Tag Archives: Monetary System

CUBA ELIMINATES TAX ON US DOLLAR

Havana Times, March 17, 2016 |

HAVANA TIMES — The Cuban government announced today that it will eliminate its 10% tax on the use of the US dollar on the island. The good news for ordinary Cubans and tourists alike comes in response to Washington’s new measures to further relax the economic embargo on Cuba, reported dpa news.

“The Cuban government has decided to eliminate the 10 percent tax that it applies today on US dollars entering our country,” said Foreign Minister Bruno Rodriguez.

He said the decision should enter into force as soon as US authorities allow Cuban state institutions to use the dollar in transactions in the United States, as announced earlier in the week.

The new relaxations on the embargo, announced by the Obama government on Tuesday, officially entered into force on Wednesday.

Besides allowing Cuban institutions to carry out transactions in dollars in the United States the administration also relaxed travel restrictions on US citizens wishing to visit the island.

The gestures by both governments come as a prelude to president Obama’s historic three-day visit to Cuba starting this coming Sunday.

Rodriguez told a press conference in Havana that in the coming days Cuban state institutions will see if in effect the United States has eliminated restrictions on who can use the dollar.

The elimination of the tax in Cuba will be effective only after verification that the Cuban State can use the dollar in its operations passing through the United States, specified Rodríguez. “While there is financial persecution, the tax remains,” he said.

The 10 percent tax on the US dollar was imposed by the government of Fidel Castro in 2004. Many Cubans in Cuba receive dollar remittances from relatives or friends in the United States, and were the most hurt by the measure.

The tax “has served to compensate the Cuban financial institutions for the risks and costs” caused by the use of the dollar by Cuba internationally, Rodriguez noted.

The inability to use the dollar in international trade was to date one of the major impediments for Cuba to access markets.

Other ways the embargo still hurts Cuba

Rodriguez also criticized as inadequate the measures taken by the Obama administration to relax the embargo. The foreign minister said a number of restrictions still apply to Cuban institutions, for example their inability to export products to the United States.

The sanctions imposed by Washington on the island in the 1960s came in retaliation for the nationalization of US companies in Cuba after the revolution and can only be lifted by the US Congress. However, the Republican majority still opposes lifting the embargo.

Obama’s trip to Cuba on Sunday, the second by a US president to the neighboring island in 88 years, is part of the historic thaw initiated in December 2014, after decades of sharp differences.xx xxx

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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

New Picture (2)

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MUCH UNFINISHED WORK REMAINS AS CUBA REFORMS ITS ECONOMY

December 14, 2014 – Miami Herald – MIMI WHITEFIELD

Original here: UNFINISHED WORK

Unifying Cuba’s cumbersome dual-currency system tops the list of reforms the government says it will carry out, but analysts say other changes — from measures to speed up foreign investment to a new tax structure — are critical to deepen and expand the reforms.

Cubans use one type of money, the Cuban peso, for everyday purchases and most salaries. But tourists generally use another currency, the convertible peso, which is also needed to purchase coveted consumer items.

To add to the confusion, there’s also one exchange rate for state enterprises and another for Cuba’s fledgling private businesses. The official exchange rate is 25 Cuban pesos (CUPs) for one Cuban convertible peso (CUC), but for state enterprises the CUP is on par with the CUC. One CUC equals $1 U.S.

The government first said it planned to eliminate the unwieldy two-tiered system in 2013 and work toward a single currency, the Cuban peso, but currency unification remains the most important piece of unfinished business as Cuba seeks to overhaul its ailing economy.

“This is probably the most difficult reform of all. It’s extremely complex but it’s also a key reform, especially at a time when Cuba is trying to attract foreign investment,” said Carmelo Mesa-Lago, an economist who has written extensively on Cuba.

Not only is the CUC over-valued but it creates distortions across the Cuban economy. The 1-1 exchange rate, for example, makes it difficult to determine the true productivity of state enterprises. Most wholesale and retail prices in Cuba are out of whack and the over-valued CUC tends to make Cuban exports less competitive.

“It holds them back and deforms everyone’s economic behavior,” said Arch Ritter, an economist and professor at Carleton University in Ottawa.

The dual-currency system also has created severe wage disparities in Cuba. Those who work for foreign companies and receive tips paid in CUCs are far better off than those who work for the state and receive their salaries in CUPs.

