By: Staff Writer
January 5, 2021
Cuba ended its dual currency economy on January 1, but a Cuban trade expert said that there will be “substantial pain” brought on the country as a result of it and a Floridian academic said the Cuban government seemed “confused” on the issue.
John S. Kavulich, president of the U.S.-Cuba Trade and Economic Council, Inc. in New York, said about the end of Cuba’s dual currency exchange on January 1: “The general rule for a government seeking to implement what the Republic of Cuba is now doing- await a strong economy, robust foreign exchange reserves, and have low levels of unemployment.
Mr Kavulich added: “The Republic of Cuba has commenced the currency reunification during a pandemic, when tourism revenues have collapsed, when it has no foreign exchange reserves, when its exports have decreased and imports are challenging due to a lack of foreign exchange, its internal bureaucracy stifles economic and commercial efficiency, and the United States continues to implement sanctions upon it and upon Venezuela, which provides oil products to the Republic of Cuba.”
“There will be substantial short-term to medium-term pain for the 11.3 million citizens of the country,” said Mr Kavulich.
U.S.-Cuba Trade and Economic Council
There was two currencies, both called peso. One was called the “Cuban peso” (in Spanish moneda nacional, ISO 4217 code: CUP) and the other is the Cuban convertible peso (ISO 4217 code: CUC, often called “dollar” in the spoken language), both currencies are subdivided into 100 centavos.
On January 1, Cuba eliminated the CUC and is keeping the CUP. Cuba set up the dual-currency system in 1994, when the country was reeling from the loss of subsidies from the Soviet Union, on which it had relied during the Cold War. Alongside the Cuban peso it created the CUC, a convertible currency pegged to the dollar at one to one in hopes that this would prevent Cubans from dumping pesos in favour of dollars. Importers, which are state-owned, use CUC to obtain dollars on favourable terms, which makes imports cheap. Most Cubans, who work for the state, are paid in pesos. The change has taken effect on January 1 and the CUC will be removed totally from circulation in June, 2021.
Sounding some optimism however, Mr Kavulich said: “The currency unification is long overdue and once completed will enhance the country for its citizens and will leave the country more attractive for direct foreign investment.”
Cem Karayalcin, chairman of the department of economics at Florida International University, on the other hand said: “Well, the first thing to point out is that they seem to be quite confused. The ‘dollarisation’ they are talking about appears to be the unification of a dual fixed exchange currency system (meaning: instead of two fixed exchange rates, Cuba is moving to one unified fixed exchange).”
the department of economics at FIU
He added: “Both systems are reported to have the same exchange rate of $1 to 24 Cuban pesos, so it is hard to see why there would be inflation by moving to a unified exchange rate.”
When a visitor goes to Cuba now they only have the CUP to contend with and no more hassling with vendors over the conversion of the CUC and how much it costs.
They can use US dollars, Canadian dollars, and Euros only at airports in Cuba. Actually, shops and restaurants at Cuban airports only accept foreign currencies. As reported by Al Jazeera, earlier this year, Cuba reallowed “dollar stores,” which let people buy goods like food, toiletries and electronics with bank cards loaded with US dollars or other foreign currency. That, in turn, let the government snap up those dollars to help deal with its liquidity crisis.
The use of US dollar had previously been banned in 2004 when the government created the CUC. The CUC has historically been used for state business and buying goods from abroad, but it can’t be taken out of the country. It is pegged 1:1 to the dollar but exchanged with the public at a rate of 24 to buy and 25 to sell.
For the average Cuban, one CUC is worth 25 times more than one CUP, and not everyone can get their hands on them. CUCs are used in businesses that involve foreign money — such as tourism or buying goods imported from abroad.
Mr Karayalcin said about the possibility of the Cuban central bank managing monetary policy moving forward and the convertibility of the currency: “There are two possibilities: If Cuba restricts the convertibility of its currency, its central bank can carry out independent monetary policy, and if they are not disciplined, they may print too much money, which will lead to inflation. If it allows full convertibility, its central bank will lose the ability to conduct independent monetary policy, but thereby avoid inflation as a fixed exchange rate with full convertibility will make it impossible to print money at will.”
Most Cubans who don’t work in the tourism sector are still paid in CUPs, and this dual system has created a lot of disparities, which is one reason why CUCs are being scrapped.
The Cuban government also announced it would increase government workers’ salaries and pensions to adjust for inflation. But private-sector workers won’t have those protections and will be able to afford less when paying with their new Cuban pesos than with their convertible ones.
Mr Karayalcin said however, “Regarding the ease with which they can have a unified fixed exchange rate system, it is important to note that almost every country in the world was on such a system for decades before the 1970’s and most countries in the developing world had this system up until very recently. It does not require much to do it.”
In announcing the currency unification plan, the Cuban government said it would publish the exchange rate for the Cuban peso daily on the Central Bank’s website, meaning that it could potentially fluctuate rather than stay at its fixed rate. That’s also new for the island.
In a speech earlier this month, Cuban President Miguel Diaz-Canel said the reforms were necessary “to go ahead with the transformations that we need to update our economic and social model”, Bloomberg News reported.