• Submitted by: lena campos
• Business and Economy
• 10 / 23 / 2013

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Cuba took the first step towards scrapping its two-tier currency on Tuesday in a move which could boost local workers' income and remove a major hurdle for importers and exporters.

The government said it had approved a plan to gradually eliminate the dual monetary system which has been in place for the last two decades, part of reforms aimed at improving the Soviet-style economy's performance.

"(Unification) is imperative to guarantee the reestablishment of the Cuban peso's value and its role as money, that is as a unit of accounting, means of payment and savings," a government communique carried by official media said.

Cuba's convertible peso (CUC) is pegged to the U.S. dollar, while the local peso (CUP) is valued at a fraction of the greenback's value, angering the population which is paid in the latter, and complicating accounting, the evaluation of performance, and trade for state companies.

Most wages and local goods are priced in CUP while the dollar-pegged CUC is used in the tourism industry, foreign trade and upscale eateries and stores carrying imported goods. Neither are legal tender outside Cuba.

In a country where almost the entire economy is in state hands and prices are fixed, companies must exchange dollars and CUCs with the government at the official one-to-one exchange rate, while the CUC is valued at 25 pesos at exchange offices.

The unification of the two currencies is expected to be a gradual process that will take up to 18 months, according to Cuban economists, and will involve devaluing the CUC and perhaps revaluing the peso somewhat.

Juan Triana, an economist at Havana University's Center for Cuban Economic Studies, applauded the move but said more details were needed on the new official exchange rate.

"This will eliminate the crazy situation today where a company is profitable in dollars and runs at a loss in pesos, and may allow these companies to improve their workers' wages," he said.

The official communique said the government would make good on the value of the CUC by announcing any devaluation and giving people time to convert their holdings.

PILOT PROJECTS

President Raul Castro's government has already begun a series of pilot projects aimed at increasing demand for pesos versus CUC and thus the peso's value. They include pricing more goods and services in pesos and collecting taxes in pesos. Next year's budget deficit will be financed in part through a bond issue, instead of printing more currency.

At the same time it has been experimenting with the official one-to-one exchange rate with state companies to bolster efforts to improve the trade balance and pay workers in key sectors more.

For example, in the sugar industry, 1 million dollars in exports can now be exchanged for 12 million in pesos, instead of 1 million, and some of that money used to improve wages and the payments farmers receive for their cane.

But at the same time, the sugar industry must now pay 7 pesos for a dollar of imports, instead of 1 peso.

The government statement said these measures would become more generalized in the coming months, as would the purchase of CUC-priced goods in pesos at the 25-peso CUC exchange rate.

"The main changes in this first phase will be in the business sector to foster conditions that will lead to increased efficiency, better measurement of performance and the stimulation of sectors that produce goods and services for export and the substitution of imports," the statement said.

Phil Peters, director of the Washington D.C.-based Cuba Research Center, said the devil would be in the details, which were not contained in Tuesday's announcement.

"But in the end, the Cuban economy will benefit by ending a strange monetary system that creates two tiers of income for individuals, and makes imports appear cheap for businesses," he said.

Source: Reuters