A monetary and, especially, an exchange rate reform, in my opinion, should be at the top of our list of measures to take. For me, it is the main Gordian knot that we must undo, both because of its negative role in fueling many of the problems facing present-day Cuba, and due to its effect on the rest of the measures to be implemented and goals to be reached. Our current currency and exchange-rate regime is to blame for the lack of reliability and transparency of the accounting and statistical system that underpins the country's macro- and microeconomy. It does not provide a starting point nor shows a reliable route when it comes to making major decisions about economic planning. It hinders management, clouds and twists the figures related to our economic output ―often deceitful and out of touch with reality― discourages exports and foreign investment while encouraging imports instead. It restrains productivity and production growth, particularly in the state sector and in the economy as a whole. Likewise, it contributes to increased socioeconomic inequality and is a breeding ground for today's rampant corruption.
These reflections and suggestions about how to undertake the yet-to-be-settled Monetary and Exchange Rate Reform are part of a Comprehensive Program of changes to be made and measures to be taken, including some as essential and urgent as the reform itself, which ranks first on the chronological agenda but would only be feasible and successful if it is launched together and in close interrelation with the rest of the said measures, as they all constitute a system of mutually interrelated precedents and outcomes. Should it be approached in an isolated manner, my suggestions concerning our currency and exchange rate-related issues could prove to be inadequate or even counterproductive.
The first step of my proposal, before any modification of the exchange rates, is to eliminate the circulation and existence of the Cuban convertible peso (CUC) and keep the Cuban peso (CUP) as the only legal currency, making it legal tender and of obligatory use, in the face of foreign currencies that will remain banned from circulation as a means of cash payment, as is customary in most countries around the world. As the first step, the elimination of the CUC for both corporate relations and the population at large would be implemented in the span of two to three months, although the ultimate timeframe could be open to debate.
Right after this first step, solely of monetary unification, the existence of a single currency ―the CUP― would lay the foundation for a process of changing the exchange rates, which in my view would take about one year and should start on the first day of the year to make it coincide with the beginning of the Annual Plan.
This move toward the elimination of the CUC would be based on the current rates that holders of CUCs and owners of CUC bank accounts use to exchange them for CUPs, as promised by the Cuban government. The rates currently in force for transactions by State enterprises would also be applicable, in order to convert all accounting and statistical records and bank accounts held by enterprises to CUP, with the exception of foreign companies and joint ventures, who could keep hard currency bank accounts and accounting systems.
We believe the monetary unification is a necessary step to clear the field, not unlike what is done in a future construction site to get rid of all the shrubs, grass, stones, rubble and litter before digging the foundations of a building. And we see it as a relatively simple step, since the existence of two national currencies is in practice a mere formality.
Cuban consumers can nowadays use either currency to buy goods and services from any state or nonstate retailer ―barring some isolated bureaucratic entities― at the prevailing 1:24 rate, which can fluctuate between 1:23 and 1:25, and even 1:20 when small change in CUC is used.
Keeping the two currencies in circulation entails additional efforts and expenses for the retail goods and services sector, mainly for state establishments, where all prices must be marked in both CUCs and CUPs and items may be paid in either, which is conducive to unnecessary confusion, errors, fraud, price gouging and other forms of unlawfulness and corruption.
When someone goes to the CADECAs (exchange bureaus) to change any amount of foreign currency into CUCs at the existing rate that day, they can turn those CUCs into CUPs at the rate of 1 CUC for 24 CUPs, immediately and without even moving away from the counter. It would be just a matter of eliminating the first, purely formal step and deliver Cuban pesos directly to the exchanger at the relevant foreign/national currency rate in force at the time of the exchange. The CUC would only be used by the bank as an intermediate base to calculate the applicable foreign currency-to-CUP exchange rates.
Right now, some level of the Cuban corporate structure is taking care of the transition of all its accounts to the CUP system in order to streamline balance sheets, pay its taxes and register figures in the country's National Accounts. Only the primary registries, some middle-level accounts and bank deposits are still based on the dual currency. It would be a matter then of standardizing all the primary registries of inventories, fixed assets, depreciation, etc., as well as all asset and liability accounts in CUP, using the current 1:1 rate or others applicable to various specific transactions.
As to bank accounts, the enterprise sector's current CUC deposits cannot currently be converted into foreign currencies. Such an operation would require the respective liquidity certificate (CL), which in fact has entailed the appearance of a third currency that could be labeled as CUC-CL. And no CUC accounts are needed to undertake the centralized allocation of foreign currencies or use close-end self-financing schemes for overseas payments, as long as we are compelled to do so. It would suffice to open special bank accounts in CUP-CL and use that money to purchase authorized currencies according to the existing rate at the time.
