Translation from the original Spanish by Ariana Hernandez-Reguant
The process of economic and social reform that began in Cuba in 2007, however slowly and haltingly, was part of an explicit plan. Most of the policy changes were outlined in the Guiding Document of the Sixth Communist Party Congress (2011), and have subsequently been inscribed within a legal framework. Most important among these are the calls to increase foreign investment; to improve the efficiency of the production process; and to guarantee the sustainability of the welfare system that has distinguished Cuba for the past half century. None of these goals will be fully attained, however, until the problem of the dual currency system, still in place today, is resolved.
The main factor giving rise to a partial dollarization of the Cuban economy in the early 1990s was the decline in the Cuban peso’s purchasing power, a result of the fall of the Soviet bloc, that led to the institutionalization of a dual currency system. Because the system was originally conceived as a temporary measure, keeping it in place ever since has required modifications, such as the creation of a Cuban convertible peso (CUC), used in the process of de-dollarization between 2003 and 2004 to effectively replace the U.S. dollar. The CUC issuance was backed up by foreign currency, in such a way that for every one CUC issued there was one dollar in the reserve. Meanwhile, the Cuban peso (CUP) continued to circulate.
The dual currency system operates today with the following features:
- the coexistence of two different exchange rates: the CADECA (the state money exchange counters), which offers the general public an exchange rate of 24 CUP = 1 CUC; and the so-called official exchange rate, which stands at 1:1 for legal persons (that is, companies);
- the distortion of this latter rate, which is highly over-valued given the greater number of Cuban pesos (CUP) in circulation, and thus results in low convertibility;
- the huge divide between the networks in which the general public exchanges money and those open to corporations;
- the parallel fiscal systems, which result in revenues and expenditures not reflected in the state budget.
The most harmful of these traits is the distorted rate set for official exchanges between CUP and CUP (the 1:1) because it disconnects the financial flow between both currencies at many levels, from the financial sector, to corporations, to the state budget. As a result, financial and economic indicators are compromised. Moreover, this exchange rate results in a distortion of costs, and therefore of prices; so much so that prices and costs in CUC must be accounted for and analyzed independently. This strategy may facilitate currency control, to some extent, but it does not allow a holistic assessment of the policies pertaining to both national production and imported resources.
We are now at a point in which the country’s leading authorities on economic policy are aware of the urgent need to solve this problem, but at the same time recognize how complex this process will be. After the October 2013 announcement by the monetary authorities of a road map leading to currency unification, it seemed that policies to that end would be implemented quickly. The announcement foregrounded a two-step approach: first the elimination of CUC circulation, and then a consolidation of the exchange rate. This latter step would be extremely contentious, as it would probably imply devaluing the exchange rate at the corporate level, leading to inflation for ordinary people
Another interesting point included in the press release was the role of the Cuban Central Bank in backing up the current CUC exchange rate for natural persons (i.e. individuals). This guarantee sought to appease people’s anxieties and avoid a banking panic.
Until now there seems to have been little progress toward even the first phase of the monetary union. In official declarations, both President Raúl Castro and Marino Murillo, Minister of the Economy and a leading proponent of economic reform, claim that the government is working hard on this issue. Yet, actual measures have been few. The most important ones are:
- the option to use Cuban pesos (CUP) in state-owned retail stores that used to only accept CUCs;
- ministerial resolutions regarding the revaluation of active and passive CUC holdings on Day Zero (as the day of the CUC’s elimination is referred to);
- restructuring of both wholesale and retail prices;
- the issuance of higher denomination CUP bills in order to facilitate financial transactions;
- the progressive implementation of better adjusted exchange rates for state companies, along with a close monitoring of their effects.
There is no doubt that all scenarios for the near future are extremely complicated. Nevertheless, maintaining the present monetary situation is even more difficult and inefficient. By acting quickly on a currency and exchange unification, the macroeconomic landscape should become a lot more transparent, and the economic incentives generated will be capable of mobilizing and activating economic growth.