Tag Archives: Exchange Rate Policy

CUBA URGES CALM AS OVERHAUL OF MONETARY SYSTEM LOOMS

Reuters, October 12, 2020

By Marc Frank

HAVANA (Reuters) – Cuba’s economy minister on Monday urged calm as the government prepares to unify its dual currency system and multiple exchange rates in hopes of improving economic performance.

The Caribbean island nation is undergoing a crisis caused by an onslaught of new U.S. sanctions on top of a decades-old embargo, the pandemic and its inefficient Soviet-style command economy.

Alejandro Gil, speaking during a prime-time broadcast on state-run television, said the country could not overcome the crisis without unification which he said included wage, pension and other measures to protect the population.

“It is a profound transformation that the economy needs that will impact companies and practically everyone,” Gil said.  “It is for the good of the economy and good of our people because it creates favorable economic conditions that will reverberate through more production, services and jobs,” he added.

The monetary reform, expected before the end of the year, will eliminate the convertible peso while leaving a devalued peso, officially exchanged since the 1959 Revolution at one peso to the dollar.  The soon to be removed convertible peso is also officially set at one to 10 pesos to the dollar for state companies and 24 pesos sell and 25 pesos buy with the population.

The government has stated numerous times that residents will be given ample time to exchange convertible pesos at the current rate once it is taken out of circulation and banks will automatically do the same with convertible peso accounts.  President Miguel Diaz-Canel said last week the country would end up with a single currency and exchange rate with the dollar but did not say what that rate might be or the date devaluation would happen.

Foreign and domestic economists forecast the move will cause triple digit inflation and bankruptcies while at the same time stimulating domestic economic efficiency and exports over imports.

The state controls the lion’s share of the economy and sets most wages and prices. Neither domestic currency is tradable outside Cuba.

“There will be no shock therapy here, the vulnerable will be protected. At the same time, it will favor motivation to work and the need to work to live,” Gil said.

Diaz-Canel announced in July that market-oriented reforms approved by the Communist party a decade ago and never implemented, including monetary measures, would be quickly put in place in response to the crisis. He said last week that monetary reform had now been approved by the all-powerful politburo.

Cuba, dependent on food, fuel and other imports has been caught short of cash as sanctions hit its foreign exchange revenues and the pandemic demolishes tourism and undermines remittances, creating food, medicine and other shortages.  Last year, the government began opening better stocked foreign exchange stores for people with access to dollars or a basket of other international currencies from remittances and other sources. However, all transactions must be electronic, for example through debit cards.

Foreign and local economists forecast economic activity will decline at least 8% this year, with trade down by around a third.

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Welcome to Queueba: WITH SHOP SHELVES BARE, CUBA MULLS ECONOMIC REFORMS

The government hints it may scrap its dotty dual-currency system

The Economist, Oct 10th 2020

Original Article: Cuba Mulls Economic Reforms

LONG QUEUES and empty shelves are old news in Cuba. Recently, though, the queues have become longer and the shelves emptier. Food is scarcer than it has been since the collapse in 1991 of the Soviet Union, which supported the island’s communist regime. Now shoppers queue twice: once for a number that gives them a time slot (often on the next day). They line up again to enter the store.

Once inside, they may find little worth buying. Basic goods are rationed (for sardines, the limit is four tins per customer). Shops use Portero (Doorman), an app created by the government, to scan customers’ identity cards. This ensures that they do not shop in one outlet too often. Eileen Sosin recently tried but failed to buy shampoo and hot dogs at a grocery store near her home in Havana. She was told that she could not return for a week.

Queues at grocery stores are short compared with those outside banks. They are a sign that, under pressure from food shortages and the pandemic, the government is moving closer towards enacting a reform that it has been contemplating for nearly two decades: the abolition of one of its two currencies. In July state media began telling Cubans that change was imminent. Cubans are eager to convert CUC, a convertible currency pegged to the American dollar, into pesos, which are expected to be the surviving currency. If they do not make the switch now, Cubans fear, they will get far fewer than 24 pesos per CUC, the official exchange rate for households and the self employed.

Cuba introduced the CUC in 1994, when it was reeling from the abrupt end of Soviet subsidies. The government hoped that it would curb a flight into dollars from pesos, whose worth plunged as prices rose.

The system created distortions that have become deeply entrenched. The two currencies are linked by a bewildering variety of exchange rates. Importers of essential goods, which are all state-owned, benefit from a rate of one peso per CUC. That lets them mask their own inefficiencies and obtain scarce dollars on favourable terms. This keeps imports cheap, when they are available at all. But it also discourages the production of domestic alternatives. Foreign-owned earners of hard currency, such as hotels, do not profit from the artificial gap between revenues and costs. That is because instead of paying workers directly they must give the money to a state employment agency, which in turn pays the employees one peso for every CUC (or dollar). The rule is, in effect, a massive tax on labour and on exports.

The dual-currency regime is an obstacle to local production of food, which already faces many. Farmers must sell the bulk of their output to the Acopio (purchasing agency) at prices set by the state. It gives them seeds, fertiliser and tools, but generally not enough to produce as much as their land will yield.

A farmer from Matanzas, east of Havana, recently complained on social media that the Acopio, which required him to provide 15,000lbs (6,800kg) of pineapples, neither transported them all the way to its processing facility nor paid him. Instead, they were left to rot. When the Acopio does manage to provide lorries, it often fails to deliver boxes in which to pack farmers’ produce. They can sell their surplus to the market, but it is rarely enough to provide a decent income. No wonder Cuba imports two-thirds of its food.

It is becoming more urgent to free the economy from such burdens. Although Cuba has done a good job of controlling covid-19, the pandemic has crushed tourism, a vital source of foreign exchange. The Trump administration, which imposes sanctions on Cuba in the hope that they will force the Communist Party out of power (and, perhaps more important, that they will please Cuban-American voters in Florida), recently tightened them. In September the State Department published a “Cuba prohibited accommodations list”, which blacklists 433 hotels controlled by the regime or “well-connected insiders”. Venezuela, Cuba’s ally, has cut back shipments of subsidised oil. The economy is expected to shrink by around 8% this year.

