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Monetary Ordering, a measure with positive sign

cuba-reforma-monetariaThe beginning of the Economic Ordering Task on January 1st, marks the end of the CUC as currency – although there will be a six-month period to collect all the CUC that still remains on the streets, and the establishment of a single exchange rateof $ 24 Cuban pesos for $ 1USD, explain Marino Murillo Jorge, member of the Political Bureau of the Communist Party and head of the Permanent Commission for Implementation and Development during an appearance in the Mesa Redonda television show.

He informed that the measures to implement the ordering task, around 110, are already published in the Official Gazette, and they were conceived as methods, in order to avoid mistakes.

On the general aspect, he commented: “the devaluation or elimination of a currency anywhere in the world is not a complicated process in technical terms. The issue comes when it happens at the same time that the elimination of excessive subsidies and undue services free of charge while transforming the income systems in a Socialist country, where no one is left defenseless.”

The monetary unification will leave only one currency with legal tender: the Cuban peso (CUP); all the transactions and deposits will be expressed in CUP and the exchange rate of the cash in hands of the population remains at $ 24 CUP x $ 1 USD, he explained.

Marino Murillo recalled that there have been two monetary circuits in the Cuban economy: the one of the business sector, which operated with an exchange rate of 1 CUP x 1 USD and the one for natural persons, which exchange rate was $24 CUP x $1 USD.

In this scenario, he explained, the Cuban peso was devaluated in the sector for natural persons, due to the Currency Exchange Offices rate (CADECA). With the exchange rate established in 1 USD x 24 CUP, the duality is solved without further devaluation in the persons sector.

Therefore, the solution was to devaluate the Cuban peso against the dollar in the business sector and to maintian the exchange ratein the persons sector.In this way, on January 1st, the monetary duality is eliminated and only one exchange rate is established for both sectors.

However, this measure will have an impact in the person’s sector because subsidies will be eliminated, and the earnings such as wages, pensions and retirements will transform at the same time.

Regarding the business sector, the switch of exchange rate from USD 1 X1 CUP to 1 USD x 24 CUP, will make all export prices higher at first, he elaborated.

It should be added that the wage rise forms costs and the business prices rise; therefore the retail prices will go up too, otherwise the State will have to subsidize their prices, and the logical courseof action will be to subsidize people instead of products.

In short, the new measure consists of eliminating the CUC, adopt one single exchange rate of 1 USD x 24 CUP (for both businesses and people), to rise the businesses prices as a result of the devaluation and the wage restructure, the retail prices will rise too and in order for the population to be able to afford them, incomesneed to change too.

In order to illustrate the effects of the devaluation in the business sector, Marino Murillo ratified that the export entities will have better results, which is in line with the purpose of Cuba of stimulating exports.

The key, he suggested, is to export more than import. For every dollar they receive from export, they earn 24 Cuban pesos. At the same time, every dollar they pay for imports equals 24 Cuban pesos. Therefore, this measure supports the strategy approved by the country from the economic and financial standpoint as it encourages exports and discourages imports.

The head of the Permanent Commission for Implementation and Development also mentioned that estimations expect the businesses prices to rise twelve times. In this sense, if the exchange rate rises 24 times and the business prices rises 12, it would be the best benefit.

He stressed that the fact that the rise of the business prices represent 50% of the rise in the exchange rate is the first anti-inflationary measure in the Cuban economy. The control of inflation begins with the design of the wholesale prices, he underlined.

In the words of Murillo, this will demand greater efficiency from the businesses, something that is not only achieved by establishing one single exchange rate or by managing price rise by the government. It also entrails giving more authority to the business system so it has a superior reaction capacity.

In conceptual terms, the real devaluation occurs when the rise of the business prices is lower than the rise of the exchange rate, which is the goal of the Cuban economy.

However, if the exchange rate goes from 1 USD x 1 CUP to 1 USD x 24 CUP and the prices rise 24 time, it overturns the effect of the devaluation and it is called in financial and monetary matters, a nominal devaluation.

Nonetheless, Murillo warned there could be a worse scenario: if the exchange rate goes from 1 USD x 1 CUP to 1 USD x 24 CUP and the business prices rise from 1 USD x 24 CUP to 1 USD x 30 CUP, then an appreciation of the currency takes place, having the opposite effect.

For Cuba, he stressed, it is important in the first year to regulate the inflation naturally caused by the currency devaluation. Moreover, he emphasized that the measure has been designed to attain positive effects; but it is necessary to create wealth and to work more efficiently.

(Taken from Granma)

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