Cuba's currency

Cuba's currency
Double trouble
Oct 23rd 2013, 13:23 by Economist.com

"ONE country, two currencies" is one of Cuba's more peculiar
idiosyncrasies. The Cuban peso (CUP) and the Cuban convertible peso
(CUC) are both legal tender on the island, though neither is
exchangeable in foreign markets. The CUC is pegged to the dollar and
worth 25 times as much as the CUP. But whereas most Cubans are paid in
CUP, nearly all consumer goods are priced in CUC. The system, which
highlights divisions between those with access to hard currency and
those without, has proved unpopular. On October 22nd state media
published an official announcement that it is finally going to be
scrapped. Cuba's Council of Ministers, it said, had approved a timetable
for implementing "measures that will lead to monetary and exchange
unification".

Raúl Castro had promised to tackle the issue on taking over as President
from his brother Fidel in 2008. The unusual scheme has been in place
since the collapse of the Soviet Union. In 1993, after decades of
benefiting from generous trade arrangements with the Eastern bloc, Cuba
found itself desperately short of hard currency. With few other options,
Fidel made the momentous decision to legalise the American dollar
(possession of which had previously been punishable by prison). Dollar
stores mushroomed to capture the money flowing in from newly welcomed
tourists and Cubans living abroad. Meanwhile, all Cuban state workers
were still paid a pittance (less than $20-worth a month) in the old
Cuban peso.

Initially the dollar stores sold only "luxuries", such as perfumes and
fancy kitchen utensils. But the Cuban government increasingly took to
pricing anything from toothbrushes to cooking oil in dollars. In 2004
the greenback was officially removed from circulation, and replaced by
the convertible peso. For Cuban shoppers this amounted to but a name change.

Other countries have managed to unify twin exchange rates in their
economies (most notably China when it devalued the yuan in 1994). But
unravelling twin currencies with such diverging values will be trickier.
That is perhaps why details of the timetable have not been made public,
as one Havana-based businessman wryly notes. The transition is in any
case likely to begin cautiously, with selected state enterprises being
allowed to trade using a variety of hypothetical exchange rates. Some
shops are also expected to start accepting payments in either CUCs or
CUPs (at the current real rate of 25 CUPs to one CUC).

The government has declared that the transition will not hurt holders of
either currency. Cubans, though, are understandably wary. Any increase
in the value of the unified peso would increase their spending power.
This could stoke inflation and lead to widespread shortages. The
concomitant fall in the value of the CUC, meanwhile, would be fiercely
resisted by those with savings in the harder currency.

Unifying the currencies would also end a bizarre anomaly in Cuban
accounting, whereby state companies pretend in their balance sheets and
domestic trading books that one CUP equals one CUC. The practice has
prevented CUP inflation. But it has made imports seem artificially cheap
and exports unprofitable. It also obfuscated inefficiencies that plague
Cuba's predominantly state-owned businesses. Ending the charade could
have dire consequences for many firms.

Over the past twelve months rumours that unification is being seriously
considered have led to an appreciable weakening of the CUC. In Havana's
main tourist hotels bank clerks offer to buy dollars, off book, at above
market rates. An illegal network of currency traders, which almost
disappeared when the dollar was legalised in 1994, is re-emerging.
Unpicking the bizarre system is a good idea. Cubans will be hoping that
the island's authorities can implement it better than they have socialism.

Source: Cuba's currency: Double trouble | The Economist -
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