Cuban Economy Minister Marino Murillo said last month that eliminating the dual-currency system is the most important task now before the government and that certain transitional steps are underway.

There had been speculation that currency unification would come as a big bang, but now it appears the government is taking the gradual approach.

Stores that once only accepted CUCs have begun to accept both currencies, and prices are now being posted in both currencies at selected stores. The practice is gradually being rolled out across the island.

The government also has been running small-scale experiments with different exchange rates — 10 CUPs for 1 CUC, for example — in some state industries, said Mesa-Lago.

Analysts said a realistic and unified exchange rate will make the Cuban economy more competitive, but the process isn’t without risks, and there may be winners and losers during the transition.

“They need to be very careful; there could be unrest,” said Richard Feinberg, a professor of international political economy at the University of California, San Diego and a senior fellow at the Brookings Institution.

But government officials have tried to calm the population by saying the currency unification will be done in way that won’t be detrimental to those who have maintained their savings in Cuban banks in either CUCs or pesos.

“I don’t know how they will do this,” Mesa-Lago said. “There is also the possibility that it will generate inflation. But if they do it right, in the long-run it will be beneficial.”

Feinberg and a group of scholars and economists from the United States, Cuba and other Latin American countries met over the course of a year to examine how to shape Cuban economic policy in a way that encourages sustainable growth.

“We wanted to look at a country transitioning from a central economy to a somewhat more market-oriented economy” and study it from the point of view of economies that have already gone through the process, Feinberg said.

“We’re not saying you can take lessons learned and copy them like a stencil but there is no point in repeating mistakes,” he said.

The collaboration resulted in a Brookings report, Cuba’s Economic Change in Comparative Perspective, that concludes now is the time for Cuba to accelerate its reforms and prioritize price reforms, expansion of the private sector, foreign investment and gradual engagement with international financial institutions.

Phil Peters, president of the Cuba Research Center in Alexandria, Va., agrees that the government needs to come up with a way to allow lawyers, engineers, architects, consultants and other professionals to engage in self-employment.

Some are getting around the prohibition. An architect, for example, may take out a license as a self-employed construction worker, Peters said.

“But if they don’t find a way to allow skilled professionals to work, they are leaving a lot of money on the table,” he said.

There are other missing pieces — both big and small — in Cuba’s economic reform process. If they’re implemented, Cuba analysts say they would make the island’s fledgling entrepreneurs more successful and could help revive economic growth.

When Cuba’s National Assembly convenes Friday, it’s expected to review the reforms to date, and discuss the 2015 budget and the island’s new foreign investment law.

Not so much a missing piece as a question mark is Cuba’s ability to attract foreign investment, which officials have said is essential to the island’s development plans.

This fall, Foreign Trade Minister Rodrigo Malmierca Diaz announced 246 projects adding up to an investment of $8.7 billion that are open to foreign investment. The government hopes to attract $2 billion to $2.5 billion annually from foreign investors.

Among the projects on the wish list are 86 in the oil industry, 56 tourism projects — including golf-condo projects and 21 new hotels, a plant to produce bottles and another to produce aluminum cans, shrimp and peanut farming projects and wind farm projects where 100 percent foreign ownership will be allowed.

Health, education, the media and the military remain closed to foreign investment.

The Cubans hope that their foreign investment list in combination with the new foreign investment law plus a special economic zone tied to expansion at the Port of Mariel will entice the investors who are needed to jump-start development.

Malmierca has said the Cuban economy must grow at the lofty level of 7 percent annually for the type of development the country needs and that foreign investment will play an important roll in that equation.

The foreign investment law exempts investors from paying a tax on profits for eight years and cuts the tax from 30 to 15 percent.

But foreign firms will not be free to hire and pay workers directly.

“A lot of potential foreign investors question whether there will be sufficient freedom, profitability and security for their investments,” Feinberg said.

Malmierca himself also pinpointed another issue that makes foreigners wary. “Many people complain about the time in which we do things, but everyone’s got their own pace. We’re going to do this our way and we want to do it well,” he said.

In the past, approvals for joint ventures have often come at a glacial pace and the process has been excessively bureaucratic.

The 180-square-mile Mariel Special Development Zone, about 30 miles west of Havana, is supposed to be a focal point for foreign investment and offers the possibility of 100 percent ownership for foreign ventures that set up there.