As it often does when times are tough, Cuba is improvising. To hoover up dollars from its citizens, since last year the government has opened many more convertible-currency shops. As these usually have the best selection of goods, demand for dollars has rocketed. Banks have none left. Cubans either get them from remittances, sent by relatives abroad, or on the black market, where the price can be double the official rate of one per CUC.

The government is now sending signals that it wants to scrap the economy-warping dual-currency regime. “We have to learn to live with fewer imports and more exports, promoting national production,” said the president, Miguel Díaz-Canel, in July.

But it has signalled before that such a reform was imminent only to decide against it. That is because the change, when it comes, will be painful. Importers with artificial profits may lay off workers en masse. If they have to pay more for their dollars, imports will become more expensive, sparking a rise in inflation. Pavel Vidal, a Cuban economist at the Pontifical Xavierian University in Cali, Colombia, expects the value of Cubans’ savings to drop by 40%. The government has said that it will raise salaries and pensions after a currency reform, but it has little cash to spare. This year’s budget deficit is expected to be close to 10% of GDP. That could rise when the government is forced to recognise costs now hidden by the twin-currency system.

The government may yet wait until it has built up bigger reserves of foreign exchange to help it cushion the shock. It may hope that Joe Biden will win the White House and reverse some of the sanctions imposed by the Trump administration. That would boost foreign earnings.

The economic crisis makes other reforms more necessary. Under Raúl Castro, who stepped down as president in 2018 (but still heads the Communist Party), a vibrant private sector started up. It has gained more freedoms, but at a slow pace.

The government has recently promised faster action. It said it would replace lists of the activities open to cuentapropistas, as Cuba’s entrepreneurs are called, with negative lists, which specify in which sectors they cannot operate. The new rules have yet to be published. The government recently let cuentapropistas import supplies through state agencies, but prices are prohibitive. In July it opened a wholesale market, where payment is in hard currencies. Firms that use it no longer have to buy from the same bare shops as ordinary citizens.

Cuentapropistas have been lobbying since 2017 for the right to incorporate, which would enable them to sign contracts and deal normally with banks, and to import inputs directly rather than through state agencies. The government has yet to allow this. Until it frees up enterprise, Cubans will go on forming long queues outside shops with empty shelves. ■

 

Street Vendor , 2015

State Food Distributer, 2015

State Vendor, ANAP (Asociacion Nacional de Agricultores Pequenos)

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CUBA ON EDGE AS GOVERNMENT READIES LANDMARK CURRENCY DEVALUATION

Government is forced to act as it faces a dire shortage of dollars and collapse of tourism


Marc Frank
in Havana. Financial Times, September 30, 2020.

Original Article: Landmark Currency Devaluation

Cuba is stepping up plans to devalue the peso for the first time since the 1959 revolution, as a dire shortage of tradable currency sparks the gravest crisis in the communist-ruled island since the fall of the Soviet Union.

Two Cubans and a foreign businessman, all with knowledge of government plans, said the move to devalue the peso had been approved at the highest level. They said the devastating effect of the coronavirus pandemic on tourism, a fall in foreign earnings from the export of doctors and tougher US sanctions had created the worst cash crunch since the early 1990s, forcing the government to move forward with monetary and other reforms. The sources said preparations for the devaluation were well under way at state-run companies and they expected the measure before the end of the year. They asked not to be identified owing to the sensitivity of the subject.

The government declined to comment. Scarcity of basic goods and long queues at shops have been a feature of life in Cuba since the Trump administration pushed for tighter sanctions against the country in 2019. The shortages have been exacerbated by the pandemic because Cuba imports about 60 per cent of its food, fuel and inputs for sectors such as pharmaceuticals and agriculture.

The Cuban government has yet to provide any economic data this year but the UN Economic Commission for Latin America and the Caribbean predicts the economy will contract 8 per cent after a sluggish performance over the past four years. Most other foreign analysts say trade is down by at least a third. People queue to exchange money at a bank in Havana.

Cuba operates two currencies: the peso and the convertible peso. The government claims both are of equal value to the US dollar, but neither currency has any tradable value abroad and imported goods, when available, are priced with huge mark-ups when they are purchased in the domestic currencies. The Cuban public can buy the convertible peso for 24 pesos and sell it for 25 pesos, although the government sets different domestic exchange rates between the two currencies in some sectors, ranging from one peso to 10 pesos. For example, in the special economic zone at Mariel near Havana, one convertible peso is exchangeable for 10 pesos.

According to the sources and recent government statements, the peso will be devalued significantly from its current level on paper of one per dollar and the convertible peso will be eliminated. Economists have long argued that Cuba’s currency system is so unwieldy that it stymies the country’s exports, encourages imports and makes it difficult to analyse corporate profits. Cuba’s government has said it will respect the peso’s current rate for an unspecified period to allow people to exchange convertible pesos into pesos. It will convert bank accounts priced in convertible pesos. As monetary reform becomes a reality Cubans face a shortage of hard currency and will once again be allowed to make purchases in US dollars, though only with a bank card. This was last permitted in 2004.

It is legal in Cuba to own US dollars and other internationally tradable currencies, but until recently they were not deemed legal tender even when paying by card. There is a large black market in US dollars beyond the government’s reach in which the American currency has this year appreciated by more than 30 per cent when valued in the local currencies. According to the government there are now more than 120 official outlets which price goods in dollars, selling everything from food and hygiene products to domestic appliances, hardware and car parts, and the government plans to open more.

