Currencies and exchange rates:
During the severe economic crisis caused by the collapse of the Soviet trading block in the early 1990s, the fully-monetised fiscal deficit ballooned and the value of the Cuban peso (CUP) relative to the US dollar on the black market plummeted, from around 7 CUPs to 1 dollar in 1990 to more than 120 to 1 in 1993. From 1993-95, the government introduced stabilising measures and a number of structural reforms. Among these were the legalisation of the holding of US dollars in 1993, followed by the creation of the ‘convertible peso’ (CUC), a new currency to circulate within the domestic economy as a US dollar equivalent. While the official rate of exchange between the CUP and CUC was 1:1, a legal second rate, known as the ‘Cadeca’ (Casas de Cambio) rate, was introduced for personal transactions. This rate was determined by supply and demand, and therefore successfully eliminated the black market. Stabilisation and reform resulted in the appreciation of the CUP, to CUP25:US$1 by the end of 1995. It fluctuated around that level for a decade.
In 2004, the US dollar was withdrawn from domestic circulation, leaving only two currencies in circulation within Cuba: the CUP and the CUC. The CUP can only be exchanged for CUCs, and since March 2005 the rate has been fixed, at CUP24:CUC1. The CUC can be exchanged for foreign currency within Cuba, but is not convertible outside the island.
The current system therefore consists of two currencies, with two exchange rates:
The value of the CUC is fixed at par with the US dollar. This valuation is broadly in line with a market rate, in terms of the pricing of imported goods in domestic state-owned CUC stores. However, the lack of flexibility means that it is unresponsive to demand fluctuations in competitive international markets. This is a particular difficulty for Cuba’s tourism industry.
The CUP has two values:
- the ‘official’ exchange rate, used by state entitites, of CUP1:CUC1; and
- the Cadeca’ rate, originally only available to households for personal transactions but now also used by the growing private sector, of CUP24:CUC1.
