Analysis: Cuba’s currency unification
By Domingo Amuchastegui
Cuba’s reforms and changes, aiming at a complete redesign of its rigid,
state-controlled socialist experience, has come to a point of no return.
There’s no turning back, and the Achilles Heel of this present stage is
the effort to put an end to the two-tier currency system, with all its
distortions in finance, accounting, incentives, productivity, and social
Although the Party’s Guidelines (Lineamientos) announced currency
unification in 2011, it was only in October 2013 that the government
disclosed a timeline, without details or specific dates. A Granma
article on Oct. 22 was clear: “It is imperative to guarantee the
re-establishment of the Cuban pesos’s value and its role as currency, as
a unit of accounting, means of payment, and of savings. Since then, a
debate has ensued among academics and observers over what analyst David
Brunat has called “the most sensitive subject Cuban lawmakers are to
face in the economic sector.”
Any discussion must consider two contexts.
One is the current state of the Cuban economy and the legacy of the past
20 years of coping with the downfall of Soviet-style socialism. A
partial recovery has taken place, but GDP growth is still less than 3%,
well below the 5-7% growth generally deemed necessary. To be sure,
despite ample criticism of this fact, one conclusion remains valid: The
government decided to distribute the cost of the crisis among state
employees, instead of “sending thousands of families to absolute
poverty,” as economists Pavel Vidal and Omar Everleny Pérez Villanueva
put it in a Brookings Institution-sponsored conference in December.
A few structural issues that have not been dealt with deserve special
•There is a humongous problem with nearly 3,000 state companies,
representing two-thirds of the economy and some 2 million workers: They
were not profitable in 1960s, they were not profitable in the 1980s, and
they are not profitable today. The government continues to subsidize
their activities, resulting in damage to budgets, salaries, output, and GDP.
•These industry and service companies are, for the most part, operating
with machinery, tools and other supplies dating back to the Soviet, or
even pre-1959, era, and incapable of meeting their production goals and
•These state companies are the Number One source of losses and defaults,
causing deficits and disruptions in their relations with other state
companies and the national banking system, wreaking havoc on process and
causing corruption. “Cuban economists say one of the most complicated
parts of the unification process will be determining the real vale of
state-owned enterprises, and adjusting accounting systems,” wrote CBS
correspondent Portia Siegelbaum in October.
•Of those nearly 3,000 companies, the Cuban leadership has identified
941 as “highly vulnerable,” due to corruption. The meat and dairy, food
production and construction materials industries, as well as
warehousing, transport and restaurants are among the worst, labor union
leader Ulises Guilarte said in April. Guilarte is among many other
officials and economists insisting on the crucial importance of
establishing wholesale markets, to provide the growing “non-state”
sector and reduce corruption. Even so, proposals by Brazilian and
Chinese companies to establish such outlets are still waiting for an
•The Cuban leadership recognizes the need for increased productivity, in
order to obtain higher salaries and a robust economy. But productivity
gains are not conceivable within the context of the 3,000 problematic
companies. Such gains are limited today to fewer than 1,000 entities,
most of them state companies associated with foreign investors, or
private players and cooperatives in agriculture.
•Solutions? The Lineamientos of 2011 are very clear: Entities who do not
meet standards will be closed down. If leaders don’t want to appear too
drastic, they can organize fire sales, turn state companies into
cooperatives, or break them down into small entities. There is a
precedent for that: Twelve years ago, the government did just that with
three-quarters of the country’s sugar mills.
•Ending the dual currency system is not just an issue of establishing
financial mechanisms. Without tackling dysfunction at state companies,
those financial mechanisms will remain extremely vulnerable. This is the
Black Hole of Cuban economics; it’s not a monetary issue, it’s
structural. Monetary expert Pavel Vidal put his finger on this when he
told IPS correspondent Patricia Grogg in October that “the dual currency
system is not responsible for the low purchasing power of wages or for
inequality … These are both structural, not monetary problems.”
The second context to discuss are the dynamics of reforms toward a mixed
economy. Some angles that could make the unification more effective,
faster, and less traumatic deserve special attention.
•Microfinance and bank credit have begun to reach small businesses,
private farmers, and urban and agricultural cooperatives. But the
numbers — less than $100 million for some 300,000 customers — are
modest, and most of the loans go to non-productive purposes (home
construction and improvements, and some services).
•Small and midsize companies, both privately owned and cooperative,
should not be excluded from interacting with foreign investors, and
should enjoy direct access to imports and exports. The same is valid for
state companies. Union leader Guilarte gave an example of the absurdity
of the current restrictions: An executive for a state company may need a
$50,000 hard-currency loan to buy a machine that produces crackers for
the tourist industry. But she can’t go directly to a Cuban bank, and the
application process gets stuck in ministerial red tape. Meanwhile,
hotels are spending $1 million to import crackers.
