Currency reform will begin this year, officials say

In street-level exchanges, despite a surtax on dollar sales, the U.S. dollar rose immediately against the convertible peso (CUC) — which will be replaced by the Cuban peso (CUP) — closing in on a 1:1 rate

CUBA STANDARD — In what is the first time Cuban authorities put a timeframe on the planned merger of the country’s two currencies, officials told a visiting delegation of U.S. Congresspeople that the government will begin with currency reform this year.

“We talked at considerable length about getting the Cuban currency unified,” Sen. Ron Wyden (D-Or.) said during a press conference at the U.S. embassy in Havana. “The Cuban officials repeatedly told us this was the year to get it done, to unify the currency.”

Wyden added that the U.S. Congresspeople — who met with President Raúl Castro, among others — urged officials to end a 13% penalty charged for the exchange of U.S. dollars.

In street-level exchanges, despite the surtax, the U.S. dollar rose immediately against the convertible peso (CUC) — which will be replaced by the Cuban peso (CUP) — closing in on a 1:1 rate. The CUC is nominally tagged to the dollar.

Although Cuban leaders have repeatedly assured that holders of CUC and owners of CUC bank accounts will not suffer any losses in the currency reform, Cubans are trying to exchange their CUCs for foreign currency, such as U.S. dollars, euros, or Canadian dollars.US$ CUC CUP

According to the official mantra, merging Cuba’s two currencies — thus ending the distortions the dual system creates in pricing and accounting — is inevitable. However, even though currency reform was first announced four years ago, little progress has been made. Raúl Castro admitted in his year-end speech to the National Assembly that the CUC-CUP merger “cannot be delayed any longer”.

“Although the elimination of the dual currency and exchange system by itself will not magically resolve all the accumulated problems of the Cuban economy, it is the most decisive process to advance in the actualization process of the Cuban economy,” Castro said. “That is due to the impact it will have on all economic and social activity in the nation. Without resolving this, it is difficult to advance in a correct manner.”

Some 200 experts — including foreign ones — are working “intensively” on monetary unification, Vice President Marino Murillo, who heads the permanent commission that oversees the reform process, told the assembly in December. He added that this is a “very complex” issue. In March, the permanent commission will present to the National Assembly a strategic implementation plan through 2021, including for monetary reform, he said.

The biggest obstacle to unifying exchange rates and currencies has been the absence of economic growth and of a rise in productivity in the state sector, which is expected to trigger inflationary pressure on the new currency. Public anxiety about rising prices has prompted the authorities to walk back several economic reform measures recently.


Not a one-stroke event

Officials have made it clear that the currency merger won’t be a one-stroke event, but rather a process that will take several quarters, beginning in state enterprises with the devaluation of the official 1CUP:1USD parity. Even so, devaluation is expected to happen in rather big steps.

“Since so much time has been lost, and the measure has been proposed too many times, it wouldn’t make sense if the Central Bank were to begin with a too gradual devaluation,” says economist Pavel Vidal in the latest Cuba Standard Economic Trend Report. “The Cuban peso would have to be devalued up to 24 times in a not too long period. At the least, the devaluation should be expected to begin with a 10CUP:1USD exchange rate. This is a harsh but necessary shock for state enterprises.”

This, in turn, means that enterprises that most depend on imported supplies will feel pain, possibly leading to shutdowns and mergers. Simultaneously, the export sector and those able to substitute imports stand to benefit, if they are agile enough and given enough space. But pretty much everything else is unknown.

“How to control inflation, how to soften the accounting effects and the financial shock on enterprises’ bottom line, how to move fiscal policy, and how to avoid the social costs of this adjustment are some of the questions whose answers we will soon get once the government publicizes its monetary strategy,” Vidal says.

More private-sector openings necessary

Vidal suggests that there is a potential for failure.

“One has to be aware that the government has two options: One, implement a hard monetary reform with real impact on the economy, or two, implement a soft and nominal monetary reform, with little real impact that leaves intact distortions in prices, salaries and the accounting of state enterprises.”

The former Central Bank economist argues that only “hard reform” promises success — if state enterprsies are allowed to make investments, hire more workers, and expand their activities, while loss-making state enterprises would be allowed to close down or merge.

“Many state enterprises live in a financial bubble fed by implicit subsidies they receive every time they pay for imported supplies at an overvalued exchange rate. This bubble must burst, and the state sector must be restructured, which requires a new employment adjustment. For the monetary reform to be real, it should trigger, in the mid- and long run, a shift of jobs between industries and towards the private sector.”

This, he argues, makes additional openings for foreign investment and a broader liberalization of the private sector inevitable.

“Both factors could help soften the financial shock brought about by the devaluation of the official exchange rate. It must be understood that Cuba does not have sufficient international reserves or access to international loans to support the monetary reform. Allowing additional openings to increase capital inflow, thus supporting the value of the new currency, is therefore key. Meanwhile, broader liberalization of the private sector would allow to absorb the unemployment that will rise as a result of the devaluation-trigged bankruptcy of enterprises.”

The ‘sonic affair’

The delegation’s main topic during the visit was the “sonic affair” — a series of unexplained illnesses that has affected 24 U.S. diplomats in Cuba, prompting the Trump administration to withdraw more than half of its embassy personnel and order the same to the Cuban embassy in Washington, while issuing repeated and escalating travel warnings. The withdrawal of consular officers has forced Cubans to apply for U.S. visas through the U.S. embassies in Mexico and Colombia. This, in turn, makes it unlikely the United States will be able to issue 20,000 visas per year, as agreed in a bilateral accord.

“We need to get back our embassy fully staffed, and we have been reassured there is no conceivable way of granting the number of visas that we have agreed,” said Sen. Patrick Leahy (D-Vt.) during the press conference. “There is no way we’re going to have improved relations if we don’t have the personnel to do it.”

The Trump administration must decide by March whether to make the staffing cuts at the U.S. embassy permanent.

Leahy described Castro as “animated”, “involved”, and “positive” in an “extremely candid conversation” about U.S.-Cuba relations and climate change.

“Cuba is changing,” said U.S. Rep. James McGovern (D-Mass.), referring to the inauguration of a new president on April 19. “Regrettably at this historic moment in Cuban history, U.S. engagement is limited.”

The delegation, led by Leahy, also included Sen. Gary Peters (D-Mich.), and Reps. Susan Davis (D-Cal.) and Kathy Castor (D-Fla.).
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