The arrival of the famous “day zero,” the day when one of the two Cuban currencies currently in circulation is eliminated, is a recurring theme these days for Cuban society. Since 2011, when the Lineamientos de la Política Económica y Social del Partido y la Revolución (Economic and Social Policy Guidelines of the Party and the Revolution) were approved at the 4th Congress of the Communist Party of Cuba, this was one of the objectives to be achieved for the Cuban economy. In the approved document, it was established as necessary to “Strengthen the levels of macroeconomic policy coordination and conclude the studies to eliminate dual currency and improve exchange rate policy.” This need has been endorsed in each of the plans and strategies subsequently approved. Although at other times the arrival of “day zero” has seemed imminent, now many economists, who have studied the subject, agree that everything seems to indicate that the days are numbered for the CUC (Cuban convertible peso). On this subject I talked with Juan Triana, Doctor in Economic Sciences, specialist in Cuban economy issues, columnist for OnCuba.
Do you think the time has finally come for monetary unification?
Yes, without a doubt, if we interpret the reiteration of the issue in the official media. That is why “there’s fire where there’s smoke,” it seems that is the case. It’s true that it’s not the first time this has happened; however, this time, at least in my case, I perceive a greater insistence in the press.
I would like to start by saying that, on monetary and exchange rate problems, there are many works written by the academy, which go back almost to the very beginning of the exchange and monetary duality, even with certain discrepancies between them regarding specific issues on this matter. But the truth is that there is a group of outstanding works, among them a book1 and several doctoral theses. Several authors also stand out for their seriousness and the depth with which they have dealt with the subject, almost all current or former professors of the Faculty of Economics of the University of Havana: Vilma Hidalgo, Yaima Doimeadiós, Pavel Vidal Alejandro, Carlos Pérez-Souto, Carlos Lage Codorniú and Eduardo Hernández. With this I mean that the academy was never oblivious to this great problem of the Cuban economy, and almost from the beginning it systematized its characteristics and proposed solutions on more than one occasion. In more recent years, other scholars have dealt with the subject and published valuable papers on it. Among them I would like to highlight articles by Pedro Monreal and again Pavel Vidal, Omar Everleny Pérez, Julio Carranza, Mauricio de Miranda and Ricardo Torres. There are other Cuban economists not so closely related to the academy who, through the networks, have also exchanged and projected on this subject. There I can list Joaquín Benavides, Humberto Pérez and Fidel Vascós, for example, but the list is much longer.
The exchange and monetary duality was one of the alternatives—in this case, the one that was taken—in the early 1990s, to try to generate an objective in certain sectors that would help the Cuban economy to come out of the crisis. Undoubtedly, there were other options, including a drastic devaluation of the Cuban peso against the dollar. It must be understood that in the beginning it meant allowing the circulation of the dollar in one segment of the population market and maintaining the Cuban peso in another.
Then the CUC appeared at a rate of one to one with the dollar and with a regulation of use that did not allow more CUCs in circulation than backup dollars. And I think it’s fair to say that it worked for a while.
Money, says a historian of monetary affairs, is trust written on paper. While the rule of not issuing more CUCs than backup dollars was fulfilled, “the markets” (that is, both the population and foreign and national companies) recognized it as good as the dollar. Then, between 2003 and 2004, other decisions were made that undermined that confidence: partial de-dollarization and the use of the CUC in all market segments, the growth of operations in CUC without backing in dollars and the consequent loss of confidence in said currency, the repeated supplier payment crises and the emergence of the famous CL (liquidity certificate), which guaranteed that the operations were backed in dollars or another currency. Then the CL also lost the confidence of “the markets.” However, “thanks” to the existing segmentation, the population market remained relatively solid until a few months ago.
Bad economic policies, someone once said, have generally been good policies that have lasted a long time and thus have been left out of context and away from new realities. That’s why I think that even with all the risks it means this time, it’s time and it should not continue to be postponed.
Could it have been done before? What do you think has delayed this measure so much?
Without a doubt. I think that in the beginning it was a short-term resource understood as the least costly. Then it went on in time. There has never been an official explanation. From my perception, what often happens, happened; the measure paid off, the economy began to grow, albeit at modest rates. Then international support appeared (Venezuela on the one hand and the increase in remittances on the other), which made it possible to solve imbalances and facilitated obtaining external income.
No time is truly opportune. When in an economy a monetary and exchange reform is necessary, it’s exactly because it’s far from being OK. Of course, if there’s a group of favorable conditions, the costs of this measure and those that must accompany it would be lower and can be better cushioned or compensated. The ideal conditions would be to have an economy with a strong productive sector and with high complementarity, a positive balance in the trade of goods, in the current account, the balance of payments, a position in terms of manageable debt, sufficient fiscal space, access to sources of financing, a lender of last resort, and a good “business environment” that makes the country attractive. But in a certain sense it’s somewhat contradictory, because if those were the conditions, then most likely it would not be necessary to have an exchange and monetary reform (I’m not saying a devaluation).
Cuba is exactly on the opposite side of that situation. The international environment does not help at all: the strengthening of the blockade, a world economy in recession and a global pandemic, with immense costs in lives and in the world economy. To this should be added the internal difficulties. I will not insist on them; I will only emphasize that our productive system today is not capable of providing a short-term response (I’m speaking of a six-month outlook) to the requirements that the reform will generate. I hope I’m wrong.
In these things it sometimes happens like in our house: you know that you must change something, but that something is not so bad and then you evaluate the cost of opportunity of not changing it against the cost of changing it. Undertaking such a complex process is, without doubt, a great challenge. The uncertainties in its results generally constitute the greatest obstacle to not undertake it.
