Monetary and exchange unification in Cuba: an urgent decision

It is urgent to eradicate the double monetary circulation, the dilemma lies in the structural problems of the economy still unresolved.

Monetary and exchange unification in Cuba: an urgent decision
Cuba. Photo by Alexander Kunze / Unsplash

The acceptance of the double monetary circulation in Cuba (1993-1994) was one of the measures taken in the country to face the economic crisis of the 1990s, known as the "special period".

The implementation of this monetary duality obeyed two fundamental reasons. The first: the need to introduce a strong currency at the most critical moments of the economic crisis of the nineties, to avoid a drastic nominal devaluation of the national currency; that is to say, its dizzying devaluation, much more than what came to be depreciated.

The second reason: the urgent need to be able to enter fresh currencies, given the loss of the fundamental export and import markets that developed over several years, under favorable terms of trade for the Cuban economy and soft credit conditions, which were enjoyed until the beginning of the crisis.

Double circulation is a gradual process, in which the hard currency fulfills, in the first instance, hoarding functions, bearing in mind that, during this stage, the national currency depreciates constantly. Between the end of 1993 and the summer of 1994, the informal exchange rate reached up to 150 Cuban pesos per dollar; while, before the economic crisis of the nineties, it was quoted in the underground market at a ratio of five Cuban pesos to 1 USD.

Then, the strong currency happens to fulfill other functions as means of circulation, when people begin to quote in dollars their operations, as a guarantee of a sale.

Since the establishment of the double monetary circulation, the official exchange rate was set at a Cuban peso for a dollar and has remained so to this day (except in the exchange relationship with the population). However, this does not constitute a guarantee to avoid or lower inflation, since it not only has a monetary component but also a structural component.

Sometimes the monetary duality has been considered a necessary evil, but always to achieve monetary reunification, extremely complex objective, outlined in the Guidelines of the Economic and Social Policy of the country, the program of transformations drawn up in 2011. From its beginning, that duality accentuated the differentiation in access to consumption by the population.

The monetary and exchange duality was conceived, from its beginnings, as a transitory process; however, it has spread far beyond time and created economic, social, and political difficulties.

It is worth remembering that in November 2004, the circulation of the US dollar was replaced by the convertible peso (CUC), the only convertible in the national territory. This step was, really, a simple process of substitution of the internal monetary circulation of the US dollar by the CUC.

All the relations remained the same, except the coffers of the Central Bank, to which a volume of foreign currency passed that up to that moment was in the hands of the population. As of that moment, in the monetary sphere the circulation of two currencies continued (CUP, Cuban pesos, and CUC, convertible Cuban pesos), under the characteristic that both are of national origin, but with dual currency.

In reality, the CUC is anchored to the US dollar, and, to date, a fixed rate of the Cuban peso has been established for the CUC (24 or 25 pesos, for sale or purchase). In parallel, decisions were made to bring the prices of both currencies closer to the retail trade areas in Cuban pesos and CUC in the commercial circuits, in a group of consumer products, usually of high demand in Cuban pesos, with prices close to to the commercial area of the market in CUC, according to the parity between both local currencies.

Since 2005, steps have been taken to increase the number of minor retirements and gradually increase salaries in some priority entities. At the same time, the prices of some regulated foods and electricity increased. Immediately the level of income was reduced, particularly those who did not benefit from the increase in salaries and pensions, or this was insufficient.

The amount of CUC in circulation must correspond to the support in US dollars and other currencies (currency board) that is available and that makes possible the equilibrium situation.

The Ministry of Finance and Prices issued Resolution 19 of 2014, published in the Official Gazette, which describes the financial and accounting measures that will come into effect before the monetary unification, as well as the procedures and rules for the revaluation of the Cuban peso in State entities, starting with the so-called "zero-day".

After the devaluation, there would be a series of effects on companies, such as the valuation of inventories, assets, debts, and everything valued in CUC, to change it to Cuban pesos. In this way, the CUCs would multiply by a certain exchange rate, whose magnitude has been the subject of speculation, with variants from 1 to 10 or from 1 to 8, among others. Inclusive, concrete steps have been taken in sales-purchase relations to tourism, whose exchange rate moves in that environment and where the currency used is the Cuban peso.

