Cuba begins currency reform

All together now: Cuban pesos (CUP) ...
... and Cuban pesos (CUC)

CUBA STANDARD — Trying to create a currency that helps increase productivity and restores the buying power of salary-earning Cubans, the government announced it agreed on a schedule of steps towards unification of the two currencies that currently circulate on the island.

In a curtain raiser to currency reform, state media on Tuesday published an “Official Note” short on specifics announcing that the Council of Ministers agreed on a schedule and that “the process towards currency merger will be started.”  The first stage will apply just to state enterprises and government institutions, the note said.

Most Cubans earn salaries in non-convertible Cuban pesos (CUP). However, many goods and services are available in convertible pesos (CUC) only, at prices that are out of reach for Cubans who exclusively depend on a salary. This has forced Cubans into a vicious circle of lower productivity and black markets, in which workers are seeking informal sources of hard-currency income inside or outside their workplace.

The decision to unify the two currencies dates back to a rank-and-file congress of the Communist Party in 2011.

The gradual approach that begins with state enterprises spares regular salary earners and consumers the harsh effects of a devaluation, for now. The intent behind devaluing the CUP for enterprises first is “to attain the conditions for an increase in efficiency, improve measurement of economic facts, and stimulate sectors that produce goods and services for export and the substitution of imports,” the note said. The process will start with a preparation period to work out a legal framework, make changes in the computer accounting systems and adjustments to accounting norms, and train the people who will implement the transformations.

Beginning devaluation at state enterprises makes sense, said Pavel Vidal, a Cuban economist who teaches at Colombia’s Universidad Javeriana. “There are financial controls in state companies, so the potential for speculation is muted.”

The announcement comes after a meeting Saturday of the Council of Ministers presided by Raúl Castro, which deliberated about currency unification as well as changes in agriculture.

The Council of Ministers in the official note lowers expectations, saying that monetary unification “is not a measure that by itself solves all current economic problems.” In a July speech, Raúl Castro said that currency reform has popular support, and he rejected the idea of Eastern European-style “shock therapy and abandonment of millions of persons.”

According to Vidal, a former Central Bank of Cuba economist, Cuban economists and finance executives have been pondering two options within the gradual model. One option is complete reform, consisting in the implementation of gradual devaluation in the CUP exchange rate for all companies at the same time. The second option would be currency reform by sector, consisting in the gradual incorporation of some sectors in a particular system with a devalued official exchange rate.

Ninety-percent devaluation?

Based on pilot projects implemented over the past two years, Vidal believes the CUP devaluation will be in the 90-percent range. In 2011, the government established a special exchange rate of 7 CUP : 1 US dollar for direct transactions between state hotels and agricultural cooperatives. This year, the government raised the rate to 10:1. Also this year, the sugarcane industry has begun to use multiple exchange rates — 12:1 for the accounting of export revenues, 7:1 for imports, and 4:1 for imports of Venezuelan oil and fuel. Finally, recently created transportation service cooperatives will be allowed to buy supplies — such as fuel, tires, parts and components — not at the official 1:1 rate but at 10 CUP : US$1. Given that the convertible peso is pegged to the dollar, this translates to 10 CUP : 1 CUC — which means an effective 90-percent devaluation of the official exchange rate for the sectors that participate in the exchange rate adjustment.

Foreign investors

How the devaluation of the CUP will affect foreign investors in Cuba is not clear yet. One area where the impact could be felt quickly is in the salaries foreign companies pay their Cuban employees via a government agency, Vidal says. In the mid-term, if state companies adapt to the new opportunities, a stronger CUP should incentivize foreign participation and competition in domestic markets that have been off-limits. Sectors foreign investors may begin to watch include transportation, telephony and other communications, as well as agriculture.


The biggest challenge, according to Vidal, is the fact that “everything depends on state companies. We all know the slowness and bureaucracy of state companies. If there is an absence of effective response to take advantage of the devaluation, it could become difficult,” Vidal says.

Meanwhile, Juan Triana, an economist with the Center for the Study of the Cuban Economy (CEEC) at the University of Havana, lays out a list of tasks ahead for Cuba’s currency managers. They include making sure there is continuous exchange between the two currencies, decide on one figure and set a fixed exchange rate, avoid the emergence of a variety of sectorial exchange rates and eliminate existing ones, begin to watch for inflation and set benchmark goals, create a fund that provides temporary aid to enterprises affected by the devaluation, and set a ceiling for public debt.

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The history — a tale of three currencies

Since 1993, the Cuban peso and the U.S. dollar have officially been circulating in the Cuban economy, side by side. In 2003 and 2004, the government took a bundle of measures that brought about the substitution of the dollar’s functions by a third currency: The CUC. This effectively stopped the dollarization of the Cuban economy, while maintaining parallel circulation of the two currencies, both of which are issued by the Central Bank of Cuba.

In the 1990s, together with the double currency, an even bigger distortion occurred: The duplication of exchange rates. From 1990 to 1993, the exchange rate of the CUP suffered an enormous depreciation vis-a-vis the dollar in the informal market. This was accepted by the government network of exchange houses (Cadeca) created in 1995. However, the new value of the CUP was never applied to the accounting and exchange operations of the business sector. Institutions continued to operate with the official 1:1 exchange rate. Today, Cubans and tourists get 24 CUP for US$1 in Cadeca  exchange houses, but the official exchange rate used to calculate macro-economic performance and that of state companies continues to be 1:1.

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