Many Cubans queue for hours outside dollar shops to obtain the products they sell. To do so, Cubans first need to open an account in which they can deposit cash or wire transfers in dollars or other hard currencies; they can then use a debit card to pay for goods in dollars. There are already more than a million dollar-denominated cards in circulation, according to local reports.

“Now, on top of everything else, I have to also worry about the value of my money and how to buy dollars on the informal market for the card because the state has none to exchange at the moment,” said Jenifer Torres in Havana, who said she had a good job but was supporting dependent parents at home.

Bert Hoffmann, a Latin America expert at the German Institute of Global and Area Studies, said: “Instead of monetary unification — for many years the government promise — Cuba is moving into an economy with two different monetary circuits.” These were “the dollarised debit card shops and the normal domestic economy, in which the Cuban peso will be under strong inflationary pressures”.

The Cuban economy is largely owned and run by the state, which sets exchange rates and many prices. As the cost of inputs increases due to the currency devaluation, state-run companies are likely to increase their prices — fuelling inflation. Alejandro Gil, economy and planning minister, said in July that the crisis was “exceptional” and announced the government would move towards market-orientated reforms and loosening of the Soviet-style central planning system.

Continue Reading

President Diaz-Canel

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EL REGRESO DEL DÓLAR A CUBA DEBILITA EL CUC

En el mercado negro, donde se realizan las transacciones entre particulares, el dólar cotiza ahora en 1,13 CUC en lugar de 0,95

14YMEDIO / MARIO J. PENTÓN, La Habana/ Miami | Octubre 23, 2019

El simple anuncio por parte del Gobierno cubano de que el dólar y otras divisas tendrán curso legal en la Isla dentro de unos días ha provocado un desplome del valor del peso convertible (CUC).

En el mercado negro, donde se realizan las transacciones entre particulares, el valor del dólar se cotiza ahora en 1,13 CUC en lugar de 0,95, según la plataforma online Revolico y varias fuentes consultadas en La Habana. Últimamente, a raíz de una mayor demanda provocada por los aumentos salariales, los cambistas pedían entre 1 y 1,05 CUC por dólar.

En las casas de cambio oficiales, las Cadeca, la cotización no se ha movido de 0,87 dólar por 1 CUC porque se trata de un mercado controlado por el Estado, a diferencia del mercado paralelo. donde rige la ley de la oferta y de la demanda. El Estado castiga la divisa estadounidense con un impuesto del 10% y una comisión del 3%, Además, las Cadeca no venden dólares, solo los compran.

“La gente está buscando la seguridad del dólar porque no ve claros los pasos del Gobierno con la economía”, dice vía telefónica Mongui, un cambista que trabaja en las cercanías del hotel San Carlos, en Cienfuegos.

Mongui pide 1,13 CUC por dólar, pero cuando el cliente compra más de 1.000 dólares le hace una rebaja y se lo vende por 1,08. “Ya tengo mi clientela fija, gente que va de mula a Panamá, Cancún y otros lugares. Ahora hay mucho nerviosismo porque el Gobierno le quiere quitar el negocio a las mulas“, agrega.

María Luisa, de 69 años, recibe unos 100 dólares mensuales que le envía su hijo desde Florida y cree que el incremento del valor de esa moneda debió haberse producido hace mucho.

“¿En qué cabeza cabe que el CUC valga más que el dólar, la divisa más fuerte del mundo? Fidel quitó los dólares de la circulación y a cambio nos entregó papelitos. Ahora quieren quitarnos nuevamente los dólares y darnos un número en una tarjeta magnética. Ellos siempre se quedan con lo mejor”, protesta.

María Luisa ha pedido a su hijo que le envíe las remesas en dólares y que para ello deje de utilizar Western Union, que convierte automáticamente las remesas en CUC a un tasa de 0,95 por cada dólar. “Prefiero que me mande el dinero con gente que viene de Miami. Así me rinde más. Lo cambio por fuera de Cadeca. Para ellos puede que sea un peso, pero aquí son 25”, dice la jubilada, que cobra 310 pesos de pensión.

Los dólares no servirán para pagar en efectivo, sino con tarjetas de débito en las 77 tiendas estatales donde se comercializarán productos importados, sobre todo electrodomésticos, motos eléctricas o repuestos para automóviles.

El anuncio no ha sido bien recibido por los clientes que tenían una tarjeta asociada a cuentas en pesos convertibles o pesos cubanos. “Ahora tengo que sacarme otra tarjeta porque la que tengo es de mi cuenta en chavitos (CUC) no me sirve”, lamentaba este lunes Rogelio, un jubilado que recibe remesas de sus dos hijos emigrados.

Los bancos amanecieron este lunes con largas colas en La Habana de clientes interesados en contratar la nueva tarjeta magnética con saldo en divisas. Ahí estaba Rogelio, delante de la sucursal del Banco Metropolitano, en los bajos del Ministerio de Transporte, para comenzar el proceso de apertura de la cuenta y la solicitud de la tarjeta. “Lo bueno es que no se necesita saldo alguno para abrir la cuenta pero lo malo es que esto de pagar con tarjeta es muy complicado en las tiendas”, explica a 14ymedio.

Los constantes cuelgues del sistema de comunicación entre los mercados estatales y los bancos convierten la experiencia de pagar con tarjeta en un dolor de cabeza. Los terminales de pago, conocidos como POS, se quedan con frecuencia sin servicio y sin conexión y los empleados no pueden procesar el pago por esa vía.

“Cuando uno va a una tienda y va a pagar con tarjeta toda la cola te mira con mala cara, porque saben que te vas a demorar bastante, entre una prueba y otra para lograr comunicarse con el banco”, explica Yusimí, una habanera que este lunes también fue de las primeras en solicitar la nueva tarjeta bancaria.

“Hace unos pocos años se estaba hablando con mucha fuerza de que estaba al doblar de la esquina la unificación monetaria, pero ahora resulta que se agrega otra moneda. Esto no hay quien lo entienda”, se queja Nelson, contable en una empresa estatal donde ha tenido que lidiar con las distorsiones que provoca la dualidad financiera.

