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12/04/13 - Havana Times - Cuba's Monetary Unification Reaches Critical  Stage

By Renato Recio 

HAVANA TIMES - Recent explanations by two renowned Cuban economists about
the acute problem of monetary duality have disclosed some facts not usually
understood by the general public that allow a clearer view of what to
expect in the process of currency unification.

An interview in the magazine Bohemia with Economics Science Ph.D. Vilma
Hidalgo and an article by Dr. José Luis Rodríguez published in Cuba
Contemporánea have contributed to a greater understanding by the public at

Both economists agree in one way or another that the expectations people
have about monetary duality tend to be higher than what really can be
expected, because most of the people associate the dual currency with an
unequal distribution of income and the rise in the cost of living. Thus,
they feel that merely by eliminating the dual currency such negative
effects will go away.

But, as Rodríguez says, all that monetary unification will do is create the
conditions to improve economic activities and their measurement.
Overcoming the problems that affect the production of goods and services
and the population's income and well-being will be possible only with a
profound structural change in the economy.

In other words, the profound structural change would be limited, or
ineffective or nonexistent if not done in harmony with monetary

The great invisible cost of duality

There are other costs of the monetary duality that are less visible to
those who are not economists, Hidalgo says, but they are very important and
are mentioned in the official note that announced the start of this
process. They are related to measurement of the economic actions and the
efficiency of the business sector.

We need to remember that the regime of monetary duality was established in
Cuba as a transitory measure during the acute economic crisis created by
the collapse of the socialist countries in Europe. Suddenly, Cuba found
itself without a large majority of its markets, which resulted in a
complete and lethal U.S. blockade against the island.

The shortage of hard currency became so acute that the country found itself
on the brink of collapse when currency duality facilitated foreign
investments and encouraged the arrival of remittances.

Dr. Hidalgo considers that the duality was functional for a situation where
the domestic currency experienced a dizzying loss of purchasing power under
the conditions of the crisis and needed to slip into a new international

On the other hand, she points out, by avoiding drastic measures such as the
usual "shock therapies," the social guarantees were largely maintained and
the high human cost of mass unemployment was avoided.

But the benefits that duality provided in the early years began to fade as
time went by. The existence of two currencies linked by a rate of exchange
that overvalued the Cuban peso (CUC) with reference to the U.S. dollar has
greatly hindered its very concept and the appreciation of the economic

Let us remember that, for the companies that deal in hard currency, the
government has maintained and exchange rate of 1 CUP = $1 = 1 CUC, while
the rate for ordinary people has been kept for years at 25 CUP = 1 CUC.

In this sense, Rodríguez explains, when integrating the two currencies in
the balance sheet of a company, products with a high level of imported
components appear as profitable when the external cost is calculated in

Conversely, exportable products are seen as not profitable when the
external cost is calculated in the same currency. In the end, that rate of
official exchange tends to encourage imports and discourage exports, which
ends up worsening the trade deficit.

Rodríguez provides the following example: "An efficient and competitive
Cuban furniture manufacturer offers a hotel a table for 100 CUP. The hotel
owner makes a comparison and learns that an imported table of the same
quality will cost him 50 dollars. At the exchange rate of 1 to 1, the
imported table is a better deal because the price is lower. But the same
table, if imported at the rate of 10 = 1, would be too expensive (500 CUP)
so the hotelier would opt for the Cuban-made table, thus boosting the
national economy."

Adjustment in exchange rate is a first step

The logic of the experts indicates that an adjustment in the rate of
exchange for businesses must be one of the first steps in the process of
unification. Supposedly, a business rate of exchange will benefit the
competitiveness of Cuban enterprise and will alter the dynamics of the
domestic prices after the devaluation.

This second probability implies foresight to the risk of an inflationary
spiral. Such a risk could not be avoided, considering that there's already
a latent inflationary pressure, with a liquidity of nearly 40 percent in
the hands of the population.

Rodríguez believes that, after first devaluing the official rate of
exchange that today rules business operations, a convergence will
eventually be achieved with the CADECA rate, a complex adjustment that
might take three or more years.

"The speed and the way in which the devaluation of the official rate of
exchange is done are extremely important," he says. "In a socialist
society, you mustn't have a sudden devaluation, with the negative effects
that are typical of neoliberal policies."

Rates of exchange of up to 10 CUP = 1 CUC in the sale of agricultural
products to the tourism sector have been tried in Cuba since 2011. The
sugar industry utilizes a system of multiple rates of exchange, and the
companies involved in the ongoing experiment are working with rates of 10
CUP = 1 CUC.

Dr. Hidalgo, who also favors a convergence of both types of exchange, as
economic conditions allow it, says that "hopefully those types of multiple
exchanges will hold steady for a while, but with a more realistic rate of
exchange in the business sector."

In the end, in a relatively near future, the Central Bank of Cuba will
issue a single currency capable of performing its duties as a unit of
accounting and as a means to conduct transactions, which will also allow
people to buy and sell goods in all establishments in the country.

Original Source / Fuente Original: http://www.havanatimes.org/?p=100424


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