Subsequently, in this process, there would be a devaluation that would have many effects on wages, balance sheets of companies, and others. It would also transcend retail prices (in general, the exchange rate has been an important determinant in the evolution of prices) and wages (already mentioned), ways in which monetary unification is linked to the population, which is not only through the CADECA exchange rate.

In recent times, everything seems to indicate that the necessary correspondence between the CUC and its support in US dollars and other currencies has not occurred, due to a greater emission of CUC than its support in dollars. This has led to an inflationary process in CUC and its corresponding depreciation, which is reflected in the increase in prices in foreign currency stores and, at the same time, in the free supply and demand markets in Cuban pesos.

Under the valuable consideration of achieving a growing and sustained economic development, the conditions would be created to take progressive steps with a view to monetary unification in the business sector and the population. At the same time, it would be more appropriate to do it utilizing approximations of both currencies, until achieving the convergence between the national currency (Cuban pesos) and the CUC. In the same way, due to how the Cuban economy is structured - in which the state enterprise occupies an important place - the most advisable thing would be to begin the process of monetary unification for that business sector.

Up to the present, there is a kind of vicious circle between low wages, which in turn leads to low levels of production (productivity). That is, there are no higher salaries because there is no higher production. The devaluation (it is advisable to do it gradually) could be a way to break that circle since companies -particularly from the state sector- could increase wages and their workers feel encouraged to increase production.

All this process of reunification, with the devaluation of the Cuban peso (business sector), according to the technically-economically based rate of change, which would not be unmovable and initiated by the business sector, will bring costs and benefits.

The costs would include companies whose actual economic results do not allow them to continue operating. These entities must close or be subsidized through various credit mechanisms by the State, for a certain time, until they reach their solvency. Another alternative is that effective consultation with their workers, they assume the productive process under cooperative forms, with the initial financial support of the State, under bank credit conditions, subsidies, allocations, direct or mixed foreign investment with national capital and/or loans from international financial institutions.

During this phase, a process of adjustment of employment in the state company will be necessary, in search of efficiency, and only the necessary personnel would be maintained. Other sectors could assimilate the surplus personnel in other activities, from greater flexibility in the creation of new economic spaces.

All of the above requires economic support (whether in reserves, foreign currencies, and national gold and/or international financial support) that supports the impact that may arise.

The reserves of the Cuban economy (see ANNEX 1) have shown recovery from 2010 to 2017, reaching a level close to USD 13,000 million. On the other hand, the country recently renegotiated the external debt, which entails fulfilling the obligations of agreed payments, which annually move between four thousand and four thousand 500 million USD. To this is added the reduction in export earnings, the high dependence on the importation of food, raw materials, inputs, fuel difficulties, among others, as well as signs of a return to the increase in external debt. The current scenario is complex, according to the results for 2017 and the first quarter of 2018.

Among the benefits that would motivate the process of monetary reunification is that you can know the levels of efficiency, which entity is profitable and which is not.

On the other hand, at a certain point, monetary and exchange unification will have to be carried out in the sphere of the population. According to the process of rapprochement of the two currencies in this sector, it is expected that a revaluation of the CUP (Cuban peso) will be manifested. This would imply an increase in the purchasing power of the Cuban peso (CUP) and the immediate growth of demand for food and other products.

For this, it will be necessary to have sufficient inventories that allow to face the increase of the demand, and/or to have the monetary and financial resources in real currency to buy and pay the suppliers, with immediate deliveries. Also, monitor that the prices of the products are not increased, both in the state market, as well as in the private and cooperative sector. Those who have concentrated money, both in CUC and in CUP, will go to buy immediately, particularly the CUP holders, while the CUC holders would try to convert them to CUP.