Cuban leader Raúl Castro and Brazilian President Dilma Rousseff jointly opened the first phase of the nearly $1 billion Port of Mariel renovation in January. It is largely financed by Brazil and Cuba purchased more than $800 million in goods and services from Brazilian suppliers during construction.

The container port, which is eventually supposed to take Havana’s place as Cuba’s main commercial port, is operating and a ship from South Florida, a Crowley vessel loaded with frozen chicken, was the first to call. A rail link to the port also has been completed.

But those who have toured the special development zone recently say it is far from finished and companies are yet to move in. Build-out for specific projects is expected to take place some time next year.

Tim Cole, the British ambassador to Cuba, was among the recent visitors. “What’s immediately striking as you drive in is the ambitious nature of the project. The area set aside for the zone is huge… with plans that include logistics facilities for offshore oil exploration and general cargo and bulk foods facilities,” he wrote in his blog.

“There are, apparently, more than 100 companies who have expressed an interest with the first projects likely to be approved by the end of the year,” Cole wrote. “Deadlines are tight as those companies coming to Mariel will need efficient services — for example, water, sewerage, electricity and high-speed Internet — to be able to operate.’’

As the work proceeds in Mariel, enforcement of the slew of new regulations and tax evasion by budding entrepreneurs remain problems for the government.

Granma, the Communist Party daily, recently reported that the government plans to tackle a number of enforcement issues in 2015. Among them: the under-reporting of income by self-employed workers and misrepresentation of how many workers they employ in their businesses.

Changes allowing Cubans to take full advantage of the new real estate market are also needed. Before Cubans could legally buy and sell homes, a permuta or swap was the way people moved from house to house — often with an under-the-table cash payment to sweeten the deal. Some of that sleight-of-hand has translated to the new market with off-the-books foreign owners putting up money for purchases, buyers and sellers declaring a lower-than-actual purchase price to lessen taxes and sales masquerading as donations.

To curb such practices and help calculate taxes, Granma reported that Cuba will begin using a market-based assessment tool that considers a number of factors, including the number of rooms, location and amenities, such as a garden or patio.

Granma also said the government planned to crack down on illegal economic activity in the coming year and concentrate on increasing the productivity and efficiency of state enterprises to stem losses. A new 2 percent tax on wholesale transactions also will be levied in 2015.

Other issues Cuba needs to address as it shapes economic policy are boosting agricultural production by giving small farmers more incentives, making more credits available so small entrepreneurs can expand their business, and improving wholesale markets, according to Cuba watchers.

Ritter said that even though he’d like to see a complete overhaul of Cuba’s labor laws and wage system, “I don’t think they’re going to do this.”

“The lineamientos were most ambitious,” he said. “If the Cubans could manage to do everything outlined in the lineamientos, it would be a huge reform.”

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AUMENTA CIRCULACIÓN DE BILLETES FALSOS EN LA CAPITAL CUBANA

Lisbán Hernández Sánchez

Hablemos Press, noviembre 21, 2014

En la capital cubana aumenta la circulación debilletes falsos en moneda nacional (CUP) y convertible (CUC), alertan trabajadores del sector privado.

Los dueños de negocios se pasan el mensaje de alerta ante la aparición de pesos convertibles falsificados de 5, 10 y 20 CUC, dijo el lunes el dueño de una cafetería del municipio Habana Vieja, quien no quiso dar su nombre.

Asegura el cuentapropista que la desconfianza ante los consumidores se ha incrementado en los meses de octubre y noviembre debido a los constantes intentos por insertar estos billetes en paladares, dulcerías, cafeterías y entre choferes de carros de alquiler, según él ha podido escuchar en su negocio.

“A lo largo de estos dos últimos años, varios trabajadores por cuenta propia se han visto afectados con billetes falsos de 5, 10 y 20 CUC que no han logrado identificar”, dijo al ser consultada una empleada del Banco Metropolitano en la habanera calle Monte.

Ariel Gutiérrez, quien trabaja en una paladar, comentó: “En agosto detecté al menos 5 intentos (de jóvenes de entre 25 y 30 años) de pagarme con billetes falsos”.