Therefore, the CUP would be convertible, albeit not freely convertible at first, whether for enterprises or individuals, whose requests to buy foreign currency must be submitted to a certain degree of control and perhaps even to different exchange rates according to the expected destination of the money, so as to prevent a possible capital flight.
What must be emphasized is that, after the aforesaid first step toward monetary unification is implemented in two to three months, or any other time frame (before the process to modify or unify the exchange rates), the resulting money market would no longer witness a clash between foreign currencies and the money supply split into two Cuban bills, as those currencies would play opposite a single Cuban currency. Nor would Cuba's two current money supplies clash with each other since there would be just one currency to begin with. This new money market scenario would last for one year or maybe a little more.
During that time the country would learn to adapt to a single currency system ―abiding in all cases by the current exchange rates but without the CUC― prepare the technical, accounting and statistical grounds and develop plans and estimates to anticipate the impact that the new rates and other measures designed at this stage and scheduled to be implemented simultaneously, will have on the business sector and the population. This process would involve all levels of the enterprise system from the bottom up and rely on the support of teams of university and academic specialists led by a national methodology.
At the same time, and as transparently as possible, we would undertake a process of information, explanation, reasoning and search for popular consensus through the media and other advisable channels.
As part of my proposal I suggest a single rate of 1:15, which undoubtedly involves an appreciation of our national currency (the CUP) at the CADECAs. And we must bear in mind that it also involves the depreciation of the said currency at the level of intercompany relations.
I have recognized, and now I repeat here, that this specific proposal of a single 1:15 rate to replace the 1:1 and 1:24 rates is totally arbitrary, since I have neither the information nor the required figures to hint at the most advisable rate under the present circumstances with any solid scientific grounding. It is only an attempt to place it halfway between the 1:1 rate applied to the corporate sector and the 1:24 rate used in street-level transactions, both of which, in my view, are not only out of keeping with today's actual objective economic relations but on opposite ends to boot.
Such initial 1:15 rate should vary on a regular basis for intercompany relations ―say, every two or three months― taking into account the fluctuations of international import and export prices. In the case of street-level exchanges, the rates would shift on a daily or weekly basis, just as it happens today between foreign currencies and the CUCs. More profound and serious studies stemming from practice will help us devise economically objective and better reasoned rates.
However, the most important thing about the suggestions that I put forward in this article is to keep in mind the rest of the elements and aspects and their relationship with the rates proposed herein.
As I stated above, it is not about proceeding with the modification of our exchange rates under the present circumstances. Such a step should only be taken about a year after the withdrawal of the CUC and only when we have come to terms with the new situation and the time is technically, economically and politically ripe, once we have planned for the possible impact of this process and thought out what corrections might be deemed advisable.
The most important element to supplement this measure is to combine the reform of our rates with the increase of people's salaries and pensions, raising the minimum wage and pension to 1,000 CUP per month and starting the gradual implementation of a radical wage reform on new grounds in which workers' salaries are not contingent on their employer's economic output, as is the case today. They would be based only on their status as workers and, therefore, on the labor cost of the average family’s weekly shopping basket, and on a salary scale based on a whole set of rates related to the employee's qualification, performance and working conditions, as well as on the social importance of the work to be done, all of which should point to an average monthly starting salary of 1,400 CUP to 1,500 CUP.
Workers’ incomes associated with their enterprise’s economic results, should be based on their condition as owners of the means of production and not as simple employees, through the distribution of a part of the profits earned by the enterprise in the period in question.
As plans are developed for a Wage Reform, intended to be implemented gradually right after the modification of the exchange rates, and for enabling the human resources departments of our organizations and enterprises, we must definitely engage both our labor unions and all links and workplaces throughout the country, as well as gain the support of academics and scholars specializing on these issues, who will work under centralized guidance.
A major aspect to be considered regarding this proposal is that the appreciation of the CUP for street-level exchanges from 1:24 to 1:15 would likely become an immediate and significant financial stimulus to support the indispensable salary and pension increase. This cannot be postponed any longer without detriment to the overall money supply currently in circulation, which would just be redistributed from the upper income groups to the most disadvantaged sectors who cannot make ends meet these days. What other source of sufficient funds could we turn to without waiting until hell freezes over, to carry out the indispensable and urgently needed salary and pension increase? Not only for reasons of social justice and equity but as an uplifting measure both to encourage labor stability of our qualified workforce in the state sector and to boost production and productivity, the building blocks of our hopes for development.
