Cuba with Two Currencies and Four Exchange Rates

January 28, 2016 |

by Fernando Ravsberg

HAVANA TIMES — One needn’t be an economist to imagine how complex the process of re-establishing a single currency monetary system is, but one also need not be an expert on the subject to understand the chaos that the existence of two currencies with four different exchange rates brings about.

Thus, when government economists declare that establishing a single currency and exchange rate “isn’t easy,” they are merely stating what all Cubans already know. What the nation as a whole and foreign investors based in Cuba are interested in is the when.

The disappearance of the Cuban Convertible Pesos (CUC) will not directly affect the purchasing power of average Cubans. The most it will do is offer a more transparent sense of how little they earn in comparison to the prices at State stores, a country where they earn 20 pesos a day and a one-liter bottle of oil costs 60.

Foreign investors find it very hard to deal with 2 currencies and 4 different exchange rates: Photo: Raquel Perez Diaz

It will also put into question the 240% markup applied to products (including basic ones), a “tax” that originally sought to redistribute wealth among those who earned hard currency and those who had no access to it.

The truth is that, for most Cubans, paying 60 pesos or 2.40 CUC is just as difficult. It’s the country’s macro-economy that’s irrational under the present system, to the point of becoming chaotic and leading to perverse levels of wastefulness in the country.

Exchange offices offer an exchange rate of 24 pesos to 1 CUC, Cuba’s convertible currency which has about the same value as the US dollar or the euro. In the State business sector, however, the official exchange rate is of 1 peso to 1 CUC, a fact that distorts economic reality.

I have previously mentioned the example of hotels, which take in millions of dollars and, despite this, end up being unprofitable because this 1 to 1 exchange rate makes it impossible for them to pay employee wages, supplies, water and electricity.

With this exchange rate, a company that imports mops at US $ 0.10 the unit and sells it at 0.80 CUC appears highly profitable on the surface. However, when the real exchange rate (of 24 to 1) is applied to this operation, it turns out this company is selling the product at a price three times less than cost.

For Cubans, store prices in pesos are just as high as those in CUC. Photo: Raquel Perez Diaz

Establishing a single currency system would make many deficit-saddled companies go bankrupt and lead to unemployment. A foreign businessman once told me it would be more profitable to send people home and pay them wages than to continue running these companies, which consume oil, electricity and water.

A Cuban government business person told me of yet another economic distortion produced by the country’s different exchange rates. He is forced to bring a technician from abroad to repair his equipment, at a cost of US $ 8,000, when a self-employed technician in Cuba would do the same job for 30,000 pesos (around US $ 1,500).

The problem is that Cuba’s self-employed can only charge in pesos, and the State applies the 1 to 1 exchange rate, meaning that the technician appears to be receiving US $ 30,000. This fictitious exchange rate forces State companies to pay 7 times more for a European technician, who charges in hard currency.

In addition, production has to stop for a good while because, in order to hire a foreigner, the technician needs a work visa, a migratory document that Cuba takes around a month to issue.

Exchange locales offer rates closer to reality, 24 Cuban pesos to 1 CUC. Photo: Raquel Perez Diaz

If the company official skirts these rules and looks for a quicker and cheaper solution, he commits a serious crime that could cost him his job. In this topsy-turvy world, the “smart move” is to follow orders without thinking about the terrible consequences they can have for the nation.

Just imagine the look on the foreign investor’s face when they are told they have to deal with 4 different exchange rates, the official one at exchange locales, another 24 times smaller between State companies, plus the one established for wages in the Mariel development area and the one operative in farmer-hotel transactions.

The economists say that reestablishing a one currency system “isn’t easy,” and I do not have the knowledge needed to debate that. However, I doubt that the consequences would be more serious and costly for the country’s economy than those of the current two currency system.

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  • Moses Patterson

    To be sure, dropping the CUC is EASY. It’s just not convenient. The Castros are afraid of the sticker shock Cubans will experience when a 1,500 CUC flat screen TV that sells for $300 in Miami suddenly shows a sell price of 36,000 CUP. If the average Cuban earns less than 600 pesos a month, they will realize that they have to work 5 years to buy a new TV. Oh yea, that’s as long as they don’t eat for those 5 years.

    • There is no potential sticker shock. Actually if you go into a TRD today, using your 1,500 CUC example, you will find the TV has two prices listed: 1,500 CUC and 37,500 CUP. This has been that way for longer than a year.

      Secondly, the exchange rate is 25:1, not 24:1. If you go into a CADECA with CUP, it take take 25 of them to buy a CUC. The 24:1 rate only applies if you take CUC into the bank and want to exchange for CUP. (but you can get 25 if you have a friend that works at the TRD or someplace similar)

      Thirdly, the TV that sell for $300 in Miami is not 1,500 CUC but around 750 CUC or 18,750 CUP. Still high but not to the extent you refer to.

      Certainly the Cuban whose only source of funds is a 600 CUP a month salary is not going to buy a flat screen TV. But many Cubans have other sources of income. My next door neighbor makes about 350 CUP a month as manager of the bus station but is always selling something on the side. He recently sold his 32″ flat screen and bought a new 42″ one.

      • Moses Patterson

        You make an important point even if I disagree with you about relative costs. Your next door neighbor, by your comment, makes about $16 per month. Yet he just bought a new 42″ TV? That’s a lot of “on the side” selling. Let’s say the new TV costs even $1000, that’s a great part-time job! It’s probably illegal or involves a lot illegal something for sale. Is that what the Castro revolution has accomplished? Converting bus station managers into black market masters. Is that the New Man?

  • N.J. Marti

    The Cuban’s know that the old model does not work. Some hard heads keep fighting the future. Soviet Style Socialism has no future. Just a matter of time before pragmatism wins out.

    • maxxweber

      Don’t tell that to Bernie Sanders.

      • Bonnie

        I believe Bernie is a Democratic Socialist

        not a Soviet Style Socialist.

  • Gordon Robinson

    I am leaving Vancouver today for my 90th research trip to Cuba. Michel and Angelica Robinson will join me in Varadero. Their home is in Holguin. First nights – Iberostar Varadero – then to the Melia Sol Palmers. I should have a good report on my return.

    • Moses Patterson

      The 90th research trip to Cuba? Quite impressive! What, pray tell, does one one need 90 trips to Cuba to do research on? Is this institutionally-funded research or a personal quest?