Otros cuentapropistas consultados aseguran que han tratado de infiltrarles billetes de iguales cifras. “En estos actos delictivos también participan mujeres, que pasan más desapercibidas”, agregó uno de ellos.

En la isla no solo circulan billetes en CUP y CUC falsos, también haybilletes de 100 dólares americanos y monedas de 1 CUC.

Un artesano dijo que intentaron pagarle con monedas falsas de 1 CUC. “Ya me habían advertido de las monedas de metal de 1 CUC y pude identificarlas con una piedra de imán que tenía en mi cartera para eso”.

En Cuba circulan dos monedas, el CUP (moneda nacional) y el CUC (convertible). Según la tasa de cambio actual 1 CUC equivale a 24 o 25 CUP, según sea a la venta o a la compra.

Odalis López, residente en el municipio Centro Habana, quien realizó una transacción en una CADECA (Casa de Cambio), dijo que ella fue testigo de una conversación donde algunos trabajadores del lugar advertían que “están circulando billetes falsos, y tienen mucha similitud con los billetes reales”.

Lázaro Izquierdo Ramírez, un trabajador de la construcción, comentó que en el mes de junio cambió 10 CUC en moneda nacional en la CADECA de la calle 26 y Puentes Grandes, y al pagar en una juguera con uno de los billetes de 10, le dijeron que era falso. Al revisar, encontró otros tres billetes de a 10 falsos entre los 240 pesos cubanos que le dio la cajera.

“Muchos de los empleados de los bancos, de las Casas de Cambio y hasta de las Tiendas Recaudadoras de Divisas son cómplices de los delincuentes“, indicó Izquierdo, quien dijo que el propio Estado tiene conocimiento de esto.

Otros ciudadanos consultados han recibido billetes falsos de 100 y 50 pesos cubanos como vuelto en cafeterías estatales y negocios por cuenta propia.

La activista Maritza Castro, residente en el municipio Cerro, fue estafada por dos mujeres de la provincia Cienfuegos que le cambiaron 5.000 CUC por dólares americanos que resultaron ser falsos. Un grupo de jóvenes del reparto La Victoria, en Centro Habana, comentaron que uno de sus vecinos estafa a turistas en el casco histórico de la Habana Vieja con billetes Felipe Paso, que circularon hasta 1960.

“Les hace creer que los billetes viejos tienen más valor que el dólar americano. También lo hace con los billetes de 3 pesos con la imagen del Che”, aseguran los jóvenes.

Según un ex prisionero consultado, en el mercado La Cuevita, del municipio San Miguel del Padrón, se pueden conseguir billetes falsos de 5 CUC a 40 CUP.

Aunque varias CADECA exhiben carteles que anuncian cuáles son los billetes falsos en moneda nacional, las autoridades no identifican el problema de fondo; tampoco los medios oficiales alertan a la población. Cabría preguntarse: ¿De dónde sacan los malhechores el papel moneda? ¿Dónde fabrican esos billetes tan realistas?

Publicado originalmente en Hablemos Press

tres-pesos-convertiblesTres Pesos Convertibles: Not Subject to Falsification!

Tre_pesos_cuba_frontTres Pesos , Moneda Nacional (about $US 0.12):  Not Worth to Counterfeiting?

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URBAN PLANNER OFFERS TOUGH TALK ON CUBA’S ECONOMIC PROSPECTS

By Larry Luxner

November 10, 2014 http://newsismybusiness.com/planner-economic-prospects/

WASHINGTON — When Miguel Coyula discusses Cuba’s struggling economy, he sounds more like a Miami-based critic of the Castro regime than a retired Cuban official visiting the United States on a lecture tour, then going back home to Havana. But times have changed, and Coyula says he isn’t afraid to speak his mind.

“In Cuba, the word ‘criticize’ means to blame or demonize. But I try to be like a doctor. I tell the truth,” said the renowned architect and urban planner, who recently returned to Havana after a month-long trip that began in Providence, R.I., and included speaking engagements in not only Washington but also New York, Atlanta and Miami.

“To quote Raúl, we need to learn to listen to others, even when we don’t like what we hear. He’s invited people to speak out,” Coyula said. “These days, people who work for the government are more open. The instruction coming from the top is that it doesn’t matter what people say; no one can be interrupted.”

