The Slow Agony and Death of Fidel Castro’s Currency

Cuba’s two official currencies: the Cuban convertible peso (CUC) and the Cuban peso (CUP).

14ymedio biggerElías Amor Bravo, Economist, 27 November 2019 — The CUC was the fictitious currency created by Fidel Castro during the Special Period to avoid the dollarization of the Cuban economy. A controversial decision that has created not a few problems in the operation of demand and supply.

Three years after his death, the authorities seem to have lost confidence in that currency and anticipate a long and slow agony. A magnificent chronicle by Cuban journalists Luz Escobar and Mario J. Pentón for 14ymedio about the depreciation of the CUC, encourages fears about the way in which the authorities will address the elimination of this currency.

Causing its loss of value, until it dies of starvation. Instead of announcing an end to the fictitious currency, on a transparent and clear date and conditions so that the economic agents having CUCs in their possession know what to expect, the communist leaders have grown tired of the mortgage of the CUC and according to information coming from the island, its days are numbered. But best of all, the pressure of the dollar continues, and even increases in strength. Arango and Parreño already said it.

At the moment, the depreciation of the CUC is noted, above all, in the transactions that are carried out in the powerful and diversified informal economy that exists in Cuba, whose development and social roots are due to the prohibitions, obstacles and communist interferences in normal behavior of economic agents on the island.

Well, the CUC has depreciated in these informal exchange markets, and citizens are surprised when changing the dollars they receive from their families for CUC that they get a greater amount of currency. In fact, many people are asking their relatives abroad, instead of sending remittances by bank, to bring the money in their pockets. It will not take long to see the Cuban customs searching those who enter the country.

A good part of the convulsion suffered by the price of the CUC is due to the competition of the dollar, which the leaders of the regime have allowed to be used stores in an attempt to compete with private imports (via ’mules’) of household appliances and auto parts.

This fact has meant that the value of the CUC is reduced by 30% in the black market while the official exchange rate is still applied in the official CADECA currency exchanges.

Conclusion, those who receive remittances from the United States now get more CUCs for the same amount of dollars if they change them in the informal markets. Mules that carry cash will see their business grow.

But the collapse of the CUC has very negative consequences on demand and supply, because its loss of value and progressive cornering in the economic system will influence the behavior of the prices of goods purchased with this currency, which are practically all, as there is more variety and they are used in more and better stocked stores.

At the moment, in the shops of the Rancho Boyeros airport it has been announced that payment is not accepted in CUC, so that tourists who arrive with remnants in this currency to make the last purchases should be aware that this practice will be impossible.

In the short term, the depreciation of the CUC will increase the price of the goods that are bought with this currency, or in other words, to buy a specific product, more CUC will be necessary than before. This can have an inflationary impact.

Now, if prices cannot increase, because they are buffered or because there is no market reaction, then the goods will be scarce. The CUC may not even be accepted as a means of payment in some establishments. This would be the final death of Fidel Castro’s currency.

As for the offer, I do not want to think about the problems created in state companies that keep their accounts in double currency, when one of them continuously loses value and the other does not. Reviewing the accounts, re-analyzing the investment plans and calculating the balance sheet and income statement ratios, becomes a very complicated task with the new situation.

Another major loser with the depreciation of the CUC is the regime, the state apparatus, basically because it will not be raising the dollars that previously entered the CADECA network (the official exchange houses) since many people prefer to change their currency in the informal market where they get more for it and also avoid the 10% tax on the dollar in cash.

Cubans will retain dollars for all types of operations, from leaving the country, to buying goods or services inside, a large number of activities.

The steps towards dollarization are being taken. As the government forces people to open accounts in dollars to be able to buy appliances in a series of state stores, by means of an electronic card, the resistance to this procedure will also mean losses for the regime, along with those in the CADECAs.

The appreciation of the dollar and the simultaneous depreciation of the CUC in the informal market is apparently not affecting the Cuban peso (CUP), which is outside these trends, at least for now. But it will soon be affected, despite its marginal role in the economy. The depreciation of the CUC may mean that its exchange with the CUP, currently 1:24, also ends up benefiting the Cuban peso, the historical currency.

Imagine the parity in the exchange and the consequences that this could have on the economy. I do not see how this can be possible if one takes into account, as already stated in another entry in this blog, that the fundamentals of the economy do not give much attention to the CUP. In any case, this is the most complex scenario ahead.

Meanwhile, it will be necessary to see what happens with the most important economic operations on the island, such as the purchase and sale of homes, the rental of vehicles or the supply of inputs by private entrepreneurs. An apartment, with the price in CUC, may experience a price increase, if currency depreciation continues. Conclusion, people will end up conducting operations in dollars or in extreme cases, in CUP.

Therefore, it is assumed that the demand for dollars by the population will increase. A demand that also the authorities of the regime will also have to face with international creditors. The conflict is set. Letting the CUC die is a possibility; however, there is a weak link: deposit holders in this currency have to receive some kind of compensation if the dreaded losses occur.

And given the magnitude of monetary circulation in Cuba, where cash in the hands of the public is as much as 25% of GDP, it will not be easy to drain that liquidity. Monetary unification in Cuba is far from being achieved. The CUC will continue to languish until it finally dies.


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