What will happen when Cuba unifies its currency? Economists say it won’t be good
With Cuba suffering through its worst economic crisis in decades, the government is getting ready for a risky currency unification to put its finances in order.
The unification of the peso and the convertible peso, known as CUC, will take place alongside a devaluation of the peso against the U.S. dollar and a steep increase in prices and salaries, Cuban ruler Miguel Diaz-Canel and Prime Minister Manuel Marrero have said.
The changes, at least in the short run, will mean more poverty for Cubans who do not have access to hard currency, as well as higher inflation because prices will soar and purchasing power will drop despite the higher salaries, several experts predict.
Marrero has given no date for the unification but said it would be carried out on the first of a month before the end of 2020.
The actual date, known in Cuba as “day zero,” therefore could be Dec. 1.
The announcements have pointed to unprecedented salary increases to counterbalance the price increases provoked by the currency change and the devaluation against the dollar.
Although there’s been no official announcement, leaks and experts have been predicting increases of up to 13.7 times the price of products currently offered on the highly subsidized ration card. Salaries are predicted to rise by more than 800 percent, according to Pedro Monreal, an economist who lives on the island.
Economist Carmelo Mesa Largo, a Cuban-American and University of Pittsburgh professor emeritus who has studied the Cuban economy for decades, warned of the risks of the currency unification.
“The immediate impact will be that inflation will be unleashed and the purchasing power of the population will drop in parallel,” he said.
“Supposing that the exchange rate is set at 20 pesos per dollar, that would imply a 2,000% devaluation. If it’s set at 24, the devaluation would be 2,400%, and if it’s set at 30, the devaluation would be 3,000%,” he said.
A COUNTRYWITH THREE CURRENCIES
Cuba now uses the peso and the CUC, which are not accepted abroad and have a value set arbitrarily by the government, Mesa-Lago said. In recent years the government also has imposed a partial dollarization of the economy, opening shops that only accept some convertible currencies.
That measure has sparked complaints among Cubans and is perceived by many as an “economic apartheid” that separates those who have access to convertible currencies and those who don’t.
The dollar shops are not new. They were first opened when Soviet subsidies to Cuba ended in the early 1990s, sending the country into a profound economic crisis and plunging the value of the peso.
The CUC, which is expected to disappear, has several exchange rates. Government currency exchange shops sell it at 25 pesos, but state enterprises exchange it at one to one U.S. dollar.
INFLATION IS GROWING
Official reports show that inflation has been rising in the past two years. MesaLago said he believes the official figures underestimate the real level of inflation, reflected in the increasingly longer lines of people waiting to buy basic products, the empty shelves and the rising prices.
“The prices in the open market, where the law of offer and demand rules, have soared in recent months. For example, a carton of 30 eggs cannot be found in state stores” except once per month with a ration card, Mesa-Lago said. “In the free market, you could find it years ago for 87 pesos. Now they cost
175 pesos. That means the price has doubled, and that’s happened with other food prices.”
Cash in the hands of consumers is another way to measure the drop in the value of money. Official figures show that liquidity, as a percentage of Gross Domestic Product, rose from 34.1 percent to 58.9 percent between 2004 and 2018. The figure for 2019 has been estimated at more than 60 percent.
“In 1993, the worst year of the crisis in the early
90s, the proportion was 73 percent, and Cuba is quickly approaching that high mark. The devaluation of the peso will make an already very high inflation rate much worse,” the expert added.
Mesa-Lago has calculated that the purchasing power of the salary of the average Cuban worker today, 879 pesos, stands at about 47 percent of its level in 1989, before the end of the Soviet subsidies. Retirees who receive 362 pesos per month saw their purchasing power plunge by up to 48 percent since 1989.
“It would be extremely difficult for the government to increase salaries by 2,400 percent in 2021 if the exchange rate is set at 24 pesos per dollar. The government will raise salaries, but by much less than that, like it did between 1989 and 2019, the salaries as well as the pensions will cover even less of the basic necessities,” he added.
One solution to this dire scenario would be to expand the private sector and micro-enterprises, MesaLago said.
The number of employed rose by 102,520 in 2019, with 89 percent of them in the private sector. The government then eliminated the list of allowed selfemployed jobs in August, and in November the Reuters news agency reported that thousands of small government-owned enterprises would be shifted
to the private sector.
“This is something that is positive, if it’s done quickly and without roadblocks,” Mesa-Lago said.
It is expected that with the change in the current exchange rate, many state enterprises will go bankrupt. The government, which already has failed to make some payments on its foreign debt, will allow some of these inefficient enterprises to disappear, officials have said. Economists said part of those enterprises’ employees might shift to the private sector.
CUBA NEEDS THE ECONOMIC REFORMS
Omar Everleny Pérez Villanueva, an economist who spent several years at the Center for the Study of the Cuban Economy in Havana, said the reforms promised by the government are “risky but necessary.”
He said he hopes the government will not continue to delay the laws and regulation allowing micro, small and medium enterprises. and urged authorities to ease the bureaucracy in order to increase foreign investments.
“We would need to study the work of the (state) monopolies in some economic sectors, in the absence of a healthy competition that benefits everyone,” Perez said.
He added that the “collateral damage” of the currency unification will be the drop in the purchasing power of those people who have saved throughout their lives as they prepare for their old age.
Some academics have proposed certain compensations for those who lose the purchasing power of their savings, such as increasing interest rates in long-term bank deposits, he added.