El economista Pavel Vidal, que fue funcionario del Banco Central de Cuba durante varios años, considera que el regreso del dólar a la economía nacional dará “algún alivio rápido a los crecientes desbalances financieros que se vienen acumulando desde 2015”.

En una columna publicada en OnCuba, Vidal considera que en el corto plazo se observarán “efectos positivos” por estas medidas, como una mayor liquidez en divisas en los bancos y “mayores opciones de compra en mercados formales”. Sin embargo, el ahora profesor de la Universidad Javeriana de Cali (Colombia) considera que el regreso del dólar implica la pérdida de la autonomía monetaria y retrasa la salida de la dualidad monetaria peso/CUC.

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RE-DOLLARIZATION OF THE CUBAN ECONOMY !! ??

“Autorizar operaciones con divisas en algunos mercados de consumo y en algunas industrias es abrir la caja de Pandora a una redolarización acelerada del resto de la economía”, sostiene el economista Pavel Vidal

Agencias, Madrid | 24/10/2019 9:20 am

Los cubanos pueden desde esta semana abrir cuentas en dólares en bancos locales para adquirir electrodomésticos, motos eléctricas, e incluso encargar equipos específicos, con cargo a su tarjeta de débito, informa la AFP.

El gobierno los comercializará y busca así recaudar divisas, tratando de sortear el embargo que le aplica Estados Unidos desde 1962. A continuación, algunas claves para entender las medidas:

¿En qué consisten?

Se habilitará a finales de mes una red de tiendas estatales para la venta en dólares y otras divisas extranjeras de productos de fuerte demanda de importación, como equipos eléctricos, electrodomésticos de alta gama, autopartes y ciclomotores.

El pago se realizará con tarjetas de débito que podrán recibir transferencias desde el exterior o de otras cuentas (en dólares y en otras divisas), libre de impuestos.

También podrán importar algunos bienes específicos a través de empresas estatales (bajo la misma modalidad de la cuenta bancaria), sin depender de la caja central estatal.

¿Qué se busca?

El gobierno busca captar divisas, en momentos en que el gobierno de Donald Trump arrecia el embargo, con medidas que afectan al turismo, las inversiones, el envío de remesas y la importación de combustible.

“El país necesita divisas para financiar” su “desarrollo económico y social” explicó el ministro de Economía, Alejandro Gil.

Cuba, gobernada por el Partido Comunista (PCC, único), busca evitar la fuga de cientos de millones de dólares, debido a las crecientes importaciones particulares.

Según la consultora privada Auge, solo en la Zona Libre de Colón (Panamá) los cubanos gastaron este año un promedio de “20 millones de dólares mensualmente”.

Con el dinero recaudado, el gobierno podría hacer frente a la falta de liquidez de su sistema económico, pagar a tiempo a sus proveedores y adquirir insumos que necesita el país.

¿Cómo se beneficia el gobierno y el ciudadano?

“Es previsible que en el corto plazo se observen efectos positivos”, pronostica el economista cubano Pavel Vidal, de la Universidad Javeriana de Cali.

Los bancos estatales podrán fortalecer su liquidez en dólares y otras monedas extranjeras, y el gobierno garantizar una oferta de productos deficitarios en la red minorista, sin tener que emplear las divisas que destina a gastos prioritarios.

Por su parte, los cubanos tendrán acceso a productos que hasta ahora sólo podían adquirir en mercados informales y a precios competitivos, mientras que el sector privado local (13 % de la economía), gastará menos en viajes para abastecerse de insumos.

¿Se dolarizará la economía?

Gil niega que la venta interna en divisas conduzca a la dolarización de Cuba, que ya apeló a la moneda estadounidense entre 1993 y 2004 para sortear la grave crisis económica de los años 90.

Según el ministro, las dos monedas nacionales: el peso cubano (CUP) y el peso convertible (CUC, equivalente a 24 pesos cubanos) siguen circulando, y el comercio en dólares se realizará solo por vía electrónica.

Pero los economistas destacan que el proceso de dolarización no depende del soporte empleado, sino de que el dólar suplante en algunas funciones a las monedas domésticas.

“Autorizar operaciones con divisas en algunos mercados de consumo y en algunas industrias es abrir la caja de Pandora a una redolarización acelerada del resto de la economía”, sostiene Vidal.

¿Y la unificación monetaria?

Gil subrayó que las medidas no detendrán el proceso de unificación de las dos monedas nacionales, previsto desde 2013, sino que pondrán al país en “mejores condiciones” para alcanzar esa meta, con una industria y un comercio minorista fortalecidos.

La doble moneda está acompañada de tasas preferenciales de cambio para el sector estatal, lo que distorsiona la economía.

Vidal advierte que, lejos de solucionar “el (actual) complejo y distorsionante sistema de múltiples tipos de cambio y dualidad monetaria”, las nuevas medidas ahora “llevan a la economía a operar no con dos, sino con tres monedas”.

“La redolarización anunciada cancela la unificación de las monedas”, considera.

 

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FINANCIAL TIMES SPECIAL REPORT ON CUBA, June 16, 2015

Financial Times, June 16, 2015

Document here: Financial Times SPECIAL REPORT on CUBA June 16 2015

Authors:

John Paul Rathbone, Latin America Editor; Geoff Dyer, US diplomatic correspondent; Richard Feinberg, Professor, UCLA San Diego; Marc Frank, Journalist based in Cuba; Cardiff Garcia, FT Alphaville reporter

obama-castroTHAW IN US RELATIONS RAISES EXPECTATIONS; Tentative signs of openness heighten hopes, but is the island ready to do business?