One of the first measures that I suggest in my proposal is the implementation of a Wholesale Price Reform also during the one-year period between the end of CUCs and the beginning of new rates. This will require estimating the impact of the new valuation, the aforesaid salary/pension increase and, insofar as it is possible, the international price levels of similar goods in similar markets. Furthermore, it will be necessary to include an initial plan of state subsidies for unprofitable enterprises, subject to a subsequent analysis of their possibilities, or lack thereof, to survive the exchange rate adjustment and decide what to do about those found to be unable to recover from the financial shock.
These subsidies would come from the increased revenues and profits earned by net exporters of goods and services benefitted by the increase of the inter-company rate from 1:1 to 1:15. The resulting windfall profits could be allocated to the state budget in order to compensate importing enterprises that supply the domestic market, and prevent them from increasing retail prices in the aftermath of the CUP devaluation, with a view toward protecting consumers from the inflationary spiral that would likely ensue.
In the so-called TRD outlets (stores that sell in CUC), an imported item with a current cost of 1 USD = 1 CUC = 1 CUP is sold at an approximate price of 2.40 CUC = 58 CUP. Following the exchange rate modification, this cost of 1 USD would rise to 15 CUP, but its retail price would still be the same 58 CUP, and thus the outlet would enjoy a substantial markup and profit margin.
Launching an across-the-board restructuring of the state enterprise system from the very outset is also proposed.
On one hand, this reorganization would affect the size and scope of the state enterprises. Of course, activities such as nickel and oil production, power generation, ICT and others would require big, national enterprises and, in some cases, the creation of Unions of Enterprises, or however these corporate groups may be called.
In general, however, the restructuring process should pave the way for the predominance of middle-sized and even small state enterprises and of those capable of bringing together establishments as geographically close to one another as possible ―that is to say, intraprovincial and intramunicipal outlets which not necessarily report to a local government― in order to facilitate teamwork, improve mutual knowledge and social interrelation, and further cooperation. That will allow workers to better exercise their collective ownership of their entity's means of production. As far as I know, this has yet to be achieved in any previous socialist experience (I do not have up-to-date information about today's Vietnam). In my opinion, a sugar mill, for instance, should be an independent and financially self-sufficient enterprise with its own legal status and accounting system rather than a Base Enterprise Unit (UEB).
We are talking about designing real decentralization and democratization mechanisms ―in practice, today they still are merely formal― for labor to participate in the selection of their managers and in the planning, management and distribution of company profits. This will require a transfer of powers and prerogatives from the Higher Organizations of Business Management (what we know today as OSDE) and other similar corporate entities to the so-called UEBs, or Basic Enterprise Units, in order to convert them into autonomous enterprises. The objective is to develop and strengthen the State enterprise system and make it competitive with the nonstate sector. The former is currently at a disadvantage in terms of organization, management and finances, flexibility and motivation and, consequently, of productivity and efficiency. It is necessary to enact a Corporate Act that encompasses both state and nonstate enterprises, taking into account their differences and similarities.
In general, these proposals are intended to herald measures held to be indispensable in order to grow and not to be implemented after we grow. With some of them, like the one related to salary and pension increases, we face the dilemma of which comes first: the chicken or the egg.
From the economic viewpoint, the advisable and natural thing to do would be to increase supply ―resulting from greater productivity, production, exports and imports― before or together with the pay rise in order to avoid inflationary pressures and match nominal and real pay rises. But at the same time, we are faced with the fact that if the employees are not paid for their work sufficiently to motivate them to produce more and be more efficient every day, we will fail to achieve the essential growth that we need in productivity, output and supply.
Currently, the salaries paid in the state sector, which owns our country's fundamental means of production, produces most of our GDP and employs almost 70% of our labor force, are not enough to get by, as they are well below the present value of labor if we take into account the cost of the average basket of goods that workers and their families need to survive. Not only is this an economic anomaly, but also a sign of social injustice that we must overcome straightaway. A similar predicament affects Cuban pensioners and retirees who used to be members of this workforce.
That is the reason that my proposals, interrelated as they are, try to respond to this and other problems without further delay and without waiting for economic growth and other conditions that, supposedly and according to orthodox economic logic, should precede them and be their foundations.
Traductor: Jesus Bran
Editor: Rafael Betancourt