If the re-evaluation of the CUP (Cuban peso) occurs, the income of the population would increase and this could contribute to breaking the vicious circle between low wages, which in turn leads to low levels of production (productivity). Without sending more money to the street, an increase in income would be achieved and it would help to achieve the objectives of greater production and productivity. However, certain variables referring to the concentration of money in certain strata will have to be delimited, necessary openings will be made, on which we will abound later, and act under a systemic approach.

Although in recent years important spaces have indeed opened up for other economic actors (private, non-agricultural cooperatives), the state business sector as a whole is the majority and has the greatest weight in the total economy, except in agriculture.

The most appropriate way to achieve and consolidate the existence of a single currency would be given by the growth of material production and productive services, the generation of exports that enter the foreign exchange, and their accumulation to increase reserves.

However, the measures implemented and directed in this direction, expressed in the updating of the economic model, have not achieved the expected effect, for reasons that need to be analyzed immediately and that have adversely affected economic results, since they have not had the dynamism necessary to achieve sustained growth.

The time elapsed, beyond what was initially foreseen since the establishment of the double currency and exchange circulation, has contributed to making the situation more complex. The reality indicates that the full growth of economic development cannot be expected to begin the steps toward monetary unification.

A review of the difficulties

In practice, the established monetary system tends to a position of equilibrium, in which it is difficult to advance in the reduction of prices. Whenever the offer becomes deficient or insufficient in the rationed or state market (at lower prices), it motivates the consumer to move their demand to another market, with substantially higher price differentials in the free, underground, and foreign markets. (CUC), for which you have to convert your income into national currency, at the informal market exchange rate (CADECA). It must be borne in mind that the amount of the average salary, as a source of fundamental income for the population, is very insufficient about current prices and their rate of growth.

This complex situation, which manifests itself both in the daily life of the population and in the business system, demands immediate solutions. In the current scenario there is a depreciation of the CUC, already mentioned, and a concentration of the CUC and the CUP (Cuban pesos) in certain population strata, which translates into increasing economic power. The opening to create new non-state economic entities in the domestic, self-employed, and cooperative market has generated an internal demand that taxes the national economy, as it motivates expenditures in USD or another currency with no return (see ANNEX 2).

This flow of demand in currency brings with it a series of unfavorable collateral effects, not by the economic-social system to which it aspires.

Some restrictions and regulations prevent the attainment of productions and exportable services to new economic entities with the possibility of doing so. The way to guarantee the availability of USD or another currency and cover that growing domestic demand is, up to the present, the national economy. Likewise, the participation of foreign capital, directly, in companies and businesses of interest to foreign investors, such as new productive forms and agricultural cooperatives, whose productions could be exported and generate income in USD or another currency, is not allowed. that it would compensate or cover imports that, at present, the national economy centralizes, thus limiting its investment and development possibilities.

On the other hand, there is a flight of foreign currency, mainly USD, that arrives in the country through various means, such as direct remittance delivery, savings for trips abroad, foreigners who visit or work in the country, etc. That currency is usually changed in the underground market, whose exchange rate moves between 0.93-0.95, and even 0.97 CUC per USD (it probably reaches the exchange rate of 1 CUC for 1 USD or more); while CADECA delivers 0.87 CUC per USD.

Those who operate in this underground market accumulate a certain amount of foreign currency that allows them to travel abroad (Panama, Mexico, Bahamas, USA, and other countries), buy items in free zones or wholesale markets, bring them to the country and sell them. Even paying the established customs taxes, the sales of these goods in the submerged market, at prices lower than those of similar products that are sold in the network of stores in foreign currencies or national currency, leave them a non-negligible margin of profit, for what they repeat that cycle. They also make purchases abroad on request; in both cases, they are using the currency that enters and leaves the country.

In summary, there are at least two foreign currency escape routes: one, through the state route (see Annex 2 "Currency demand flow"); the other, using those known as "mules", that import product in USD and sell them in CUC, which in turn converts USD internally, through the purchase in the underground market.