NEW CONNECTION DIVIDES OPINION; President Obama’s overtures play better than expected at home — although not with everyone

STRAITS DEALING BRIDGES MANY GAPS; Retailers in Florida cash in on items needed by customers across the water

GLIMMERS OF GLASNOST BEGIN TO WARM ISLAND; Government retains a firm grip, but there are signs it is loosening a little

NEW PORT ZONE HARBOURS BIG AMBITIONS; A would-be capitalist enclave in a socialist state, the Mariel project is emblematic of change

STATE EXPERIMENTS WITH CO-OPERATIVE THINKING; From garages and restaurants to dealers in exotic birds, co-ops are expanding

CUBA’S NASCENT KNOWLEGE ECONOMY; The island could capitalise on a wealth of expertise in science

US COMPANIES STILL FACE INVESTMENT HURDLES; Bureaucracy, eroded infrastructure and regulatory risk are among hurdles

GOVERNMENT LIKELY TO END TO DUAL CURRENCY; Change would be part of reforms to remove price distortins

COMPENSATION IS KEY TO FUTURE RELATIONS; What now for legal claims by those who lost property in the revolution?

OPINION: WHAT CUBA CAN LEARN FROM VIETNAM; The island has the resources and location to create a balanced economy

 There is a new entry among Cuba’s roll of important dates. Alongside Fidel Castro’s 26th of July movement and the January 1 1959 “triumph of the revolution”, there is now December 17 2014. That was the day when Barack Obama and Raúl Castro, the US and Cuban presidents, announced that they wanted to normalise bilateral relations and end more than 50 years of cold war enmity.

 To be sure, communist Cuba was already changing. After formally becoming president in 2008, Mr Castro began a tentative economic liberalisation process to boost the country’s flagging economy — especially urgent now that Venezuela’s growing crisis jeopardises the $1.5bn of aid it sends every year. But the December 17 announcement lit a bonfire of expectations among US businesses — even if Cuba’s $80bn economy, for all its exotic allure, is much the same size as the Dominican Republic’s. “There is a new sense of excitement, of US companies coming to look and thinking of starting seed businesses,” says one long-established European investor in Havana. “It makes sense. Start small, learn how the system works and then see how it all goes.”

 So, how might it all go? Continue reading:  Financial Times SPECIAL REPORT on CUBA June 16 2015

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CUBA’S ECONOMY: DAY ZERO OR D-DAY?

The tricky task of unifying a crazy system of exchange rates

The Economist, May 16th 2015

Original here: UNIFYING THE EXCHANGE RATES SYSTEM

CUBA has two currencies and a mind-boggling number of exchange rates. So when President Raúl Castro set out four years ago to unify the currency system by 2016, it was not surprising that he gave few details on how he would achieve it. A year in advance, it is still not clear. Nor is there a fixed date. Cubans call the unknown day of reckoning Día Cero (“day zero”).

The main difficulty is not unifying the two currencies per se. They are the Cuban peso, which most people use, and the convertible peso (CUC), worth about $1, which is a dollar substitute used by individuals in tourism, for remittances and in the private sector. It would be relatively easy for the average Cuban to scrap the CUC and conduct all transactions in pesos. Already many goods can be bought with either currency. The exchange rate for the peso is 24 per CUC, a level that has changed little since the CUC was created in 1994.

But for the economy at large what looks like a relatively simple book-keeping exercise could have devastating consequences, because there is a parallel exchange rate, mostly hidden from the public, that is used in accounting by state-owned firms and foreign joint ventures. It is one peso per CUC (or dollar). The massively overvalued rate has been in place since the 1980s, when Cuba was subsidised by the Soviet Union. It creates huge distortions in the economy, allowing importers to buy a dollar’s-worth of goods for one peso, a wheeze that drains precious foreign exchange from the country. Cutting the overvalued rate to the cheaper one would be the equivalent of a 96% devaluation. This could bankrupt many state-owned firms, whose costs have been accounted for at the overvalued rate.

Augusto de la Torre, the World Bank’s chief economist for Latin America, says he doesn’t know of any country that has started unification with such diverse exchange rates, and that it could be “suicidal” to join them in one big bang at 24:1. Vilma Hidalgo, vice-rector of the University of Havana, urges caution. She says many segments of the economy, such as exporters and firms that struggle to compete against subsidised imports, would benefit from devaluation, but others could be devastated.

So Cuba is, typically, treading carefully. The government has started with hotels and the sugar and biotech industries. Though their new exchange rates are far from uniform, the most common is 10:1, which some think may be the target rate for unification. But even if the whole economy were to merge at that rate, it would still represent a 90% devaluation for most.

Typically, a country embarking on such an upheaval would get financial help from the IMF and World Bank. Because of its history of enmity with the United States, Cuba does not have that option. Ms Hidalgo hopes that rapprochement will spur enough trade and financial flows to support the new exchange rate. In the meantime, gradualism will remain the guiding principle, which means the distortions will persist. Expect many day zeroes.

Che Guevara: One of the Architects of Cuba’s Monetary Pathology, immortalized (?) on the three CUP and three CUC bills

CU107Three Peso in Moneda Nacional (CUP),  worth about $US 0.12 in mid-2015. 

Cuban3PesosThree “Convertible Pesos”  (CUCs), now ostensibly worth $US 1.00.

