Monetary Counterpoint

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The Cuban monetary realm is divided into two segments and each one is governed by different exchange rates.  In the state enterprise sector the peso (CUP) equals the U.S. dollar ($USD). It is an abnormality which distorts the performance of the enterprises and the macro-economy. It prevents objective assessments in feasibility and management studies, as well as in the national accounts.  In the segment involving natural persons the exchange is at the rate of 1CUC = 25 Pesos, and previously it was a higher.  The real rate is slippery.  Between 1995 and the beginning of 2002 a floating exchange rate regime was in place, but a fixed rate of 25 CUP= 1$USD was adopted in the latter year, and still remains in force today.   

This monetary illusion emerged as a result of equating the Peso and the Dollar in the state enterprises and had the good intentions of not undermining the accounting records. The result has been an overvaluation of the CUP.  Additionally, the need to capture hard currency obtained by the population, using the CUC as the main instrument, came into play. It was a duo of currencies from the same issuer acting independently with different purposes and incompatible exchange rates. Such a mixture degenerated into the vilified currency duality.

The Current Cuban Economy

Following the demise of the socialist bloc the country was able to transform its external economic model. Seventy percent (70%) of its income is currently met by service exports. Some of them absorb foreign disbursements.  By contrast others constitute net inflows, and there are those with significant advantages in profit margins. 

Tourism is the most dynamic sector. The number of visitors amounts to approximately five million per year with a growing trend. Many purchase all-inclusive packages which entail payments to the airline companies, commissions and the imported portion of their consumption. There are those who come directly and pay in cash their whole stay, except the travel.  A small portion of the excursionists who arrive on cruise ship limit their stay to one or two days.

Whatever the modality might be, all of them incur in out-of-pocket expenditures not accounted officially. These are the payments for souvenirs, taxis, automobile rentals, transportation, tips, personal services, bars, etc. Some of these expenditures are net cash inflows. A tip represents an income without any costs. It is the same with personal services. Their effects are real incomes similar to those of the cash remittances.

The sale of Cuban products is equivalent to exports, but at retail prices. This is particularly the case with tobacco, beverages, handicrafts and other industrial products.  They also have generous profit margins.

For visitors it is possible to estimate out of pocket expenditures of 280$USD per person, with an average length of stay of eight days [1]. Official statistics [2] indicate that the average expenditure for every excursionist in cruise ships, on each of the port of calls of the Caribbean, oscillates between 222$USD and 300$USD. They travel and sleep on the same ship at night, but they have high out of pocket expenditures. All sorts of marketing promoters await them in each port of call.

With five million tourists the summation of these out of pocket expenditures could amount to approximately one billion dollars.

Cash remittances make up 60% or 70% of the foreign currency income of the Cuban population. The exact amount is not known because not all of the remittances follow the bank route. Reliable estimates put the remittances amount at around three billion dollar in 2017 [3]. Remittances do not have any costs and together with tips, gifts and the like are the Olympic champions in net inflows of foreign currency. Other merchandise exports or services do not enjoy this benefit.

Will the cash remittances be affected by a lower exchange rate? Chi lo sa. The reaction of the remittance senders is unknown, but a contraction would not be a surprise.

There is little information regarding service exports. The spending of those designated as “internacionalistas” occurs in the locations where they are stationed, but they also maintain a savings reserve to be utilized in Cuba. They are equivalent to cash remittances.

In this vein the services in the balance of payments could be classified as follows:

  • Profits in non-visible items (earnings minus costs).
  • Net hard currency inflows: remittances, tips and certain services for tourists.
  • Exports of goods at retail prices; in situ purchases of Cuban products by tourists.

The non-visible items with their 70% share constitute the hen of the golden eggs of the balance of payments. It is necessary to foresee the impact that the elimination of the currency duality could have on them.

The Unified Currency

The CUP is the acknowledged heir, but presently it is handicapped. Convertibility will have to be conferred to it for it to assume its function as the national currency.

