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Posted March 23, 2008 by publisher in Business In Cuba

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IPS | By Dalia Acosta

Cuba’s new government, headed by Raúl Castro, appears to be prepared to take urgent action to tackle complex problems like the country’s dual monetary system and the low wages that fail to stimulate production, in a country that has been in the grip of an economic crisis for nearly two decades.

The priority to be given to economic questions was made clear in Castro’s first speech as president, on Feb. 24, and has lately been the buzz on the streets in Cuba.

“They say they’re going to devalue the Cuban convertible peso (known as CUCs) against the national currency,” said a 34-year-old woman while standing in line to exchange money in the capital.

Speculation is rife. The rumours, which began to spread even before Raúl replaced his ailing brother Fidel as president, point to a drop from the current rate of exchange of 25 Cuban pesos for one CUC to 20, 16 or even 13 Cuban pesos per CUC.

The dollar officially stands today at 1.04 CUCs.

“If it’s true, it will benefit the people who depend on their salaries in Cuban pesos,” said the woman, who changes 40 CUCs a month for Cuban pesos in order to “more or less” cover the price of the food she needs from the farmers’ markets.

“But people like me, who live on remittances sent from their families abroad, would be hurt,” she told IPS.

It has become clear that for the government the priority is to strengthen the national currency and thus boost the real value of wages, which have been heavily undermined since the start of the economic crisis that broke out in 1990 after the collapse of the Soviet Union and the East European socialist bloc, Cuba’s main aid and trade partners.

In his first speech as president of the Council of State on Sunday, Raúl Castro said one of the main aims of his administration would be to “meet the basic needs of the population, both material and spiritual, based on the sustained strengthening of the national economy and its productive base”.

Pavel Vidal, an expert with the Centre of Studies on the Cuban Economy, said that thanks to “the growth in gross domestic product and exports in sectors like nickel and professional services,” Cuba is in a position to strengthen the Cuban peso against the CUC.

Since 2005, the CUC has traded for 25 pesos in the government exchange bureaus.

The measure would benefit a large part of Cuba’s population of 11.2 million, and “would not dampen the inflow of hard currency,” Vidal told IPS.

However, segments of the population with a larger proportion of their income made up of hard currency, such as dollars or euros sent home from relatives overseas or earned from working with tourists, would feel a drop in their buying power.

Cubans receive state salaries and pensions in pesos, which are used to pay the low rates charged for basic public services like water and electricity, buy tickets for cultural and sporting events, purchase some manufactured products and a very limited range of subsidised rationed food items, or buy food in the farmers’ markets.

Each Cuban family has a ration book, a system used by the government to ensure that everyone has access to a basket of basic goods at reduced prices, including rice, beans, sugar, coffee, oil, eggs, salt, pasta, bread and biscuits, fish, chicken and other meats like sausages, and milk and yoghurt for children.

For fresh produce and other goods, consumers go to the free farmers’ markets, where a variety of high quality food is available, and prices are set by supply and demand.

The CUC, meanwhile, which replaced the dollar in 2004, provides access to a much broader range of often essential—and higher quality—goods, including food, clothing, footwear, furniture, home appliances, and personal hygiene and household products in the government’s chain of hard currency stores.

The rumours of a possible devaluation of the CUC have given rise to long queues outside the exchange bureaus in Santiago de Cuba, some 850 km east of Havana, where “people have begun to withdraw CUCs from the bank to exchange them for Cuban pesos,” high school teacher Yolanda Felipe told IPS.

“I believe that reaction is due to speculation and to a misinterpretation of (Raúl) Castro’s speech,” said economist Armando Nova, who is sceptical about the possibility of a devaluation of the CUC in the near future.

Nova told IPS that he believes the solution does not lie in gradually devaluing the exchange rate, but in bolstering production.

The dual monetary system was legalised by the government in 1993, with the aim of injecting fresh dollars into the national economy at the height of the crisis. At that time, the Cuban peso stood at 150 against the dollar, and dollars were only available on the black market. The CADECA exchange bureaus were not opened until 1995.

“The elimination of the dual monetary system would not put an end to the inequalities,” said Vidal.

Since the start of the crisis, social differences have become more pronounced in Cuba. Today, hotel doormen, taxi drivers, and others who work in the tourism sector, and thus have access to dollars or euros, can make as much in a day as a doctor or other state-employed professional earns in an entire month.

In Vidal’s view, the disparities between incomes could be reduced by strengthening the Cuban peso in the CADECA exchange bureaus and by increasing wages and pensions, both of which would depend on factors like labour productivity, exports and competitiveness.

According to official estimates, around 60 percent of Cubans have access to CUCs, through family remittances, tips, limited self-employment initiatives like “paladares” (small family restaurants) or the rental of rooms to tourists, government productivity bonuses or wages and other payments from foreign firms or agencies operating in the country.

“The greatest benefits from the elimination of the dual monetary system would be seen in the business sector,” said the analyst.

Enterprises that operate in Cuban pesos cannot use them to purchase CUCs or hard currency, which means “it is very difficult for them to make the imports necessary to complete their economic cycle,” he added.

In his Feb. 24 speech, President Raúl Castro warned that “any changes related to the currency shall be made with a comprehensive approach, mindful, among other things, of the wage system, the retail prices, the entitlements and the subsidies running in the millions presently required by numerous services and products distributed on an egalitarian basis”.

“It is our strategic objective today to advance in an articulate, sound and well-thought out manner until wages recover their role and everyone’s living standard corresponds directly with their legally earned incomes, that is, with the significance and quantity of their contribution to society,” said the president.

In a study published in early 2007, Nova concluded that a family of four needed 1,319 Cuban pesos a month to cover their basic needs, and that if both parents worked and earned the average monthly salary of 408 pesos, the family would still need an additional 503 pesos to make it to the end of the month.

Cubans pay very little in rent and for public utilities, while education and health care are free. But the average Cuban family dedicates 93 percent of their income to putting food on the table, leaving very little for other necessities like clothing and shoes, or for recreational and cultural activities.

Another study, carried out by Vidal, found that the real average wage in 2006 represented just 24 percent of the real average wage in 1989, the year before the onset of the economic crisis, despite the increase in nominal wages in that period, from 188 to 385 pesos. However, the across-the-board increase in state wages and pensions in 2005 did slightly increase purchasing power.

In his speech, Castro described the state’s subsidies for the egalitarian distribution of services and products, especially those covered by the ration-book system, as “irrational and unsustainable.”

Similar statements made by Fidel Castro in March 2005 prompted speculation among local economists that the policy of equal distribution would be replaced by a system that would take into account differing income levels and living conditions, but so far no moves have been made in that direction.

“Many people still depend on the ration-book to be able to eat,” 62-year-old Elena Suardíaz told IPS. “If they do away with it, they’ll have to put in place some alternative for those who have little money, especially pensioners like me,” said the retired nurse, who is supported today by her children because “I can’t afford anything on my pension.”

  1. Follow up post #1 added on March 25, 2008 by abh

    I don’t believe that they will abolish the dual currency system right away, change will be gradual as the gov moves carefully to consolidate its power.  It would seem to be a bad move if Raul is raising expectations and does not plan to deliver, so let’s hope to see some improvement in the next year or so.

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