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Brookings Institution: CUBA’S ECONOMIC CHANGE IN COMPARATIVE PERSPECTIVE

Edited by RICHARD E. FEINBERG AND TED PICCONE

Full Document Here: Brookings, 2014:  Cuba’s Economic Change

                         TABLE OF CONTENTS

 Introduction and Overview    Richard Feinberg

Policies for Economic Growth: Cuba’s New Era,  Juan Triana Cordovi and Ricardo Torres Pérez

Economic Transformations and Institutional Changes in Cuba. Antonio F. Romero Gómez

Institutional Changes of Cuba’s Economic-Social Reforms: State and Market Roles, Progress, Hurdles, Comparisons, Monitoring and Effect. Carmelo Mesa-Lago

Economic Growth and Restructuring through Trade and FDI: Costa Rican Experiences of Interest to Cuba, Alberto Trejos

Monetary Reform in Cuba Leading up to 2016: Between Gradualism and the “Big Bang” Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva

Exchange Rate Unification: The Cuban Case. Augusto de la Torre and Alain Ize

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“Reforming the Dual Monetary System”

By Justin Rohrlich. from “VICE”, , 23 January 2014

Original essay Here: http://www.vice.com/read/millions-of-cubans-may-lose-their-life-savings-this-year

“F___ing cops in Cuba are always busting everybody’s balls.”  A man mutters this to me in perfect English as I walk down the once-elegant Calle 23 in downtown Havana. He is the very last customer waiting in a Kafkaesque line that wraps around the block and doubles back on itself twice. The afternoon is stiflingly hot. Two police officers are hassling a nearby teenager because he took off his T-shirt.

“But that’s why things here are so safe,” the man continues, much louder this time. I’m confused until I realize another cop is standing behind me. He wandered over after spotting a Cuban nacional talking to me—an American gusano. “Very safe, very safe. You know, because the police do such a good job!”  The officer gives him a long, hard stare, then wanders away. I take my place at the end of the line next to my new buddy, who says his name is Yaniel.

Along with several hundred other Cubans, Yaniel and I are waiting to get into Coppelia, the iconic ice cream parlor created in 1966 by order of Fidel Castro and named for his then-secretary’s favorite ballet. Located across the street from the Habana Libre hotel, a one-time Hilton from which Fidel directed the revolution for three months in 1959, Coppelia has been called the “ultimate democratic ice cream emporium.” But, as I quickly find out, that isn’t exactly true.

coppelia-lineCoppelia on  la Rampa

When the Cubans around me spot a foreign tourist standing with them in the endless queue, they’re quick to inform me that the line we’re in is for people using Cuban Pesos—which is to say, most Cubans. As a woman in curlers and a tube top explains, people holding Convertible Pesos, the country’s other currency, aren’t forced to endure such Socialist indignities. Foreigners, like me, carry Convertible Pesos. She then points to a tiny building surrounded by a well-kept patio and leafy trees offering respite from the blistering mid-summer sun. There is no line at this Coppelia stand and, sitting in the shade are several happy, relaxed-looking people, enjoying their ice cream.

This, in a nutshell, is what having two currencies has done to the already dysfunctional Cuban economy for the past 20 years. The good news is that the government is finally attempting to fix it. The bad news is that millions of Cubans could lose their life savings in the process.

Kooks and Coops
Cuba is the only country on earth that prints two currencies. When the Soviet Union fell in the early 90s, Havana’s subsidies from the USSR were cut off. As a result, Cuba suffered a devastating 35 percent drop in its GDP. The situation on the ground was dire. In Con Nuestros Propios Esfuerzos (With Our Own Efforts), a 300-page volume of everyday survival strategies distributed in the early 90s by the publishing arm of the Revolutionary Armed Forces, Cubans were offered helpful instructions for how to make shampoo out of rum and “sausages” made of nylon stockings stuffed with seasoned grapefruit rind.

Desperate for hard currency, Fidel Castro grudgingly legalized use of the US dollar in 1993. People working in the tourism industry were allowed to earn—and keep—tips given to them in foreign currency. In addition, a resolution by the National Bank of Cuba permitted some Cuban citizens to own foreign currency; the list included government officials, artists and athletes paid overseas, airline and fishing vessel crews, and employees of foreign embassies or organizations.

Castro’s ultimate goal was to get greenbacks into the state’s coffers. In order to capture as many of the now-circulating dollars as possible, the Cuban government promptly opened a network of so-called “dollar stores,” which carried otherwise-impossible-to-find goods available only to people who used American dollars to pay for them. The Cuban government would purchase, say, cans of Pringles and bottles of Gatorade from American manufacturers thanks to a humanitarian loophole in the then-30-year-old US trade embargo. Then the government would sell the Pringles and Gatorade to citizens at a 240 percent markup. The state kept the profit.

However, the trade embargo made it all but impossible for the Cuban government to do much with their American dollars, especially after the US Federal Reserve fined Swiss bank UBS $100 million for its dealings with the regime. And so, in 2004, Fidel Castro once again outlawed the US dollar and popularized the Convertible Peso, or CUC, which had been in limited use since 1994. CUCs (pronounced “kooks”) are worth one US dollar, and are used primarily in domestic tourism and foreign trade. Cuban Pesos, or CUPs (pronounced “coops”), are worth 1/24th of one CUC—about four US cents—and are what the government uses to pay Cuban salaries. (The government owns just about everything in Cuba, and so nearly every Cuban is a government employee.) Doctors, who are employed by the national health system, earn a little less than 800 CUPs per month. That’s about $30.

Thus, in theory, a cabdriver who gets tipped by foreign tourists in CUCs can earn a cardiologist’s monthly income in a single shift. And since it’s against the law for anyone with a professional degree—doctors, lawyers, accountants, etc—to ply their trade in business for themselves, a domestic brain drain has decimated Cuba’s educated class.

“Basically, the incentive structure that shapes people’s behavior has become completely perverted and dysfunctional,” says economist Arch Ritter, a professor at Ottawa’s Carleton University who has been studying Cuba for almost 50 years.

People with access to CUCs live far more comfortably than those without. Buses that accept CUCs look like the ones you take to pick up your rental car at American airports. Buses that accept CUPs are Soviet-era, exhaust-belching beaters. Essentials like cooking oil and toiletries are easily purchased with CUCs, while CUP earners like Mario, a parking attendant I met one afternoon behind the Habana Libre hotel, ask tourists if they have extras. After I gave Mario a Right Guard Sport Stick and two bars of Irish Spring, he noted that we both have a 36-inch waist. So he asked for my belt.

