Cuba continues its liberal opening by scrapping double currency

. Jan 06, 2021
Cuba is embarking on a dramatic currency reform. Photo: Martchan/Shutterstock Cuba is embarking on a dramatic currency reform. Photo: Martchan/Shutterstock

After the 1959 revolution led by Fidel Castro’s 26th of July Movement, the Caribbean island of Cuba became an enemy of the U.S., taking on the role of Washington’s communist bogeyman in the western hemisphere. The nerve center of global capitalism responded to the new socialist state with decades of economic embargoes that made Cuba almost completely dependent on the Soviet Union during the Cold War.

When the USSR disintegrated in 1990, aid to Cuba stopped and plunged the island into crisis. During what was called the “Special Period in Time of Peace,” Cuba’s GDP fell 34 percent and the country lost almost 80 percent of its trade portfolio.

</p> <p>In response, the socialist government took drastic measures, lifting a ban on citizens possessing U.S. Dollars and selling tourism services and luxury goods in USD. A second currency was created in 1994 — the Cuban Convertible Peso (CUC), or <em>chavito</em> — pegged to the greenback.</p> <p>Now, with the harshest cash crunch since the Special Period — largely influenced by tighter U.S. sanctions and dwindling tourism due to the coronavirus — the CUC&#8217;s days are numbered. On December 10, President Miguel Díaz-Canel <a href=";">announced that the <em>chavito</em> would be discontinued this month</a> and all convertible pesos removed from circulation by June.</p> <p>Scrapping the CUC was accompanied by a major devaluation of the Cuban peso, which became valued at CUP 24 : USD 1 as of January 1. Mr. Díaz-Canel claims the move is necessary to &#8220;move forward with the transformations demanded by the updating of our economic and social model.&#8221;</p> <h2>Special times return in Cuba</h2> <p>Regardless of the socialist island&#8217;s <a href="">effective control of the Covid-19 pandemic</a>, the coronavirus crisis has brought about a series of economic challenges, not least tougher sanctions from the U.S. and the almost complete paralyzation of the country&#8217;s money-spinning tourism industry.</p> <p>Rationing has returned in the country, with more and more Cuban citizens using the so-called <em>Libreta de Abastecimento </em>— a government-issued ration book for basic supplies made available at subsidized prices.&nbsp;</p> <figure class="wp-block-image size-large"><img loading="lazy" width="1000" height="667" src="" alt="Havana on January 2, 2021. Photo: Yandry_kw/Shutterstock" class="wp-image-54632" srcset=" 1000w, 300w, 768w, 600w" sizes="(max-width: 1000px) 100vw, 1000px" /><figcaption>Havana on January 2, 2021. Photo: Yandry_kw/Shutterstock</figcaption></figure> <p>However, as hinted to by President Díaz-Canel, currency unification is not simply a drastic measure to mitigate the crisis. It is also part of a new agenda of economic opening which started during the rule of Raúl Castro, Fidel’s brother and the First Secretary of the Cuban Communist Party since 2011. In the one-party state, Mr. Castro holds authority over President Díaz-Canel, with the office of president only being introduced in 2019.&nbsp;&nbsp;</p> <p>The rise of Raúl Castro to become the most powerful figure in Cuba has seen increased attention paid to the private sector, historically ignored and suppressed during Fidel Castro&#8217;s reign. Incentives were given for <a href="">self-employment</a> and the private sector now accounts for 30 percent of the island&#8217;s GDP, a share expected to grow in coming years.</p> <p>In a new Constitution approved in 2018, the socialist state made radical changes, recognizing the existence of private property and the importance of foreign investment and &#8220;the market.&#8221; Scrapping the CUC goes in line with these apparently liberal changes.</p> <h2>One single currency, many possible problems</h2> <p>Moving to a single currency scraps the confusing calculations Cuban citizens were faced with every day. For companies, CUC 1 (and, therefore, USD 1) was equal to one Cuban peso. However, for the average Cuban at the grocery store, CUC 1 was traded at CUP 24.&nbsp;</p> <p>In times of shortages, Cubans often referred to convertible pesos as &#8220;dollars,&#8221; giving the sensation of a dollarized economy, as is seen in other Latin American countries. This is one of the issues the government seeks to eradicate.</p> <p>Short-term effects of the change could be devastating. For those holding savings in convertible pesos, their value will diminish over 95 percent. To cushion the blow, the government says it will exchange CUC for the old 24:1 rate for another six months and state salaries and pensions will be increased 500 percent. No such mitigation measures have been announced for the private sector or rural workers, however.</p> <p>Collin Laverty, a Senior Partner at Havana Strategies and expert on U.S.-Cuba relations, reinforces the reform’s importance, despite the uncertainty. “It’s a very necessary reform, perhaps the most important, to help reorganize the Cuban economy and gain efficiency,” he tells <strong>The Brazilian Report</strong>.&nbsp;</p> <p>According to the Havana-based expert, tourism in the island will be one of the most-impacted sectors, especially when it comes to foreign companies. But they will see benefits due to a unique exchange rate. “Dealing with Cuban companies will become more straightforward,&#8221; he says.&nbsp;</p> <p>Indeed, tourists have traditionally brought hard currency to Cuba and exchanged it for convertible pesos. With the CUC being scrapped, these visitors will now turn to Cuban pesos or use foreign currency for payments.</p> <p>“The government is focused on controlling official exchange rates and prices of many goods, and perhaps services, so travelers shouldn’t expect major changes in prices. The impact of Covid-19 and [President Donald] Trump’s policy have driven prices down, so any changes in cost will likely be more related to demand and not currency reform,” he added.

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Lucas Berti

Lucas Berti covers international affairs — specialized in Latin American politics and markets. He has been published by Opera Mundi, Revista VIP, and The Intercept Brasil, among others.

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