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Currency and foreign exchange unification A very urgent decision Interview with Joaquín Infante Ugarte, advisor to the president of the National Association of Cuban Economists and Accountants (ANEC) August 3, 2014 Last October, we published an Official Note of the Cuban government announcing the introduction of new steps toward the unification of our currency and foreign exchange market. Many questions about the said process have come up ever since: which currency will remain in force? How will our economy be affected? What will come of our savings accounts? Some of them are already answered. For instance, in its last sessions, the Cuban Parliament made it clear that this process is intended to re-establish the Cuban peso’s value, even if it will not resolve on its own the current problems of the economy, unquestionably contingent on an increase of national production. Doctor of Sciences Joaquín Infante Ugarte, advisor to ANEC, points out that ditching the dual-currency system in the state sector is one of the most important steps to be taken, as it will make it possible for us to properly size up how profitable and competitive our production really is and measure all our macroeconomic indicators with greater objectivity. DUAL CURRENCY: WHERE DO WE START? Infante explained that a dual-currency system begins “when you have two different currencies in circulation, usually a foreign and a domestic one, or like in Cuba’s case, two domestic ones. It could be partial –when the foreign one replaces some of money’s functions as an accounting unit and as a means of payment and accumulation– or total, when it takes over all of them. “It could respond to structural or temporary reasons,” he adds, “but it’s because of both here. Among the former are our extreme dependence on foreign trade and our scarce foreign currency reserves, while the latter include the U.S. economic and commercial blockade and the fluctuation in the price of imported and exported goods in the world market. “The dual foreign exchange rate, on the other hand, exists when you have two different rates, which is all the more complicated in Cuba because one ordinary Cuban peso (CUP) equals one convertible Cuban peso (CUC) for economic-financial relations at state level, while the citizens must abide by a 25-CUP-to-1-CUC rate of exchange”. Consequently, people have a twisted view of both production costs and the data needed for a feasibility study or an investment assessment and, among other consequences, they underrate importation. Contrary to popular belief, however, Cuba’s dual-currency system is far from being a modern-day problem. According to Infante, we had it as early as in 1914 –in neo-Republican times– when the Cuban peso first co-existed with the dollar, whose circulation stopped in 1948 when the newly established Banco Nacional de Cuba declared the Cuban peso as the country’s sole legal tender. The dual system came into being again in 1993, when Cuba abolished a law dating back to 1961 that made the possession of dollars illegal. In this regard, Infante remarked: “In the early 1990s, following the fall of the socialist camp, our economy took a nosedive. Our GDP dropped by around 35%, we were only exploiting 15% of our industrial capacity, and the state budget deficit was 30% of the GDP. “The Cuban peso was devalued and the dollar was put into circulation at a very high rate of up to 150 Cuban pesos. We went for the dual system instead of an internal devaluation through a change of currency as the less traumatic solution, since our socioeconomic policy did not, nor does it make room for another choice. No one is left unprotected”. A HARD BUT NECESSARY DECISION Asked why now, Dr. Joaquín Infante replied without hesitation that it is a step we urgently need and should have taken long ago. “In my view, the best strategy is to do away with the dual foreign exchange rate in the state sector, kept in place for several reasons that include the excessive centralization of operational decision-making, the formal nature of our financial system, and the fact that our economic management is based on administrative decisions rather than financial and economic indicators”. He also mentioned the existence of a “third currency” at state level: the so-called Receipt of Liquidity (CLC) –used to identify hard currency-endorsed CUCs– brought forth by the issuance of convertible pesos without enough foreign currency to endorse them. Despite the complex economic outlook, Infante holds that the effects of the currency and exchange rate unification on the state sector will soon become apparent, but its impact on the citizenry is likely to take a bit longer. Eliminating the dual-currency system will not of itself increase people’s purchasing power. The appreciation of the Cuban peso will depend on our productivity, labor efficiency, competitiveness, and production cost-effectiveness. “As a strategic decision, this unification cannot be put off any longer,” Infante points out. “The mere fact that we can truly know the value of our production and how profitable and competitive it is will help us have the upper hand, for it will not only improve those indicators but also make our workers more aware of the importance of what they do, since they will know the real value of their contribution”. |
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http://www.granma.cu/cuba/2014-08-03/una-decision-impostergable |