Monetary Unification Must Still Wait in Cuba
HAVANA TIMES – Cuban President Raul Castro said on Sunday that studies continue on the removal of the dual currency monetary system prevailing on the island, Prensa Latina reported. Castro make the statement in his closing speech of a parliament session.
“This effort will require careful preparation and execution, both in the objective and subjective”, said the president, adding that he hopes to unify the two currencies “in an orderly and comprehensive manner, to make possible far-reaching changes.”
Most citizens of the island receive low wages in regular Cuban pesos, with much less value (1:24) than the CUC, the currency with which it sells most of the products in the state run stores.
Castro has been announcing his goal of monetary unification since coming to power, without achieving it thus far.
Hi Griffin,
Since this article was published, Cuba has undertaken a piecemeal approach to eliminating the two-currency system, and a number of decrees published this year make clear that the CUC will be eliminated and provide subtle hints of preparations for currency unification. We still don’t know when currency unification will take place (Dia Cero).
I am not so optimistic. I see the economic reforms, including the expansion of the FAR owned holding companies, together with the lack of political reforms, as a sign of a more ominous transformation. The last vestiges of “socialism” will fade away to be replaced with a post-modern Fascist regime. State-owned monopolies control the economy. The PCC will continue to control the political process, and the military in charge of all the key positions of power.
As Griffin has commented, waiting to do so only worsens the effect. The good news is that as Venezuela also continues to suffer from a falling currency as well, Cuba has a buddy to commiserate with. They can hold hands as they circle the drain.
“cancel the CUC. Everything that costs 10 cuc now will suddenly cost 240 cup”
They could do that easily. That would really just be status quo, no actual change. Tourists, etc, would still exchange their currency for the CUP, so the Cuban gov’t would still have the same incoming resources.
The benefit would be in a simpler system to administer, much simpler commerce for Cubans, and a whole lot less confusion for tourists. Peso stores vs Dollar stores would be eliminated, and there’s be a lot less stigmatization over which type of currency you have access to.
Griffin, I think the Castros understand the inevitability of the their consummate failure. As a result, I believe we are witness to the last years of the Castro reign being spent on wealth consolidation intended to insure at least that the next two generations of Castro progeny and their oligarchical elite will be financially secured. I also believe there is an ongoing attempt to rewrite the history of the early revolution by sanitizing accounts and allowing those who would disagree to leave the island. Just prior to the end of Raul’s term in 2018, we may see meaningful political reforms take place. I believe the current strategy is simply to hold on to power until the last possible moment.
It will take more than eliminating the CUC to make the CUP a real currency. They Cuban government must allow the CUP to be valued on international currency markets, if it is to have any true value. As it stands today, neither the CUP nor the CUC are allowed to float.
But when the CUP is floated, as you pointed out, the value will crash because the gov’t has sustained an artificially high exchange rate. Cuba’s negative balance of trade is so large relative to the GNP, that there will be massive pressure further devaluing the CUP.
The regime is putting off this reckoning in the hope that some miracle will happen to bail them out of this mess. Of course, the longer they put it off, the worse the sticker shock will be. Oh well, by then the two idiots who stuck Cuba with this mess won’t be around to help clean it up.
With due respect, your analysis is overblown and wrong. Eliminating the CUC is doable immediately as it is a currency based on the world standard US dollar. As a result, it relates to other currencies as the dollar relates to other currencies. When the dollar strengthens, the CUC rises in its value and vice versa. The CUP is currently maintained at a fixed 24:1 value against the CUC. Therefore, once the CUC is eliminated, the CUP will initially have the same relationship with other currencies similar to the CUC but by a factor of 24. Herein lies the problem: immediately thereafter, the CUP will float against other currencies directly in accordance with its internationally-perceived value. The Castros will be forced to either make foreign exchange with a near valueless CUP or trade their national currency for US dollars or Euros in order to purchase foreign goods. In both cases, It will not likely enjoy an exchange rate of 24:1 or 29:1 (dollars or euros respectively). The Castros will be further compelled to attract foreign currency. The empty shelves you fear will come about because of a lack of foreign exchange. The hyperinflation will arise because those Cubans who receive remittances in dollars or euros or those workers who have direct access to these currencies will be able to drive up the prices for goods and services on the island. Cubans who hold only the national currency will see the cost of cooking oil, deodorant and dish soap soar as limited supplies are chased by the weakening CUP. This is sticker shock. There is nothing new to study here and no way to avoid it.