The latter has indeed found a gap not covered in the domestic market and managed to establish a continuous flow of goods not provided by official markets. The idea is not to eliminate this route, but to achieve competition from the official markets. But, for this, you need internal establishments where you buy in foreign currency (USD, euros, pounds sterling, etc.), at prices even lower than those sold in these underground places.

Regarding the drainage of foreign currency, it could be interpreted that it is proposed to return to the USD in payments in the domestic market. However, it is important to show some facts that help to reflect:

Information recently provided by the television about the Tourism in Europe convention, attended by Cuban officials, announced important investments in the Mariel Zone and the construction of homes in the country, the latter for sale from abroad, through payment in foreign exchange.

For some time they have been making purchases over the Internet from abroad, with payments in foreign currency, of products such as meat (particularly beef). These purchase sales are prioritized in the domestic market (stores in CUC), above the demand of the domestic market.

These facts are known by the population and generate unfavorable opinions, which emerge in expressions that allude to discrimination, including: "why can the outsider and I can not?"

In both situations, in fact, in practice one is going through a process of dollarization, which has already begun from the outside.

There is a non-negligible volume of currency that the population owns, it does not change in CADECA -for several reasons, such as the high tax for the USD- and prefers to retain it and/or exchange it in an underground currency market, with a better exchange rate. In the same way, goods are bought in a place where they are exhibited and sold, at lower prices and, to a certain extent, of better quality, more updated, and with a varied assortment. The official market is not usually, until now, a competitor for that underground market.

The aspects discussed so far are part of the complex system in which monetary relations are intertwined, the current monetary and exchange duality is expressed, and internal economic relations and their link with external ones become more complex.

The Cuban economy is in a very complex situation, it requires obtaining fresh foreign currency immediately, by various means, within the established legal frameworks, and adopting measures with a certain emergent character.

Once this scenario is over or in a scenario that shows signs of recovery from the current crisis, a path should be prepared where these measures cease to be emerging and replaced by those required by the normal performance of the economy.

We need to work in various directions and stages, taking initiatives in the business sector, where the obstacles and ties that are in force must be eliminated under an excessive regulatory framework imposed by institutional bodies and intermediate structures. On many occasions, these become extensions of institutional bodies (the OSDES / Higher Organization of Business Management, trying to seek separation of state functions of business), subtract the necessary autonomy to direct producers, and limit their productive potential. These examples are evident in the agricultural sector.

In the non-state entrepreneurial sector, particularly the agricultural sector, autonomy is needed to achieve a broad development of the productive forces (agricultural cooperatives, agricultural private, agricultural usufructuary, second-degree cooperatives). This business sector tends to give quick answers, does not require large investments and contains export potential and import substitution.

Some considerations

The double monetary and exchange circulation has extended beyond what was expected or initially conceived, which has led to a complex situation in the economic, social and political spheres.

Undoubtedly, the path of sustained growth of the Cuban economy would have led, through the accumulation of foreign exchange reserves, the approximations of both currencies, until achieving the convergence between the CUP and the CUC, to finally achieve a single currency supported by the increases of material production and production services. In that way, a technically and economically based exchange rate would have been possible and supported by this economic growth.

It is necessary to implement measures aimed at solving this problematic situation, accompanied by more dynamic decisions, to achieve greater decentralization and elimination of regulations and restrictions that currently limit the development of productive forces and do not favor the expected results in updating the model Cuban economic

The objective conditions indicate that the pace of recovery, growth and sustained economic development has not been achieved; what would have allowed, based on this growth, create the conditions to take progressive steps in monetary unification in the business sector and the population.

How the Cuban economy is structured, where the state enterprise occupies an important place, usually indicates that it would be advisable to start the process of monetary unification for this business sector.

It is necessary to break the vicious circle between low wages and low levels of production (productivity). The devaluation of the Cuban peso (as part of the monetary and exchange unification process, in business) could be a way to break this circle since companies -particularly the state sector- could increase wages and thus incentivize their workers to increase production.

On the other hand, the re-evaluation of the CUP (in the population) could also contribute to breaking the vicious circle between low income, production, and productivity, taking into account a systemic approach.

