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Cuba is embarking on the biggest devaluation of the peso since the 1959 revolution and the elimination of a dual currency system as the Communist government grapples with its worst economic crisis since the collapse of the Soviet Union.
The peso, which has been artificially put at par with the US dollar for decades, will be valued at 24 pesos to the dollar from January 1, Cuban President Miguel Díaz-Canel announced Thursday evening. This is similar to the level at which citizens were able to exchange a second currency, the convertible peso. This currency will now be eliminated.
Mr Díaz-Canel, accompanied by Communist Party leader Raúl Castro in a brief television appearance, warned that the measure was not a silver bullet that would solve the country’s economic problems, but would help pave the way.
“This will put the country in a better position to carry out the transformations required by the updating of our economic and social model,” he said.
The Cuban government is keen that devaluation does not fuel the unrest, especially given expressions of dissent by artists demanding greater freedoms.
The government plans to increase state wages and pensions fivefold to compensate for inflation likely to be generated by the devaluation. However, the 40 percent of the workforce working in the private and informal sectors, or those who live off the land, will face the loss of wages on their own.
“They will opt for a ‘big bang’ exchange rate adjustment, although they will try to regulate the impacts with administrative measures and suppress inflation,” said Pavel Vidal, a former Cuban central bank economist who teaches at the Universidad Javeriana Cali in Colombia.
“There is no complete unification of currencies, because the economy is dollarizing, but they will progress a lot in the unification of exchange rates,” he added.
The devastating effect of the coronavirus on tourism, declining foreign revenues from the export of medical services, and tougher US sanctions created the worst financial crisis in Cuba since the early 1990s.
In 2019, the government started opening hard currency stores to capture tradable currencies in the retail sector, arguing that it did not have the money to import many products and then sell them in pesos. .
As part of the new reforms, Havana unveiled cuts in subsidies to state-owned enterprises. They will be affected by the scrapping of the convertible peso, as they have been allowed to use it at preferential exchange rates, flattering their accounts.
Neither the peso nor the convertible peso are exchangeable outside Cuba, and economists have long argued that the dual currency system is so unwieldy that it blocks the country’s exports, encourages imports, and makes it difficult to analyze corporate profits.
As part of the transition, the Cuban government has said it will accept convertible pesos at the current 24-to-one rate for six months and convert bank accounts to convertible pesos.
Alejandro Gil, Minister of the Economy, said he expects further devaluation in the future.
Scarcity of commodities and long queues in stores have been a part of life in Cuba since Donald Trump’s administration tightened sanctions against the country in 2019.
The shortages have been exacerbated by the pandemic, as Cuba imports around 60% of its food, fuel and inputs for sectors such as pharmaceuticals and agriculture.
The Cuban government has yet to provide economic data this year, but the United Nations Economic Commission for Latin America and the Caribbean predicts the economy will contract 8% after a weak performance over the past four years. . Most other foreign analysts said trade was down by at least a third.
the long-awaited monetary reform iThe key to the success of many other market-oriented reforms underway on the Communist-ruled island as it attempts to move away from a Soviet-style managed economy. It is viewed positively by foreign businessmen, diplomats in Havana and analysts abroad.
“If the Díaz-Canel administration can successfully implement unification and devaluation, the sources of foreign direct investment will be favorable, as will governments,” said John Kavulich, chairman of the United States Business and Economic Council. -Cuba.
“American companies will remain inactive [by the sanctions], but ready when the opportunity arises, ”he added.
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