What’s going to Cuba’s new single forex imply for the island? | Enterprise and Economic system Information

The Cuban government officially ended its dual currency system on Friday, devaluing its peso for the first time since the 1959 revolution that brought the late Fidel Castro to power.

The government has set the exchange rate at 24 Cuban pesos at $ 1, and the convertible Cuban peso known as CUC will expire completely by June, leaving the island with a currency for the first time in more than 20 years.

What does this mean for Cubans and visitors to the island? Here’s what you need to know.

Rewind. Why does Cuba have two currencies?

The Cuban peso, known as the CUP, was created as an island currency by the first president of the country’s central bank after the revolution, Ernesto “Che” Guevara.

Thanks to a United States embargo and some government economic policies on the island, the value of the Cuban currency has become a sensitive issue.

When a country’s national currency is unstable, subject to high rates of inflation, or generally untrustworthy to hold its value, people may use a second currency that they believe will perform better – especially when buying imported goods.

When people unofficially use another currency it can create a thriving black market and put extreme pressure on the economy. Sometimes countries officially turn to the US dollar in what is known as “dollarization” or the euro.

Cuba’s tourism industry has been hit hard by coronavirus-related travel restrictions and the tightening of the embargo by the Trump administration [File: Lisette Poole/Bloomberg]

OK, does that mean they are only using a foreign currency instead of their own?

Countries can choose to fully adopt the US dollar or some other foreign currency as their own, although this can provide stability, it gives governments far less control over their monetary policy.

Countries can also use a domestic and a foreign currency at the same time. This is what Cuba decided after the collapse of the Soviet Union, when Havana legalized the use of the US dollar alongside the Cuban peso in 1993.

Does Cuba now also use the US dollar?

Sometimes. Earlier this year, Cuba opened new “dollar stores” where people can purchase goods such as groceries, toiletries and electronics using bank cards loaded with US dollars or other foreign currencies. This in turn allowed the government to raise those dollars to help manage its liquidity crisis, Reuters reported.

The use of US dollars was banned back in 2004 when the government established the CUC. The CUC has been used in the past for state business and buying goods from abroad, but cannot be taken out of the country. It is pegged 1: 1 to the dollar but is exchanged with the public at a rate of 24 to buy and 25 to sell.

The CUP is still used in everyday domestic transactions, and many Cubans are paid in CUPs.

There are signs on the walls of a shop in Havana, Cuba that read “No CUC” in relation to the convertible peso [File: Ramon Espinosa/AP Photo]

Confusing. Are they worth the same

No. For the average Cuban, a CUC is worth 25 times more than a CUP, and not everyone can get their hands on it. CUCs are used in companies that use foreign money – for example in tourism or when buying goods imported from abroad.

But most Cubans who don’t work in the tourism sector are still paid in CUPs, and this dual system has created a lot of differences – which is one reason CUCs are scrapped.

So what happens to all those convertible pesos floating around?

Cubans will have until June 2021 to exchange CUCs for Cuban pesos. This emerges from a decree published in the Official Gazette of the Cuban government on December 10th.

However, the devaluation of the currency by 24 Cuban pesos to 1 CUC means they will lose a significant amount of money in the process, which is likely to hit especially hard those private sector workers who have been paid in CUCs for years.

It’s already been a tough year for workers, many of whom are employed in the country’s tourism sector, which has been decimated by coronavirus-related travel restrictions and the Trump administration’s strict policies on the island.

What is the Cuban government doing?

Cuba announced that it would raise government employees’ salaries and pensions to adjust to inflation. But private sector workers do not have this protection and can afford less if they pay with their new Cuban pesos than with their convertible pesos.

When the currency unification plan was announced, the Cuban government announced that it would publish the exchange rate for the Cuban peso on the central bank’s website on a daily basis, meaning that it could potentially fluctuate rather than maintain its fixed rate. This is new for the island too.

In a speech earlier this month, Cuban President Miguel Diaz-Canel said the reforms are necessary “to drive the transformations we need to update our economic and social model,” reported Bloomberg News.

From January 1, 2021, the order placement will start with an exchange rate of 24 Pesos MN to 1 dollar, reported the President of #Cuba in a special appearance, accompanied by Army General Raúl Castro, First Secretary of the Communist Party pic.twitter.com/s9wDQvmnV9

– Presidency of Cuba (@PresidenciaCuba) December 11, 2020

What does this mean for Cubans?

A painful transition. Cubans can see the price of everyday goods rising at a time when they are already dealing with shortages. Venezuela, one of the country’s main proponents in the region, has similarly seen its economy slackened further this year by skyrocketing inflation and US sanctions.

The Cuban government announced that all arriving travelers will be required to present a negative COVID-19 test prior to entry from Friday.

That means the tourists who normally flock to the island nation’s beaches and streets to listen to Cuban music, enjoy a meal, and experience its unique culture are not likely to return until after extensive vaccination makes international travel more practical.

Until then, Cubans must do what they have successfully done for decades – adapt to difficult economic conditions and innovate where they can.