The direct or ultimate recipients of the CUC include almost all of the population. Between them there are large differences. For those who receive the smallest amounts the process of decreasing the exchange rate would be particularly traumatic.

The population suffers from a seller’s market where supply is always lagging behind demand: the consumer is never right. This situation has persisted for more than a half-century, is a source of corruption and leads to the temporary stockpiling of goods that are not consumed. Worse is the negative effect on incentives. Paradoxically, the consumer has been neglected in a society where human beings are at its core. In this case, the duality has a profile which is more commercial than monetary. An adequate supply would have a domino effect on agriculture and the rest of the economic and service activities.

When the unification is undertaken there will be a new Peso functioning as a unit of account which will be necessarily convertible. This last quality cannot be applicable to the state enterprises which shall continue subjected to the centralized allocation of foreign currency. It is the inevitable result of scarcity.

The variations in the exchange rate of the state sector will bring about different responses.

The production costs of goods produced for the internal market will increase, which will result in inflation in the long term for the population.

The goods intended for export will have their accounting costs reduced. There will be an improvement only if their demand increases.   

The self-employed workers face situations similar to those mentioned above.  They could benefit if they are allowed to use the current exchange rates of the Currency Exchange booths (Casas de Cambio abbreviated as CADECA). In this case measures will have to be put in place to compel the self-employed workers to submit to the same rules of the game as the state workers.

In domestic accounts foreign investments will mean more Pesos for each unit of foreign currency contributed. The capital of the foreign investment partner will increase and would represent a higher share in the profit distribution. For example, if a potential partner contributes 30 units of assets out of a total of 100, and assuming, hypothetically, that the exchange rate would be 5 Pesos=1$USD, his/her share would become 150 Pesos. In this case the total capital invested would then become 220 Pesos and his/her share will increase to 68%.

For purposes of international comparisons the new calculation would have to be converted into dollars at established rates. According to United Nations figures, in 2014 Cuba ranked number 37 among 51 countries of Latin America and the Caribbean in terms of GNP per capita.  At an exchange rate of 5 Pesos per 1$USD, the $7,274 GNP per capita would be reduced to $5,920.

Trains Crashing

The so-called ‘shoppings’ or CUC stores currently accept payments in Pesos through a simple conversion, multiplying their CUC prices by 25. To a large extent currency unification has already happened there. Such a rate demonstrates the inadequacy of the supply: it is only partially regulated by means of very high prices. Those establishments enjoy commercial prestige and are a meeting point where the two incompatible exchange rates stand in sharp contrast to each other in an almost insulting way. Historically, state enterprises sought not to undermine the value of the goods produced by equating the Cuban currency with the foreign one.  In the retail sector the target was the collection of foreign exchange.

Prices of an affluent country apply in the retail stores, which is in contrast to the incomes of an underdeveloped country.  The exchange rate applied by the state enterprises is obviously overvalued. The final match between both values will be challenging. Its harmonization does not depend on administrative decisions but rather on the performance of the economy. A tour de force would mean a train crash. The monetary illusion requires a decompression period before coming out to the surface.

The setting of retail prices is governed by criteria which could be discordant.

Assume a product whose cost delivered to the store, is 1$USD. The sale price is set at 2CUC after applying to it a coefficient of 2. Using nominal value pesos, at the 25$USD=1CUC rate, the price becomes 50 Pesos. The replacement cost of the item is 1$USD. If a hypothetical rate of 5 Pesos per dollar is applied, the replacement of the article would require 5 Pesos. Following the pattern of setting the sale price based on a coefficient of 2, the product would sell to the public for 10 Pesos. In this scenario, for purely illustrative purposes, the unmet demand would soar.

Simultaneously, those who possess CUCs will be affected and those who have access to CUPs will be better off. The balance of these counter effects is difficult to estimate.

