Cuba’s Raúl Castro takes a big chance on currency reform

April 24, 2014

HAVANA, Cuba – Cuba is making a big gamble as it launches its most ambitious economic reform yet, the unification of its two currencies, which analysts say could bring enormous benefits but also danger.

Cuba’s dual monetary system, in place for nearly 20 years, has been a bane to economic planners and a source of growing inequality between Cubans with access to dollars and those without.

On Tuesday, the island’s communist government announced it will phase out the system, as part of President Raúl Castro’s gradual attempt to overhaul the country’s Soviet-style economy.

“This is a – possibly the – big ticket item of the reforms. It has long been considered in the ‘too difficult’ box of the Cuban economy,” said Paul Webster, a former British ambassador to Havana and now a professor at Boston University.

Webster said the system is “so frustrating and so absurd for most Cubans that Castro knows it is essential that he must invest his personal authority as a Castro in trying to concoct a more rational system.”

Under the current system, Cubans’ with dollars can buy convertible pesos (CUC) at a one for one rate and use them to buy scarce goods in well-stocked special state stores.

Cubans’ salaries, however, are paid in non-convertible pesos (CUP), which are valued at 24 to a convertible peso and do not go far in a country where doctors, for example, are paid $20 a month.

“The unification of the exchange rate would be an extraordinarily bold reform, which could immensely improve the business climate, sending more rational price signals to investors, foreign and domestic, potentially boosting profitability and incentivizing exports,” said Richard Feinberg, a Brookings Institution fellow and former White House adviser during the Clinton administration.

“It would also signal to the international community that Cuba is accelerating its march forward toward a more market-friendly and open economy,” he told AFP.

A long way to go

But the road ahead will be long and difficult.

“The implementation of this decision is likely to be slow and complicated, much like the other reform measures in Cuba recently,” said Michael Shifter, president of the Inter-American Dialogue, a Washington think tank.

In announcing the decision to go to a unified currency, the Cuban government was careful not to lay out a timetable but said there would be no “shock therapy.”

The Gordian knot is that the state and state companies do their bookkeeping using the convertible peso’s one-to-one rate.

“This distortion of economic measures falsifies all decisions taken by companies and all centralized planning,” said Pavel Vidal, a Cuban economist at Colombia’s Universidad Javeriana.

Vidal, however, said that the process of reconciling the exchange rates of the two currencies has already begun on an experimental basis.

A whole series of transactions are made at varying exchange rates, he said. For example, he said, farmers sell agricultural supplies directly to hotels at a rate of 10 CUPs to one CUC, instead of 24 to 1.

The sugar industry also has begun to make transactions at rates different from the one CUC to one dollar rate used by state companies. It exports at 12 to 1, imports at 7 to 1, and imports fuel at a 4 to 1 rate, Vidal said, citing unofficial information.

The reforms, which give some state enterprises greater autonomy, also forsee converting all their financial statements to convertible pesos at variable interest rates.

“No official information is available with respect to it,” Vidal said.

Extricating the country from this monetary quagmire is an enormous political challenge for the regime.

Said Webster: “It will show whether the economic system devised by Fidel Castro is in major ways going to be dismantled by his brother Raúl before 2018.” 

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