How does it feel to be the only country in the world which prints two currencies? How does it feel to be paying a notional 240% tax on your wages? How can a cab driver earn more in a day than what a doctor earns throughout the month? Well, ask the Cubans.
In April this year, Miguel Diaz-Canel, the new President of Cuba, inherited an economic mess from the Castros, who had executive control over the island nation for close to six decades. Amongst all of this was the dual currency system. Thanks to former American President John F. Kennedy, a U.S. embargo had forced Cuba to rely on the erstwhile Soviet Union as its primary economic ally. Therefore, when the USSR collapse in 1991, the inevitable happened. Communist Cuba, itself on the brink of a calamitous economic crisis, was forced to introduce market-oriented economic reforms. This period during the 90s, called the ‘Special Period’, forced even the great Fidel Castro to allow the usage of the US dollar for transactions inside the country. It is worthwhile to note that the possession of American currency was previously punishable by imprisonment.
By allowing the dollar, the tourism industry received a boost and overtook sugar as the most productive sector of the nation’s economy, in terms of revenue generated. By 2004, however, 10 years after the dollar was allowed inside the country, nationalist pride kicked in, and the government banned the dollar yet again. Instead, the Cuban government promoted the Convertible Cuban Peso (CUC) with an exchange rate of 1:1 with the US dollar. After its introduction, CUC existed alongside the local Cuban Peso (CUP). Both the CUC and CUP were legal tender and anyone could possess either of them. The CUC was (and still is) 25 times dearer than the CUP.
This was the beginning of a series of horrific and sadistically comical scenarios which the Cubans were about to witness. Theoretically, there were supposed to be two parallel economic systems. Cuban locals, 80% of whom work in the public sector, were supposed to earn wages and buy goods and services (most of them from the State) in CUP. Only the industries functioning primarily in the tourism and foreign sector were to transact in CUC. Such was the distinction between CUC and CUP supply chains, that initially, tourists were fooled into buying CUP in CUC as souvenirs, much above the market rate, as the poor foreigners didn’t even know CUP existed! Cubans were restricted from tourist resorts and hotels till 2007 (except the staff). Basically, two separate ‘Cubas’ existed.
To facilitate exchange rate arbitrage, the retail exchange rate was 1 CUC: 25 CUP, but it was 1 CUC: 1 CUP for businesses. As they continued to maintain parity of CUP and CUC for businesses, the government was forced to subsidised imports in order to boost its dwindling foreign reserves. Another advantage was that Cuban firms, in a joint venture with a foreign firm, could profit in real terms while paying wages (oxymoron, eh?). For example, if the salary for workers was 500 CUC, the foreign firm would pay 500 CUC to the local employment agency. Using the 1:1 exchange rate, the employment agency would pay 500 CUP to its workers. In real terms, therefore, the workers receive only 1/25th of what they should be paid.
This creates a big problem for those who earn their wages in CUP (which is 80% of the population), Since, health services are provided by the state, doctors are paid in CUP and earn an average of merely $40 a month. A cab driver, in contrast, who drops a foreign tourist from the airport into Havana charges $25. An average driver earns $60 dollars a day. Hotel owners who facilitate tourists and their workers who get tipped in CUC earn more in a single day than the average Cuban monthly salary of $20. This has generated significant resentment among workers earning in CUP. This has led to many qualified engineers, accountants and nurses quitting their jobs to work as cab drivers and waiters.
Why? CUP buys you basic amenities available through a ration card. CUP can be used to pay electricity, telephone bill, local grocery and public transportation in Havana. Cuban Convertible Pesos (CUC), meanwhile, buys you all sorts of luxuries. CUC is used for most products and imported products. Basically, people earning in CUP have little hope of living the ‘Cuban’ dream, if they dare have one. This has created a new type of class consciousness: professions like tour guides generally considered ‘inferior’ to technical professions like engineering in most ‘civilised’ countries, are among the most coveted in Cuba. A new class divide is on the rise in Cuba: those who have CUC, and those who don’t. Your revolution has failed, Che!
An example of La Coppelia, one of the largest ice cream parlors in the world, situated in the middle of Havana, built by the whim of Fidel Castro because of his fascination with ice creams (and more so, his desire to have 29 ice cream flavours, 1 more than famous US brand Howard Johnson’s 28) fits in well. There are two lines in front of La Coppelia: one in which you have to stand for hours before you can buy the plain vanilla flavour; the other where there are almost no people and all the flavours are available. Why so? People in the first line will pay in CUP while the elite second line pays in CUC.
