Currency reform in Cuba: economic uncertainty grows hours after process begins

The uncertainty increase in Cuban economy, as the country approaches a monetary reform which, among other things, provides the unification of its two currencies, the Cuban peso (CUP) and the convertible (CUC) in what will be their first devaluation since 1959.

To reflect the strong devaluation resulting and the subsidy reduction, Cuba is increase the prices of goods and services from transmission to electricity. In addition, quintuple pensions and salaries in the public sector, which comprises about two-thirds of the working population.

The immediate impact continues to be a disturbing conundrum for many Cubans who are already struggling to move forward in the midst of the worst depression in the country in decades, which stimulated a partial dollarization of a import-dependent economy and what is it liquidity problems.

Lines outside stores by the product shortage have grown up as some Cubans rush to buy what they can before the measures are put in place, while the value of the dollar on the black market is increasing and banks remain inundated with inquiries.

Private companies and foreign investors strive to measure the impact on their operations price and wage adjustment. “It gets complicated, so I buy what I can,” Sulema Sotto Rojas (57), a cleaning worker at a public company, told Reuters after getting up at four in the morning to stand in line. and shopping. chicken. Your company has not yet confirmed your new salary, while government adjusted at the last minute some electricity and gas tariffs.

Pricing issues

The reform is part of a series of measures that the Leader of the Communist Party, Raúl Castro, announced ten years ago to make the the local economy takes care of itself, after half a century of relying for the first time on Soviet then Venezuelan aid due to internal inefficiency and a US trade embargo.

The government had stopped and even canceled some reforms because of the opposition of bureaucratic interests, but a new generation of leaders led by President Miguel Díaz-Canel has chosen to resume them in the midst of the current crisis.

This means, however, that more short-term pain will be inflicted in a economy which has already contracted by 11% this year following the Coronavirus pandemic and American sanctions more stringent.

A lot state-owned enterprises who work with a exchange rate of one peso per dollar they probably won’t be able to survive new exchange rate from 24 to 1.

The government maintains that it will give them a year to be competitive by subsidizing them, although that could be very little, especially given the weakness of the global economy and Cuba’s lack of capital to improve its fragile infrastructure.

“If the government had made structural reforms to first stimulate the agricultural and commercial sectors, the economy would be in a better position to cope,” Ricardo Torres of the National Center for Economic Studies told Reuters. Cuban.

Cuban economist Pedro Monreal said that an increase in demand for goods and services driven by wages in the absence of an increase in supply would result in inflation and more difficulties in an economy with flourishing black market.

“Rising prices, obviously, will generate inflation and it is a purgative that must be taken and analyzed in what benefit or what harm you,” engineer Mauricio Alonso, who rents rooms in the city, told Reuters. his apartment in Havana.

New world

Those with savings in local currency or those working in the non-state sector are at risk of loss. The government established price limits for agricultural products and said the nascent private sector cannot raise prices more than threefold. Any price above is considered “abusive” and violators are subject to fines.

Several business owners told Reuters they would need time to measure the offsetting impact of recent more modest reforms, such as importing and exporting through state-owned enterprises and offsetting their costs with taxes. .

“There are a lot of challenges at the same time,” said Liber Puente, owner of a private tech company, who has hired a financial strategist to help him with the matter. “There will be some six months of uncertainty“, said.

One mystery that worries Cubans is the dollar value on the black marketSince many products, even basic ones, can now only be found in new dollar or hard currency stores in the informal market supplied by “mules” from abroad. The The dollar’s black market rate has appreciated to about 1.5 times the official rate this year because the dollar has become virtually impossible to acquire through public financial institutions. “Prices are already rising everywhere and not because of currency reform, but because of the lack of dollars,” said Maykel Suárez, owner of a mobile phone workshop.

The government maintains that the controversy Dollar stores are a temporary solution to cash shortages. US President-elect Joe Biden is expected to ease some existing sanctions against Cuba, and tourism and trade are expected to pick up slightly in 2021.

Havana has also played with other minor reforms over the past year, including allowing companies to keep more of their export earnings instead of relying on a centralized allocation of foreign exchange.

Instead, economists hope that deeper structural reforms will be implemented, such as the legalization of small and medium enterprises and the liberalization of the agricultural sector.

“I just hope that the measures to be taken in parallel with this (monetary reform) to increase production and services will be approved in a short period of time,” Cuban economist Omar Everleny told Reuters.