14ymedio, Elías Amor Bravo, Valencia, 30 December 2021 — Well, we have come to the end of a very difficult and complicated year for all Cuban compatriots. The deadline is looming for people who still have convertible pesos, CUC, in cash, to exchange them for Cuban pesos (CUP) in compliance with the central measure of the Ordering Task*, which was to put an end to the monetary duality that existed in Cuba since the 1990s.
A concise note in the State newspaper Granma said that “the Central Bank of Cuba reminds the population that commercial banks will continue to exchange convertible pesos (CUC) for Cuban pesos (CUP) in cash at bank branches until this Thursday, December 30, the date on which the period of 180 days granted in Resolution No. 178 of June 15, 2021 to carry out this operation expires, as published by that institution on its website.” It does not appear that there are much CUCs left in circulation to be exchanged, but if so, run to the nearest bank and say goodbye. It’s over.
However, a period remains open, until March 31, 2022, so that the accounts in convertible pesos of on demand savings, time deposits and certificates of deposits of natural persons are kept in that currency, so that the holder of the same can decide whether to convert them to Cuban pesos or decide to opt for a certificate of deposit in foreign currency, according to the conditions established for this product.
And it is over. In this way, without fanfare, the dual currency CUC (Cuban convertible pesos) and CUP (Cuban pesos) — which according to communist leaders created serious problems and distortions to the functioning of the economy — had to be put an end to, saying goodbye without further ado.
However, at the same time, shadows of threat are emerging in the Cuban monetary landscape that are causing much more serious damage, with important consequences in terms of inequalities and that point to a new scenario, not of duality, but of monetary multitude, with the formal and informal acceptance of the freely convertible currency (MLC), and of the main international currencies in all types of transactions.
In fact, although there are no official data, the circulation of currencies has reached significant proportions in the Cuban economy in recent months and the objective of the communist leaders to unify transactions in a single currency, the Cuban peso, is sailing against the wind, without realizing it. Now, in addition, the country is facing the threat of inflation, which at the end of the year will hit an interannual rate of 70% (in 2020 it was 18.5%).
So how did this situation come about?
The answer is simple and easy to understand. In a matter of months, there has been an absolute mismatch between the currencies that enter the country and the national currency in circulation.
The former is easy to understand.
Tourism, the main source of income, has plummeted from the 4.7 million level in 2019 to the 500,000 level in 2021, after the strong hit in 2020. Some communist leader has pointed out that the loss of income exceeds two billion dollars, but it is possible that it was much more. The paralysis of tourist activity is absolute and the prospects for the high season of 2022 do not seem favorable, due to the explosion in the Covid-19 omicron variant circling the world.
Foreign investments have once again had a disastrous exercise, because international capital already has two destinations in Central America and the Caribbean that are much more profitable and receptive than the Cuban communist regime: the Dominican Republic and Costa Rica. The prospects for Cuba are not good and Malmierca’s announcements of alleged reforms of Law 118 indicate that the authorities know that the model is exhausted and they have to react by opening spaces for foreign capital.
Like tourism, income from the sale abroad of medical, professional, trainers, and all kinds of services have come to a sharp stop, proving to the regime that, even in difficult times in terms of public health, this type of business has its limits and cannot grow continuously, as countries react to their shortcomings and seek more effective solutions to solve problems.
Merchandise exports have collapsed because of the uneven evolution of world markets and supply chains, in which the communist regime has never had the slightest intention of participating. In fact, Cuba has not even managed to integrate itself into Chinese foreign trade.The self-exclusion from global trade practiced by the communist leaders and their commitment to bilateral agreements and agreements with countries of similar ideology, more typical of the cold war, is a brake on development and the external competitiveness of the economy.
Remittances have not given cause for joy either, despite the fact that they are the only component that injects foreign currency, specifically dollars, into the national economy. But even in this case, the regime, by prohibiting deposits in this currency as of the summer, has shot itself in the foot, pushing remittances into the informal economy realm or into stores in MLC using tricks to collect revenue from trade margins.
Last but not least, since debts with international creditors (the Paris Club) have not been paid, access to financial markets is closed, which prevents obtaining financing other than through subsidies or donations, the money for which goes to programs with little economic and social impact such as agro-ecology or local development.
Thus, the scarce inflow of foreign currency encounters a disproportionate increase in the issuance and circulation of the internal currency, in this case, the Cuban peso.
The uncontrolled monetary expansion, for which the Central Bank of Cuba and the Government have direct responsibility, is due, on the one hand, to the needs for the conversion of the CUC (which is exchanged at 1-to-24 on the dollar), generating an artificial expansion of Cuban pesos. This has generated in Cuba one of the highest percentages of M2 (money supply) relative to GDP in the world, 121%, and the reduction seems problematic.
On the other hand, the uncontrolled expansion of Cuban pesos has its origin in the overflow of the public deficit, which is probably close to 20% of GDP, despite the fact that investments have been reduced, recklessly and irresponsibly. The expansion of the public deficit caused by expenses that grow well above income expands the amount of money in Cuban pesos and distorts the internal balance of the economy.
To all this must be added the consequences of the inflation caused by the Ordering Task. A Cuban who changed his CUC to pesos on January 2 of last year would have obtained almost double the purchasing power for the same CUC changed to pesos on December 2.
The galloping inflation of 2021 erodes the purchasing power of salaries and pensions, and the same can be said of on demand savings deposits, time deposits and certificates of deposits in CUC, which if they continue to be held until March without being exchanged for Cuban pesos, will probably be worth much less than theyare now, because inflation will continue to advance, to the extent that there is no single measure the regime might take to solve the problem.
In fact, the inflation that is hitting and will hit the Cuban economy is a direct consequence of the mismatch between the hard currencies and the national currency in circulation. Good proof of this is that the fixed exchange rate of the 1-to-24 pesos against the dollar could not be sustained by the authorities. In the informal markets the rate for these transactions is at a much lower level, with 70 Cuban pesos required to obtain one US dollar. Maintaining a fixed exchange rate under these conditions and with a year-on-year inflation of 70% is a suicidal decision. The authorities must devalue the peso and do it with courage, imposing budget adjustments that facilitate the expansion of the private sector, the only one that can lead the Cuban economy out of this vicious circle derived from the obsolete and crisis-ridden communist social model.
Seen from this perspective, the balance sheet of monetary unification has been a real disaster in terms of its implementation. Cubans have to operate with a weak currency, in which confidence has been lost and that nobody wants, despite the fact that it continues to be the main currency in the economy as a whole (wages, salaries and pensions are paid in Cuban pesos). On the other hand, a space has been created for alternative trade in foreign exchange and MLC (freely convertible currency) that applies to goods and services that cannot be purchased with pesos and this generates an additional demand for foreign currency that, as has been indicated, is not offset by the offer. The last has been the slogan for state companies, selling their products for domestic consumption in hard currency, to customers who are paid in Cuban pesos.
What was intended to be corrected with the Ordering Task has deteriorated to levels difficult to explain or justify, and meanwhile Cubans must prepare to live dangerously in 2022. A year that, like the one that is ending now, is going to be very complicated and will have very negative consequences to the lives and prospects of families, accentuating the enormous social inequalities and deteriorating the living conditions of the vulnerable. The communist social model of the 2019 constitution has to be modified because it does not work. We will see this throughout the year. The budgets of Señora Bolaños do not give more, the plan of Minister Gil will not be fulfilled, tourism will not work in the high season, and only humanitarian aid can serve to alleviate the situation. And so it will be seen.
Editor’s Note: This article was originally published on the author’s blog, Cubaeconomía.
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