Cuba likely to end dual currency system

Cuba likely to end dual currency system
Marc Franc

Cuba is likely to eliminate its dual currency system by the end of this
year in a first step to simplifying a multiple exchange system that
investors view as a serious obstacle to business.
Cuba currently operates two currencies: the peso (CUP), which largely
circulates in the domestic economy, and the so-called convertible peso
(CUC). Residents and tourists can purchase CUCs at government exchange
offices at a rate of one for 25 CUP ($0.04). State and foreign companies
must exchange CUCs at the official one-to-one rate. Neither currency is
convertible outside the island.
"It is my understanding that the CUC will be removed from circulation
before the next Communist party congress in April," says a Cuban
economist with knowledge of reform efforts.
The move would continue President Raúl Castro's efforts to introduce
market elements and remove price distortions, and improve accounting
transparency and the efficiency of state companies.
The economist adds that the currency reform was one of more than 300
reforms adopted at the last party congress, "and Raúl wants them all
done by then [April]".
In a country where the state controls more than 75 per cent of the
economy and most wages and local goods are priced in CUP, the CUC is
used in tourism, to price imports such as gasoline, and also in upscale
eateries and stores.
Until recently, the currencies operated separately, with CUC used by
those with access to foreign exchange, or who changed CUP for CUC to
shop in better-stocked stores. But there are signs of convergence. Many
previously CUC-only outlets now accept either. At the same time, a new
system of CUP pricing and accounting is being rolled out.
Bigger CUP notes, ranging from 200 to 1,000 pesos, went into circulation
this year, and anyone can go to state-run CUC stores and buy a fridge
for 1,000 CUCS or the equivalent 25,000 CUPs.
The prospect of reform has unsettled Cubans since the announcement in
October 2013 of plans to do away with the dual system. Better-off Cubans
have turned to other currencies.
"It is all funny money, only the dollar or euro are safe," says the
owner of a private Havana restaurant. "I change what I can and send it
out of the country."
There has been talk of return to a single currency since Cuba legalised
the dollar in 1994 and let the CUC circulate alongside the peso. At the
time, the dollar traded at 150 pesos on the black market, compared with
seven in 1989.
While unifying the currency — dubbed "day zero" — is a step forward, it
is a far cry from full convertibility, which typically requires the
backing of large hard currency reserves, often supported by
International Monetary Fund loans.
Cuba is not a member of the IMF. Nor does it report its holdings of
foreign currency, but the Economist Intelligence Unit estimates it has
$11bn of reserves against a forecast 2015 current account deficit of
£524m as of May 20.
Economists say currency unification, by itself, ignores the real issue:
a devaluation of the official exchange rate of one CUP to the dollar, in
effect since 1959 and used by many state companies.
"A real monetary reform implies a significant devaluation of the CUP
exchange rate," says Cuban economist and monetary specialist Pavel
Vidal, of Javeriana de Cali University in Colombia. "This would change
the financial situation of state companies — some of which would fold —
improve competitiveness of the sectors operating within the global
economy and promote more transparency in financial accounts."
Mr Castro says there will be no shock therapy. Central bank officials
have told foreign businesspeople that devaluation will proceed
cautiously and only in tandem with a strengthening economy.
For now, the government will continue to tinker in the hope of improving
the trade balance, stimulating local production and paying workers more.
For example, the state-run sugar monopoly receives 1,000 CUP, instead of
100 CUP, for every $100 of sugar exports, letting it invest and pay
workers more. In the Mariel special zone, the state will pay workers 10
CUP for each $1 foreign businesses pay their employees, instead of 1 CUP.
The state-run tourism industry also began buying food direct from
farmers in 2013, instead of via state distributors or imports. Hotels
now change one CUC per 10 CUP to buy local produce.

Source: Cuba likely to end dual currency system - FT.com -
http://www.ft.com/intl/cms/s/0/b34fd7b8-fb12-11e4-9aed-00144feab7de.html#axzz3dDA5UmG0