Rumours of reform: the likelihood and consequences of currency reform in Cuba
Since September this year, indications have been growing that the Cuban government intends to move forward with sweeping reforms to the country’s currency and exchange rate systems. These reforms will certainly involve the unification of the country’s current dual currency system. Nevertheless, such a change is easier said than done and will almost certainly be painful in the short term, particularly given the economic blow the country has already received due to the COVID-19 pandemic.
The Dual Currency System and its Weaknesses
In 1994 Cuba introduced a second currency pegged 1:1 to the US dollar, the convertible peso (CUC), as part of efforts to deal with the economic hardship of the Special Period, an economic crisis that beset the country throughout the 1990s following the collapse of the Soviet Union. The CUC is considerably more valuable than the ordinary Cuban peso (CUP) due to its dollar peg; indeed, the CUC is worth approximately 25 times the Cuban peso. Given the predominant use of the CUC as the currency for tourists and the fact that the majority of Cubans are paid in the less valuable CUP, the fact that these two currencies differ so much in value has had notable debilitating effects on the country’s economy.
One of the key socioeconomic distortions caused by the dual currency system comes from the aforementioned fact that most Cubans are paid in CUP and that tourism is one of the main sectors where CUC is circulated. This reality has led to the development of a situation where educated professionals like doctors, lawyers and scientists are incentivised to engage in unskilled work as taxi drivers or tour guides due to those jobs’ higher earning potential; these circumstances have almost certainly had a limiting effect on the growth potential of Cuba’s medical and scientific spheres through brain drain and the discouragement of higher education. Low wages and the CUP’s poor purchasing power also encourage Cubans to use the black market as a means to sell stolen essentials like medicine in exchange for CUC, denying the state a means of revenue and forcing ordinary Cubans to make difficult moral choices about stealing and the purchase of illicit goods.
The Likelihood of Reform
It is not the first time that there has been talk of reform to Cuba’s currency system. In fact, in 2013 official sources stated that the country’s Council of Ministers had agreed on the implementation of measures towards currency unification, but few actual changes were made and expectations of change at the time soon petered out. However, reports have emerged over the last two months suggesting that the Cuban government is once again considering moving forward with the long-overdue reforms; according to anonymous sources, the change may even come before the end of this year. Recent changes on the island certainly lend credence to the idea that currency reform is likely to occur at some point in the near future. For example, in July Cuba re-introduced ‘dollar stores’ where people can purchase essentials and some harder-to-come-by goods like air conditioners with US dollars. The significance of this change is apparent given that the last time dollar stores were introduced was during the Special Period, hammering home just how tough the country’s economic situation is.
The re-introduction of dollar stores and the resurgent rumours of currency reform are both a product of the economic damage done to the country by the COVID-19 pandemic. With tourist visits and exports down by around 60% and 19% respectively, Cuba desperately needs to devalue the CUC – effectively ending the two currency system – in order to boost exports and thereby obtain more of the foreign currency it needs to pay for imports. The chance that the government will go through with the change is also increased by pressure from the Trump administration, which has stepped up sanctions against Cuba in recent months. For example, the company Fincimex was banned from handling remittances in November, leading to the closure of Western Union locations in Cuba (with which Fincimex is associated) and cutting off one of the key routes for foreign currency coming into the country.
Reforms thus seem essential and are quite likely to occur soon, though they will not necessarily occur this year as rumours imply. Instead, it is possible that the currency reforms will be thrashed out and announced after the 8th Congress of the Communist Party of Cuba, scheduled for April next year. This is because the Congress will provide a favourable environment for the complex and co-ordinated decision making necessary for such an important change, and because reforms have been the subject of previous Congresses.
The Impacts of Currency Unification
Currency unification is highly likely to be painful for the country in the short term. Devaluation will almost certainly make imports more expensive, further stretching the finances of ordinary Cubans who already rely heavily on imported food. If the Cuban government opts for a gradual devaluation as opposed to a ‘big bang’ approach it should be possible for the associated economic shocks to be mitigated to an extent. Either way, the Cuban government will certainly be faced with the need for additional reforms in order to restructure the economy around a single devalued currency.
Among the most pressing needs will be for reforms to raise wages so that Cubans will be able to cope with the increased prices of imports, particularly in the state sector which employs the vast majority of Cubans. In order to avoid risking the dollarization of the economy, the government will also have to make moves towards a flexible exchange rate. In the short term, however, such a move is unlikely to be feasible as Cuba is likely to require more time to establish a free market and the institutional infrastructure necessary for a floating exchange rate to be effective.
Nevertheless, if these reforms are carried out successfully the potential benefits for Cuba in the long term are numerous. Only time will tell.
