Implications of Cuba’s current monetary situation

I have previously said that a CUC (Cuba’s convertible peso) is simply a 24 CUP (the Cuban peso) banknote that is directly tradable between themselves, and therefore, in this sense, the monetary duality is a formality.

What’s new and complicated is that the CUC no longer seems convertible and therefore could be easily eliminated. It has become like the appendix — it once served something but it is no longer necessary.

The issue now is not the monetary designation, but the exchange rate between the CUP and the dollar (or between the CUC and the dollar if you adjust it. It doesn’t matter because the latter is in practice a 24 CUP banknote — except that its value can be changed to eliminate it and changed to a new rate for those citizens who have savings in CUC; but at this moment, I insist, the CUC is a simple 24 CUP bill).

The exchange rate now stands at 24 CUP for a dollar, or 1 CUC for a dollar, but only in accounting terms and only in a one-way transaction. In other words, you can’t buy them, only sell them to the monetary system. As I’ve explained neither the CUP nor the CUC are currently directly convertible in any operation. It operates now only as a measure of value to sell dollars (in one direction) and as a reference mark for the foreign currency black market that will likely become more active and speculative (I understand that dollars will not be sold in CADECAS [Cuban monetary exchange houses] and those who have them cannot use them directly, but through bank deposits and cards, which we’ll see how they work).

On the other hand, the official exchange rate for businesses remains at 1 CUP for 1 U.S. dollar (USD). This is the most complex point in the monetary and exchange reform. In other words, the necessary devaluation of the CUP for state sector business operations — obviously the most important in the national economy; the exchange rate that is established with an economically based calculation will strongly move the entire economic system, including relative prices, wages, subsidies, etc., so the decision becomes complicated, but also essential. For example, without this factor, any exhortation to an exporting mentality is very weak, because it only appeals to the subjective behavior of economic agents, when the objective conditions of the economy (official exchange rate) encourages the opposite.

Of course, in addition to the current overvalued exchange rate, companies need to be assigned currencies to operate, an administrative decision motivated by the shortage of foreign currency. 

The complexity of the issue for the general population is the value of the CUP and CUC in terms of goods and services, which in practice are supposed to be interchangeable, a central question because of the reduction of what is available which are lower quality basic necessities. This could be a strong disincentive for the non-state sector, which could imply a reduction in its capacity to generate employment. This would be critical at a time when that function is increasingly necessary because if business functions are decentralized in the state sector (as expected and how it should be) then the surplus of the supernumerary workforce will lead to a reduction in government employment as a condition (not the only one) for greater efficiency.

More than two years ago we had proposed maintaining the CUC as it was and in the duty-free zones creating direct purchasing in foreign currencies to competitively sell what informal importers brought. This implied a permanent and large exit of the country’s foreign currency. The state would then handle these imports under better conditions, offer more competitive prices, and also retain a non-negligible commercial gain in a limited market that would be self-financing and would also be a way for the general population that had foreign currency to purchase scarce goods, including (and this is very important) means of production, especially (but not only) for agriculture.

This also allowed the convertibility of national currencies at the rate that monetary policy calculated as adequate to stimulate exports and discourage imports (this would not imply the elimination of informal importers but subjects them to different competitive conditions , which reduces its ‘super profits,’ favors the population, including non-state producers, and would also favor the state).

The tremendous shortage of foreign currency that exists now limits (almost eliminating for the moment) any convertibility of national currencies, which is understandable, but generates no less problems than explained above.

‘The socialist economy is not the suppression of the market’

One must consider that a part of the current ALBA (Bolivarian Alliance for the Peoples of Our America) is largely formulated around tourism (restaurants, room rentals, transportation, crafts, etc.) and with the pandemic this demand has fallen to almost zero for the past several months. It is not clear how and at what rates it will be reactivated. This sector, that generates a significant amount of jobs, would not have direct access to foreign currency (in the event that under the current circumstances they were allowed to obtain it directly from their activity), nor could they obtain it through CADECA before they have some indirect access. This situation can impact it by reducing their activity and, as I have said, their ability to generate employment. All this will have more importance and greater consequences even if the conditions of the money markets do not change when MIPYMES (micro, small and medium sized businesses) are created and in operation.

Parallel to this is the inflationary risk that should be brought under control with fundamentally non-administrative economic measures. Whether one likes it or not, there’s always tension with the black market, which although illegal is part of the economic dynamic and is very difficult to eliminate only by repressing it, this has been demonstrated with force and persistence by historical evidence.

What I am expressing is not at all a criticism of the reform that has begun which I consider headed in the right direction and includes measures of great importance that have returned the initiative to the government in challenges we face today. In other words, reactivation of the economy with a fundamental and comprehensive reform.

My purpose is to accompany, and contribute to, a necessary and committed debate and to continue advancing the economic strategy seeking the most appropriate solutions in order to overcome the inevitable and very complex contradictions and conditions our economy faces. Ours is a country that faces a very tough economic blockade, but one that has decided to resist and advance against all odds.