The Unification of the Currencies and Exchange Rates in Cuba: Main Challenges

Este artículo forma parte del dossier: 

I

The gradual elimination of the dual monetary system, in effect on the Island since 1993, constitutes a necessary and decisive step toward a more robust and even definitive implementation of the reforms in progress. In fact, it can be asserted that its achievement probably represents the heart of the evolution of the process of Modernization of the economic model.

In correspondence with the strategic importance of the necessary regulation of the country’s monetary operations, on October 22, 2013 the Council of Ministers adopted the resolution to begin to work on the process of monetary unification. [1]

The subsequent dissemination of this decision generated diverse expectations nationwide, especially in the realm of the real economy, given that the gradual implementation of this measure should progressively surmount different distortions prevailing in the economy. In particular, it will make available a uniform and reliable accounting register of all financial transactions, since presently it is impossible to determine with certainty how much a given economic activity really costs.

The gradualness that has characterized the implementation of the process of elimination of the economic and monetary duality, is due to various factors. Among them, we can highlight that in practice implementing this decision entails carrying out two interconnected transformations: on the one hand, it is necessary to carry out the unification of the two currencies, while on the other, the introduction of profound adjustments in the exchange rates, an action that implies carrying out a progressive monetary devaluation that will bring with it certain economic and social costs, difficult to correct in the short run.

Linked to the above, the process of monetary and exchange rate unification will have to be implemented in the presence of persistent macroeconomic weaknesses: low rates of economic growth, unstable flow of revenue contributed by the export of goods and services, factors that contribute to the risk of insufficient liquidity; the pressures to honor the financial obligations associated with foreign debts; insufficient levels of international monetary reserves, etc. Added to this is the persistent crisis that acts as an inherent component of the evolution of the national economic cycle.

The suppression of the pattern of economic and monetary duality also presupposes a profound evaluation of the decisions that must be adopted, parallel with the unification. Among them these stand out: the reform of the banking and price systems; the financial, fiscal and exchange operations related to workers’ salaries; as well as adjustments to the central government mechanism of assigning foreign currency.

In general, the way in which the factors described above behave and interact can help explain why in the period after 2013, there was little tangible progress toward the elimination of the monetary duality.

 II

The exchange rate unification represents probably one of the most complex aspects associated with the process of monetary reorganization, since it is not simply addressing the traditional situation of overvalued exchange rates, but transforming the use of the exchange rate as a strategic instrument for making decisions by business enterprises, since in practical terms there is but a limited vision in this regard by enterprises linked to the foreign sector.

The unification of exchange rates should be preceded by the elimination of the circulation of the CUC, a process that has a number of complexities, insofar as objectively a number of inconsistencies and disruptions could arise in the transition from a management model tied to foreign exchange, to one anchored exclusively in the peso. Also, it will be necessary to create a minimum framework of convertibility of the peso. (Joaquín Infante, 2017)

It is worth remembering that for various reasons the domestic financial market has not been adequately developed nor is there a system of CADECA [exchange booths] strictly designed for the State enterprise system that allows them to satisfy their specific financial requirements.

Similarly, the unification of exchange rates will have a strong bearing on the structure of relative prices and, therefore, on the possibility of determining the levels of business profitability. It could even generate additional fiscal pressures, insofar as it is foreseeable that there will be an increase in the financial resources that will be used to compensate the enterprises that will be adversely affected directly by said unification.

An implicit challenge that will accompany the exchange rate unification is the necessary devaluation of the current exchange rate, applicable both to the rate for official transactions as well as that for the population. For objective reasons, the modification of the exchange rate will affect the dynamics of domestic prices, as I indicated. In practical terms it will become a potential factor that will stimulate the increase in inflationary pressures. [2]

We still do not know the exchange rate gradations that will result from the process of devaluation, although in today’s practice there is a system of multiple rates in operation, in particular for transactions between the State and non-State sectors. In the proposal formulated by Humberto Pérez (2016) and Joaquín Infante (2017) the suggestion is to apply a general devaluation—both for the enterprise system and for consumers— of 1 CUC = 15 CUP, which is higher than the current rate in some State markets and for the transactions mentioned above (1 CUC = 10 CUP). Independently of whether the proposal of Pérez and Infante is accepted, the expected devaluation is significant and its impacts in the short run can be substantial.

From another perspective, the devaluation in the medium term should become a stimulus for increasing exports. Let us recall that during the prevalence of the dual currency, the monetary system tended to encourage imports rather than international sales. Of course, we should not expect automatic effects derived from the devaluation, that is, that the benefits accompanying this decision will not lead to an immediate increase in exports.

In this new context of elimination of the dual monetary system, monetary policy should also privilege maintaining the equilibrium of macroeconomic variables, as well as to achieve a better interrelation with fiscal and tax policy. Similarly, the exchange rate policy should move toward a more flexible operational framework and yield greater weight in the dynamics of the domestic economy, transforming it into a strategic component of economic management, both at the enterprise as well as government levels. At the same time, it should facilitate the creation of those basic macroeconomic conditions that allow the exchange rate to guide economic management, and evaluate, with greater certainty, the competitive capacity of the national economy.

In general, the process of monetary and exchange rate unification has journeyed through what we can define as the first phase of the process, which includes the enactment of the legal documents that should guide the operation of the enterprises when the time comes to suspend the circulation of the CUC. The use of the CUP in the segment of the market that operates in foreign currency has been practically generalized, at the rate in force at CADECA, in the transactions with the population. The Central Bank of Cuba emitted bills of higher denomination to achieve a better organization of the monetary circulation. Nevertheless, in relation to the exchange rate policy, there is still little clarity as to what will be the exchange rate that will be in effect after the unification, given that different rates continue in force.

Finally, if building an economic system based on the use of hard currency was a complex task, the return to a regulatory framework based exclusively on the traditional Cuban peso will be much more complex. (González, 1998) It will need to envision the subsequent advance toward its necessary international recognition, allowing for minimal conditions of monetary convertibility in the international market.

 

Bibliography

Resoluciones 19, 20 y 21 de 2014, del Ministerio de Finanzas y Precios. Gaceta Oficial, Extraordinaria, del 6 de marzo de 2014.

González, A. (1998) "Economía y sociedad: los retos del modelo económico". Temas, n. 11, julio-septiembre.

Infante, J. (2017) "Eliminación de la pluralidad monetaria y cambiaria". Documento de la Asociación de Economistas de Cuba.

Pérez, H. (2016) "Principales debilidades internas actuales del modelo y perspectivas de nuestro socialismo". Catalejo (Temas), 6 de octubre.

 

Notes

[1]. For greater detail see: "Nota oficial of the Gobierno of the República of Cuba". Granma, 25 of octubre of 2013, The Habana.

[2]. Expanding the possibilities for the practice of self-employment, the elimination of subsidies, the introduction of other forms of managing public property, among other measures, have stimulated the tendency toward a progressive increase in domestic price levels.

 

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