An interesting report on proposed economic reforms in Cuba:
“Cuba to begin deregulating state companies in 2014”
The reforms will affect big state enterprises like nickel producer Cubaniquel and oil company Cubapetroleo and entail changes like allowing the firms to retain half of their profits for investment and wage increases and giving managers more authority. The plan also threatens nonprofitable concerns with closure if they fail to turn themselves around.
“Murillo’s empowerment of state-run companies is a milestone on the road toward a new Cuban model of state capitalism, where senior managers of government-owned firms become market-driven entrepreneurs,” said Richard Feinberg of the Washington-based Brookings Institution and an expert on Cuba’s economy.
“But only time will tell whether the government is willing to truly submit the big firms to market discipline – to let the inefficient ones go bankrupt,” he said.
http://business.financialpost.com/2013/07/08/cuba-deregulating-state-companies/
The issue is not as simple as it looks. The ghost of the hyperinflation is one of the main reasons that make the currency “unification” a tough task. Ask any Cuban that lived there early 90’s. Cuban wholesale and retail markets are full of imported goods that are paid with hard currency. How are you going to recoup these costs? If the government removes the CUP and start paying salaries in CUC (as per one-to-one), you will soon see the shelves of every single “shopping” empty and the country will face similar hyperinflation (or worse) than two decades ago, when everybody had loads of cash but nothing to buy. There is no easy answer but to generate goods and services that can be exported and can generate enough hard currency to paid for imports, so the trade balance at least is neutral (would be desirable to be cash positive, though). Another alternative is to generate savings from producing certain products in the country and not importing them (such as food) or even export them. Unfortunately to do this, you still need to import consumables and supplies and they don’t come cheap. If the industrial and agriculture base would be efficient, Cuban companies could take advantage of their relatively cheaper labour costs to produce more competitive products and gradually bring the salaries to similar levels to neighbour countries in the area. But sadly, this is not the case. Industrial and agricultural sectors have suffered a progressive divestment and many plants are obsolete and very inefficient (that was nothing new under the sun but became more apparent after 1990). Alternative emerging sectors (such as biotechnology) have generated a lot of expectations but despite some interesting results, they have underperform in terms of financial delivery. Tourism has been the star guest but I have the impression that has been stagnant in the last few years and it is also highly sensitive to downturns. So, Raul have been a bit more aggressive that his brother attracting foreign investors that can bring highly-needed cash and investments to the country, as well as updating the industrial and agricultural capabilities . He has also realised that there is lot of non-productive overheads that need to be cut and the less traumatic solution is to open the gate (although limited) to small business. Will the small private sector be export oriented? Unlikely under the current rules. But it is a safety valve and also will generate a healthy revenue through taxes. Personally, and despite a lot of wishing-well, I don’t see the solution around the corner. Last but not least, it is also the issue of currency exchange rates, which is again, another painful issue. The Central Bank has different rates for individuals and companies. Because accounting reports are set in one currency, any transaction in foreign currency has to be brought to CUP. Strange as it is, for these transactions USD 1 equals to CUC 1. This absurdity distort the companies accounting information. So, as you can see, there is a lot of complex work that has to be done to fix this mess…
The longer they wait, the more damage the dual currency system will do the the Cuban economy.
The sudden sticker shock the people will experience is one thing. The bigger shock will be to all those state run enterprises that seem to be profitable only because they take in dollars & cucs. When they eliminate the cuc and everybody has to use the peso, these enterprises will suddenly discover how inefficient and unprofitable they really are.
That’s the issue holding up plans for currency unification.
Yes, the economic genius who thought up the dual currency scheme really painted the country into a corner this time.
What a load of crap! Two currencies? Fine, cancel the CUC. Everything that costs 10 cuc now will suddenly cost 240 cup. The only reason the cuc even exists is because Cuba invented a currency to exchange or convert for the US dollar. Raul is afraid, and well he should be, that in eliminating the cuc, Cubans will further face the reality of how really poor they are. Suddenly, they will see how low their salaries are and how truly weak their economy is. News flash Raulito: Cubans already know this. Right now Cubans realize they have to work three months just to buy a pair of Converse All-Star athletic shoes and a 40 inch LCD TV means at least two years of monthly paychecks. They already have a clear idea how little buying power they have. There is nothing to study.