D11_293_021Miguel Coyula

A prominent architect and urban planner, Coyula, 72, advised Havana’s municipal government for more than 20 years as part of a progressive think tank known as Grupo para el Desarrollo Integral de la Capital (GDIC). He spoke to us following a private roundtable briefing at Downey McGrath Group, a Washington lobbying firm.

Among Coyula’s key predictions:

  • Investment in the much-hyped Mariel special development zone won’t materialize anytime soon — despite the new foreign investment law and incentives — mainly because foreign companies are deeply unhappy with the government’s refusal to allow them to pay employees directly.
  • The number of universities island-wide will be slashed from 67 to 15 in order to save money, but the quality of education will suffer as a result — especially when young Cubans need business skills such as accounting and management.
  • Cuba’s population, now stagnant at 11.2 million, will never hit the 12-million mark. That’s because Cuba is aging rapidly due to a low birth rate and the continuing exodus of young people. By 2030, at least 30 percent of all Cubans will be 60 or older, up from 20 percent today.
  • The Cuban government will begin phasing out the convertible peso (CUC) in December, as part of efforts to end the dual-currency system.

“By the end of this year, they’ll begin substituting CUCs for regular pesos, so if today you pay 2.50 CUC for a liter of oil, you’ll pay 60 pesos. Considering that the average monthly salary is 150 pesos, that’s a lot of money,” said Coyula. With the planned phase-out of convertible pesos, people are trying to get rid of their CUCs and acquire dollars instead. Officially, the exchange rate is 87 cents per CUC, but on the black market, it’s 96 to 98 cents per CUC.

“Prices are astronomically high, and there’s a lack of economic education after decades of no education on this subject,” he said. “People don’t realize that the society creates wealth. The state administers that wealth, but it must come from somewhere.”

Embargo is ‘ethical issue’

Coyula’s U.S. visit was sponsored by the Center for Democracy in the Americas, a Washington-based NGO that favors lifting the embargo and all U.S. travel restrictions against Cuba. His cousin, the well-known architectural historian Mario Coyula — who headed the GDIC — died this past July at the age of 79.

“For me, the embargo is an ethical issue,” he said. “But lifting it doesn’t necessarily mean that the day after people’s mindsets will change. The Cuban economy needs to be more efficient and dynamic — with or without the embargo.”

In Coyula’s opinion, “the revolution spends more than 40 percent of its time surviving. It’s maneuvering back and forth, and this has created a reactive mentality — always reacting to problems and not being pro-active. The present leadership is committed to the legacy of the revolution. They will try to keep the boat afloat as long as possible, until they die. Then they’ll pass the problems to the new leaders.”

And one of Cuba’s biggest problems, he said, is the rampant corruption that has impeded foreign investment — even as the government attempts to crack down on corruption by jailing foreigners such as Canadian businessman Cy Tokmakjian, who in September was sentenced to 15 years in prison.

“Recently, the World Bank ranked 189 countries based on the ease of investing. The best place to invest was Singapore. Last on the list was Chad,” he said. “Cuba is not even on the list. Imagine, Chad is there and Cuba’s not.”

Even North Korea, the world’s most isolated state, has something Cuba doesn’t have, Coyula pointed out: a sprawling free zone built with foreign (South Korean) investment that employs tens of thousands of workers.

“Mariel is the most promoted place in Cuba, with special development zones for investors. But soon it’ll be a year after the opening of Mariel, and there is absolutely nothing. Even the container terminal in Havana was moved to Mariel to give it a sense of activity, but no one will invest there,” he complained.

It’s the same thing with half a dozen golf course projects that have been enthusiastically proposed by overseas firms — yet Cuba’s new foreign investment law by itself won’t be enough to drum up business.

“All these projects are about to happen, but they haven’t happened yet,” Coyula told us. For one thing, potential foreign investors in Mariel don’t like the fact that they can’t hire employees on their own, but instead must pay a government employment agency in dollars for that labor. The agency, in turn, pays workers in Cuban pesos. That’s because the Castro government wants to avoid creating a class of highly paid Cubans who work for foreign companies, “but inequalities are there whether you like it or not.”

For example, Coyula spoke of a woman he knows who works for an Italian joint venture. That company pays the state $850 a month for her services, but the woman herself receives only 360 Cuban pesos (worth about $14 a month).