Then you have to face the costs of not doing it. That is, in part, what we are facing today.
How do you think it will be done? How do you think it should be done?
It’s never good to speculate on these things. The official information in this regard has been very brief, as is to be expected, when it comes to an exchange reform, although unofficial information appears on the networks and even a list of prices and possible salary scales.
The Cuban authorities have affirmed the existence of a group of people who for several years have dedicated themselves to evaluating how to carry it out.
I don’t like to talk about monetary unification because right now a circuit in dollars has been opened that will obviously remain in our country for a long time. When the elimination of the CUC occurs, we will have two currencies: the CUP and the USD in a not small segment of the market. That’s why I prefer to talk about exchange and monetary reform.
I hope it’s deep enough to allow for the necessary adjustment. Today conditions have changed drastically compared to a year ago, the CUC has even lost value against the dollar. I believe that these new realities will have to be taken into account.
In general, what has been preferred is to prepare the population for changes before making them.
What are the consequences of this measure?
There are multiple reasons for the need and also the importance of undertaking exchange and monetary unification. Our press, in recent weeks, has emphasized many of them. I list some:
- It will make the performance of our enterprises more transparent, in terms of costs and profits.
- It will help improve the efficiency and productivity of the economy.
- It will improve incentives for enterprises that export and will allow increased exports.
- It will discourage imports.
- It will also make the relations between the different economic actors more transparent.
However, I want to anticipate that all the above and other positive effects that could be expected, will be achieved if and only if, that exchange and monetary reform reaches the depth that the economy requires, in terms of devaluation of the official exchange rate, that it generates the microeconomic adjustments and efficient allocation of resources that it must imply, with the costs this entails. These costs are not only economic and, even when there is a plan to cushion them, they cannot be eliminated. I’m talking of a necessary business resizing, employment adjustment, cost increases and the threat of inflationary processes, if there were no response from the supply to the increase in wages. Its positive effects will last if and only if an exchange rate regime is adopted that allows us to connect our economy with the international economy, in real time, in order to avoid generating new distortions and exchange controls that transmit certainty to those who have balances in CUP and other currencies. In any country it’s difficult to achieve this, even more so in Cuba, due to all the circumstances that I mentioned before. Nor is it automatic that increases in exports, labor productivity or efficiency can be achieved.
Eliminating the exchange and monetary distortion is necessary, but not enough at all. Export, productivity and efficiency also depend on other structural and institutional factors that, if they remain unresolved, will not allow the full advantage of the exchange and monetary reform.
From my perspective, it’s counterproductive to generate expectations in the population. Expectations that are based on simplifying reasoning about such a complex process, whose consequences cannot be anticipated 100%, and not for lack of knowledge, because of superficiality or poor preparation or poor application of measures, but simply because in economics the sum of 1+1 is generally never equal to 2. And I want to make it clear that this not only happens in Cuba.
Why is it essential for the Cuban economy to eliminate dual currency?
There’s a very short answer. If we look at what is happening today in our economy, if we look at our external accounts, if we look at how many times import substitution policies have failed, or the great weakness of our external sector, then we have an answer.
But the truth is that continuing to prolong the exchange rate and monetary duality over time will multiply the sufferings of our economy today and will make the distortions that hinder efforts to grow and develop even greater.
The challenge is tremendous, because these are the hardest internal and external conditions to do it.
Who could be affected? Will this measure open more inequality gaps? What other measures should accompany this, to avoid it?
As I said before, the consequences will be multiple, some foreseeable and others not so much. Nor are they limited to the monetary sphere. They will be better or worse depending on the preparation for them (in this last stage we’ve been preparing for more than four years), on the internal coherence of the reform, on the consistency and on the government’s ability for management, especially to correct possible failures in its application.
Some will be the direct product of exchange rate unification and the consequent devaluation of the official exchange rate that must take place. This will necessarily generate an adjustment of costs, prices and wages, almost automatically, since the exchange rate is one of the most important relative prices in any economy. It should also generate enough positive incentives so that enterprises and individuals are more incentivized to work harder and better. At the same time, enough negative incentives to discourage the “voluntary unemployment” (to put it in neoclassical terms) that is very common in Cuba.
Inequality in Cuba transcends the exchange and monetary issue, although it feeds on it.
Undoubtedly, the unification program should include those instruments that would make it possible to protect the poor and the most critical population from negative effects. In the history of these 60 years, the protection of families and the weakest people has never been a forgotten or undervalued topic, quite the contrary. I hope the same thing happens this time.
Obviously, the people with the best income, access to foreign currency, etc., should be the least affected, while at the other extreme are those families with low incomes and without access to remittances or other sources of resources.
There is a whole segment of state-owned Cuban enterprises that will find itself in a very difficult situation, especially those that in their cost structure have a high percentage of imports and lack (or have little) income from exports. Those enterprises will have to resize, reinvent themselves.
I would prefer that other changes had taken place before undertaking the exchange reform, as they could help to amplify its positive effects and reduce its negative ones. Among them: the publication of the now famous and condemned to death negative list of self-employment, the legalization of micro, small and medium-sized enterprises, demanded by General Raúl Castro himself since the end of the last decade, greater facilities for foreign capital and, logically, in the real economy, a profound reform of the Cuban agricultural system. Unfortunately, these other reforms have not occurred and, given the emphasis that the official press has placed on the disclosure of exchange rate and monetary unification, it seems that they will not get here beforehand.
1 “Políticas macroeconómicas en economías parcialmente dolarizadas,” 2011. Vilma Hidalgo and Yaima Doimeadiós.