Some people think that the CUP of the population is undervalued and that a favorable exchange rate will repeat the miracle of the loaves and fishes. It is an unlikely prodigious feat. The fact is that the prices that prevail in the stores are those of an affluent country in contrast to the underdeveloped country incomes. TV frequently broadcasts consumer interviews where there is often talk of the need for “adequate prices”. It is a euphemistic interpretation of the income insufficiency. It would seem that everything can be solved with administratively set exchange rates, but that is a monetary mirage.

The exchange rate in the CADECA is uncertain. Years ago it curbed the uncontrolled dollar prices in the black market. In a certain sector of the population a floating exchange rate regime operated between 1995 and the beginning of 2002, but eventually a fixed rate was adopted, where the rate to exchange CUC to CUP is 1:25, and the rate to exchange CUP to CUC is 24:1. Since that time the conditioning factors have changed. There are new sources of foreign currency incomes whose external pricing has changed. Probably an excessive amount of CUCs was issued. However, the exchange rate has not changed. It would be wise to leave the solution to the money market. A floating ratio will dictate the rates based on money supply and demand. That is the correct procedure.

A disproportionate rate could turn out to be a shock to the out of pocket expenditures of the five million tourists. Also, several million residents would be affected to some extent.

This is not the case with the state enterprises. Foreign currency is a limiting factor. They depend on the balance of payments and their control is unavoidable. Opening up the possibility of making purchases with the new Cuban Pesos for these producers would create a monetary trauma which will be impossible to absorb.

The segmentation in two sectors, one for legal entities and another for natural persons, will have to be kept for some time. In the first sector a minimum rate should be established by decree. It will detect the inefficiencies of the state enterprises and benefit the external economy and investments.  As a negative effect inflation will permeate into the retail market. It will also affect the external image of Cuba by reducing the GNP per capita.

In late 2013 the currency unification fever was made official by the Council of Ministers through a decree. It assured that there would be no shock therapy. The situation is a complex and dangerous one. One might think about neoliberalism style desperate measures.  It would require devaluating the Peso for state enterprises and evaluating it for the consumer. A hasty action would open a Pandora’s box where all hope would perhaps sink to the bottom.  The shock policies [4] would be traumatic. They have been avoided in Cuba since 1959.  It is a principle of the Revolution.

A compulsory exchange rate is essential in the state enterprise sector. It should be fixed at the lowest possible benchmark level.  However low the exchange rate may be, it will stimulate exports, attract investment, and most importantly, will allow an assessment of the firm’s management and investments. It will confer to money its function as a unit of account.  On the other hand, it will generate greater domestic inflation and will impact fiscal mechanisms, the budget, the state enterprises’ payment capacity and solvency, and other aspects, even the GDP.  

The Unification

Currency unification emerges as the tip of an iceberg. There are two underlying situations. One which is purely monetary occurs in the state enterprises; the other one involves the market and productivity of natural persons.

For foreign visitors it is also a problem of supply and demand, as well as exchange rates. Once the currency is unified, and hence convertible, the tourists would use this alternative for their out of pocket expenses and they could have their remaining currency reimbursed when leaving the country. 

Different problems require different solutions.

The unified Peso will function as an accounting unit and should be traded against foreign currency. For now it is suitable to keep the centralized allocation of foreign currency in the state sector. Its chronic shortage requires it.

Ensuring the Supply

The centralized allocation of foreign currency is a necessary evil compelled by its scarcity. The availability of foreign currency varies from one year to the next, according to the prices, economic conditions and other circumstances. Roughly speaking, 40% of the foreign currency income is used to import oil, approximately one third is for the repayment of the foreign debt, and 12% is allocated to foodstuffs.  The remaining 15% is centrally assigned for various import needs. The allotment for purchases destined for chain stores (originally in foreign currency) is among the uses of the latter percentage. Since 2005 they lost their financial autonomy and the Central Bank began issuing them an amount for imports according to the availability of foreign currency.  At the present time the centralized allocation mechanisms cannot be abandoned, but they hinder the straightforward resupply of products in the retail chain. Availability and assortment are increasingly affected. The growth of tourism itself generates more demand due to the out of pocket expenditures, and a greater need for inputs by those who cater to it.

