There are words that mark eras, that define futures. And when the Cuban economy in this century is discussed, terms like dual currency and monetary unification will always be present, in every environment, from academic reviews to everyday conversation, because issues that impact the lives of a people enter into national history.
Monetary and exchange rate unification, experts agree, is necessary, but not sufficient, to the restructuring and updating of the Cuban economy, currently immersed in a crisis aggravated by the impact of the COVID-19 epidemic on the global productive system and the tightening of the U.S. blockade.
With the goal of understanding how much monetary and exchange rate duality affects us, its historical antecedents, and the ideal context for our development, Granma spoke with experts at the Central Bank of Cuba.
ORIGINS OF MONETARY AND EXCHANGE RATE DUALITY
During the 1990s, the collapse of the Soviet Union and the disintegration of the socialist camp hit Cuba hard. Between 1989 and 1993, the Gross Domestic Product declined by almost 35%; fuel consumption was cut in half; and foreign trade reduced more than 80%, since the island lost relations with socialist countries developed over 30 years.
Addressing the issue was Mercedes Yolanda García Armenteros, the Central Bank of Cuba’s director of economic research. In a measured, expert voice, she commented that, in this period, the fiscal deficit increased to 33% of the GDP, since expenses related to salaries, subsidies of essential products, and social programs, among others, were maintained.
At the same time, the economic, commercial, financial blockade imposed by the United States against Cuba was tightened, and along with the aforementioned, generated shortages in retail markets and created strong monetary imbalances, García explained.
This situation led to a process of “repressed inflation,” in which money in the population’s hands surpassed the country’s capacity to offer goods and services, the prices of which were not raised, thus exacerbating the lack of supply in stores, already impacted by the reduction of imports by 75%.
Nonetheless, despite the circumstances, the state made the decision to maintain the level of salaries and subsidies, in order to protect the people.
The Cuban peso was losing purchasing power at a rapid rate, along with its role as a means of exchange, of maintaining reserve value, and as a unit of accounting, the specialist explained, adding that the new context facilitated conditions for de facto dollarization, evident in the informal market.
These dollars came from incipient tourism, remissions from abroad and travelers who arrived in the country. The dollar, at that time, assumed the monetary roles of the Cuban peso and the exchange rate reached a level close to 150 pesos per dollar.
In this context, in 1993, a series of measures were designed to reactivate the economy, reinsert Cuban products in the international market and address the serious macro-economic imbalances present. The package of steps to be taken was discussed in the National Assembly of People’s Power.
Among the most important decisions adopted was the decriminalization of possession and use of the dollar by Cubans; the opening of stores to capture this hard currency; a plan to increase exports of services, in particular, tourism; a gradual opening to foreign investment; and the authorization of remissions from abroad.
The principal exporters were allowed to retain some of the hard currency earned and some transactions between Cuban state enterprises were conducted in USD, all of which – along with the promotion and expansion of exports by prioritized sectors to increase income for the country in hard currency – allowed for gradual reanimation of the economy.
CLEANING UP INTERNAL FINANCES
The Central Bank director of research noted that dollarization of the economy was never complete, since salaries, social security, and assistance, charges for basic services and prices of subsidized products, among other activities, continued to be in Cuban pesos.
In 1994, a process of re-calibrating internal finances was conducted, including the elimination of some gratuities and subsidies, as well as establishing a way for individuals to exchange pesos for USD.
In December of this year, the Convertible Peso (CUC) was introduced for purchases in a retail network simultaneously operating in hard currency alongside the new peso.
In 2003 and 2004, the economic recovery had reached a point which allowed for the withdrawal of dollars from circulation, first in the enterprise sector (2003), with the elimination of inter-enterprise commercial relations in this currency, replaced by the Convertible Peso.
In 2004, the process of retracting USD as a form of payment for the population began. From this moment to date, sales of products in the country were conducted in two national currencies, the Cuban peso (CUP) and the convertible, thus establishing monetary duality.
In 2011, on the basis of the Policy Guidelines approved by the VI Congress of the Communist Party of Cuba, a unification process was mandated as part of the country’s monetary re-structuring.
THE OTHER SIDE OF THE COIN
By the end of the 21st century’s first decade, socio-economic conditions in the nation had changed significantly, as compared to previous years. The measures taken had detained the economy’s decline and a gradual recovery had begun, as early as 1994.
Ian Pedro Carbonell Karell, Central Bank specialist in the Economic Policy Directorate, explained that the phenomenon of duality has two underlying problems that urgently need to be resolved.
One is the dual currency itself and the other is the dual exchange rate that establishes different exchange rates for the two national currencies, and between them and foreign currencies. This generates distortions in the enterprise sector and in the way the population interacts with this sector.
One of the problems associated with this duality that requires greater attention is the type of exchange rate established for enterprises (one CUP equal to one CUC equal to one USD) which is what we call “overvalued,” Carbonell stated, which serves as a brake on the development of productive capacity, as a negative disincentive for exporters which favors importers.
This situation also has considerable impact on operations and companies’ accounting, hampering accurate measurement of economic transactions and the effect incentives should have, he said.
For the population, the difficulty lies, above all, in the tedious process of using two national currencies in everyday life, which has been corrected to some degree with the possibility many facilities now have to operate in both.
Likewise, duality also produces, in many cases, an internal imbalance between retail and wholesale prices.
THE IDEAL CONTEXT FOR MONETARY EQUILIBRIUM IN CUBA
Karina Cruz Simón, specialist in the Central Bank’s Economic Studies Directorate, assumed the challenge of describing the ideal circumstances in Cuba, that would allow money to fulfill its roles.
Cruz cited “stability” for the national currency as key, which “is achieved by ensuring that the processes of issuing money are aligned with the real, productive economy’s evolution.”
Among the processes that can undermine stability, she mentioned inflation, that occurs when there is too much money in circulation and prices rise, impacting the purchasing power of the currency and its credibility.
Scarcity can also be generated (repressed inflation), excess liquidity (obligatory savings) and a greater role for the informal market, all of which damage the stability and purchasing power of the currency.
A favorable situation that would allow the Cuban peso to serve its purpose, with macro-economic equilibrium preserved, implies the sort of exchange in which supply matches the hard currency demand; the existence of clear rules governing the issuing of money, so the economy has just the amount needed; and disciplined management of government income and expenditures to control the public debt.
Additionally, she emphasized the necessity of coordination among entities responsible for conducting macro-economic policies, and moving from administrative direction to the use of financial mechanisms, so prices can offer indications to allow for better performance on the part of consumers, producers and economic planning in general.
Cruz also noted that maintaining a stable supply of quality goods and services that can be acquired in the national currency is key, along with the creation of conditions that encourage individuals and companies to save and seek credit in the national currency.
The economist concluded by emphasizing the importance of professional development for all involved in making this ideal situation as real as possible for Cuba.
(Source: Granma)