•The redesign of agriculture, although it has advanced considerably, is
still hampered by the survival of old policies — particularly the
mechanism of acopio, the forced procurement by a state distributor,
which poses obstacles to getting food to market. Another factor limiting
agricultural potential is farmers’ lack of access to wholesale supplies
such as machinery, tools, fertilizer, and fuel.
•Other measures are still pending. They include salary reform (following
the lead of recent measures for doctors and athletes), taxation, price
reform, accounting, and more. Taxes must provide a consistent incentive
for private businesses, and not just favor cooperatives and foreign
investors. Agriculture took that step recently, when the government
corrected the exclusion of private farmers from tax incentives.
•The reformers have some successes to show since 2007. Chief among them:
“The deficit on current accounts of the balance of payments was reduced,
the fiscal deficit has shrunk to approximately 3% of GDP, and the
banking crisis was solved,” Vidal and Everleny said in their Brookings
presentation. Also, they add, inflation today is lower than in the 1990s.
•Reforms in the external sector, such as the new migration law,
legislation for the Mariel Special Development Zone (ZEDM), and the new
foreign investment law, are bound to play a positive role. Although it’s
too early to determine how successful they are, they sure help the
currency merger process.
•Also, Cuba has been successful in renegotiating its heavy external debt
with its biggest creditors, such as Russia and Japan, as well as with
other countries (including an important rescheduling with China).
Démarches are underway with the Paris Club of lender nations, exploring
ways to trade debt for investments. The temporary freezing of
hard-currency accounts in Cuban banks, to face the impact of the 2008-09
world recession, is over and compensated. For the first time in 55
years, Cuba’s hard-currency reserves are modestly increasing, allowing
steps such as the cash buy-out of Italy’s STET, allowing the government
to take full control of state telecom ETECSA. The deal was in accordance
with international standards and satisfactory for the Italian partners,
thus setting a positive precedent for future investors.
•But huge imbalances between growing imports and limited exports
persist. Trade with Brazil totals nearly $700 million, $600 million of
which are Brazilian exports. Trade imbalances of that kind will
undermine any currency adopted by Cuba.
Many experts and observers compare Cuba to the Chinese experience. But
there are two differences. One, China operates in an entirely different
historical context. Two, China had a two-currency system from 1978 to
1994 with a highly divergent system of exchange rates.
Within this time frame, the Chinese conducted their reform process
through two stages, 1978-1984 and 1984-1993. During the first period,
three main transformations took place: Privatization of agriculture,
opening to foreign direct investment (in part through special
development zones), and the promotion of private startups. During the
second period, a wave of privatization of once state-controlled
industries swept over the economy, prices were liberalized, and state
companies were limited to key monopolies, all under a dual exchange rate
system. By 2005, 70% of China’s GDP was generated by the private sector.
It was only then that China started its currency unification process —
at the culmination of its reforms, along with extraordinary two-digit
Cuba, in contrast, starts its currency merger when its reform process is
hardly beginning. The Cuban experience will have to develop along three
a. Doing away with dysfunctional and outdated institutions, policies and
mechanisms from the 1980s and 1990s;
b. move forward with the implementation of the reforms already adopted,
and begin with the many others that are still pending; and
c. the currency unification, which will act as an effective detonator to
push forward a. and b.
This is the reason why ending the dual-currency system will not come out
of the blue, overnight, in one single piece of legislation to be
enforced on a ‘Day Zero’, as suggested by some journalists. Nor can it
take place in the course of 2014 by way of “carefully orchestrated
quarters, as consultant Emilio Morales suggested in a November study.
BBC reports indicating an 18-month implementation are not realistic at
all. Exchange trade analyst Tom Cleveland made a better assessment on
these pages in 2012 when predicting that “the dual-currency system will
take years to resolve.”
The complexities are too many to be met with short-term solutions. But
the process cannot wait any longer. As pointed out by Vidal and
Everleny, “Unfortunately, the nation will have to face this complex
process of monetary unification without the assistance of international
financial institutions, with very limited international reserves, and at
a time of low economic growth. Nevertheless, we cannot go on waiting for
‘the ideal moment’ to implement it; the structural reforms are in need
of the monetary reform.”
This is the reason why important economists, such as Vidal, Everleny,
Brunat, Morales and others, support the notion of gradualism. Cuban
leaders have insisted on a similar gradual pace, and the process has
already begun, “Cuban style” — experimenting with pilot projects in
limited areas, assessing results, making corrections, and moving ahead
slower or faster, depending on results.
A few examples for that pattern in currency reform:
•Free-market sales by private farmers and cooperatives to hotels and
restaurants are already operating with an exchange rate that began at 7
Cuban pesos (CUP) per U.S. dollar, but was then lowered to 10:1.
•A host of state companies — regardless of their subordination to a
ministry and independently from them — are conducting their transactions
with other state entities and the Central Bank based on an exchange rate
of 10 CUP: US$1 or 5:1.