The process of monetary-exchange reunification will bring costs and benefits. Among the costs: that they stop working, or look for other solutions, the unprofitable companies. Among the benefits, it will allow reality to surface: who is profitable and who is not.

An important aspect of the updating of the economic model is the creation of new economic spaces (private sector and non-agricultural cooperatives). However, this has generated an internal demand that taxes the national economy, because it motivates expenses in USD or another currency without return. This flow of demand in the domestic currency causes unfavorable collateral effects, alien to the economic and social system to which it aspires.

As an immediate need, to break the cycle that is eroding the national economy in terms of currency availability (see Annex 2), the following is suggested:

That the stores enabled and to enable as wholesale markets (food, materials, supplies in general) are the place to which the new economic entities come (non-agricultural cooperatives and private in general, with prior identification) and that the payment for purchases made Do in USD, Euros or other appropriate currency. It is expected that this measure will motivate the increase in the demand for real currency and, at the same time, increase the exchange rate in the underground market. The demand for USD should also increase in the informal exchange house (CADECA). Assess the convenience or not of applying a percentage of discount to the price in USD, from a certain magnitude or quantities to buy.

Similarly, the retail consumer could go (as it currently happens), but the payment for purchases would assume it in USD, with no discount percentage.

Consider the possibility that individual non-state producers (including agricultural cooperatives), which have potential in terms of quality, assortment, and systematic supply, may access foreign investment, to export and insert themselves into value chains external, to attract technology, modern management methods, generate income in foreign currency and cover foreign exchange expenses generated by inputs that need to be imported.

The process of monetary and exchange unification will necessarily extend to the population. It must be borne in mind that, outside the bank accounts, there is an accumulated amount of cash, particularly concentrated in a reduced stratum of the population, both in Cuban pesos and in CUC. This pressures and affects the economy and the whole process of monetary and exchange unification.

The economy and its performance usually have points of contact with other specialties, such as psychology, and in this, it has a function to fulfill the communication.

On certain occasions, reference has been made, through official channels, to the need for the process of monetary and exchange reunification, which has been delayed and needs to be addressed. This has generated interpretations and rumors that, in turn, have led to actions, particularly by sectors that concentrate a considerable volume of CUC, before the possible fact that the only currency that is finally established is the CUP. These people have moved to the various banking institutions to convert the CUC into CUP, so official clarifications disseminated by the mass media have insisted that all this process will be reported promptly, in search of tranquility for the population.

However, a movement is beginning to manifest itself -from the aforementioned strata- towards the purchase of real estate (homes, cars, appliances), to convert the CUC into durable goods, some of which, over time, they increase their value.

From the foregoing, it could be deduced that any communication and information on the subject of monetary-exchange dualism and reunification requires extreme and precise care.

An alternative to reduce pressures and unfavorable effects could be to make a change of currency once initiated, in parallel, or after completing the adjustments in the business sector. This measure involves economic, political, and social costs and benefits that, undoubtedly, will need to be evaluated. There is previous experience in the exchange of currency made at the beginning of the revolutionary process, but then two currencies did not circulate in parallel, nor was their dual currency.

Next, the moment to establish a single currency, it will be necessary to have an exchange rate of the national currency to the currencies (USD, euros, pounds sterling, and others), which will move according to the behavior of the external financial market and the dynamics of the growth of the national economy.

The current situation becomes extremely complex and unsustainable in the short term. Immediate measures will have to be taken, gradually or in parallel, first in the business sector, as has been pointed out: decentralize and grant greater management autonomy, in a more accelerated manner in key sectors such as agriculture, agro-industry, the export sector; greater openness to foreign investment in sectors that have an important multiplier effect, which impregnates rapid dynamism, including cooperatives (agricultural and private).

This process should be undertaken with the necessary observation and the required restraint that guarantees the continuity and sustainability of the economic-social model to which it aspires, fair and with the greatest possible equity (with everyone and for the good of all), but that achieves sustainability and growth. If we continue with immobility, the risks will multiply and could generate a strong shock to the economy, with undesirable results.

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