Saturday, March 31, 2018

Why Cuba Has Two Currencies and Is Moving to Unify Them

Fri Mar 30, 2018 10:48 am (PDT) . Posted by:

"Walter Lippmann" walterlx

(Rumors about a quick ending of the dual currency system today
led the Cuban
National Bank to issue a formal denial. This issue been discussed
many times
in the Cuban media, going back many years, and including by Fidel
This linked item should be translated to English soon.)\
Currency Standardization in Cuba, Urgency and Complexities
Por Maria Julia Mayoral

Havana (Prensa Latina) Cuba has two currencies as legal tenders,
the peso (CUP) and the convertible peso (CUC), but according to
facts, none of them complies with the functions of money, thus
creating distortions in the national economy.

Although it is a harmful phenomenon, the dual exchange rate is
even worse. In the wholesale circuit (where companies operate),
there is parity between the CUP and the CUC, and between the
latter with the U.S. dollar, while in the retail sphere, the
exchange rate is 25 CUP per one CUC.

In both circuits, the existence of two currencies has led to the
segmentation of markets. In addition, within the retail network,
there is coexistence of products in pesos, with or without the
protection of state subsidies, and others in CUC, whose prices
include high value added taxes (VAT).

Add to this the limitations in the availability of foreign
currencies. The companies, for example, need to have a liquidity
certificate (CL, in Spanish), which is granted by the central
Government, so that they can buy foreign currencies with their
CUC to import products.

According to President Raul Castro, the elimination of the
currency and exchange duality by itself will not magically solve
all the problems accumulated in the Cuban economy.

However, he said, 'It is the most determining process to progress
in the update of the economic model due to the impact that it
will have on all spheres of the nation's economic and social

The head of State and Government assured before the Parliament
that the purpose is standardizing the monetary system and at the
same time 'overcoming the existing distortions in terms of
subsidies, prices and wholesale and retail tariffs and,
logically, in the pensions and salaries in the State sector of
the economy'.

For his part, Vice-President Marino Murillo informed that 13
subgroups made up of more than 200 people 'are working with all
intentionality on this issue', including meetings with
international experts.

Both dualities, the official noted, have effects 'on the entire
society and on the economy, and it is not just eliminating one
currency and setting an exchange rate: it has to do with the
formation of prices, it has to do with people's incomes, it has
to do with the purchasing power of the salary'.

From the technical viewpoint, economists agree, it would not be
difficult to standardize the currencies and exchange rates, the
difficulty lies on the political and social costs for Cuba's
socialist project, which focuses on achieving equality,
prosperity and sustainability.

Cuba's currency and exchange duality is nearly 25 years old, a
too long period, and as days go by, solutions will be more
complex, according to the researcher Hiram Marquetti Nodarse,
from the Center of Studies on Public Administration and a
professor at the University of Havana.

The academic recalled that after the demise of the Soviet Union
and the socialist camp in Eastern Europe, Cuba lost 73 percent of
its import capacity and the Gross Domestic Product (GDP) fell
34.8 percent in 1993.

The government of the United States saw that situation as a
one-in-a-lifetime opportunity to suffocate the Cuban Revolution
by stepping up the economic, financial and commercial blockade,
knowing that the Caribbean island would not have access to the
main international financial institutions either.

As revenues were seriously affected, the Government resorted to a
group of measures, including the liberalization of the
circulation of other currencies on the national territory in July
1993. That contributed to promoting tourism, boosting direct
foreign investments and facilitating a different connection with
the world economy, Marquetti noted.

According to the expert, it was an innovative decision that
involved the liberalization of seven foreign currencies: U.S.
dollar, French franc, Swiss franc, Japanese yen, pound sterling,
German mark and Spanish peseta. In addition, in the Latin
American context, the Mexican peso was granted an exchange

The decision also aimed to capture resources that could not be
received through the banking system, but through family
remittances, which were estimated at about 500 million dollars a
year at the time. In just five years, that figure exceeded
estimates, mainly due to the domestic market in foreign
currencies, Marquetti added.

Therefore, he summarized, the impact of liberalization was
positive in macroeconomic terms and contributed to building a
non-existing infrastructure, above all in the field of services,
by creating establishments to provide oil byproducts that at the
same time became outlets to sell food.

As a result, the national commercial network was updated to
develop the domestic market in hard currencies parallel to the
objective of boosting tourism.

From then on, innovative mechanisms were created for Cuban
economy, like the prerogative granted to the tourism sector to
finance productions for that sector and the domestic market in
hard currencies, thus generating a financial capacity that had
not existed until then, the expert pointed out.

In that context, a system of exchange houses (Cadeca) was
activated to facilitate people's access to the exchange of
foreign currencies for national currencies, and the CUC was
issued, whose existence is subject to eventual reforms.

According to Marquetti, the exchange and currency standardization
will not resolve the accumulated problems, but it would guarantee
accountable certainty in a medium term to make decisions in the
entrepreneurial and macroeconomic spheres.

In light of the current situation, it is a complex matter,
because the country is far from going through a period of
economic growth: the accumulated growth coefficient of the GDP
was 2 percent in five years and the public debt continued to
increase to finance budgetary deficits, he added.

The expert summarized that Cuba operates under conditions of
strong structural restrictions in terms of access to credits, its
capacity to back up the balance of trade deficit and the increase
in revenues by concept of exports of services.