Friday 22 September 2023

What will Cuba’s new single currency mean for the island?

Cuba is devaluing its peso for the first time since the 1959 revolution with profound consequences for its people. From January 1, monetary unification has been in force; economist warns of possible rise in inflation

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22 September 2023 - At The Banks - Source: BCCR

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Q REPORTS – The Cuban government formally ended its dual currency system on Friday, January 1, devaluing its peso for the first time since the 1959 revolution that swept the late Fidel Castro to power.

A grocery business in Havana warned, in mid-December 2020, the rejection of convertible pesos (CUC). AFP

The government has set the exchange rate at 24 Cuban pesos to one US dollar1, and the convertible Cuban peso, known as the CUC, will be phased out completely by June, leaving the island with one currency for the first time in more than 20 years.

So what does that mean for Cubans and visitors to the island? Here’s what you need to know.

Rewind. Why does Cuba have two currencies?

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The Cuban peso, known as the CUP, was created as the island’s currency by the first president of the country’s post-revolution Central Bank, Ernesto “Che” Guevara.

But thanks to an embargo by the United States and some of the island’s state-run economic policies, the value of Cuba’s currency evolved to become a tricky issue.

When a country’s domestic currency is unstable, subject to high rates of inflation or generally not trusted to hold its value, people may start to use a second currency they think will fare better — especially when it comes to buying imported goods.

If people use another currency unofficially, it can create a thriving black market and exert extreme pressure on the national economy. Sometimes, countries officially turn to the US dollar in what’s known as “dollarization”, or the euro.

Cuba’s tourism industry has been hit hard by coronavirus-related travel restrictions and the Trump administration’s tightening of the embargo [File: Lisette Poole/Bloomberg]

Cuba’s tourism industry has been hit hard by coronavirus-related travel restrictions and the Trump administration’s tightening of the embargo [File: Lisette Poole/Bloomberg]

OK, so does that mean they use only a foreign currency instead of their own?

Countries can opt to fully adopt the US dollar or another foreign currency as their own, but though it may provide stability, it gives governments far less control over their monetary policy.

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Countries can also choose to use both a domestic currency and a foreign one at the same time. That is what Cuba elected to do after the collapse of the Soviet Union when Havana legalized the use of the US dollar alongside the Cuban peso in 1993.

So is Cuba also using the US dollar now?

Sometimes. Earlier this year, Cuba reallowed “dollar stores”, which let people buy goods like food, toiletries and electronics with bank cards loaded with US dollars or other foreign currency. That, in turn, let the government snap up those dollars to help deal with its liquidity crisis, Reuters news agency reported.

The use of US dollars had previously been banned in 2004 when the government created the CUC. The CUC has historically been used for state business and buying goods from abroad, but it can’t be taken out of the country. It is pegged 1:1 to the dollar but exchanged with the public at a rate of 24 to buy and 25 to sell.

The CUP is still used for everyday domestic transactions, and many Cubans are paid their wages in CUPs.

Signs that read ‘No CUC’ in reference to the convertible peso hang on the walls of a store in Havana, Cuba [File: Ramon Espinosa/AP Photo]

Confusing. Are they worth the same thing?

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No. For the average Cuban, one CUC is worth 25 times more than one CUP, and not everyone can get their hands on them. CUCs are used in businesses that involve foreign money — such as tourism or buying goods imported from abroad.

But most Cubans who don’t work in the tourism sector are still paid in CUPs, and this dual system has created a lot of disparities — which is one reason why CUCs are being scrapped.
So what happens to all those convertible pesos floating around?

Cubans will have through June 2021 to trade in CUCs for Cuban pesos, according to a decree published in the Cuban government’s official gazette on December 10.

But the devaluation of the currency at 24 Cuban pesos to 1 CUC means they’ll lose a significant amount of money in doing so, something that is likely to hit private-sector workers who have been paid in CUCs for years particularly hard.

It’s already been a tough year for those workers, many of whom are employed in the country’s tourism sector, which has been decimated by coronavirus-related travel restrictions and the Trump administration’s harsh policies toward the island.

What is the Cuban government doing?

Cuba announced it would increase government workers’ salaries and pensions to adjust for inflation. But private-sector workers won’t have those protections and will be able to afford less when paying with their new Cuban pesos than with their convertible ones.

In announcing the currency unification plan, the Cuban government said it would publish the exchange rate for the Cuban peso daily on the Central Bank’s website, meaning that it could potentially fluctuate rather than stay at its fixed rate. That’s also new for the island.

In a speech earlier this month, Cuban President Miguel Diaz-Canel said the reforms were necessary “to go ahead with the transformations that we need to update our economic and social model”, Bloomberg News reported.

What will that mean for Cubans?

A painful transition. Cubans may see the price of everyday goods go up at a time when they are already dealing with shortages. One of the country’s main supporters in the region, Venezuela, has similarly seen its economy further pummeled this year by skyrocketing inflation and US sanctions.

Cuba’s government announced it will also require all incoming travelers to present a negative COVID-19 test before entering the country beginning on Friday.

That means the tourists who typically flock to the island nation’s beaches and city streets to hear Cuban music, enjoy a meal and experience its unique culture likely won’t return until widespread vaccination makes international travel more feasible.

Until then, Cubans are left to do what they have successfully done for decades — adapt to tough economic conditions and innovate where they can.

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"Rico" is the crazy mind behind the Q media websites, a series of online magazines where everything is Q! In these times of new normal, stay at home. Stay safe. Stay healthy.

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