[News] Day Zero: How and Why Cuba Unified its Dual Currency System

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Fri Feb 12 13:18:24 EST 2021

Zero: How and Why Cuba Unified its Dual Currency SystemBy Helen Yaffe on
February 10, 2021

first of January 2021 was known as “Day Zero” in Cuba. After almost three
decades of operating with a dual currency, Cuba’s national peso (CUP) and
its convertible peso (CUC) were unified as part of a broader process of
“monetary ordering” that also involves major price adjustments, the
elimination of “excessive [state] subsidies and undue gratuities”, and
significant changes in salaries, pensions, and social assistance benefits.
The endeavor is without precedent, both because the US blockade restricts
Cuba’s access to external finances and revenues and because the process is
underscored by the state’s commitment to cushion the population from the
trauma of restructuring. It is also being carried out in the midst of a
global economic recession triggered by COVID-19.

In January 2021, Donald Trump became the twelfth president of the United
States to leave office without accomplishing regime change in Cuba, though
it was not for want of trying. The Trump administration unleashed over 240
new measures to tighten the world’s longest and most punitive blockade,
devised to cause misery and suffering among the Cuban people. Even in the
context of the pandemic, the pressure on Cuba intensified; Washington
imposed suffocating sanctions while the Miami-based opposition promoted
political instability and civil strife. In a final act of spite, on 12
January 2021, the Trump administration restored Cuba to the US list of
state sponsors of terrorism, a move designed to obstruct any efforts by the
new Biden administration to improve relations with the island.

Incrementally since 2019, Cuba’s access to food and fuel has once again
been severely impeded, export earnings slashed, and foreign investors
scared off. Measures to tackle the COVID-19 pandemic have demanded
additional resources, while the economy was shut down and tourism revenues
plummeted as borders were closed. Even while thousands of Cuban medical
specialists have treated COVID-19 patients in over 40 countries, goods
shortages on the island have made long, exhausting queues part of life’s
daily grind, with Cubans rising at 4am to get in line. Poor agricultural
production and the pandemic have exacerbated scarcity.

Cuba’s GDP fell by 11% in 2020 – nearly one-third of the total drop the
island experienced during the “Special Period” between 1990 and 1993,
following the collapse of the Soviet bloc. Hard currency receipts were just
55% of planned receipts in 2020, while imports fell 30% compared to 2019.
Cuba needs hard currency to purchase on the international market; over half
the food, fuel, medicines, and other vital resources consumed on the island
are imported, hence the unfilled shelves and long queues. This scenario
both complicated and lends urgency to the process of monetary ordering.

Cuba’s dual currency dates back to 1993, the worst year of the Special
Period, when the US dollar was reluctantly legalized and allowed to operate
alongside the CUP. Possession of the dollar had been prohibited since 1979.
Announcing the legislation in a speech on 26 July 1993, President Fidel
Castro had made his distaste clear, warning of emerging inequalities as
those in receipt of remittances would enjoy “privileges that the rest do
not have”, something “we are not used to”. However, “black market” use of
US dollars had become so widespread that prohibition was unworkable.
Legalization transferred the benefits of using dollars from individuals to
the state so that everyone could benefit. It was also a necessary component
of opening up the tourism industry, which operated in dollars. Furthermore,
with so many Cubans having relatives in the United States, the inflow from
remittances could bolster the ailing economy. However, remittances also
exacerbated historically rooted racial and class inequalities, as most
recipients were white and better off; their relatives had often left in
earlier, politically motivated waves of emigration and were
well-established in the US or Europe, with adequate resources to send money
back to Cuba.

US dollar transactions were permitted in the domestic economy and for
personal use. Most basic necessities continued to be purchased in CUP, but
luxury goods and supplementary basic goods available outside the
ration-card allotment were sold at “hard-currency collection shops”, known
as “dollar shops”, at prices that included steep taxes. For Cuban
consumers, the value of the dollar quickly fell against the CUP (initially,
from $1 = 150 CUP in 1994 to $1 = 18 in 1996) stabilising at $1 = 24 CUP.
In state enterprises, however, accounting and exchange operations
functioned with an official exchange rate of $1 = 1 CUP. This was
problematic because it obscured losses and surpluses from their accounts,
and removed incentives to increase exports. The enterprises’ economic
results appeared the same whether their produce was sold internally for
CUP, or exported for hard currency, even though the monetary value to the
Cuban government was significantly different.