“Part of that money is used to sustain a bunch of bureaucrats,” he said. “Because of that, many foreign companies give their employees a bonus in dollars or CUCs. You never discuss with your employer how much [extra] you’re going to earn. They say it’s to protect the worker.”

 Cubans have become speculators

Because salaries are so low relative to the high prices for just about everything, Cubans have become speculators — especially when it comes to food, he said.

“People will buy everything, because if you don’t someone else will and speculate with it. So you get a pound of rice for 30 cents,” he explained. “In the free market, it costs five pesos, and in the dollar shop, it’s 25 pesos. So you sell the rice you don’t need. You wouldn’t give it to your neighbor for 30 cents a pound, you’ll sell it for two pesos, which is cheaper than the free market.”

As prices for ordinary Cubans rise, the benefits they’ve long become accustomed to, such as free education and healthcare, are rapidly drying up because the state can no longer afford to provide them.

“Cuba has 67 universities, and the idea is to leave only 15 — more or less one per province. But Havana will have more than one, so some provinces will be left with none. They’re merging institutions and reducing the budget for higher education.

They’ve already cut the healthcare budget by 15 percent. These are things that people don’t see. These measures have implications,” Coyula said, adding that old university deficits continue.

“In none of Cuba’s 67 universities can you study for an MBA. Today, we need managers and people to understand what economics really is. We don’t teach planning in our universities, either. You want to buy a book on business administration? They don’t have any. The government gives some courses in business, but in my opinion, they’re shallow.”

Telecom, tourism are bright spots

One bright spot, he said, is telecommunications. In 2009, Cuba had only 40,000 or so mobile phones in use. Today, more than 2 million Cubans have cell phones, more services are available than ever before, and costs have fallen dramatically.

“Raúl also lifted restrictions for Cubans to have access to hotels and resorts,” he said. “Last summer, half a million Cubans stayed in beach hotels. The domestic market is saving the tourism from the low season.”

But while tourism has boosted the economies of some of Cuba’s 15 provinces, others have not been helped at all. “For example, Matanzas and Cárdenas are taking advantage of Varadero, which generates hundreds of millions of dollars in tourism revenues. And Havana is, of course, the jewel of tourism,” he said. “But Las Tunas and Guantánamo have nothing.”

The resumption of normal relations resume between Washington and Havana would be dire news for Cuba’s closest Caribbean competitors, predicts Coyula.

“The day the embargo is lifted, the Dominican Republic will commit suicide,” he warned. “The Dominicans inherited our sugar, tobacco and tourism industries. Once Cuba is open again, nobody will be interested in the D.R. You wait and see.”

 mariel Mariel Special Development Zone

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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”

New Picture (4)

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.

New-Picture-8

Pavel Vidal y Omar Everleny Pérez

 

 

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Exchange Rate Unification: The Cuban Case

New Picture (5)Exchange Rate Unification: The Cuban Case

By: Alain Ize and Augusto de la Torre

 In Exchange Rate Unification: The Cuban Case, Augusto de la Torre and Alain Ize take an international perspective in examining the challenges Cuba faces in unifying its exchange rate, and compare various options to meet this objective.

Since 2011, the Cuban authorities have placed exchange rate unification as one of their top policy priorities. Indeed, the current dual exchange rate system—whereby a one-to-one exchange rate for the “convertible peso” coexists with a twenty four-to-one exchange rate for the “Cuban peso” (both against the U.S. dollar)—introduces severe and pervasive distortions with costly consequences for resource allocation and the growth potential of the Cuban economy. At the same time, the unusually large (by international comparison) spread between the two exchange rates exacerbates the transition costs and thus constitutes one of the main reasons delaying their unification.

De la Torre and Ize argue in favor of a fast unification approach, cushioned during a pre-announced transition period by lump-sum taxes and subsidies applied on an enterprise-by-enterprise basis. By allowing for relative price changes to operate in full from the start, the immediate unification would maximize efficiency gains. At the same time, by cushioning the Cuban economy from potentially large transitional pains—including fiscal revenue losses, productive dislocations, inflationary outbursts and distributional effects—the lump-sum taxes and subsidies (to be gradually phased out) would ease the transition, thereby boosting policy credibility. However, to ensure the viability of the scheme and the rapid materialization of the efficiency gains, important habilitating reforms would be needed, particularly regarding the governance of state enterprises.

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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