THE CUBAN DUAL MONETARY SYSTEM AND CHALLENGES AHEAD Roberto Orro In 2004, the Cuban Government announced the pro- we believe that the opinions and conclusions present- hibition of the use of the U.S. dollar as a means of ex- ed in this paper are valid in the event another foreign change in retail as well as in other commercial opera- currency—the Euro, for example—should displace the tions. From then on, all transactions have been U.S. dollar as the prevailing foreign currency in Cuba. conducted using Cuban convertible pesos (CUC), the Cuban peso backed in U.S. dollars. Cuban authorities The CUC has also failed to foster monetary conver- proclaimed that the proscription of the U.S. dollar was gence. Moreover, criticism of the dual system has an act of independence, aimed at untying the Cuban gained more proponents and spread across the coun- economy from the currency of the staunchest enemy try. Whether ordinary citizens, dissidents, or Cuban of the Revolution. This measure was presented as a de- officials, they all agree that the current dual monetary cisive move towards monetary convergence, a step to system should be eliminated. For some, the CUC em- end the nation’s dual monetary system, which also fea- bodies a discriminatory action against Cuban workers, tures several exchange rates. who are paid in authentic Cuban pesos (ACP). For others, the coexistence of the CUC and the ACP cre- Embracing the use of the U.S. dollar has been a thorny ates a distortion that prevents the economy from an ef- issue for the Cuban leadership. In fact, since the very ficient allocation of resources. The monetary issue has creation of the Cuban Central Bank in 1997, the au- become so important, that General Raúl Castro could thorities stressed the need for a single currency.1 We not avoid the issue in his first speech as the new head have often heard Cuban officials criticizing the use of the dollar. But time has passed and nothing—even the of the Cuban Government. plunge of the dollar against other foreign currencies— In this paper, we review the performance of the Cuban has managed to uproot the American currency in Cu- monetary system over the past four years. We also ex- ba. amine some likely scenarios for the Cuban economy It is noteworthy that by dollarization we mean more and monetary system, based on the latest political de- than the use of the U.S. currency. In the economic lit- velopments in Cuba, and the recent takeover by a new erature, dollarization means total or partial replace- head of state. This paper is also based on my personal ment of the national currency by a foreign currency, experiences during my last visit to Cuba in 2006. We with regard to the three functions of money: means of conclude that the CUC should be eliminated, no mat- exchange, unit of account, and store of value. Hence, ter the final path of Cuba’s transition. 1. Economic Commission for Latin America and the Caribbean, 2000, La Economía Cubana: Reformas Estructurales y Desempeño en los Noventa, Fondo de Cultura Económica, México. 44 The Cuban Dual Monetary System MONEY AND ECONOMY IN CUBA AFTER The special relationship with Venezuela has given the THE COUNTER-REFORM OF 2003 Cuban Government enough power and confidence to In 2003, the Cuban Government began to roll back behave the way it really wants to. Meanwhile, the Gov- the tepid reforms started in 1993. The counter-reform ernment has overturned some measures it grudgingly marked the return to centralization and the elimina- accepted in the 1990s. Many small foreign firms have tion of some concessions to public firms and the incip- been expelled and self-employment licenses trimmed. ient private sector. In July 2003, the Cuban Govern- Moreover, the high degree of confidence on inflows ment made the first big move against the circulation of from Venezuela has put the Government in the “com- the dollar in Cuba. From this point forward, all trans- fortable” position of being able to focus just on those actions in the dollarized network would have to be strategic sectors, like nickel and energy, considered as conducted in CUC. Deposits and banking accounts of less costly from the political standpoint. Other sectors, Cuban firms also would have to be denominated in like tourism and agriculture, seen as potentially dan- CUC. In addition, all operations by Cuban firms de- gerous within the political equation, have been ne- manding foreign currencies would require approval of glected. the Cuban Central Bank. The economic stability has secured exchange rate sta- A radical move followed the next year. A decree passed bility. In spite of some ups and downs, the Cuban peso in November 2004 designated