In 1994, the Cuban government introduced a new “convertible” Cuban peso
(CUC) to substitute the US dollar for use in Cuba at an exchange rate of
one to one. The CUC was printed and controlled by the Cuban Central Bank.
Gradually, use of CUCs outstripped US dollars; then in 2004 the US dollar
was removed from legal tender. “De-dollarisation” was a response to the
Cuban Assets Targeting Group, set up by Bush to stop US dollar flows into
and out of Cuba. The dual currency and dual exchange rates remained,
however, with the CUC still pegged to the dollar, exchanged at 1 CUC to 24
CUP for Cuban consumers and 1 CUC to 1 CUP for state enterprises.

The dual currency divided the economy into two parts. Which branch any
Cuban operated within depended on whether their income was exclusively from
a state salary paid in CUP, or if they had access to dollars or CUC. Many
Cubans had a foot in each sector. However, it also entrenched inequality
and broke the link between work and remuneration. Incomes no longer
reflected skill levels, nor the quantity or quality of formal work. Those
with access to dollars could buy subsidized peso goods for a fraction of
their market price and consume additional goods from dollar shops. Those
dependent on peso incomes could not afford non-subsidized markets. State
workers, including the most highly skilled, earned the lowest incomes. Many
highly qualified Cubans left their professions for jobs with access to CUCs
that provided them with a higher level of consumption, such as tourism,
taxi driving, or joint ventures.

Eliminating the dual currency was a priority for Cubans, according to the
national consultations held during Raul Castro’s mandate as president. It
was a key objective in the Guidelines for Updating the Economic and Social
Model approved in 2011, updated in 2016, and confirmed in the Sixth and
Seventh Congresses of the Cuban Communist Party (2011 and 2016). In October
2013, the government announced that the process of reunifying the
currencies was underway.

The announcement was well-received. Most Cubans had come to identify income
inequality with the dual monetary system, and thus assumed that monetary
unification would automatically see inequalities disappear. The
government’s statement, however, was clear:

Monetary and currency exchange unification is not a measure which will, in
itself, resolve all of the economy’s current problems, but its
implementation is indispensable to re-establishing the value of the Cuban
peso and its function as money; that is to say, as a unit of account,
payment, and savings.

This was necessary, the official note said, “to develop the conditions
which will lead to increased efficiency, more accurate measurement of
economic activity, and incentives for those sectors which produce goods and
services for export, and to replace imports”. That statement was reiterated
in 2020 as Day Zero approached.

Despite agreement about the urgency of unification, the process was delayed
while Cuba dealt with other pressing problems, even if initial steps were
taken. The one-to-one exchange rate in some Cuban enterprises was shifted
to 1 CUC to 1 CUP, and later one to ten, massively devaluing the CUP,
raising domestic production costs, and requiring greater state subsidies to
avoid passing on the higher costs to the Cuban population. The solution
ultimately lay in increasing production and raising productivity.
Essentially, Day Zero is the culmination of years of preparation, the
participation of hundreds of experts, and – in the final months – the
training of thousands of “cadre” officials and specialists. It was also
preceded by an intense public information campaign with government
ministers appearing on television daily to explain the measures and address
Cubans’ concerns. This continued into January 2021.

The minimum monthly wage for state employees (two-thirds of total
employees) has increased by 525% from 400 CUP ($17) to 2,100 CUP ($88). The
new maximum, based on hours worked and excluding additional payments
available, is 9,510 CUP ($396). Higher salaries will be linked to
educational qualifications and other specialist criteria. The minimum
age-related or disability pension was raised by 450% to $1,528. These rises
cushion Cubans from inevitable price hikes, which were anticipated at an
average 160% for state-controlled prices and 300% for private businesses.
It follows that the greater proportion of income a Cuban spends in the
non-state sector, the more they will be impacted by the soaring prices.
However, the benefits of the salary rise to individuals will be eroded if
scarcity of goods leads to an inflationary spiral.

Higher salaries are structured to incentivize Cubans to improve their
qualifications and skillsets. The adjustments will also push into work a
large layer in society who get by without formal employment, benefiting
from state provision and subsidized consumption. Already by December 2020,
thousands of Cubans had applied for positions in the state sector. Yet
scarcity remains high, and an inflationary spiral looms.

