Cuba badly needs currency reform, but it won’t happen yet, economists say

For decades, Cuba’s double currency masked the real shape of the Cuban economy.
For decades, Cuba’s double currency masked the real shape of the Cuban economy. AP

Cuba’s looming constitutional referendum and nagging structural economic problems mean it’s unlikely the island’s leaders will take on the much-need unification of Cuba’s two currencies this year, economists said in Miami.

For years Cuba has been talking about uniting its two competing currencies, the Cuban peso (CUP), which is generally used by the Cuban population, and the convertible peso (CUC), which is used by tourists, foreign companies and some state enterprises and private entrepreneurs.

The CUC is on par with the dollar, while 24 CUPs equal $1 U.S., but because there is such a huge difference in exchange rates there are expected to be winners and losers when the currency is unified.

While “it will be impossible to achieve significant and sustainable improvement [in the economy] without currency reform,” it won’t happen this year, said Omar Everleny Pérez, a Cuban economist.

Speaking at the 28th annual meeting of the Association for the Study of the Cuban Economy at the Hilton Miami Downtown Hotel, Pérez said when the government unifies the two currencies and divergent exchange rates, it’s expected to lead to higher inflation and hurt inefficient state enterprises that have essentially been subsidized by overly favorable exchange rates, even causing them to fail.

Amid discussion and voting on a new constitution, the government doesn’t want skyrocketing prices and widespread layoffs impacting voters, he said. A three-month comment period on a draft of the new constitution begins Aug. 13 and the referendum is expected to be held late this year or early next year.

Cubans exchange Cuban pesos and convertible pesos. The Cuban government first announced its intention to unify its dual currency system in October 2013, but so far it hasn’t happened. YAMIL LAGE AFP/Getty Images

In December, Cuban leader Raúl Castro, who has since retired from the presidency, said unification couldn’t be delayed much longer.

But it isn’t politically feasible to attempt currency unification in the current environment, said Dagoberto Valdés, of the Coexistence Studies Center, an independent think tank in Pinar del Río, Cuba. “We think it [currency unification] could have a devastating economic impact, the strongest in 60 years of the revolution.”

Economists at the ASCE meeting, which concludes Saturday, said that depends on how Cuba implements currency unification and whether it just comes up with a single currency without undertaking needed structural economic reforms.

Luis Luis, a consultant and principal at International Research & Strategy Associates, said it also would be difficult for Cuba to push through currency unification this year because it has very low international reserves. “They don’t have the reserves to have a currency that would be stable,” he said.

Luis said that 2010, when Cuba still had a huge subsidy from Venezuela and the economy was growing, “would have been a great year to unify the currencies. But they missed their chance.”

“You can’t talk about Cuba without talking about Venezuela,” said Rafael Romeu, president and chief executive of DevTech Systems and a former senior economist at the International Monetary Fund. “The source of foreign transfers, Venezuela, is on the ropes.”

Analysts say future subsidies for Cuba may not be sustainable.

“The fiscal balance of Cuba is deteriorating. There is a need to continue financing these yawning deficits, which also doesn’t augur well for currency reform,” said Romeu. “We see no unification in this environment.”

While there would be long-term benefits for Cuba with currency reform, including a more stable climate for foreign investment, “the government fears that short-term costs would be too high to bear politically,” said Armando Linde, a retired IMF economist.

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