Wednesday, October 23, 2013

Cuba will phase out troublesome two-currency system

Posted on Tuesday, 10.22.13

Cuba will phase out troublesome two-currency system

Cuba's announcement that it will phase out a convoluted two-currency
system that angered housewives and befuddled accountants for decades has
given hope to consumers and economists.

The communiqué Tuesday gave few details but should increase the
purchasing power of average Cubans, lower prices for tourists, create
more efficient accounting in state enterprises and increase incentives
to step up exports, economists said.

Since 1994, Cuban has used two currencies, one the convertible peso
(CUC) that is pegged to the U.S. dollar and used for foreign trade, the
tourism sector and at stores carrying imported goods and the other, the
Cuban peso (CUP), which is used to pay most salaries and for domestic
products. A CUC is worth 24 pesos.

Cubans have been complaining about the dual currency system since it began.

"It sounds like what people have been asking for, but who knows," said
Havana teacher Elena Martinez. "A liter of cooking oil costs me 3 CUCs.
But my salary is 500 pesos a month. How is this going to help me buy
that oil?"

Cuba's announcement said the government had approved a "chronology" to
gradually unify the two currencies — but gave no dates — as part of
President Raúl Castro's efforts to allow more market forces in the
country's stagnant, Soviet-styled economy.

"This is not a measure that by itself resolves all of the current
problems of the economy," the statement said, "but its application is
indispensable to guaranteeing the re-establishment of the value of the
Cuban pesos and its functions as currency."

Any changes will be applied first to enterprises and later to
individuals, it said. There will be no "shock therapies," and the
government will give advance warnings of any devaluation so that those
"legally" holding CUCs will not be hurt.

State-run enterprises currently get just one peso for every dollar worth
of goods they export abroad and pay only one peso for every dollar worth
of imported supplies they use — meaning they have few incentives to
increase productivity or salaries.

The unification will "create the conditions for an increment in
efficiency, a better measurement of economic events and an incentive for
the sectors that produce goods and services for export and the
substitution of imports," the government statement said.

Archibald Ritter, an economist at Carleton University in Canada, said
Cuba must eliminate the two-currency system because it reflects an old
system of government-controlled and subsidized prices that Castro has
been gradually eliminating to improve the economy, long stagnant despite
massive Venezuelan subsidies.

"The old peso economy has almost disappeared," he told El Nuevo Herald
by phone from Ottawa. "A single currency also would help the Cuban
enterprises to improve their income from exports and compete against

The unified currency also should benefit Cuban consumers, as well as
foreign tourists, by making prices now set in CUCs more accessible,
Ritter said. "The purchasing power of Cubans in pesos should increase
significantly in time," he added.

Market forces should eventually set the value of the reunified currency,
perhaps somewhere around 13 to 14 pesos to the dollar, said Ritter, who
edits the blog The Cuban Economy.

The government has recently experimented with more favorable exchange
rates for state enterprises that export, such as the sugar industry,
paying them 10 to 12 pesos for each dollar earned.

But Cuba's communiqué acknowledged that the currency unification will
face many difficulties, noting that the government will have to update
its laws, its computerized accounting programs and its training for all
of those who handle transactions.

Not listed among the difficulties was the possible rebirth of a black
market in currency as Cubans try to hedge against being caught with a
disadvantageous currency. In the past to get around onerous government
regulations and red tape, many Cubans have resorted to illegal
businesses or cheat on their taxes — and hide their true income.

"That's why there could be an increase in the value of the U.S. dollars
or the European euro within the ... illegal black market, with the goal
of preserving the surplus money that cannot be justified by its owners,"
wrote Miami radio commentator Max Lesnik in a Tuesday column.

Miami cafeteria worker Yvonne Medina said she's worried about her
son-in-law in Havana. He is keeping thousands of CUCs in cash at home in
unreported income from a bed and breakfast favored by European tourists,
she said..

"If he keeps them and they are devalued, he loses. If he reports them,
he goes to jail," Medina said. "But he's a smart man, and Cubans have
been slipping their way around the government for many, many years."

Russians faced a possibly similar situation with their rubles after the
collapse of their communist government and centrally controlled economy
in 1991.

Foreigners and Russians who had dollars were previously legally required
to exchange them for rubles at the official rate of one-to-one — and the
KGB made sure they did. But after the collapse, a dollar could bring 20,
30 and even 50 rubles in the illegal but easily accessed black market.

A three-hour Aeroflot flight within Russia that cost 400 rubles or 400
U.S. dollars before the collapse cost as little as $8 in black market
rubles afterward — until Aeroflot months later started charging
foreigners in dollars.

Source: "Cuba will phase out troublesome two-currency system - Cuba -" -

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