The Cuban government has announced plans to eliminate gradually its dual currency system, finally moving to address the most fundamental barrier to proper economic reform in the country. In the short-term, currency reform will create winners and losers. The official statement sought to reassure Cubans that their savings will be respected. However, over the medium-to-long term successful reform should generate benefits for all Cubans. If managed properly, it could also support the ongoing rule of the ruling Partido Comunista de Cuba (PCC) in a country that is far better off than it is today.
As the Cuba specialist Dr. Emily Morris and the economist Andrew Hutchings pointed out in the recent LatinNews White Paper on Currency Reform in Cuba (September 2013), 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 the 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 system needs to be stable and robust, and to be seen as such.
The Havana government has long been aware that the dual currency system could not be sustained indefinitely. It produces massive distortions to incentives to work and to the labour, goods and capital markets; and it severely damages Cuba’s international competitiveness. To give him his due, in 2008 President Raúl Castro said it would be addressed by 2013-2014. The preparations for the 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 adjustment. The government now appears to be working on a timescale of about 18 months for the actual transition phase. There were no details in the official Granma statement, save to say that the first phase of ‘monetary and exchange unification’ would be in the business sector, but it is ordinary citizens that are most fearful about the impact.
Winners and Losers
As Dr. Morris outlines, the impact on prices of the revaluation of the CUP relative to the CUC will be mixed, with some rising and others falling. In Cuban households, there will be winners and losers. For CUP-income households, she calculates that the impact would range from neutral to positive. For those at the lowest income level, whose entire budget is spent on basic goods at fixed prices, an exchange rate appreciation would have no effect on the cost of living, but for CUP-income households with income to spare, exchange rate appreciation would reduce the cost of living. That is, it would bring an immediate improvement in real income and living standards. This will enhance the effectiveness of wage incentives, she notes.
For CUC households, exchange rate appreciation will result in a rise in the cost of living, that is, a fall in real incomes, as the prices of CUP purchases in CUC terms will rise by the amount of the appreciation. In effect, she argues that the revaluation will diminish the labour market distortion that has been caused by the undervaluation of the CUP. This will reduce income inequality, because Cuba’s highest-income households are those with CUC incomes. However, households that have become dependent on jobs in the (informal or legal) non-state sectors that pay very low CUC-denominated-wages would suffer real hardship.
The number of people in this latter category will continue to grow as long as the exchange rate adjustment is postponed, so the greater the delay in making the change, the larger the problem of poverty resulting from it will be. Dr. Morris also stresses that the restoration of a single set of prices will make it necessary, as well as possible, to establish a meaningful minimum wage for the non-state sector, in line with the minimum wage in the state sector.
- A peg the logical solution?
Once unification is achieved, Cuba’s monetary authorities will need to choose a mechanism for maintaining a stable but flexible exchange rate. A currency peg system appears a logical solution. Andrew Hutchings suggests that Singapore would 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.
White paper:Cuba's dual currency system - the urgent need for reform
For an in-depth discussion of this crucial topic see our latest white paper: Cuba's dual currency system - the urgent need for reform. Subscribers to our Latin American Special Reports may find the paper in our Special Report archive as a bonus paper. Not already a subscriber to Latin American Special Reports? Sign up for a full subscription on our Subscribe page, or CLICK HERE TO PURCHASE THIS IMPORTANT WHAITE PAPER FOR JUST $200 / £130 (discounts available for non-profit organisations). |
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