This week the Cuban government announced a group of monetary transformations to face the complex financial and balance of payments situation that is extremely overwhelming the economy. It is not about the monetary reform that has been announced for years. They are not aimed at unifying the monetary system, but instead they produce new fragmentations.
They don’t point to a definitive and long-term solution to the complex and distorting system of multiple types of exchange rates and monetary duality. They are measures to face the current crisis and seek some quick relief to the growing financial imbalances that have been accumulating since 2015 in the wake of the Venezuelan crisis and the freezing of the promised structural reforms, a situation that since the end of 2017 has worsened with the intensification of the economic sanctions of the current U.S. administration.
The motivation is not to structure a monetary system that effectively contributes to the country’s long-term strategy and the development of the entire productive system. Again they are measures that are taken in the heat of urgency and looking for an immediate result, without much time to think about future implications. In fact, the monetary reform that until recently was presented publicly on the official agenda was the monetary unification.
Recent decisions are moving in the opposite direction, leading the economy to operate not with two, but with three currencies: Cuban pesos, CUCs and dollars (or its equivalent in other foreign currencies). They do not restore the Cuban peso as the only type of national currency, as embodied in multiple official documents, but partially redollarizes the economy.
The measures pursue a very precise objective. Prevent families and the private sector from continuing to import goods through informal routes, especially through people who travel to Panama and other destinations, shop in these markets and return to Cuba with the merchandise. What is sought is for the foreign currencies to stay in Cuba and that they be spent in the national territory.
For this, consumer markets will be organized that will function in dollars and operate with debit cards, and that they be better stocked than the current markets in CUC. In order to buy, people must have a bank account in dollars (or in other foreign currencies) in one of the state banks.
State-owned enterprises that sell in these markets will be able to use the foreign currencies to directly import their inputs without needing approval from the central plan, and without having to deal with the local currencies’ lack of convertibility. Mechanisms are also established so that families and the private sector can import through state-owned enterprises.
It is foreseeable that there will be positive effects in the short term. The new measures will strengthen the foreign currency liquidity in banks, families will have greater purchasing options in formal markets, and the private sector will have more direct access to certain inputs at lower costs. It also favors that certain state industries can receive financing, replace imports and act with greater autonomy from the central plan. Of course, all this within the limited efficiency and competitiveness with which the state monopoly operates in foreign trade and industry, which remains the same.
The Cuban economy was already dollarized in the 1990s and in the early 2000s. In 2004, without eliminating monetary and exchange rate duality, the Central Bank de-dollarized the economy by replacing the dollars in circulation with the Cuban convertible peso (CUC). The CUC made it possible to recover the autonomy of the monetary policy and it was seen as a transition towards a future monetary unification.
Within the Central Bank and from the academy we warned that de-dollarization implied challenges, that it was required to manage the issuing of the CUC with some kind of transparent and verifiable rule. However, since 2004 the conversion coffer that supported the CUC was abandoned (the CUC no longer had a 100 percent support in dollar reserves), we never knew how much CUC was issued each year, the National Assembly kept approving the State Budget and the fiscal deficit in Cuban pesos without knowing what happened to the budget in CUC. And the economic policy never defined a rule for prudent management of international reserves.
The foreign exchange policy did not help either. In the last 15 years the economy was subject to multiple economic and financial shocks, but the CUC exchange rate remained immovable (a single correction was applied to return to parity with the U.S. dollar and revert the 8% appreciation decreed in 2004).
Having to return to the monetary and financial mechanisms of the 1990s is a de facto recognition of the failure of the de-dollarization. That again one has to resort to foreign currencies to make domestic markets work confirms that the policies and institutions that guided the operation of the CUC since 2004 have failed.
The disproportionate issuing of CUCs, the subordination of the monetary policy to the fluctuations and excesses of public spending, and the lack of transparency gradually undermined the convertibility and credibility of the CUC. Retail chains, state industries and even foreign enterprises ended up flooded with CUC with which they can do little within the domestic markets and almost no import operations, external debt payments and repatriation of profits.
The redollarization is a measure that alleviates in the short term, but places in a very bad situation the institutions that define economic policies. If they couldn’t properly handle the CUC, what are the guarantees for a future scenario where only the Cuban peso circulates?
To authorize transactions in foreign currency in some consumer markets and in some industries is to open Pandora’s box to an accelerated redollarization of the rest of the economy. Other state enterprises will also request participation in the new dollarized markets, foreign investors will demand to be able to operate in foreign currencies within the Cuban market and workers will demand salaries or incentives in dollars. The private and agricultural sector now also has greater incentives to set prices and collect in dollars.
Some in the government spheres could be inclined to abandon the Cuban peso and the CUC definitively and dollarize the entire economy. It would be a topic to discuss. It would be necessary to consider recent experiences of economies that have not done so well without having their own currency (Greece or Ecuador), and countries like Colombia that have managed to use their monetary policy and the depreciation of the exchange rate to cushion a drop in exports (due to the collapse of oil prices) greater than that of Cuba due to the Venezuelan crisis.
It would also be necessary to take into account economies such as Argentina and Venezuela itself, which with their own currency have also failed to correct their macroeconomic imbalances and stabilize GDP growth. I think that the debate would lead us very close to concluding that what matters most are the institutions, policies and structural conditions that define the course of the currencies, precisely what failed with the CUC and that will continue to be lacking if the reforms remain frozen.
The government has not said what will happen with the project to eliminate monetary duality. But it seems obvious that for now the monetary unification is ruled out. However, the adjustment of the official exchange rate of the Cuban peso in the state business sector is still necessary.
The economy continues to require a correction of the exchange rate that clarifies the financial balances of the enterprises and the relative prices. The correction of the exchange rate of the Cuban peso cannot be abandoned after a significant increase in wages has been decreed in the state sector.
With a more realistic exchange rate, some degree of convertibility could be granted to the Cuban peso and encourage state enterprises to sell in pesos and mitigate the inflationary impact of wage expansion. In fact, the devaluation of the official exchange rate of the Cuban peso could be a means to reduce the dollarization incentives of more industries and markets. The announced redollarization cancels the unification of the currencies, but not the unification of the exchange rate.