An island with two currencies

Yesterday we noted that Manuel Orozco’s new Inter-American Dialogue report called Cuban dollar exchange policies harmful to remitting Cuban families. Those policies, in conjunction with Cuba’s dual currency system, merit a more detailed examination of their historical roots and of recent developments and consequences.

From 1857 until 1994, only one Cuban currency existed—the Cuban peso (CUP). CUPs were pegged to the Soviet ruble during the Cold War, and when the Soviet Union collapsed in 1991, the exchange rate of the CUP fell to 125 pesos to the US dollar. In the midst of the high inflation and severe economic contraction that resulted, Fidel Castro’s regime decided to open the Cuban economy to foreign investment and tourism, in a desperate (but ultimately effective) move to encourage an influx of hard currency. Use of the US dollar was legalized for use in these sectors, and the convertible peso (CUC) was created and pegged to the dollar as an interchangeable currency (also only for use in the international business and tourism sectors).

In 2004, however, new policy announced by Fidel altered the system. Beginning on October 8, the US dollar was no longer accepted as legal tender in Cuba. With a week’s notice, stores immediately stopped dealing in dollars and banks stopped accepting them. CUCs took over as the currency of the international sectors, taking over all transactions that previously required dollars. The Cuban government also enacted a 10% change fee for swapping dollars for CUCs.

This relatively new policy is at the root of current problems and discontent with the dual currency system. First, and with respect to yesterday’s discussion, the 10% change fee affects families that remit money from the US to Cuba by raising the cost of sending dollars. In many cases, it means that less money ends up in the hands of family on the island, and a full 10% of that value funds a regime that most migrants do not care to support.

Second, and highly important, the dual currency system creates two classes of individuals on an island supposedly committed to economic equality—those who have access to CUCs, and those who do not. About 60% of the island has some access to CUCs, many through work in the tourism and international business sector, others from remittances, and these individuals can make purchases in a currency whose value is pegged at 1.08 dollars. The other 40% of the island only has access to pesos, which exchange at a rate of 24 to one CUC. Most of the island works for state salaries, which are paid in pesos. As Eliécer Ávila, a student of Havana’s University of Computer Science, famously pointed out to the President of the National Assembly (Ricardo Alarcón) last year: because state salaries are paid in pesos, the average Cuban must work two to three days just to buy a toothbrush.

The problem is real. A doctor in Cuba has little incentive to work on state’s wages if his earnings for a month equal what a tourism sector doorman earns in a day. Raúl has listened to the complaints and committed to eventual reform, but the solution will not be painless either. We will see when it comes.