Saving in Cuban Pesos - A Strategy

Saving in Cuban Pesos: A Strategy
November 27, 2013
Preparing for the end of the two-currency system
Fernando Ravsberg*

HAVANA TIMES — During a Santeria festivity, a number of Cubans were
debating about the consequences that the elimination of the two-currency
system would have. One of them said to us: "I'm exchanging all of my
savings for Cuban pesos, because that's the currency they're going to
keep and the one that's going to be revalued."

The others agreed and several of them recommended I buy Cuban pesos,
anticipating that Euros, US dollars and even the Cuban Convertible Peso
will become devalued. The news is welcomed by most Cubans, who blame the
loss of their purchasing power on the island's two-currency system.

This trend is confirmed by statistics. According to some economists and
researchers, the purchase of Cuban pesos skyrocketed in the days
following the government's official announcement. "Many millions of
pesos above the average" were bought, they casually tell us.

In 1993, when Fidel Castro legalized the circulation of the US dollar in
the country, Cubans began to look down on their own currency because, in
addition to experiencing a drastic devaluation, it could not be used to
buy products at hard-currency stores, where the articles they needed to
meet their basic needs were sold.

Neither How Nor When

The Cuban government announced it would begin to re-establish a
single-currency system but didn't explain what steps it would take or
when it would do so. Currently, two Cuban currencies are in circulation,
but there are at least three different exchange rates that depend on the
financial sector you move in.

Cubans must pay 24 Cuban pesos (CUP) out of their pockets to get one
Convertible Peso (CUC) at an exchange locale. State companies enjoy a
parity of exchange between the two currencies and tourist companies
exchange their money at a 1 to 7 rate to buy part of their supplies.

It is a veritable economic mess, in which highly profitable companies
appear to be bankrupt and others that only have losses show enviable
surpluses in their books. The double-currency system also gives rise to
two, separate bookkeeping processes that enable corruption.

A Cuban economist gave BBC Mundo the example of a tourist hotel that
takes in 5 million dollars and, when it exchanges at a State locale to
pay its salaries, electricity or water bill, it gets back 5 million
Cuban pesos, losing 24 times the real value of its income.

The Two-Currency System and Salaries

According to research, the purchasing power of Cubans has dropped by 35
% since 1990. In this time, salaries have doubled, but the cost of life
has risen eightfold. Economists use the example of pizzas, "which used
to cost 1.20 pesos. Today, you have to pay at least 10 pesos."

Many blame this drastic change on the two-currency system, but
researchers suggest that the real problem is people's salaries. "If you
were paid 14 thousand Cuban pesos a month, no one would complain,
because you'd be able to buy everything you need with that amount of money."

Despite rumors, no one in the government has publicly announced that the
Cuban peso is to be revalued. Thus the so-called monetary unification
could also maintain the current exchange rate of 24 to 1, which would
not increase the purchasing power of the average salary.

Apparently, a transition rate for State companies will be put in place,
but even such companies would need to adapt to the new exchange rate
applicable to the rest of society at the end of this grace period…or go
under for lack of profits.

Why Two Currencies?

Cuba's two-currency system was established in 1993 when the government,
facing a financial crisis, announced that it would authorize the
circulation of the US dollar. Up until that point, carrying dollars had
been such a serious crime that many Cubans had to be released from
prison, where they were serving sentences for trafficking hard currency.

Washington then began to clamp down on Cuban financial transactions,
sanctioning the banks of third countries that accepted dollars from
Cuba. In response, Castro substituted the dollar with the Cuban
Convertible Pesos and applied a 10% penalty on all dollar exchanges.

Later, the Cuban peso was revalued (the exchange going from 150 to 1 to
24 to 1, the current rate). The current exchange rate, however,
continues to be prohibitive for Cubans who, on exchanging their monthly
salaries, obtain a measly 17 CUC, a sum that can be spent in a single
purchase at a hard-currency store.

The experts approached agree that the re-establishment of a single
currency monetary system will be beneficial in terms of certain
macroeconomic processes, but that the purchasing power of the average
Cuban will not improve, unless the peso is also revalued, prices are
lowered or salaries substantially increase.
—–
(*) An HT translation of the original published in Spanish by BBC Mundo.

Source: "Saving in Cuban Pesos: A Strategy - Havana Times.org" -
http://www.havanatimes.org/?p=100304