•The sugar industry is currently working with three rates: 12:1 in
exports, 7:1 in imports, and 4:1 in oil purchases from Venezuela.
•Transport cooperatives are working with an exchange rate of 10:1.
•In determining salaries, the experiences of workers at the ZEDM, as
well as that of sports professionals and public health personnel are
providing hints about the policies to be put in place.
•Opening hard-currency stores to the CUP is another important signal.
The case of two important stores in Havana — La Copa and La Puntilla now
accepting both CUC and CUP — is a clear indication of the gradualism of
the currency merger process.
World Finance, in a January article, extends the benefit of the doubt to
the Cuban approach: “The complete unification of the two currencies is
many months, maybe years, away from being fully achieved, bit it could
well be the policy that defines Raúl Castro’s legacy as the reformer of
Cuba … by promoting prudent and timely reforms — which Fidel was
reluctant to do. The younger brother will have carved an even bigger
name for himself in modern Cuban history.”
Other steps and actions have not yet surfaced. For Vidal and Everleny
and many other experts, devaluation — the backbone of the unification
process — entails risks and complications. How will the devaluation
policies be implemented? How will the balances of CUP, CUC and
foreign-currency bank accounts be affected? How will this affect foreign
investors and their accounts?
In opposition to a gradual process, there are experts and observers who
suggest as inevitable the adoption of “shock therapy” policies, in which
— as argued by International Monetary Fund expert Rafael Romeu — “many
social services would have to be eliminated.”
Another concern is inflation. “Any increase in the value of the unified
peso would increase (Cubans’) spending power. This could stoke inflation
and lead to widespread shortages. The concomitant fall in the value of
the CUC, meanwhile, could be fiercely resisted by those with savings in
the harder currency.” Expert Tom Cleveland laid out a similar scenario a
year earlier: “If the 24:1 ratio were changed immediately to parity, the
demand for CUC-priced goods would skyrocket and inflation would send all
prices soaring. Dissolving the old dual-currency system is not easy.”
Despite such apocalyptical vision, whatever the policies the Cuban
leadership will follow, there are certain pillars of the Cuban model
that will not be jeopardized or even questioned:
a. The notion of “shock therapy” or “big bang” is not an option;
b. no more egalitarian practices or designs;
c. no one will suffer destitution; and
d. the most important social programs will not be eliminated.
Even those who suggest shock therapy are very cautious. Emilio Morales,
who is not precisely on friendly terms with the Cuban government,
stresses that “shifting to a single currency cannot turn into a sort of
’shock therapy if political suicide is to be avoided.”
Vidal and Everleny point out that “compensatory measures will be
required for state businesses and families affected.” They also stress
that “economic authorities will have to avoid an inflationary spiral” by
subsidizing retail markets.
The Cuban leadership and the economic team are very much aware of the
costs and benefits of every single step of the process. They have
studied carefully, in Cuba and China, the Chinese experience to see
whatever may be valid for Cuba.
None of the authors mentioned in this paper have made any reference to
the many IMF-sponsored monumental disasters in implementing monetary
recipes and new-currency experiments — such as the Plan Austral in
Argentina and Plan Cruzado in Brazil, both triggering hyperinflation —
and what lessons to draw from them. There is also the infamous Caracazo
of 1989, resulting from a package recommended by the IMF, where
hundreds, possibly thousands, were killed by state security and the
Are we to ignore such experiences? Is someone wishing for a similar
outcome in Cuba? Is the Cuban leadership is unaware of these traumatic
experiences? Quite the contrary, those experiences have been studied in
great detail in Cuba, and everyone is well aware of their results. It
would be foolish to think that the Cuban leadership is not fully aware
of the complexities and risks of ending the dual currency system.
In conclusion, some key ideas regarding government policies:
•The unification process is already beginning to unfold, step by step,
following a pattern of gradualism.
•The crucial stages are not to take place anytime soon — this year, 18
months from now, not even by 2016. By 2018, completion of the
convergence of the two currencies may be a more tangible reality.
•The four pillars (no shock therapy, no egalitarianism, no destitute, no
end to crucial social programs) and the three lines (do away with
economic legacies, push forward and expand the reform, and currency
unification) will be the guiding principles and strategies of the Cuban
A highly qualified expert on Cuban affairs, Julia Sweig of the
Washington-based Council on Foreign Relations, has this to say: “The
dual currency has for years hovered over the reform process — a symbol
of inequality and an obstacle to an efficient, productive economy. Raúl
Castro first surfaced the need of unifying the currency when he took
office. I’m betting by the time he steps down in 2018, if not before,
and despite the vagueness of the official language, Cuba will have a
Former Cuban intelligence officer Domingo Amuchastegui has lived in
Miami since 1994. He writes regularly for Cuba Standard and CubaNews on
the Communist Party, Cuba’s internal politics, economic reform, and
South Florida’s Cuban community.
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