Cuba's currency

Cuba's currency

Double trouble

Oct 23rd 2013, 13:23 by Economist.com



"ONE country, two currencies" is one of Cuba's more peculiar

idiosyncrasies. The Cuban peso (CUP) and the Cuban convertible peso

(CUC) are both legal tender on the island, though neither is

exchangeable in foreign markets. The CUC is pegged to the dollar and

worth 25 times as much as the CUP. But whereas most Cubans are paid in

CUP, nearly all consumer goods are priced in CUC. The system, which

highlights divisions between those with access to hard currency and

those without, has proved unpopular. On October 22nd state media

published an official announcement that it is finally going to be

scrapped. Cuba's Council of Ministers, it said, had approved a timetable

for implementing "measures that will lead to monetary and exchange

unification".



Raúl Castro had promised to tackle the issue on taking over as President

from his brother Fidel in 2008. The unusual scheme has been in place

since the collapse of the Soviet Union. In 1993, after decades of

benefiting from generous trade arrangements with the Eastern bloc, Cuba

found itself desperately short of hard currency. With few other options,

Fidel made the momentous decision to legalise the American dollar

(possession of which had previously been punishable by prison). Dollar

stores mushroomed to capture the money flowing in from newly welcomed

tourists and Cubans living abroad. Meanwhile, all Cuban state workers

were still paid a pittance (less than $20-worth a month) in the old

Cuban peso.



Initially the dollar stores sold only "luxuries", such as perfumes and

fancy kitchen utensils. But the Cuban government increasingly took to

pricing anything from toothbrushes to cooking oil in dollars. In 2004

the greenback was officially removed from circulation, and replaced by

the convertible peso. For Cuban shoppers this amounted to but a name change.



Other countries have managed to unify twin exchange rates in their

economies (most notably China when it devalued the yuan in 1994). But

unravelling twin currencies with such diverging values will be trickier.

That is perhaps why details of the timetable have not been made public,

as one Havana-based businessman wryly notes. The transition is in any

case likely to begin cautiously, with selected state enterprises being

allowed to trade using a variety of hypothetical exchange rates. Some

shops are also expected to start accepting payments in either CUCs or

CUPs (at the current real rate of 25 CUPs to one CUC).



The government has declared that the transition will not hurt holders of

either currency. Cubans, though, are understandably wary. Any increase

in the value of the unified peso would increase their spending power.

This could stoke inflation and lead to widespread shortages. The

concomitant fall in the value of the CUC, meanwhile, would be fiercely

resisted by those with savings in the harder currency.



Unifying the currencies would also end a bizarre anomaly in Cuban

accounting, whereby state companies pretend in their balance sheets and

domestic trading books that one CUP equals one CUC. The practice has

prevented CUP inflation. But it has made imports seem artificially cheap

and exports unprofitable. It also obfuscated inefficiencies that plague

Cuba's predominantly state-owned businesses. Ending the charade could

have dire consequences for many firms.



Over the past twelve months rumours that unification is being seriously

considered have led to an appreciable weakening of the CUC. In Havana's

main tourist hotels bank clerks offer to buy dollars, off book, at above

market rates. An illegal network of currency traders, which almost

disappeared when the dollar was legalised in 1994, is re-emerging.

Unpicking the bizarre system is a good idea. Cubans will be hoping that

the island's authorities can implement it better than they have socialism.



Source: Cuba's currency: Double trouble | The Economist -

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