Responding to inflation and debt pressures, the Banco Central de CubaÂ announced today it devalued the convertible peso (CUC) by eight percent.
The devaluation, effective today, brings the CUC back to parity to the U.S. dollar, six years after the government imposed an 8-percent exchange rate increase and a 10-percent penalty, in response to U.S. pressures on third-country banks accepting U.S. dollars from Cuba. The 10-percent penalty on dollar cash sales continues in effect. From its introduction in 1994 to 2005, the the CUC had been pegged 1:1 to the dollar.Â
A devaluation is overdue, Pavel Vidal, an economist with the Centro de Estudios de la EconomĂa Cubana at the University of Havana, said at a recent conference. It would particularly benefit the cost competitiveness of Cuban tourism and reduce the excessive amount of convertible pesos in circulation that are not covered by reserves, Vidal argued.
A devalued CUC should also lead to “higher efficiency in the process of hard-currency allocation,” while stimulating exports and import substitution, the Central Bank said inÂ decree 30/11, published Monday by Communist Party daily Granma.
The Domestic Trade Ministry â€” the only ministry that buys large amounts of hard currency from the Central Bank â€” is expected to raise the pressure on state companies to increase productivity and exports because the devaluation will result in fewer revenues, measured in dollars, to buy dollar-denominated imports.
“On balance, [the devaluation] tilts the advantage towards exporters and import substituters, and away from imports and importers,” a foreign banker in Havana told Cuba Standard.
Finally, the devaluation is expected to attract foreign currency, thus easing the burden of hundreds of millions of dollars in overdue hard-currency debt with foreign suppliers, accumulated during two years of cash crunch.
The partial freeze on hard-currency accounts in Cuba imposed since late 2008 has “continued to decrease during 2010,” Central Bank President Ernesto Medina VillaveirĂˇn says in the decree. “At the same time, significant advances in the renegotiation of debt with our main lenders have been achieved.”
The freeze caused most foreign companies in Cuba to move their banking outside the country.