Problems don’t end here. Multiple exchange rates make it more profitable for an entrepreneur to import services than hire locals. According to a businessman, it costs his company $8000 to hire a European technician and 30000 CUP to hire a local technician. Ordinarliy, applying the 1:25 exchange rate, 30000 CUP should mean $1200 for the business. However, since businesses have to follow a 1:1 exchange rate, 30000 CUP mean they have to pay $30000, 4 times more than a European technician. No wonder Cuba’s real wages have decreased since the 1980s.
To add to this, several ancillary exchange rates exist as well. The exchange rate in the Mariel Special Economic Zone, and for hotels buying food directly from farmers is 1 CUC: 10 CUP. Fortunately, the government has understood the need to unify their double currency and multiple exchange rates. In 2013, Raul Castro said the government will be taking steps towards unifying the currency. 5 years on, however, no major progress has been made. While China did unify its exchange rates in 1994, it has always had a single currency. A better guide could be Germany which unified the two currencies, following its reunification after the Cold War. Even the European Union, which replaced multiple currencies with the Euro in the late 1990s, could present a useful model that Cuba could adopt in its currency reform.
History offers a rough guide to Cuba, but the task of currency unification it is much easier said than done. The government will have to devalue the CUC, which would mean many state companies that hold their money stock in CUC facing illiquidity. Devaluating the CUC will increase the purchasing power of people, which will add inflationary pressure in an economy already struggling after Hurricane Irma, notwithstanding the fact that it faces severe shortages of basic necessities, a simple example being the fact that it imports 80% of its food. Cuba, reportedly with only $11 billion in foreign exchange reserves, is not self-sufficient enough to control the rise in import costs, which invariably follows the devaluation of a currency. Usually, a country looks to the International Monetary Fund (IMF) in such situations. Alas, Cuba is not an IMF member (Thanks to the United States, once again).
While the government has started printing high denomination CUP notes, which is a step towards bringing CUP and CUC closer, ‘DAY ZERO’, when CUC and CUP are unified, seems far away. Miguel Diaz-Canel is seen as a liberal by Cuban standards. How long can the new President continue the wage theft, without inciting greater resentment in a generation born well after the dreams of the Cuban revolution had passed, is the real question.
By Tushar Singh.
In April this year, Miguel Diaz-Canel, the new President of Cuba, inherited an economic mess from the Castros, who had executive control over the island nation for close to six decades. Amongst all of this was the dual currency system. Thanks to former American President John F. Kennedy, a U.S. embargo had forced Cuba to rely on the erstwhile Soviet Union as its primary economic ally. Therefore, when the USSR collapse in 1991, the inevitable happened. Communist Cuba, itself on the brink of a calamitous economic crisis, was forced to introduce market-oriented economic reforms. This period during the 90s, called the ‘Special Period’, forced even the great Fidel Castro to allow the usage of the US dollar for transactions inside the country. It is worthwhile to note that the possession of American currency was previously punishable by imprisonment.
By allowing the dollar, the tourism industry received a boost and overtook sugar as the most productive sector of the nation’s economy, in terms of revenue generated. By 2004, however, 10 years after the dollar was allowed inside the country, nationalist pride kicked in, and the government banned the dollar yet again. Instead, the Cuban government promoted the Convertible Cuban Peso (CUC) with an exchange rate of 1:1 with the US dollar. After its introduction, CUC existed alongside the local Cuban Peso (CUP). Both the CUC and CUP were legal tender and anyone could possess either of them. The CUC was (and still is) 25 times dearer than the CUP.
This was the beginning of a series of horrific and sadistically comical scenarios which the Cubans were about to witness. Theoretically, there were supposed to be two parallel economic systems. Cuban locals, 80% of whom work in the public sector, were supposed to earn wages and buy goods and services (most of them from the State) in CUP. Only the industries functioning primarily in the tourism and foreign sector were to transact in CUC. Such was the distinction between CUC and CUP supply chains, that initially, tourists were fooled into buying CUP in CUC as souvenirs, much above the market rate, as the poor foreigners didn’t even know CUP existed! Cubans were restricted from tourist resorts and hotels till 2007 (except the staff). Basically, two separate ‘Cubas’ existed.