the CUC as the only has been hovering around 24 pesos per U.S. dollar currency accepted in the dollarized network of goods (Figure 1). Since 1994, the Government has not faced and services. At the same time, the Government estab- a sudden and sharp devaluation of the Cuban peso. lished a 10% tax on the U.S. dollar. By taxing the U.S. This rate is no exempted of Government manipula- dollar, the Cuban Government was supposedly en- tion. After the elimination of the U.S. dollar as a couraging remittances in other foreign currencies. U.S. means of payment, most exchange outlets sell Cuban restrictions on the use of U.S. dollars by Cuba were al- pesos and CUC. However, buying back U.S. dollars or legedly the reason for implementing the tax. Cuban any other foreign currency can be done at few economists claim that this measure has succeeded in places. slashing the share of inflows in dollars from 80% to 30%.2 Finally, the CUC was officially appreciated Figure 1. Unofficial Exchange Rate against all foreign currencies in April 2005. Cuban Pesos/U.S. Dollar The offensive against decentralization, the private sec- pesos/dollar tor, and the U.S. dollar was not a coincidence. External 100 factors have played a key role in the strengthening the 80 60 CUC. Very favorable trade terms and other inflows 40 from Venezuela have made possible the return to cen- 20 tralization. The Cuban Government has reasons to 0 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 ooze confidence. Thanks to Venezuela, Cuba is now shielded from the ravages of the oil market.3 Revenues from services rendered by Cuban workers in Venezue- The CUC has not helped tourism at all. I have not la have enabled the island to double imports over three conducted empirical research to measure the impact of years, 2003–2006. Chinese investments in nickel have the CUC appreciation on foreign tourism in Cuba. also helped, but they pale compared to the paramount Nevertheless, tourists are doubtlessly feeling the heat. support from Venezuela. Based on my experiences during my last visit to Cuba 2. Vidal, Pavel, 2006, Estabilidad, Desdolarización y Política Monetaria en Cuba. Centro de Estudios de la Economía Cubana. 3. It is noteworthy that Granma, the official newspaper of the Cuban Communist Party, cheers every new record high world market oil price. 45 Cuba in Transition • ASCE 2008 in 2006, I perceived that tourist money does not go tribuidos de una forma igualitaria, como los de la li- very far, and visitors experience how their funds literal- breta de abastecimiento...4 ly evaporate as a result of the harsh mix of an unfavor- Just a few days after Raúl’s inauguration as head of able exchange rate, very high prices, and little options state, rumors about an imminent appreciation of the in the streets of Cuban cities. Cuban peso drew many Cubans to exchange outlets. Citizens were trying to sell U.S. dollars and other for- Cuban citizens who receive money from relatives eign currencies at the best possible rate. The events of abroad have not gone unscathed. It is worth to point 2004 were still too fresh to be disregarded. It did not out that a significant share of the Cuban population take long before the authorities made it clear no signif- has access to, and depends indirectly on, remittances. icant change was about to happen. In fact, the most re- The purchasing power of many Cuban households has cent measures have signaled the new government is been adversely impacted by the appreciation of the implicitly protecting the use of foreign currencies in CUC. At the same time, workers who are paid in ACP Cuba. keep complaining and blaming the CUC for their many shortages. Everybody is unsatisfied. Since February 2008, the Government has lifted sever- al restrictions on Cuban citizens regarding the use and In sum, although performing stably, the CUC has not access to some goods and services. At the time this arti- fulfilled the expectations after the monetary reform in cle was being written, some prohibitions had already 2003–2005. been lifted. THE MONETARY SYSTEM AND THE NEW 1 Cuban citizens can now buy electric appliances LEADERSHIP and computers in the shoppings. The resignation of Fidel Castro as head of the Cuban 2 Cubans have now access to hotels, previously re- Government has focused worldwide attention on Cu- served for foreigners. ba. The designation of Army General Raúl Castro, 3 Restrictions on the use of cellular phones by Cu- known as more in favor of institutionalization and of ban citizens were lifted. economic reform, has unleashed a wave of speculation 4 Cimex and other dollarized retailers have begun on the economic and political future of Cuba.