Cuba’s currency conundrum

These are changing times for Cuba. Yet while much of the world focuses on its new relationship with the USA, a separate change that could prove to be more challenging and cumbersome is also taking place.

These are changing times for Cuba. Yet while much of the world focuses on its new relationship with the USA, a separate change that could prove to be more challenging and cumbersome is also taking place.

You see the country currently has two currencies, and in 2012 President Raúl Castro announced a four-year plan to unify them. So we are now entering the final straight towards the so far unspecified date of unification, which Cubans call día cero, ‘day zero’.

In theory, unifying both the Cuban peso, the currency used by most, and the convertible peso (CUP) — a dollar substitute used in tourism, for remittances and in the private sector and is worth about US$1 — shouldn't be too troublesome.

It would be relatively easy for most Cubans to scrap the CUC and conduct all transactions in pesos. Already many goods can be bought with either currency. The exchange rate for the peso is 24 per CUC, a level that has changed little since the latter was created in 1994.

The snag, however, is that there is a parallel exchange rate, mostly hidden from the public, one used in accounting by state-owned firms and foreign joint ventures. It is one peso per CUC (or dollar). The massively overvalued rate has been in place since the 1980s, when Cuba was subsidised by the Soviet Union.

It creates huge distortions in the economy, allowing importers to buy a dollar’s-worth of goods for one peso, something that drains foreign exchange from the country.

If the overvalued rate was cut to the lower one, it would be akin to a whopping 96 per cent devaluation. This could bankrupt many state-owned firms, whose costs have been accounted for at the overvalued rate.

For most learned observers, considering the dynamics at play, joining the currencies at the lower rate of 24 to 1 would be an economic catastrophe. Caution is being advised.

And so far, that's how the Cuban government is playing it. It has started with hotels and the sugar and biotech industries. Though their new exchange rates are far from uniform, the most common is 10 to 1, which some think may be the target rate for merging. But even if the whole economy were to follow that, it would still represent a 90 per cent devaluation for most.

At present, Cuba won't be getting any olive branch of support from the United States-dominated International Monetary Fund or World Bank. But there is hope in some quarters that a healthier relationship with the US will generate enough trade and financial flows to support the new exchange rate.

For now, though, it's very much a case of 'steady as she goes'. It's best not to rush some changes.

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