Cuban President Raúl Castro has quite rightly called the dual currency “one of the major obstacles to the progress of the nation.” However, he has also said, “I was not chosen to be president to restore capitalism to Cuba. I was elected to defend, maintain, and continue to perfect socialism.” So it’s no surprise that the government has announced plans to split the difference and do away with the CUC while retaining its hold on industry and commerce in the country.

How do you eliminate an entire currency? Castro has released few details about how or even when Cuba intends to begin taking CUCs out of circulation. But Ritter explained it this way: “They’ve got to make people want to hold the CUP, through the forces of supply and demand. You increase the CUP’s demand by letting people use it to buy a wider variety of goods. Then, you also limit how many CUPs are available, so its value goes up. Likewise, you reduce demand for the CUC by increasing supply, which would, in time, bring its value lower.”

In Cuba, however, economic decisions aren’t made based on supply and demand, and “the market” as Adam Smith knows it does not exist. Instead, reforms are made with the stroke of a pen, so the government could simply, say, change the exchange rate between the CUC and the CUP from 24-to-1 to 12-to-1. This would instantly halve the life savings of countless Cubans who’ve spent two decades socking away CUCs, to say nothing of the Zimbabwe-like inflation that could strike the economy after such a move.

Or, the government may just take everyone’s savings outright. “My guess is that when the government does the reform, it will expropriate some part of the population’s wealth accumulated in CUCs,” says economist Daron Acemoglu, co-author of Why Nations Fail. “This is exactly the sort of expropriation that Argentina did.”

In the years following the collapse of Argentina’s economy in 2001, the government nationalized private pension funds, swiping roughly $24 billion of the citizenry’s money. Argentinians’ dollar-denominated bank accounts were frozen, and withdrawals were severely limited before everyone was forced to convert their savings into comparatively worthless pesos. The result were protests, a flood of court cases, violent riots, a worsening economic crisis, and a two-week period in which Argentina had five different presidents.

Raúl Castro has declared that the transition will not hurt holders of either CUCs or CUPs. But the concept of protecting individual wealth has no place in Cuba—a fact specifically stated in the Cuban Communist Party’s Lineamientos (Guidelines). And as Mauricio Claver-Carone, executive director of the right-leaning Cuba Democracy Advocates points out, the Cuban government could really use the money.

“The Castro regime seems to undertake these currency operations when it’s suffering from a hard-currency crisis,” he explains. “The anticipated currency swap is simply another episode in a long series of asset confiscations by the Castro regime.”

Expropriations and nationalizations of private property have occurred repeatedly since the beginning of the Castro era. People leaving the island in the early days of post-Revolutionary Cuba were forced to give up their property and assets in addition to their rights as citizens. Those who stayed were soon relieved of 42 percent of their wealth in a top-down currency revaluation. In recent years, the CUC has been devalued in pursuit of stabilizing government debt, and hard currency accounts have been periodically frozen and restricted when it has suited the regime.

The economy of Cuba’s main benefactor, Venezuela, is thought by many economists to be in the midst of collapse. Just as the Soviet Union’s was 20 years ago.

Mucho Resolver
Carlos, like 4.6 million of the 5 million people in Cuba’s labor force, works for the state. A lighting and set designer who lives in the “upscale” Vedado section of Havana, the 74-year-old has accompanied traveling Cuban theater and dance productions all over Latin America and Eastern Europe. The government pays Carlos relatively well for his work; he earns roughly what a doctor earns. Yet even though he is relatively privileged by comparison, Carlos’s monthly salary covers perhaps half a month’s worth of expenses. And so, displaying the optimistic, opportunistic trait known in Cuba as resolver, Carlos makes up for the shortfall by earning CUCs on the side.

Carlos runs a small bed-and-breakfast—known in Cuba as a casa particular—out of his art-deco townhouse. He rents out two rooms—he could rent more, but the government imposes limits on how many rooms can be occupied at once—and charges 30 CUCs a night per room (the authorities also set maximum room rates). On paper, this means Carlos can multiply his monthly salary several times with just a handful of bookings. The reality, however, is another story.

Over the course of the three nights I stay with him, Carlos explains how it works. He pays about 300 CUCs a month to the government for the right to run his casa, whether or not he rents a single room. In other words, Carlos needs to fill one bed for 10 nights a month just to break even with the government, to say nothing of his own expenses. Still, the fact that he’s even still in business means Carlos is ahead of the game. One woman I met selling salsa CDs along Calle 12 in Vedado told me she’d set up her home as a casa particular, but was forced to shut down after just two months because she’d gone broke paying the government fees.

Attracting guests presents a whole other set of challenges. Advertising in Cuba is against the law, and few people are permitted Internet access in their homes, making it all but impossible to attract tourists looking for accommodations. Carlos is among the lucky Cubans who has internet access in the form of an old HP laptop and creaky dial-up connection, allowing him to maintain a web page to market himself to tourists.

First legalized in 1997, casas particulares generate intense competition among Cubans eager for precious CUCs. Mercedes, a rheumatologist who rents me a room in her perfectly preserved colonial mansion in the touristy hamlet of Trinidad, has to contend with dozens of other nearby casas. But in addition to going head to head with each other, small-business owners like Mercedes and Carlos must also compete against Gaviota S.A., a government-run tourism operation overseen by members of Raúl Castro’s inner circle.

A division of the Cuban Revolutionary Armed Forces, Gaviota’s tens of thousands of hotel rooms across the island generate the equivalent of almost a billion dollars a year. The money goes directly to the government.

But the big hotels that divert business away from people like Carlos and Mercedes also give other people—housekeepers, bellhops, bartenders—the chance to obtain CUCs for themselves. And state-run entities (particularly ones with bars, restaurants, and plenty of cash on hand) offer opportunities for all manner of graft, theft, and other types of financial chicanery that make up a robust underground economy in Cuba. It’s impossible to put a dollar value on the amount of money that’s stolen or hidden from the state, but economist Arch Ritter estimates that at least 95 percent of Cubans do it.

