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<font size="1"><a href="https://www.resumen-english.org/2021/02/day-zero-how-and-why-cuba-unified-its-dual-currency-system/">https://www.resumen-english.org/2021/02/day-zero-how-and-why-cuba-unified-its-dual-currency-system/</a>
</font><h1 class="gmail-reader-title">Day Zero: How and Why Cuba Unified its Dual Currency System</h1>By Helen Yaffe on February 10, 2021</div><div class="gmail-content"><div class="gmail-moz-reader-content gmail-reader-show-element"><div id="gmail-readability-page-1" class="gmail-page"><div id="gmail-wrapper2">
<p><a href="https://i1.wp.com/www.resumen-english.org/wp-content/uploads/2021/02/2-12-cuba-currency.jpg?ssl=1"><img src="https://i1.wp.com/www.resumen-english.org/wp-content/uploads/2021/02/2-12-cuba-currency.jpg?fit=747%2C420&ssl=1" alt="" width="280" height="157"></a>The first of January 2021 was known as “Day Zero” in Cuba. After almost three decades of operating with a dual currency, <span id="gmail-more-16757"></span>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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:</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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).</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>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.</p>
<p>Source: <a href="https://blogs.lse.ac.uk/latamcaribbean/2021/02/10/day-zero-how-and-why-cuba-unified-its-dual-currency-system/">Latin America and Caribbean Center</a></p>
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