Currency “D-Day” expected in the first quarter

 havana-live-CUC-CUP-changeHAVANA, 3 January (By Sabrina Valle and Anatoly Kurmanaev) Cuba will need international loans to fund its plans for a currency “D-Day” — the transition to a single exchange rate system — said Omar Everleny Perez, a professor of Economics at University of Havana.

The government has told companies to adapt their accountancy systems for the unification of its dual exchange rate created two decades ago, Perez said in an interview in Havana today. Now, it needs to find the funds to shore up any new exchange rate. “The government told the companies last month to prepare for what it calls D-Day,” said Perez, who has advised a government committee on the implementation economic changes.

“What is still not decided is the exchange rate at which the national currency will be changed to dollars.” The plan for a single currency comes as the communist state of 11.1 million people seeks to lure more foreign investment. Central bank President Ernesto Medina said in October that the elimination of the dual system is a critical step in preparing the economy for the global market.
Accessing international loans to fund the transition to a single peso may have become easier after U.S. President Barack Obama announced plans last month to restore diplomatic ties with Cuba and ease trade restrictions, Perez said. Tourists visiting Cuba are currently given convertible pesos, known as CUC, at a rate of one-to-one with the dollar, while Cubans are paid in local pesos, or CUPs, which are fixed at 25 to the dollar.
The system forces tourists to pay higher prices for goods and services, while helping the state subsidize basic items for the local population.

IMF Membership
Any exchange rate below 5 pesos to the dollar would cripple state-owned companies, which currently import goods at the exchange rate of one-to-one, Perez said. The authorities will need help from abroad to support the new currency. “I believe that World Bank or the International Monetary Fund will step in to give Cuba a life jacket of around $1 billion to resolve all those financial problems,” Perez said. “Up to now, Cuba has been prevented from approaching those institutions because of America’s policy.

Obama’s announcements open the door for negotiations.” Cuba left the IMF in 1964, five years after the revolution that brought Fidel Castro to power and four years after the U.S. started to impose its embargo on the island. “With the change in U.S. policy, one can now see a pathway to membership, but the Cuban government as of now has not signaled its interest in membership,” said Richard Feinberg, a senior fellow at the Brookings Institution in Washington.
“The IMF is the gatekeeper to large-scale international balance of payments support.”

Company Preparations
Cigarette-maker Brascuba, a joint venture between Rio de Janeiro-based Souza Cruz SA (CRUZ3) and Cuba’s state-owned Tabacuba, says it is ready for a new single currency. “It’s imminent,” Alexandre Carpenter, co-president of Brascuba said in a telephone interview on Dec. 30. “We are prepared for it and expect it for the first quarter.” A single currency would fuel a rise in domestic demand, Carpenter said.
Some of Brascuba’s brands and other products such as Nestle ice creams can only be bought using CUCs. Unifying the currency would immediately increase the potential market, he said. “Most likely, we’ll have a boost in demand,” Carpenter said. The accounting and payment systems at Brascuba, which makes cigarette brands including Cohiba and Hollywood, are already prepared for the new currency, he added.

Brazilian construction company Odebrecht SA, responsible for works in a port, airports and a sugar plant on the island, is also ready for a single peso, according to a person close to the discussions who asked not to be named because the government is keeping the information private to avoid a run on the currency.

Venezuelan Oil
Unification is being expedited by the fall in preferential oil supplies from Venezuela, which have allowed President Raul Castro to maintain subsidies on basic goods priced in non-convertible pesos, according to Rafael Romeu, president of economic consultancy DevTech Systems and a member of the Washington-based Association for the Study of Cuban Economy.

“Castro’s government will no longer be able to inflate away the inefficiencies of the economy by printing more unconvertible pesos,” Romeu said in an e-mailed response to questions. An official at Cuba’s International Press Center didn’t return a phone call and an e-mail about the timing of unification. Any economic shock from a change to the currency system could be partly mitigated by increasing remittances from the U.S. Obama said he would allow Cuban in the U.S. to send back as much as $8,000 a year to relatives on the island, up from $2,000 now.

Romeu said the central bank will have to devalue the currency soon after unification, as it doesn’t have enough dollar reserves to back the convertibility of the new unified peso. A weaker currency will increase pressure on prices and boost inflation, he said. “The bottom line is that the government will have to continue eliminating subsidies until its deficit is closed and it no longer needs to print away money,” he said. “Because of Cuba’s low wages you can imagine how difficult it will be politically for the government to do that.
Photographer: Lisette Poole/Bloomberg