December 19, 2019 / 3:55 PM / a month ago

Explainer: Navigating Cuba’s money labyrinth

HAVANA (Reuters) - The Cuban government has ramped up moves of late to eliminate the Communist-run country’s dual monetary system, a step many analysts say may take place in 2020.

FILE PHOTO: An employee of a money exchange office gestures at the door as a sign announces a new 500 pesos note in celebration of the 500th anniversary of the city, Havana, Cuba, December 18, 2019. REUTERS/Alexandre Meneghini

WHAT IS CUBA’S CURRENCY SYSTEM?

The two currencies circulating in Cuba’s state-run economy are the peso and the convertible peso (CUC), pegged to the dollar.

The currencies are exchanged at various rates: 1 to 1 for state owned businesses, 24 pesos for 1 CUC for the public and others for joint ventures, wages in island’s special development zone and transactions between farmers and hotels.

Cuba legalized the dollar and created the labyrinthine system as part of a package of measures to open up its economy after the collapse of former benefactor the Soviet Union while trying to cushion the blow to citizens and national industry.

While the system helped Cuba get through the shock of the Soviet collapse it ended up also distorting the economy and hiding the real economic situation, productivity and competitiveness of state-run companies and favoring imports instead of exports.

ADIOS TO CONVERTIBLE PESO

The government says it will eliminate the convertible peso and leave the peso as the only currency and has already taken important steps in that direction.

Larger peso bills denominated at 200, 500, and 1,000 are now in circulation. Previously, 100 pesos was the highest denomination.

Thousands of state-run retail outlets now price items in pesos as well as CUC and cash registers and card swipers are programmed for both currencies.

In November, Cuba banned the import and export of convertible pesos and began charging travelers in tradable currencies at airports once past the gate.

In December the government began giving change at some stores only in pesos. [nL1N28C0DG]

HELLO DOLLAR!

Cuba banned the dollar as legal tender in 2003 after the United States hiked sanctions on its use of the greenback.

But in October the government began opening stores that sell appliances, car parts and other items for dollars, though only with a bank card, raising the possibility the U.S. currency will be used at least electronically once the convertible peso is taken out of circulation. [nL2N27D0QC]

That could end the state’s prior practice of importing appliances and other goods with tradable currency and selling them in local currency useless for purchasing more imports.

RISKS

Bringing the fixed official 1:1 and 1:24 public exchange rates more in line with each other and their true value will be difficult, especially given the government’s pledge that consumers will not be hurt, an impossibility, according to many local and foreign economists

They say fixing the exchange rates will inevitably cause inflation and reveal just how unproductive and bankrupt many state-run companies are, leading to layoffs.

The government counters it will freeze prices, increase wages and take other measures to insure the social dislocation common in other developing nations when they experience monetary policy failure does not occur, claiming its planned economy allows for a different outcome.

Reporting by Marc Frank; Editing by Alistair Bell

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