"ONE country, two currencies" is one of Cuba's more peculiar idiosyncrasies. The Cuban peso (CUP) and the Cuban convertible peso (CUC) are both legal tender on the island, though neither is exchangeable in foreign markets. The CUC is pegged to the dollar and worth 25 times as much as the CUP. But whereas most Cubans are paid in CUP, nearly all consumer goods are priced in CUC. The system, which highlights divisions between those with access to hard currency and those without, has proved unpopular. On October 22nd state media published an official announcement that it is finally going to be scrapped. Cuba’s Council of Ministers, it said, had approved a timetable for implementing “measures that will lead to monetary and exchange unification”.
Raúl Castro had promised to tackle the issue on taking over as President from his brother Fidel in 2008. The unusual scheme has been in place since the collapse of the Soviet Union. In 1993, after decades of benefiting from generous trade arrangements with the Eastern bloc, Cuba found itself desperately short of hard currency. With few other options, Fidel made the momentous decision to legalise the American dollar (possession of which had previously been punishable by prison). Dollar stores mushroomed to capture the money flowing in from newly welcomed tourists and Cubans living abroad. Meanwhile, all Cuban state workers were still paid a pittance (less than $20-worth a month) in the old Cuban peso.
Initially the dollar stores sold only "luxuries", such as perfumes and fancy kitchen utensils. But the Cuban government increasingly took to pricing anything from toothbrushes to cooking oil in dollars. In 2004 the greenback was officially removed from circulation, and replaced by the convertible peso. For Cuban shoppers this amounted to but a name change.
Other countries have managed to unify twin exchange rates in their economies (most notably China when it devalued the yuan in 1994). But unravelling twin currencies with such diverging values will be trickier. That is perhaps why details of the timetable have not been made public, as one Havana-based businessman wryly notes. The transition is in any case likely to begin cautiously, with selected state enterprises being allowed to trade using a variety of hypothetical exchange rates. Some shops are also expected to start accepting payments in either CUCs or CUPs (at the current real rate of 25 CUPs to one CUC).
The government has declared that the transition will not hurt holders of either currency. Cubans, though, are understandably wary. Any increase in the value of the unified peso would increase their spending power. This could stoke inflation and lead to widespread shortages. The concomitant fall in the value of the CUC, meanwhile, would be fiercely resisted by those with savings in the harder currency.
Unifying the currencies would also end a bizarre anomaly in Cuban accounting, whereby state companies pretend in their balance sheets and domestic trading books that one CUP equals one CUC. The practice has prevented CUP inflation. But it has made imports seem artificially cheap and exports unprofitable. It also obfuscated inefficiencies that plague Cuba's predominantly state-owned businesses. Ending the charade could have dire consequences for many firms.
Over the past twelve months rumours that unification is being seriously considered have led to an appreciable weakening of the CUC. In Havana’s main tourist hotels bank clerks offer to buy dollars, off book, at above market rates. An illegal network of currency traders, which almost disappeared when the dollar was legalised in 1994, is re-emerging. Unpicking the bizarre system is a good idea. Cubans will be hoping that the island's authorities can implement it better than they have socialism.
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