Cuba Starts 'Monetary Ordering.' But Will Cubans See More Economic Chaos?
As Cuba unifies its two currencies, ordinary Cubans brace for skyrocketing prices — with still no structural reform of the island's failed economic system.
On New Year's Day, Cuba unified its two currencies into one single Cuban peso.
It was a necessary macroeconomic move.
But it's certain to be a painful one for ordinary Cubans who are already struggling with long food lines and regular power outages — especially since the currency reform is expected to send prices skyrocketing.
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WLRN’s Christine DiMattei spoke with Americas editor Tim Padgett, who's been watching Cuba's currency unification — a move the communist government calls “ordenamiento monetario,” or monetary ordering, but which most Cubans expect to bring more economic chaos.
Excerpts from the conversation:
DIMATTEI: Tim, why did Cuba have two currencies in the first place?
Back in the 1990s, when the Soviet Union collapsed and Cuba lost its chief financial patron, the island was essentially staring at economic ruin. So Fidel Castro's government created a dual currency system: the Cuban peso, or CUP, for ordinary Cubans, and the convertible peso, or CUC, more or less on par with the U.S. dollar, for tourism and foreign imports and things like that. It helped bring more dollars and hard currency to the island and help keep Cuba’s shambles of an economy afloat.
So why is Cuba going back to a single currency system now, and what will it be called?
The new unified currency will just be called the Cuban peso. They're doing this because the two-currency system just didn't work anymore. It created really big economic distortions in Cuba. The complicated exchange rate system made it difficult for anybody to invest there.
And just as important, it led to what critics call an “economic apartheid,” where Cubans and especially Cuban military officials who have access to dollars are now the upper class and the average José is trying to make it on $25 a month. That's not very communist-spirited, right?
This couldn't be happening at a worse moment economically for Cuba, when the island is virtually bankrupt and and food and basic services like electricity are already in painful shortage.
But you mentioned that converting to the single peso currency effectively means a big currency devaluation for Cuba. Why is that?
Right. That's because they've now scrapped the convertible peso. It was the big source of those distortions I just talked about — but but in theory, as I said, it was also on par with the dollar. The regular Cuban peso, however, was set at 24 to the dollar. So as soon as Cuba went to just a regular peso last Friday, its new single currency was automatically devalued by 2,400 percent.
SKYROCKETING LIGHT BILLS
And you also mentioned that the currency devaluation will be a shock for a Cuban economy that's already practically bankrupt. What will the worst effects be for ordinary Cubans?
Most of all: inflation. Any currency devaluation usually forces prices up — and food and basic services like electricity are already in painful shortage in Cuba. Last month, Cubans were reporting on social media that a dozen eggs cost $5. (You can get them for less than half that amount at Publix.) The ordinary Cuban’s light bill is expected to go up about 400 percent.
This couldn't happen at a worse moment economically for Cuba. As you just said, the island is virtually bankrupt because its new financial patron, Venezuela, is itself virtually bankrupt now. Tourism is one of the few economic lifelines Cuba's got left — and it's down 76 percent this year thanks to the pandemic. Meanwhile, thanks to President Trump's new restrictions on Cuba, cash remittances to Cubans from abroad are now down by a third.
This will make it even harder for Cubans to run whatever private businesses the Cuban government lets them have. And that could be a big blow to economic reform in Cuba.
How is the Cuban government trying to soften the blow?
It's raising wages and salaries. It's raising Cuba's minimum wage fivefold to about $87 a month. OK, fine — but you and I both know that's only going to add to the inflation I just talked about, because while Cuba is raising pay, its worn-out communist system is not raising productivity.
Right, Tim, which brings us to what you said most economists think the Cuban regime should be doing along with this currency reform, but is not doing – which is what?
Open up its disastrous, centralized economic system. There was some glimmer of hope last month when the government announced it will finally allow foreigners to have majority ownership in certain Cuban businesses. But until the Cuban regime starts unleashing the entrepreneurial energy of its own citizens, the Cuban economy will probably just remain on life support for the foreseeable future.