Cuba begins currency reform

Cuba begins currency reform



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.



Challenges



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.



For more analysis, click here.



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.



Source: "Cuba begins currency reform « Cuba Standard, your best source

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