An Unrealistic Peso-Dollar Exchange Rate as Cuba Unifies its Currency

The newly announced date for currency unification is perhaps the latest bequest from the Castros. (14ymedio)

14ymedio bigger14ymedio, Elías Amor Bravo, Valencia, December 11, 2020 — O.K. So now we know. All the official news media outlets made the big announcement: there will be one single currency for the entire economy, the transition* will begin January 1, 2021, and we know what the official peso-to-dollar exchange rate will be. Postponement is not an option, no doubt about it. What’s done is done.

With this decision the fates of Raul Castro and Miguel Diaz-Canel are forever linked. They have set in motion a process that people have talking about since the summer, though the initial decision was announced way back in 2011.

Henceforth, January 1 will be a day for celebrating more than just the “Triumph of the Revolution.” It is clearly the latest unwanted bequest from Fidel to his brother. After today January 1 will commemorate the triumph of the currency unification. But perhaps we will have to first wait and see if it turns out to be a bust or not.

Diaz-Canel used the first part of his speech to make it abundantly clear this decision was made with the full backing of the State and the Party, which control the fate of every Cuban. Just in case.

In his historic address he cited the support of the Politburo as well as the Communist Party Central Committee as expressed during the VII Party Congress and later in the “Conceptualization of the [Economic] Model,” which established guidelines for monetary policy, exchange rates, taxation, credit, pricing, salaries and miscellaneous personal income.

He also cited Statutory Guideline #40, which describes the process of monetary and currency unification as a decisive step in the country’s financial transition process. As though that were not enough, the” 2020 Economic and Social Strategy” document describes it as a key structural component of the entire Cuban economy.

It seems that, after almost a decade, the process of putting together the necessary legal and statutory framework is finally complete. Making the announcement in this way rather than during an appearance on the Roundtable TV program is an indication that, this time around, the authorities are playing for keeps. It’s the last chance they have to set the economy on the right course.

There is no point in criticizing the decision to move forward with monetary and exchange reform. The time has come to do away with the convertible peso, the CUC — an absurd, fictitious currency created by Fidel Castro — and restore the old Cuban peso to its role as the country’s sole legal tender. The decision makes sense. It points the country in the right direction, towards financial sovereignty, and should have been done years ago.

What the regime will not do, however, is renounce, monitor or analyze any individual economic policy decisions that have caused distortions in the economy and worsened the standard of living for all Cubans.

The first thing to note is that the new exchange rate of twenty-four Cuban pesos to the dollar is not the most appropriate. Nor does it represent a “significant devaluation” as  the chairman of the Economic Policy Commission, Marino Murillo, said during a recent Roundtable interview. Murillo lied.

This type of rate is designed specifically for the business sector which, until now, was using a one-to-one exchange rate to the dollar for accounting purposes. But the leap of faith from the CUC to the CUP for consumer purchases is the first indication that this rate of exchange will not last much longer. Soon Cubans will be trading the CUP for the same rate that once applied to the now doomed CUC.

The policy authorities have adopted is an attempt to correct the serious shortcomings of the state-owned business sector. There are doubts, however, that it will benefit Cubans more broadly. The artificial status quo it creates for the CUP will not last very long. We will have to wait and see what the informal markets have to say. They are the ones to determine what the real value of the Cuban peso will be relative to other currencies. Will twenty-four Cuban pesos really be equivalent to one dollar?

The official communiqué now makes it clear that authorities’ commitment is to business and that they are disinterested in using the CUP exchange rate to benefit the population: “The monetary transition also creates conditions so that the business system can react positively by increasing benefits for all its workers and for society.”

The priorities behind this decision are obvious: to provide oxygen to the state-run business sector in hopes it will export more and import less. But it is yet to be seen if the planned devaluation of the currency, which is already steeply discounted, actually takes place. In reality, the collective interests of the Cuban people must once again take a back seat. Correcting the course of this economy with interventionist measures and communist fiscal control is a serious mistake.

Diaz-Canel acknowledges that the monetary transition “is not without risk” and justifies it, as usual, by blaming it on the “blockade” [i.e., the US embargo]. The Cuban economy, he points out, is not having one of its best moments and the current international outlook is not bright. He acknowledges that the threat of inflation is just around the corner and that this new system of monetary exchange will not solve the consumer goods shortages the economy is suffering. He also fails to offer any solution that might raise production levels.

The government communiqué states, “As always, we are open to public comment. Steps have been taken that allow us to make sure no one will be left helpless. People will not be subject to shock therapies in socialist Cuba.” Perhaps this is because the authorities fear the worst or don’t want to acknowledge it. Diaz-Canel must know that helplessness could result from setting the CUP exchange rate at a level that would not benefit, for example, people who rely on remittances from overseas or even foreign visitors at the country’s privately owned restaurants.

The communist leadership acknowledges that the transition “is not a magic bullet that will solve all the problems of the economy.” They are right to show caution because this is likely not the end of the story. In the coming months Cubans will see devaluations in the rate of exchange. A value of twenty-four pesos to one dollar is not realistic or sustainable and cannot be justified from any rational economic standpoint.

With the transition set to take effect, will the significance of January 1 be forever changed. Is this perhaps the bequest of Raúl Castro?

*Translator’s note: Cuban officials have been using the clumsy term tarea ordenamiento, translatable as “statutory task,” to refer to what is more widely known as “monetary unification.” Both terms refer to the consolidation of Cuba’s two currencies into a single currency. For purposes of clarity, these terms have been translated here as “currency unification,” “monetary unification” or simply “transition.”


Editor’s note: This article was originally published in the blog Cubaeconomía and is reproduced here with permission of the author.


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