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Currency Standardization in Cuba, Urgency and Complexities

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MonedasCubaCuba has two currencies as legal tenders, the peso (CUP) and the convertible peso (CUC), but according to facts, none of them complies with the functions of money, thus creating distortions in the national economy.
Although it is a harmful phenomenon, the dual exchange rate is even worse. In the wholesale circuit (where companies operate), there is parity between the CUP and the CUC, and between the latter with the U.S. dollar, while in the retail sphere, the exchange rate is 25 CUP per one CUC.
 
In both circuits, the existence of two currencies has led to the segmentation of markets. In addition, within the retail network, there is coexistence of products in pesos, with or without the protection of state subsidies, and others in CUC, whose prices include high value added taxes (VAT).
 
Add to this the limitations in the availability of foreign currencies. The companies, for example, need to have a liquidity certificate (CL, in Spanish), which is granted by the central Government, so that they can buy foreign currencies with their CUC to import products.
 
According to President Raul Castro, the elimination of the currency and exchange duality by itself will not magically solve all the problems accumulated in the Cuban economy.
 
However, he said, 'It is the most determining process to progress in the update of the economic model due to the impact that it will have on all spheres of the nation's economic and social life'.
 
The head of State and Government assured before the Parliament that the purpose is standardizing the monetary system and at the same time 'overcoming the existing distortions in terms of subsidies, prices and wholesale and retail tariffs and, logically, in the pensions and salaries in the State sector of the economy'.
 
For his part, Vice-President Marino Murillo informed that 13 subgroups made up of more than 200 people 'are working with all intentionality on this issue', including meetings with international experts.
 
Both dualities, the official noted, have effects 'on the entire society and on the economy, and it is not just eliminating one currency and setting an exchange rate: it has to do with the formation of prices, it has to do with people's incomes, it has to do with the purchasing power of the salary'.
 
From the technical viewpoint, economists agree, it would not be difficult to standardize the currencies and exchange rates, the difficulty lies on the political and social costs for Cuba's socialist project, which focuses on achieving equality, prosperity and sustainability.
 
Cuba's currency and exchange duality is nearly 25 years old, a too long period, and as days go by, solutions will be more complex, according to the researcher Hiram Marquetti Nodarse, from the Center of Studies on Public Administration and a professor at the University of Havana.
 
The academic recalled that after the demise of the Soviet Union and the socialist camp in Eastern Europe, Cuba lost 73 percent of its import capacity and the Gross Domestic Product (GDP) fell 34.8 percent in 1993.
 
The government of the United States saw that situation as a one-in-a-lifetime opportunity to suffocate the Cuban Revolution by stepping up the economic, financial and commercial blockade, knowing that the Caribbean island would not have access to the main international financial institutions either.
 
As revenues were seriously affected, the Government resorted to a group of measures, including the liberalization of the circulation of other currencies on the national territory in July 1993. That contributed to promoting tourism, boosting direct foreign investments and facilitating a different connection with the world economy, Marquetti noted.
 
According to the expert, it was an innovative decision that involved the liberalization of seven foreign currencies: U.S. dollar, French franc, Swiss franc, Japanese yen, pound sterling, German mark and Spanish peseta. In addition, in the Latin American context, the Mexican peso was granted an exchange capacity.
 
The decision also aimed to capture resources that could not be received through the banking system, but through family remittances, which were estimated at about 500 million dollars a year at the time. In just five years, that figure exceeded estimates, mainly due to the domestic market in foreign currencies, Marquetti added.
 
Therefore, he summarized, the impact of liberalization was positive in macroeconomic terms and contributed to building a non-existing infrastructure, above all in the field of services, by creating establishments to provide oil byproducts that at the same time became outlets to sell food.
 
As a result, the national commercial network was updated to develop the domestic market in hard currencies parallel to the objective of boosting tourism.
 
From then on, innovative mechanisms were created for Cuban economy, like the prerogative granted to the tourism sector to finance productions for that sector and the domestic market in hard currencies, thus generating a financial capacity that had not existed until then, the expert pointed out.
 
In that context, a system of exchange houses (Cadeca) was activated to facilitate people's access to the exchange of foreign currencies for national currencies, and the CUC was issued, whose existence is subject to eventual reforms.
 
According to Marquetti, the exchange and currency standardization will not resolve the accumulated problems, but it would guarantee accountable certainty in a medium term to make decisions in the entrepreneurial and macroeconomic spheres.
 
In light of the current situation, it is a complex matter, because the country is far from going through a period of economic growth: the accumulated growth coefficient of the GDP was 2 percent in five years and the public debt continued to increase to finance budgetary deficits, he added.
 
The expert summarized that Cuba operates under conditions of strong structural restrictions in terms of access to credits, its capacity to back up the balance of trade deficit and the increase in revenues by concept of exports of services. / PL