Cuba Rids of Dual Currency

Cuba has announced it is to end the unpopular dual currency system which has sharpened inequalities on the Communist island, the latest in a series of reforms aimed at relaxing its Soviet-style economy.

Since 1994 a two-tier structure of national pesos and convertible pesos has created a stark divide between most ordinary Cubans and the fortunate few with access to the more valuable tourist currency. The system was initially intended to shield the country’s Communist project from the capitalist ways of the outside world, but under President Raul Castro it has become a key target of the reforms he says are essential to Cuba’s economic survival.

An official notice published in the state newspaper Granma on Tuesday said the council of ministers had approved a timetable for implementing “measures that will lead to monetary and exchange unifaction”.

“(Unification) is imperative to guarantee the reestablishment of the Cuban peso’s value and its role as money, that is as a unit of accounting, means of payment and savings,” it said.

However few further details were offered as to how the complex system and the byzantine accounting practices which surround it will be untangled, a challenging feat which could risk major economic upheaval on the already struggling island.

Cuba adopted the dual currency system after the fall of the Soviet Union, when the loss in support and trade revenues from its former backer forced the island to open up to foreign tourism and investment. Hoping to protect the Communist project from the dangers of international capitalism, the government introduced the convertible peso for use in the tourism industry and foreign trade.

Pegged to the dollar, the convertible peso (CUC) it is worth 25 times the national peso (CUP) in which most Cubans operate. It is also, crucially, the only currency accepted in many stores, restaurants and for foreign exchange, affording those who can access it - mostly Cubans with official ties - a lifestyle from which ordinary citizens are effectively barred.

As well as broadening the gap between a struggling majority and an affluent elite, it has also had some bizarre effects on Cuban society, where a waiter or hotel cleaner can earn far more in tourist tips earn than a doctor or lawyer paid in national pesos.

In July, Mr Castro declared that the dual currency was “one of the most important obstacles to the progress of the nation”. He has embarked on a series of economic reforms - such as allowing Cubans to run private businesses and buy and sell property - that he says are intended not to dismantle socialism but ensure its future on the island.

Cuban economists have welcomed the unification but warn that it faces major obstacles. As well as risking a spike in inflation, it could shake up the social and economic hierarchy, potentially stirring public discontent on the island.

It would also eliminate a huge financial bonus to state-run enterprises at a time when cash is so short. Despite the large disparity in value between the two currencies, the Cuban government treats them as equal in official accounts, meaning state entities are getting them at a 1-to-1 subsidised rate.

“Whoever is getting these dollars at one-to-one is doing well, and that’s the official sector,” Rafael Romeu, former president of the U.S.-based Association for the Study of the Cuban Economy, told the Associated Press earlier this month. He said the state may not be able to manage an abrupt changeover. “They would be basically confronting their budget constraint in a serious way, and I don’t think they are ready to do that,” Mr Romeu explained. “They would have to cut a lot of social services.”

The unification of the two currencies is expected to be a gradual process that will take up to 18 months, according to Cuban economists, and will involve devaluing the convertible peso and possibly revaluing the national peso.

The official communique said the government would make good on the value of the CUC by announcing any devaluation and giving people time to convert their holdings. It said it would start by introducing changes in the business sector and extend them to individuals at a later date.