Returning the equilibrium to the market is as important as making investments. Today the duality problem in the population is not so much a monetary issue, as a market one. The resources devoted to the retail supply must be given the importance that they deserve.

The current volume of sales in the chain stores is slightly under 2.5 billion annually, conventionally expressed as dollars.  Approximately one billion would suffice to replenish their stock immediately, assuming that the price is more than twice the cost. A portion is already included in the food imports, which are around 1.5 billion annually. It is important that the allotment be monthly in order to facilitate resupply. Continuing with this example, it would take approximately 83 million every month. It is about immediately restoring the cost value of the goods sold [5].

Fuels are indispensable. Likewise, it is vital to honor the foreign debt, following the successful renegotiations which took place. After ensuring both objectives, the volume dedicated to consumer goods must be prioritized.

The expansion of the retail market should surmount old restrictions and prejudices by including some luxury goods that were previously inconceivable. They have not been offered, or it was done with administrative restrictions, but it is in the minds of more than a few consumers. The list would be endless. More than twenty thousand items can be identified. The price mechanism will temper their demand.

The segmentation and multiplicity of exchange rates constitutes a tangled web. It should not be cut off abruptly. A hasty transformation would affect the system as a whole, including subsidies, taxation, banking supervision, allocation of resources, purchasing power, foreign trade, tourism, foreign currency incomes, etc. A decompression, a period to adjust the economic activities, is necessary.


The elements presented above demonstrate a dual problem: a monetary one for the state enterprises and a market one for the population.

As regards the population, it will be wise to return to the fluctuating exchange rate scheme that fixes rates based on monetary supply and demand. 

The segmentation establishes different conditions for both. They are necessary. In the state enterprises it is advisable to determine a fixed rate. Even a low rate of exchange of 5CUP=1$USD will have the desired effect that money functions as an accounting unit as well as a measure of the economic outcomes. The greater the rate, the higher the production cost per unit will be, which will eventually result in inflation for the consumer.

A fluctuating exchange rate should apply for the population. The equalization between the two rates will be achieved when the performance of the economy itself equates them. Hence, the segmentation will cease and the unification will have been completed.

Accordingly, the following actions are suggested:

  1. Define the single currency and confer convertibility to it.
  2. Maintain the segmentation between the state enterprises and the population.
  3. Establish a fixed exchange rate for the state enterprises. Ideally, 5 Pesos=1$USD
  4. Establish a fluctuating exchange rate between foreign currency and new Peso exchanges. But only for the population and the tourists.
  5. Ensure a monthly allotment of foreign currency in order to replace the goods sold in the chain stores.

The elimination of the currency duality is a minefield. Its solution should be undertaken gradually. The final act does not depend on an administrative decision which would imply a shock therapy. The increase in labor productivity is the only solution to the unification of both rates. The recovery of a buyer’s market should contribute to it.  It was lost half a century ago and it is must be recovered so that money becomes once again a sufficient stimulus. It is necessary to restore to consumer demand the power to purchase an illusion, as stated by the poet from Matanzas.

La Habana, April 2018 [6].


[Traducido por Eduardo Alejandro Mendez; editado por Rafael Betancourt].



  1. Estimates in various feasibility studies. JMFO.
  2. These are Cruise Lines International Association (CLIA) statistics cited by José Luis Perelló, which are in turn cited by Rafael Betancourt in “The Importance of Tourism in Cuba’s Balance of Payments”. Cubadebate. November 24, 2016.
  3. Population. American Community Survey. 2006. Remittances Surveys of Sender and Recipients, 2005 and 2009.
  4. The term shock policy was coined by Milton Friedman of the Chicago School of Economics.
  5. When applying this procedure for the first time one should get an estimate of the sales that does not include the current undersupply.
  6. This paper summarizes an essay written by the same authors which is currently in press. It is titled “Engañoso Caballero es Don Dinero” (Mr. Money, A Misleading Gentleman).