Cuba’s Currency Unification: A New Beginning

Starting on January 1, 2021, Cuba will transition from its two currencies to a single monetary system. The island nation is removing the Cuban convertible peso (CUC) from circulation and moving forward with the sole use of the Cuban peso (CUP). As a result, the CUP exchange rate will be 24 Cuban pesos for every one U.S. dollar. This change will coincide with an increase in national (or state) salaries, a rise in pensions, and modifications to the model of social assistance provisions. 

But how did Cuba get to this point? Let’s take a deeper look.

In 1990, the Soviet Union collapsed, leaving Cuba vulnerable, as it relied heavily on the U.S.S.R.s’ resources and support. The political bipolarity that characterized the world up to that moment left Cuba behind. It held tightly to its socialist ideal while the rest of the world aligned with the capitalist economic model as the primary way forward. Without strong economic or political allies, Cuba went through the greatest economic crisis in its history. This period was called euphemistically by Fidel Castro as the "Special Period."

To sustain its political and social-economic model in a capitalist world, and with an economic and financial blockade imposed by the United States, Cuba bet all of its cards on remittances, foreign investment, and international tourism. For example,  Cuba began to transition from a socialist central planning model to a hybrid model that embraced some market elements and decriminalized the U.S. dollar. To retain foreign currency, the government created a new currency, the CUC (Cuban convertible peso).  The CUC is comparable to the U.S. dollar and could be exchanged by tourists at an exchange rate of one to one.

Thus, Cuba conserved the hard currency for its operations in the international market, and tourists had a unique form of payment to access exclusive services in the country. The idea was that as the Cuban economy recovered, the CUC would withdraw from circulation. But what began as an exclusive currency ended up expanding to all spheres of society, with Cubans gaining access to the CUC and leading the Cuban government to establish a fixed exchange rate of 24 CUP = 1 CUC. However, this is a longer story. The fixed exchange rate was meant to float and fluctuate. Still, after the economic crisis and recession in 2001 following the 9/11 terrorist attacks, the Cuban government decided to fix the exchange rate to “protect” vulnerable segments of the population. 

The influx of the CUC into the Cuban economy also impacted the business sector. Many companies began to negotiate with it but at an exchange rate different from that of the population, with 1 CUP = 1 CUC. This exchange disparity had long-term negative effects on the Cuban government. Upon seeing these effects years later, the private business sector emerged. New entrepreneurs began to see profits 24 times higher than those of the state companies due to the difference in their exchange rate. At that time, the Cuban government was forced to rethink the delayed monetary reunification project. Eventually, 1 CUP = 1 CUC became the official exchange rate for the public sector, including foreign companies.

Cuba Enters “Day Zero”

In July 2020, given the current pandemic and the intensification of the United States's blockade over Cuba and allied countries such as Venezuela, the Cuban government decided to open stores in USD and other foreign currency while eliminating the USD tax. This action resulted in a boost in its depressed economy and is reminiscent of what happened during the “Special Period” in the 1990s, but this time the CUC is no longer needed.

La Cubana store in Havana, one of the many stores that sell goods in USD. Photo by Otmaro Rodriguez, OnCuba News

Many experts say that currency unification is necessary but unable sufficiently to update and reopen Cuba’s economy. These measures’ effectiveness depends on having a stable and quality supply of goods and services that Cubans can purchase with the national currency. The devaluation of the currency itself is not the greatest challenge, as the Cuban government has proposed simultaneously carrying out this process and eliminating excessive subsidies and undue gratuities while increasing state salaries.

The monetary order will eliminate the wholesale exchange rate of 1 CUP = 1 USD and maintain the retail exchange rate of 24 CUP = 1 USD, which applies to the general population. This way, the Cuban peso is devalued with respect to the U.S. dollar in the business sector, leaving it the same for the general population. As a result, it creates disadvantages for importing products in the business sector. 

With the update to the current exchange rate, many state enterprises may go bankrupt or will have to find ways to finance themselves, mostly by exporting products or services abroad. Some of these enterprises may inevitably shift to the growing private sector.

The Cuban government wants to recover the role of wages to meet workers and their families’ needs, considering that the 1 CUC = 24 CUP exchange diminished the general population’s purchasing power. However, the government could not raise wages because production did not increase. In turn, workers were unmotivated to get involved in the state sector, meaning there was even less production. Instead, workers invested their time and resources in the black market for a more significant payoff. According to the Cuban government, this cycle’s solution is to raise wages and eliminate undue subsidies and gratuities. As a result, Cuba is replacing a paternalistic government with a hybrid government that, through the capitalist model, seeks to fulfill the socialist maxim, “To each according to his work, each according to his need.”

A Local’s Point of View (an EEAbroad Cuban Partner)

I believe that Cubans have been anticipating the currency unification for a long time; however, we didn’t expect the new salary increases, the introduction of taxes, and the modifications of the subsidy programs for people in need. Some fear that inflation will affect the unified currency’s purchasing power and its credibility as prices in the open market have soared in recent months despite governmental sanctions and its policy of capped costs. Many are concerned about how Cuba will regulate the private economy, while others feel hopeful about the signs of change. But most are waiting until after the first quarter of 2021 when it will be more evident how the currency unification measures will impact the island nation.

What is undoubted is that “Day Zero” will represent a cultural change for Cuba. The country will need to gradually adopt new economic concepts long rejected as they have been considered exclusive to the capitalist model. Cuba will have to incorporate a culture of work, efficiency, and productivity in the state sector, and embrace a more regulatory government, no longer the paternalistic government that preceded it.

Sources:

“Lo que debe saber sobre los nuevos salarios, tributos, pensiones y prestaciones de la seguridad social.” Cuba Debate. Accessed December 12, 2020. 

“Inicia el 1ro de enero ordenamiento monetario y cambiario en Cuba: La tasa de cambio será 24 pesos cubanos por un dólar.” Cuba Debate. Accessed December 10, 2020. 

“Descargue Gaceta Oficial sobre proceso de ordenamiento monetario.” Cuba Debate. Accessed December 10, 2020. 
“En PDF, nuevos salarios, pensiones y prestaciones de la asistencia social.” Cuba Debate. Accessed December 10, 2020.