The “ration book” will continue to exist as a means of distributing highly
subsidized food products, but subsidies for other goods in the family
basket will gradually be removed as the emphasis shifts to “subsidizing
people”, not products, so that state support is targeted to those in need.

Nothing dramatic happened on Day Zero itself. Cubans have six months to
spend or exchange their CUCs at the existing rate of one to 24 CUP. The CUP
will not be the only legal tender in Cuba, however. In 2019 the government
“temporarily” opened stores in freely convertible currency (MLC), including
the dollar. These stores were extended in July 2020. Though widely
unpopular, they are a means to provide the state with urgently needed hard
currencies. These MLC stores accept bank cards only, which depends on
Cubans having cash deposits in Cuban banks. The success of these stores
largely depends on remittances, but these have been hit by targeted US
sanctions and the global downturn.

All Cuban state enterprises now operate with an exchange rate of $1 = 24
CUP, a devaluation of 2,300% from the one-to-one rate. This is supposed to
force them to increase efficiency and productivity in order to adjust. The
state has committed to protecting enterprises by providing subsidies and
credit for one year. However, the drive to raise productivity is bound to
reduce job security and increase unemployment – difficult for a workforce
accustomed to extensive protections irrespective of performance.

State enterprises have been granted greater control over management
decisions: setting prices, raising salaries, distributing profits, and
securing foreign exchange. State or non-state entities that export can keep
80% of revenues. Those supplying the MLC stores can keep 100%. “Monetary
ordering” should benefit exporters, but importers will struggle. This
should serve as an incentive to substitute imports for domestic products,
fostering national production linkages, saving scarce hard currency, and
increasing foreign-exchange receipts. The measures are also intended to
equalize conditions for state-owned companies and non-state forms of
management (self-employed workers, cooperatives, and private businesses).

For foreign investors, the monetary and exchange unification will simplify
the process of negotiating, evaluating, and managing businesses in Cuba.
The positive impact is blunted, however, by the fact that the US Treasury
is threatening to fine foreigners that engage with Cuba. The Cuban
government is struggling to combat US measures to scare off foreign
investors. In December 2020, it announced that restrictions on foreign
business ownership would be lifted (except in extractive industries and
public services), removing the obligation for foreign investors to enter
joint ventures with the Cuban state in tourism, biotechnology, and the
wholesale trades. Cuba’s annual foreign investment portfolio included 503
projects for which the government seeks $12 billion as part of its national
development strategy.

Speculation about monetary unification, along with goods scarcities, saw
prices rise in late 2020. The government responded by raising state
salaries (3 million beneficiaries), pensions (1.7 million beneficiaries),
and social assistance (184,000 beneficiaries) in December 2020, earlier
than planned. To counter inflation, prices on dozens of key products and
services remain centrally set, but these limits have to be enforced. New,
higher tariffs on electricity consumption intend to reduce state spending
and promote energy saving. Some 95% of the electricity Cubans consume is
produced from fossil fuels, and 48% of that is imported at high prices,
which include a premium charged by suppliers to cover the risk of being
sanctioned under the US blockade. Ultimately, however, the government
reduced planned increases in response to complaints from the population.

Although the “monetary ordering” increases Cubans’ exposure to market
mechanisms, it is not a break with Cuba’s present system. In the context of
US aggression, trade dependence, economic crises, and scarcity, the
government aims to adopt greater material incentives in the long-running
battle to raise production and productivity within the socialist framework.
Back in November 2005, Fidel Castro talked about “the dream of everyone
being able to live on their salary or on their adequate pension” without
need of the ration book, which allows a “parasitic” layer in Cuban society
to refuse to work while benefiting from state subsidies. From 2007, Raul
Castro constantly referred to the “socialist principle” of “from each
according to their ability, to each according to their work” as an
aspiration in Cuba. He has repeated it in relation to the monetary ordering
now underway.

Cuba delayed Day Zero, hoping to create propitious conditions for its
implementation. But with the pandemic raging and a global economic
recession just beginning, nothing was to be gained from further delay. The
process may alarm Cubans, but as the adjustment filters through the
economy, and with the state’s promise that no-one will be left behind, it
could prove to be a vital step for Cuban development. But even if the new
Biden administration does lift some sanctions, this year promises to be
another tough one for Cuba.

Source: Latin America and Caribbean Center
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