To facilitate exchange rate arbitrage, the retail exchange rate was 1 CUC: 25 CUP, but it was 1 CUC: 1 CUP for businesses. As they continued to maintain parity of CUP and CUC for businesses, the government was forced to subsidised imports in order to boost its dwindling foreign reserves. Another advantage was that Cuban firms, in a joint venture with a foreign firm, could profit in real terms while paying wages (oxymoron, eh?). For example, if the salary for workers was 500 CUC, the foreign firm would pay 500 CUC to the local employment agency. Using the 1:1 exchange rate, the employment agency would pay 500 CUP to its workers. In real terms, therefore, the workers receive only 1/25th of what they should be paid.
This creates a big problem for those who earn their wages in CUP (which is 80% of the population), Since, health services are provided by the state, doctors are paid in CUP and earn an average of merely $40 a month. A cab driver, in contrast, who drops a foreign tourist from the airport into Havana charges $25. An average driver earns $60 dollars a day. Hotel owners who facilitate tourists and their workers who get tipped in CUC earn more in a single day than the average Cuban monthly salary of $20. This has generated significant resentment among workers earning in CUP. This has led to many qualified engineers, accountants and nurses quitting their jobs to work as cab drivers and waiters.
Why? CUP buys you basic amenities available through a ration card. CUP can be used to pay electricity, telephone bill, local grocery and public transportation in Havana. Cuban Convertible Pesos (CUC), meanwhile, buys you all sorts of luxuries. CUC is used for most products and imported products. Basically, people earning in CUP have little hope of living the ‘Cuban’ dream, if they dare have one. This has created a new type of class consciousness: professions like tour guides generally considered ‘inferior’ to technical professions like engineering in most ‘civilised’ countries, are among the most coveted in Cuba. A new class divide is on the rise in Cuba: those who have CUC, and those who don’t. Your revolution has failed, Che!
An example of La Coppelia, one of the largest ice cream parlors in the world, situated in the middle of Havana, built by the whim of Fidel Castro because of his fascination with ice creams (and more so, his desire to have 29 ice cream flavours, 1 more than famous US brand Howard Johnson’s 28) fits in well. There are two lines in front of La Coppelia: one in which you have to stand for hours before you can buy the plain vanilla flavour; the other where there are almost no people and all the flavours are available. Why so? People in the first line will pay in CUP while the elite second line pays in CUC.
Problems don’t end here. Multiple exchange rates make it more profitable for an entrepreneur to import services than hire locals. According to a businessman, it costs his company $8000 to hire a European technician and 30000 CUP to hire a local technician. Ordinarliy, applying the 1:25 exchange rate, 30000 CUP should mean $1200 for the business. However, since businesses have to follow a 1:1 exchange rate, 30000 CUP mean they have to pay $30000, 4 times more than a European technician. No wonder Cuba’s real wages have decreased since the 1980s.
To add to this, several ancillary exchange rates exist as well. The exchange rate in the Mariel Special Economic Zone, and for hotels buying food directly from farmers is 1 CUC: 10 CUP. Fortunately, the government has understood the need to unify their double currency and multiple exchange rates. In 2013, Raul Castro said the government will be taking steps towards unifying the currency. 5 years on, however, no major progress has been made. While China did unify its exchange rates in 1994, it has always had a single currency. A better guide could be Germany which unified the two currencies, following its reunification after the Cold War. Even the European Union, which replaced multiple currencies with the Euro in the late 1990s, could present a useful model that Cuba could adopt in its currency reform.
History offers a rough guide to Cuba, but the task of currency unification it is much easier said than done. The government will have to devalue the CUC, which would mean many state companies that hold their money stock in CUC facing illiquidity. Devaluating the CUC will increase the purchasing power of people, which will add inflationary pressure in an economy already struggling after Hurricane Irma, notwithstanding the fact that it faces severe shortages of basic necessities, a simple example being the fact that it imports 80% of its food. Cuba, reportedly with only $11 billion in foreign exchange reserves, is not self-sufficient enough to control the rise in import costs, which invariably follows the devaluation of a currency. Usually, a country looks to the International Monetary Fund (IMF) in such situations. Alas, Cuba is not an IMF member (Thanks to the United States, once again).
While the government has started printing high denomination CUP notes, which is a step towards bringing CUP and CUC closer, ‘DAY ZERO’, when CUC and CUP are unified, seems far away. Miguel Diaz-Canel is seen as a liberal by Cuban standards. How long can the new President continue the wage theft, without inciting greater resentment in a generation born well after the dreams of the Cuban revolution had passed, is the real question.
By Tushar Singh.