havana-live-cuba-pesosHAVANA, June 16  Cuba is likely to eliminate its dual currency system by the end of this year in a first step to simplifying a multiple exchange system that investors view as a serious obstacle to business.

Cuba currently operates two currencies: the peso (CUP), which largely circulates in the domestic economy, and the so-called convertible peso (CUC). Residents and tourists can purchase CUCs at government exchange offices at a rate of one for 25 CUP ($0.04). State and foreign companies must exchange CUCs at the official one-to-one rate. Neither currency is convertible outside the island.

“It is my understanding that the CUC will be removed from circulation before the next Communist party congress in April,” says a Cuban economist with knowledge of reform efforts. The move would continue President Raúl Castro’s efforts to introduce market elements and remove price distortions, and improve accounting transparency and the efficiency of state companies.

The economist adds that the currency reform was one of more than 300 reforms adopted at the last party congress, “and Raúl wants them all done by then [April]”.
In a country where the state controls more than 75 per cent of the economy and most wages and local goods are priced in CUP, the CUC is used in tourism, to price imports such as gasoline, and also in upscale eateries and stores.
Until recently, the currencies operated separately, with CUC used by those with access to foreign exchange, or who changed CUP for CUC to shop in better-stocked stores.

But there are signs of convergence. Many previously CUC-only outlets now accept either. At the same time, a new system of CUP pricing and accounting is being rolled out. Bigger CUP notes, ranging from 200 to 1,000 pesos, went into circulation this year, and anyone can go to state-run CUC stores and buy a fridge for 1,000 CUCS or the equivalent 25,000 CUPs.

The prospect of reform has unsettled Cubans since the announcement in October 2013 of plans to do away with the dual system. Better-off Cubans have turned to other currencies. “It is all funny money, only the dollar or euro are safe,” says the owner of a private Havana restaurant.

“I change what I can and send it out of the country.”

There has been talk of return to a single currency since Cuba legalised the dollar in 1994 and let the CUC circulate alongside the peso. At the time, the dollar traded at 150 pesos on the black market, compared with seven in 1989.
While unifying the currency — dubbed “day zero” — is a step forward, it is a far cry from full convertibility, which typically requires the backing of large hard currency reserves, often supported by International Monetary Fund loans. Cuba is not a member of the IMF.

Nor does it report its holdings of foreign currency, but the Economist Intelligence Unit estimates it has $11bn of reserves against a forecast 2015 current account deficit of £524m as of May 20. Economists say currency unification, by itself, ignores the real issue: a devaluation of the official exchange rate of one CUP to the dollar, in effect since 1959 and used by many state companies.

“A real monetary reform implies a significant devaluation of the CUP exchange rate,” says Cuban economist and monetary specialist Pavel Vidal, of Javeriana de Cali University in Colombia. “This would change the financial situation of state companies — some of which would fold — improve competitiveness of the sectors operating within the global economy and promote more transparency in financial accounts.”

Mr Castro says there will be no shock therapy. Central bank officials have told foreign businesspeople that devaluation will proceed cautiously and only in tandem with a strengthening economy.
For now, the government will continue to tinker in the hope of improving the trade balance, stimulating local production and paying workers more. For example, the state-run sugar monopoly receives 1,000 CUP, instead of 100 CUP, for every $100 of sugar exports, letting it invest and pay workers more.

In the Mariel special zone, the state will pay workers 10 CUP for each $1 foreign businesses pay their employees, instead of 1 CUP. The state-run tourism industry also began buying food direct from farmers in 2013, instead of via state distributors or imports. Hotels now change one CUC per 10 CUP to buy local produce.

http://www.ft.com/intl/cms/s/0/b34fd7b8-fb12-11e4-9aed-00144feab7de.html#axzz3dAiGTLxe