Since 2004 the Cuban economy has operated by making use of two currencies: the CUC (Cuban convertible peso) which is tagged to the US Dollar, and the CUP (Cuban peso).
At present the value of a CUC is about 25 times that of the CUP. To further aggravate matters most Cuban workers get paid in Cuban pesos, not the more lucrative CUCs.
Financial Socialism – But Only for Some
Once Fidel Castro legalised the Dollar in 1993 numerous Dollar stores sprung up in the country – originally only selling luxuries – but as time went by the government started pricing more and more regular goods in Dollars (which was eventually replaced by the CUC in 2004).
Understandably this caused unhappiness; as only those with access to the tourist and foreign-trade sectors could really gain access to the convertible pesos. In fact, The Economist notes that most workers in Cuban are paid in CUPs at less than $20-worth a month making it hard for the average citizen to improve their situation.
Matters are set to change now with the October 22nd media announcement made by Raúl Castro; indicating that these two currencies will now be unified.
While no official time table has been given for the process, Reuters has quoted economists as saying it will take around 18 months.
Countries with Two Currencies
Cuba is certainly not the only small country to make use of two currencies, as many rely on a stronger neighbouring currency to bolster their economy. A couple of examples include:
- El Salvador makes use of the Salvadoran colón and the US Dollar
- Cook Islands uses the Cook Islands dollar as well as the New Zealand dollar
- Kiribati has the Kiribati dollar and the Australian dollar
- Panama makes use of the Panamanian balboa as well as the US Dollar
- Sahrawi Republic relies on the Algerian dinar, the Mauritanian ouguiya and the Sahrawi peseta
Can the CUC and CUP Successfully Unify?
While most agree that the unification of these two currencies will be good for Cuba, The Economist article does note a few potential snags that will need to be dealt with:
State owned companies will no longer need to continue an odd accounting tactic whereby they pretend that one CUC equals one CUP – a practice that has thus far protected the CUP from inflation. Apart from making imports seem very cheap and exports unprofitable it has also “obfuscated inefficiencies that plague Cuba’s predominantly state-owned businesses. Ending the charade could have dire consequences for many firms”.
Another consequence, not even of the unification but just the announcement thereof, is that the CUC has weakened. Apparently a network of currency traders operating illegally (as before 1994) has sprung up with many in the tourist industry offering to buy dollars from tourists.
It remains to be seen whether the Cuban government will be able, not only to unify the nation’s currencies, but to do so while keeping the concerns listed above in check. For the moment, time alone will tell whether this move will end up bolstering or harming the Cuban economy and its citizens.
- License: Creative Commons image source
Jani le Roux is a freelance journalist with a special interest in finance, specifically as it relates to understanding currency pairs and how best to trade with them.