The Cuban government took a new step in the process of economic reforms that it is undertaking and announced, after years of waiting, monetary unification and the establishment of a single exchange rate on the island, at the rate of 24 Cuban pesos per dollar. The unification, which will enter into force on January 1, will make the convertible peso (CUC), created in 1994 and equivalent to the dollar, disappear from the pocket of Cubans, leaving only the Cuban peso (CUP) in circulation on the island, a measure that to straighten out the macroeconomic distortions accumulated over decades by an egalitarian policy that encouraged subsidies but undermined productivity and business efficiency. The population will be given a period of 6 months to exchange the CUC for Cuban pesos.
The so-called ‘Task Order’, which covers not only monetary and exchange reform, but also involves numerous changes in the policy of prices, wages, pensions, etc., was one of the measures most demanded by Cuban economists, since without it The complex process of economic changes that the country is currently carrying out would have been lame, and which include, among others, the promotion of self-employment and small and medium-sized private companies, the granting of greater margins of autonomy to the state company to stimulate productivity, and the end of subsidies to many of these that are inefficient. It is also committed to empowering local authorities to favor investment in their territories and to make policy more flexible to attract foreign investment – this week it was announced that companies with majority participation of foreign capital would be allowed in all sectors, except in the sector of extraction of natural resources and provision of public services.
The solemnity with which the coming monetary reform was announced gave the dimension of how crucial it is for the economy and the important consequences it will have for Cubans in the short term. The first secretary of the Communist Party, Raúl Castro, escorted the country’s president, Miguel Díaz-Canel, in a special appearance on television in which only the second spoke, and in which he clearly warned: “The task is not without risks , one of the main ones is that there is an inflation higher than the designed one, exacerbated by the current supply deficit ”.
Díaz-Canel affirmed that monetary and exchange unification is “a decisive step in the monetary order” of the country and said that it was essential to carry out the reform process, pointing out that their success will not be achieved “through egalitarianism, but promoting interest and motivation for work ”. Economists have already warned that, in the short term, the blow will be hard for the population, as an inflationary process is expected that will make people lose part of their meager purchasing power. Díaz-Canel referred to this, assuring that in Cuba “there will be no shock therapy” and that “no one will be left helpless.” “Abusive and speculative prices will not be allowed, they will be socially confronted with containment measures and severe penalties for noncompliants,” he said.
The structural ills of the Cuban economy are many, and one of the serious ones was that of monetary policy. Until now, currencies in Cuba were exchanged at different rates: for companies, 1 dollar (or 1 CUC) was equal to one Cuban peso, while for the population on the street, the dollar and CUC were 25 Cuban pesos. A true accounting gibberish, a hotbed of lack of competitiveness and distortions with which today it is intended to end. “Now the economy will get closer to reality,” said a foreign businessman, congratulating himself that the decision has finally been made, many times postponed due to its social cost.
Just today a battery of Decree-Laws was published in the Official Gazette of Cuba that complement the monetary reform and that establish a general increase in all salaries and pensions (multiplied by five, on average) and also in prices. In addition, a series of salary scales have been approved to encourage those who work more or occupy a position of greater responsibility to earn more, trying to end the phenomenon of the inverted pyramid – the Cuban director of a company can earn less than a lower-ranking employee who receives tips in dollars. The goal is to reactivate the economy and increase production and productivity, although that depends on many other unresolved factors that are hindered by the bureaucracy, analysts say.
In his speech, Díaz-Canel pointed out that monetary reform is not a “magic solution” to economic problems, although “it will put the country in better conditions to carry out the transformations it demands.”
On the street, what worries people is the obvious: how will their savings (whoever has them) be and what their life will be like from now on. All these changes occur in the midst of a serious economic situation in Cuba, aggravated by the covid-19 epidemic, the stoppage of tourism and the resurgence of the embargo by the Trump administration, which has left the State without liquidity or import capacity. To collect foreign currency, the authorities have opened stores in freely convertible currency – where you can only pay with a credit card – where food and appliances are sold, while in Cuban peso stores the supplies are less and less. Although many Cubans do not receive remittances from abroad, the lines in both are kilometers long.
Another consequence of the monetary reform and the productive changes that are intended will be that many inefficient state companies – close to 40% of the total, according to some analysts – could go bankrupt and their workers find themselves on the street. The Minister of Economy, Marino Murillo, has already announced that these companies will be given a year to put their accounts in order before ending the subsidies. The private sector, for obvious reasons, becomes more than ever a lifeline to absorb a large part of this workforce, if the reforms go ahead.
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