In early July 2013, Marino Murillo, Cuba's economic tsar and architect of its economic policy ‘updating’, addressed an invited delegation of international journalists and academics about the direction of the economic reforms being undertaken by the government led by President Raúl Castro. Among much else, Murillo confirmed that the government is looking to unify Cuba's two currencies.
In this Latin American White Paper, Dr. Emily Morris and Andrew Hutchings examine the current economic and political situation in Cuba and put forth proposals for currency reform in the context of the Cuban government’s tentative moves to address this key issue, often identified as the ‘elephant in the room’ for Cuban economic policymakers.
Summary
- The absence of proper money is the most fundamental weakness of Cuba's economy. At present neither the convertible peso (CUC) nor the national peso (CUP) serve as a wholly satisfactory measure of value. Neither do they serve as a medium of exchange, nor as a unit of account. Reform of Cuba's dual currency system will require much more than a devaluation of the CUC and a revaluation of the CUP, so that they are notionally of equal value. Whatever replaces the dual currency system needs to be stable and robust, and to be seen as such.
- A currency peg system administered by a formally constituted monetary board - similar to that which has worked well in Hong Kong since 1983 - appears to be a logical alternative. We argue that Singapore would also stand out as a country where a modified currency peg has contributed usefully to very strong economic performance and where the government has ensured that the gains are very widely (if not totally evenly) spread across the population.
- In the short-term, currency reform will create winners and losers among Cuban households. However, over the medium-to-long term successful reform should generate tremendous benefits for all Cubans. If managed properly, it could support the ongoing rule of the ruling Partido Comunista de Cuba (PCC) within a country that is far richer than it is today.
Introduction
Cuba’s dual currency system, which uses the Cuban peso (CUP) and the ‘Convertible peso’ (CUC), cannot be sustained indefinitely. It produces massive distortions to incentives to work and the labour, goods and capital markets, and severely damages Cuba’s international competitiveness. Preparations for currency adjustment to date have taken place at a gradual pace, with policy aimed at steadily increasing the use of the CUP by expanding the availability of goods and services in CUP markets, in order to create the conditions for eventual currency unification. This approach aims to minimise the disruptive shock of the necessary adjustment, but the lack of urgency suggests that the costs of further delay are being underestimated relative to the risks of a swift adjustment. Analysis of the relative costs and benefits of more rapid exchange rate unification suggest that it should be the main priority for economic adjustment now, ahead of further liberalisation.
Once unification has been achieved, the authorities will face a further challenge: how to manage the new currency to adequately perform the functions of money. Of the choices available to Cuba, a currency peg, run by a currency board, appears to be the most logical solution. However, this new currency would need to be underpinned by substantial reserves. In order to raise the necessary reserves, one possibility would be a bond issue. To understand the significance of such a move, and its potential institutional implications, it is useful to look at how other countries have managed their currencies. In particular, Singapore provides an interesting model for comparison.
