the westminster news
Published by the students of Westminster School
By Grace Yuan ’23
In December 2020, Cuba announced the beginning of its reformation to end its dual currency system from Jan. 1, 2021 (Majeed, 2020). The country has previously utilized two currencies: the convertible Peso (CUC) and the Cuban Peso (CUP). The second currency, the convertible Peso (CUC), was introduced into the country to help cushion its economy from the hardships brought by the collapse of the Soviet Union in the early 1990s.
Ideally, the CUC is more valuable than the CUP as its currency is pegged at 1:1 to the U.S. dollar and is 25 times worth more than the Cuban Peso (Arnold-Parra, 2020). The currency reforms announced are meant to unify both currencies into one by eliminating the convertible pesos and adopting the Cuban Peso as the official currency. Besides that, the government will create a standard exchange rate of 24 Cuban pesos for one U.S. dollar.
Scenario Before Reforms
In case of a potential grave economic crisis, countries have opted to adopt the U.S. dollar or any other foreign currency in their countries. Forde (2021) argues that while the adoption of another currency provides stability, it makes those countries' governments lose control over their monetary policies. In 1993, Cuba chose to use both its domestic currency and the U.S. dollar, but in 2004, the government created the CUC to be used within Cuban borders. Not every Cuban transacted with the CUC, but only those involved in foreign exchange business like tourism or importing goods from abroad. Many Cubans receive their wages in the much weaker CUPs and hence use it for their daily domestic transactions. According to Majeed (2020), there has been economic disparity created by the existence of the dual system.
Reasons for Implementing the Reforms
Cuba is seeking to overturn a looming crisis that may be the worst since the fall of the Soviet Union. The country is much dependent on imports, with more than half of its fuel and food supply plus pharmaceutical and agricultural inputs coming from outside its borders. However, a combination of local economic miscalculations, U.S. sanctions, and the COVID-19 pandemic has drained its ability to earn tradable income (Arnold-Parra, 2020). Besides this, in recent years, Cuba has been piling up debts and yet still faces a scarcity of essential goods such as food and medicine to goods like fuel. The COVID-19 pandemic hit hard the already suffering economy as the country experienced a slump in tourism income (Bristow & Wyss, 2020). Many businesses in the tourism sector experienced losses. Employees who received their payment in convertible Pesos experienced an eroded purchasing power due to the highly fluctuating exchange rates during the health crisis.
Majeed (2020) states that unifying the currency will facilitate the streamlining of the country’s currency system and hence upgrade its social and economic model to an improved status. It will ease trade and commerce. Additionally, the government will introduce a fluctuating exchange rate, with the Central Bank of Cuba being tasked with valuing the Peso (Forde, 2021). Cubans have only until June 2021 to exchange the convertible Pesos for Cuban Pesos based on the government's gazette notice on December 10th. For every 1 CUC, they will get 24 Cuban Pesos (Forde, 2021). The private-sector workers who have previously earned wages in CUCs will likely lose a lot of money because of the currency's devaluation (Bristow & Wyss, 2020). However, modification of salaries for citizens, adjusting commodity prices, and availing subsidies will also be part of the reforms.
Arnold-Parra, S. (2020). Rumours of reform: the likelihood and consequences of currency reform in Cuba | Global Risk Insights. Global Risk Insights. Retrieved 19 January 2021
Bristow, M., & Wyss, J. (2020). Cuba to End Dual Currency System in 2021 Amid Crisis Reform. Bloomberg.com. Retrieved 19 January 2021
Forde, K. (2021). What will Cuba’s new single currency mean for the island?. Aljazeera.com. Retrieved 19 January 2021
Majeed, Z. (2020). Cuba to end decades old 'dual currency system', will eliminate convertible peso. Republic World. Retrieved 19 January 2021