Isoyen worked at a Soviet-built, Gaviota-run beach hotel on Cuba’s Caribbean coast until he was furloughed earlier this year. When I met him, he told me it wasn’t the loss of his CUP salary that he missed—it was the CUC tips he received from tourists. A college graduate, Isoyen can only use his accounting degree to work for “the people,” making self-employment in his chosen field an impossibility. Living with his parents makes running a casa impossible, so he plans to use his resolver—and the CUCs he socked away—to open an ice cream stand.

For the elderly docents working at Havana’s Museum of the Revolution, resolver means engaging in a bit of basic arbitrage. After showing me Che Guevara’s gun in a glass display case, one of them tries to sell me a three CUP note bearing Che’s likeness as a souvenir. She asks one CUC for the bill. That’s a tidy 88 percent profit.

The Long Con
Resolver can mean a lot of things.

“My friend! My friend!” someone calls out as I walk down Calle E my first morning in Havana. “Where you from, my friend?”

His name is Rafael, and he says he’s a medical student, though he seemingly fails to understand my English only when I ask about the specifics of his education. He’s bald and wiry, and he has a homemade 13 tattoo on the webbing between his right thumb and forefinger. I like him immediately.

Rafael claims to be a licensed tour guide. He even has an official-looking ID card pinned to his shirt. He charges me 20 CUCs—the equivalent of a month’s salary at a typical government job—for a two-hour walking tour in which he listlessly points out a few local sites like the Plaza de la Revolucion and the clinic where soccer legend Diego Maradona supposedly kicked his cocaine addiction in the early 2000s.

We then go to lunch (I pay for it) at a local cafe where Rafael manages to triple his tour fee. For starters, he collects a commission from the restaurant manager for bringing in foreigners with CUCs—and, as I find out later, Rafael’s clients are charged five CUCs for a mojito instead of the usual 24 CUPs, a 500 percent markup. Rafael also sells me a bundle of cigars that he describes as “special, only for Cubans,” for 35 CUC. He’s telling the truth—they aren’t for export. However, I also come to learn they sell to locals for 25 CUP per bundle. (That’s about 1/35th of what I paid.) For his final trick, Rafael gently talks me out of the Everlast speed bag and hand wraps I brought to donate to a local boxing gym, explaining that he would walk them over for me, as the place is “very hard to find.”

As we part ways, Rafael turns to me with an earnest look on his face. “My friend, please don’t tell anybody else this is your first day in Cuba,” he says. “They will take advantage of you.”

Trusting Raul
Cuban citizens hope that Raúl Castro will tackle financial reform as artfully as Cuban citizens tackle financial survival. But the historically awful performance of the Cuban economy under the tutelage of the Castros doesn’t inspire much confidence. Nonetheless, Ernesto Hernández-Catá, former Deputy Director of the International Monetary Fund, has hope.

“This is part of a reform movement orchestrated by a few brave people in the Cuban government,” Hernández-Catá tells me. “It has been accepted by Raúl, who is not a saint, to be sure. But whereas Fidel was a crazy ideologue, Raúl wants to leave behind an image of a guy who is sober, is reasonably intelligent, and wants to improve the lives of his countrymen.”

Whether it turns out to be a failure or a success, the general consensus in the West remains that, while monetary reform is a positive development, Cuba needs to overhaul its entire financial system from top to bottom before real change can take place. While Secretary of State John Kerry called Cuba’s latest slate of reforms a good start—on top of the economic liberalizations, Cubans can now travel outside the country without an exit visa—he said Havana must do more.

And, not surprisingly, Mauricio Claver-Carone of Cuba Democracy Advocates doesn’t see life improving much for Cubans. “The Castro regime will always end up capturing income made in Cuba, one way or another,” he says. “That’s the nature of totalitarianism.”

cadeca

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La reforma monetaria en Cuba hasta el 2016: entre gradualidad y “big bang”

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Ensayo original: Monetary Reform Cuba 2016

Dr. Pavel Vidal Alejandro, Universidad Javeriana Cali y Dr. Omar Everleny Pérez Villanueva, Centro de Estudios de la Economía Cubana, Universidad de la Habana

 In La Reforma Monetaria en Cuba Hasta el 2016: Entre Gradualidad y “Big Bang (Monetary Reform in Cuba Until 2016: Between Gradualism and the “Big Bang”), Pavel Vidal Alejandro and Omar Everleny Pérez Villanueva analyze the benefits and costs of the eventual devaluation of the official exchange rate for the Cuban peso, the main measure the Cuban government will employ to achieve the goal of monetary unification in 2016. Possible policy responses and alternatives regarding devaluation of the exchange rate are evaluated. The authors conclude that, as far as is possible, the best strategy for the Cuban currency reform is a gradual devaluation and not the application of a “big bang” approach. However, given the huge gap between the multiple exchange rates, sharp depreciation in the value of the Cuban peso will be required at times.

 Este ensayo fue preparado para ser presentado en una serie de talleres de expertos sobre el cambio económico Cubano visto desde una perspectiva comparativa, organizado por la Iniciativa Latinoamérica en el programa de Políticas del Exterior de la Institución Brookings, y el Centro de Estudios de la Economía Cubana y el Centro de Investigaciones de la Economía Internacional en la Universidad de la Habana. Fue presentado inicialmente en un seminario de expertos en Havana, Cuba el 26 de septiembre del 2013 y fue revisado posteriormente. Los ensayos preparados por esta serie serán recopilados y publicados por Brookings en el 2014. Este ensayo refleja solamente las opiniones de los autores.

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Pavel Vidal y Omar Everleny Pérez

 

 

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