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12 January, 2021

12 Min Read

GS-II : International Relations International issues
Dual Currency in Cuba

Dual Currency in Cuba

  • As per the latest devaluation plan announced in December by President Miguel Diaz-Canel, the CUP’s artificial one-to-one parity with the U.S. dollar has been removed.
  • The currency will instead trade at 24 pesos to the greenback and the CUC will be phased out in six months.
  • The CUP is in circulation in the domestic economy and serves as the principal medium by which goods are priced and wages paid.

A dual domestic currency

  • During the turmoil in Cuba’s sugar industry and a plunge in nickel prices in the 1990s, a volatile CUP had fallen to 140 to the dollar. Against this backdrop, the CUC was introduced in 1994 as a unit of account and store of value, to prevent the country’s excessive reliance on the U.S. dollar following the end of the former Soviet Union. ‘
  • In recent years, this second currency has more or less steadied at one CUC to 24 CUPs in official exchange outlets and is the predominant mode of transaction for tourists and residents at high-end shopping outlets and other imported goods.
  • Apart from the disparities attributed to the prevalence of a dual domestic currency, Havana has at times had to deftly deploy the surge in dollar remittances and tourism to bolster the peso, by legalising the greenback in the 1990s.
  • It has also had to respond in kind to American sanctions at other instances, as when the government in 2004 imposed a 10% tax on the exchange of the dollar for CUCs.
  • Last July, Havana scrapped the 10% surcharge in a sequel to the 2019 opening of stores trading principally in dollars.
  • The recent shift is part of the government’s bid to boost dollar transactions alongside other hard currencies, especially after tourism was closed in the wake of the pandemic.
  • There is concern that the circulation of hard money could reinforce the segmentation and distortions of the past that resulted from access to the CUC for public sector companies at preferential exchange rates.

An important objective

  • The country’s switch back to a single currency was an important objective in the economic transformation plan envisioned in the 2011 Congress of the Communist Party of Cuba under former President Raul Castro.
  • Among the expected gains from a unified peso are transparency of firms in terms of costs and profits, higher economic productivity and incentives for exports.
  • Experts have opined that a corresponding devaluation of the peso was a necessary first step to discontinue the dual currency.
  • The government of President Diaz-Canel has sought to cushion the likely impact of high inflation resulting from the devaluation with a generous wage and pension hike for state employees, besides a roll-back of subsidies to state-owned firms.
  • There are concerns, however, that it could still leave a sizeable private and informal sector labour force exposed.
  • In addition, there is the real risk that the adverse effects from high prices could further incense protesters who have been demanding protection for civil liberties and artistic freedom following the detention of a well-known rap singer.
  • Predictably, the government has been quick to dismiss the voicing of dissent as U.S. interference in Cuba’s internal affairs. Havana must take citizens along in order to implement the new reforms.

Source: TH

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