October 14, 2020

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CUBA: Currency Unification Challenge Rears Up Again

BY Nicholas Watson

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President Miguel Diaz-Canel and other senior officials have over recent days announced their intention to end the highly distortionary dual currency regime, though no date has been set for the change. The plan would entail the elimination of the USD-pegged convertible peso (CUC) in favor of the Cuban peso (CUP), which currently has an official exchange rate of 24:1 with the CUC. The announcements follow years of talk about the need for currency and exchange rate unification but little action beyond opaquely managed and small-scale impact studies that seemingly go nowhere. However, rumors about an end to the dual system have intensified in recent months amid the liquidity crunch set off by the Covid-19 crisis.

Currency and exchange rate unification has been recognized as an essential step for years given the price distortions, inefficiencies, and accounting complexities that it engenders. The challenge has always been how to go about it without painful side-effects, including a day of reckoning for loss-making state companies and the risk of inflationary pressures. Even former president Raul Castro (2008-2018) balked at such a risky reform as he prioritized political stability in the delicate leadership transition to the next generation that culminated in Diaz-Canel’s promotion to president in 2018.

That cautious calculation has apparently changed – with the 89-year old Castro’s blessing, it is safe to assume – because the economy is under so much stress. Tightening US sanctions; the tourism shock resulting from the Covid-19 pandemic; benefactor Venezuela’s economic meltdown; lower remittances; and the drop in exports amid the global economic downturn are a shuddering body blow to the Cuban economy; the UN’s Economic Commission for Latin America (ECLAC) forecasts an 8% contraction this year. Castro, who as head of the Communist Party (PCC) until 2021 remains de facto regime No. 1, may judge it better to undertake currency unification while he is still compos mentis and with the authority to tamp down any negative backlash.

That said, economic adversity also makes undertaking a process as complex as currency unification now of all times highly challenging. Officials have dismissed the notion of “shock therapy”, while insisting that a subsidy regime will cushion the negative impact of the devaluation and that salaries and pensions will be increased. How the regime can afford to do this without access to multilateral financial aid is unclear. Currency unification should indeed engender efficiency gains, but these could take some time to materialize, especially if the reform process is undertaken gradually as opposed to via a “big bang” devaluation. In view of these costs, and until there is greater clarity over the direction of US policy towards Cuba over the next four years, it is still possible that the regime postpones implementation.

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