions – which do undoubtedly affect the national economy, especially families, but beyond condemning them, there’s nothing else we can do -; proves the country’s extreme vulnerability and foreign dependence, which has grown after the collapse of the Soviet Bloc.

Underdevelopment has become worse in this situation, which is expressed in the country’s inability to develop. The production system has collapsed. Traditional industries have collapsed and non-traditional industries can’t take off the ground because it’s hard for them to access capital, technology and raw materials. The country that was once considered an agricultural nation, can’t produce enough food to feed its population.

Faced with this reality, it makes no sense whatsoever to appeal to political issues, or to economic mechanisms that have already proved to be inefficient. The only way forward is to do something different and this means bold policies, which the Cuban Government has always shyed away from until now.

While some leaders, beginning with the president, have tried to evade their responsibility with excessive price increases, attributing this problem to the self-employed and small private business owners, and even to negligent managers of state-led companies, and have hoped the solution would be a “voluntary” contribution of profits made, once again ignoring economic laws; it’s a whole ‘nother reality.

Inflation has objective causes that are linked to the economic chaos that has been dragging on for decades. The collapse of national production has created a shock in supplies, which was already structural, and as economic theory states, when faced with supply shortages, the market’s response is to increase prices. This reality was disguised with fixed prices and half-empty stores for many years.

If we add to this more money being printed without the support of goods on the market, the only result that could come from this is higher prices, that is to say, greater inflation. We have to add the persistence of the public monopoly over a series of productive activities and services to these two factors, and this allows for monopoly prices to be established in a captive market.

By the way, as more and more essentials were sold at MLC (USD prices) stores and foreign currency bought on the illicit market became more expensive, this inflation has been growing for Cuban consumers. As the calculation methodology hasn’t been made public, we don’t know if these increases are being considered or not.

I would like to tell the minister of Economy and Planning that this chaos, the way it was produced, the time it was implemented, and having done so without really liberating productive forces – tied up by the centralized economic administrative system – is responsible for the current situation in Cuba and has a decisive influence on the stampede of prices Cubans have to endure. It’s not the toti/Cuban blackbird’s fault, as the old proverb says.

As I’ve said before in other articles and interviews on different platforms, we can’t make radical structural changes in Cuba at this point without first producing institutional and political changes that are just as radical. The latter need to be guided towards democratizing society, so that it can take back the reins over its destiny. These changes would lead to the right climate to develop goods and services production in regulated and transparent markets.

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