CUBA: Stronger Convertible Peso Good News for Some, Bad News for Others

By Dalia Acosta Reprint | | Print |

Dalia Acosta

HAVANA, Mar 25 2005 (IPS) - The Cuban government’s announcement of an imminent appreciation of the convertible Cuban peso against the dollar and other foreign currencies has made Cubans who have access to dollars, largely from family members abroad, nervous.

“There’s already a 10 percent fee when you exchange dollars, and now they’re talking about an eight percent devaluation. I don’t understand this, if one thing is added to the other, or what,” a resident of Old Havana said Friday.

The 36-year-old professional said her salary is “absolutely insufficient to live on,” and that she gets by thanks to a brother who lives in Miami, Florida and once in a while sends “a little money.”

Government sources estimate that 60 percent of Cuba’s population of 11.2 million has access to dollars, mainly through remittances from relatives living overseas, but also through work in tourism-related or other activities.

The resolution by Cuba’s Central Bank was read out by President Fidel Castro Thursday night, nearly at the end of a more than four-hour speech broadcast live to the nation.

According to the new resolution, the exchange rate for the convertible Cuban peso (CUC) will be strengthened eight percent with relation to the U.S. dollar and other foreign currencies as of Apr. 9.

Under the new measure, for each dollar that Cubans exchange, they will receive 92 cents of a CUC. But if the 10 percent fee charged since October is added to that, the value of a dollar will fall to 82.8 cents of a CUC.

Neither the Central Bank resolution nor Castro clarified whether the 10 percent fee would be maintained. The fee was established when the U.S. dollar was removed from circulation on the island late last year and replaced with the CUC.

The Central Bank gave its assurances that “bank accounts in U.S. dollars, those which already exist and any that might be opened before Apr. 9, will not be affected by this measure.”

In addition, it states that “the holders of accounts in convertible pesos and those who possess this currency will benefit from its revaluation as of that date.”

The measure follows an earlier move by the Central Bank, which on Mar. 17 strengthened the regular Cuban peso against the CUC by seven percent.

The new exchange rate, set at 24-25 pesos per CUC, replaced the rate of 26-27 pesos to the dollar or the CUC, which had remained steady since 2001.

Two currencies are used as legal tender in Cuba: the regular peso and the CUC, which was created in 1994 as a substitute for the U.S. dollar in internal transactions, and circulated concurrently with the dollar until late last year.

Cubans receive their state salaries and pensions in regular pesos, which they use to pay the small fees charged for public services and to buy a very limited amount of low-cost rationed food items as well as products in the farmers’ markets that opened in the mid-1990s and operate according to the laws of supply and demand.

The CUC, meanwhile, provides access to a much broader range of often essential goods and services, including food, clothing, footwear, and personal hygiene and household products.

Thousands of Cubans throughout the country have been flocking to currency exchange bureaux since Mar. 18, eager to change dollars into pesos in the face of rumours that the Cuban currency would be even further appreciated, and that the exchange rate could reach as low as 10 or 15 pesos to a dollar.

Others, like Alba Osorio, dream that these rumours will prove true.

A widow, with a pension of 90 pesos a month and no relatives either in Cuba or abroad to help her, she finds it practically impossible to scrape together even two or three convertible pesos a month.

A series of measures announced by Castro earlier this month are aimed at primarily benefiting the most vulnerable sectors of Cuban society, such as pensioners. They include the distribution of more goods, like electric rice cookers and additional food products through the ration stores, in regular Cuban currency and at subsidised prices.

In his recent televised speeches, the Cuban president has also mentioned plans to increase government pensions and salaries in some sectors. The vast majority of Cubans are employed by the state, and receive all or most of their salaries in Cuban pesos. In a limited number of high-priority economic sectors, workers also receive a small monthly incentive in hard currency.

The average monthly salary in Cuba is currently around 260 pesos, according to unofficial sources. Studies conducted in Havana at the beginning of the decade found that families living in the capital may need up to seven times more than what they earn in salaries to satisfy their basic needs.

One of the consequences of the “dual economy” created through the legalisation and subsequent free circulation of the U.S. dollar – a measure adopted in the 1990s to alleviate the effects of the economic crisis – was the emergence of extreme asymmetries in income and a so-called “inverted social pyramid”. Hotel doormen, taxi drivers, and others who work in the tourism sector, and thus have access to dollars, can make as much in a day as a doctor or other state-employed professional earns in an entire month.

During his speech on Thursday, Castro reiterated his confidence in the growing strength of the Cuban economy, and stressed that the convertible Cuban peso is fully backed by hard currency reserves.

“We’re not just printing up bills: every convertible peso has the corresponding backing of foreign currency,” he said.

The new Central Bank of Cuba resolution notes that when the convertible peso was created in 1994, the rate of exchange in relation to the U.S. dollar was set at par, and has been maintained for the last 11 years.

According to the Central Bank, however, this one to one parity between U.S. dollar and the convertible Cuban peso no longer reflects the true value ratio between the two currencies.

As a result, this “artificial” parity has a “distorting effect on the formulation of sound monetary policy.

Since the 1990s, various studies have been carried out by specialists to analyse the negative consequences of dual currencies and the official parity established in the peso-dollar exchange rate.

The authors of these studies, however, based their analysis on arguments that contradict the decision adopted by the Central Bank. According to these sources, the exchange rate should actually establish a lesser relative value for the Cuban peso.

According to the Central Bank, however, the country needs to take into account such factors as the devaluation of the U.S. dollar against other currencies, like the euro, the expanded use of the CUC, the “increased strength of the Cuban eoncomy,” and the intensification of the U.S. embargo against Cuba.

An economist consulted by IPS, who asked to remain anonymous, predicted that the Cuban government is seeking a convergence of the two Cuban currencies currently in circulation, so as to eventually eliminate the current “dual economy.”

In addition, given that the new measure will serve to encourage people to exchange their hard currency for pesos or open up hard currency bank accounts, it could also be aimed at collecting more convertible currency for the state coffers.

Economists calculate that an estimated 600 to 800 million dollars were exchanged for CUC or Cuban pesos when the U.S. currency was withdrawn from circulation on the island last year.