April  18, 2008

What is a “dual currency” system?

A dual currency system is an economy that accepts two different currencies as legal tender. Cuba uses two forms of currency: the Cuban convertible peso (CUC) and the Cuban peso (CUP). The U.S. dollar was also legal tender from 1993 to 2004.

How much is each Cuban currency worth?

The convertible peso is worth 1.08 USD, but there is a 10 percent fee for exchanging dollars for pesos. The Cuban peso is worth 0.04 convertible pesos (1/24 of a convertible peso), or 0.05 USD. Neither currency is traded in international markets.

Is the CUC pegged to the dollar?

Yes. The convertible peso (CUC) was originally pegged to the U.S. dollar at a 1-to-1 exchange rate. On April 9, 2005, the value of the convertible peso was re-evaluated to be worth $1.08 in U.S. dollars. The Cuban government cited many reasons for this change, including the increasing importance of the convertible peso within Cuba, the growing Cuban economy, the continued weakening of U.S. currency and the pernicious effects of the U.S. embargo. There is an additional 10 percent exchange fee for converting dollars to CUCs, making each dollar worth 0.82 CUC. One would have to exchange $1.22 USD to get one CUC.

When did each develop?

The Cuban peso was issued from 1857 on, when one Cuban peso was worth eight Spanish reales. In 1881, the peso was pegged to the U.S. dollar until 1960, when it was pegged to the Soviet ruble. Its value is now established independently by the Cuban government. The CUC was introduced in 1994, and, since it was pegged to the dollar, was used interchangeably with U.S. dollars. Its main purpose was to cover shortages in other hard currencies. The CUC became the dominant form of currency for international business, particularly tourism, in 2004.

Why are there two forms of currency?

With the collapse of the Soviet Union in 1991, the Cuban peso lost much of its value since it was pegged to the Soviet ruble. The exchange rate fell to 125 pesos per U.S. dollar. In response to the economic crisis triggered by the loss of Soviet support, Cuba legalized the U.S. dollar in 1993 to gain access to the hard currency needed for international trade and soften the economic impact of the loss of Soviet aid. Failing confidence in the Cuban economy caused rapid inflation of the Cuban peso. In response to the severe economic contraction of the early and mid 1990s, Cuba opened itself to foreign investment and tourism. The dollar was legalized for use in those new sectors and to encourage the influx of much-needed hard currency into the economy. However, dollars ceased to be accepted in Cuban stores on Nov. 8, 2004. The CUC replaced all transactions that previously required dollars and became the currency of tourism, international investment, and special hard currency stores that sell unsubsidized and foreign goods. The Cuban leadership also initiated a 10 percent exchange fee for exchanging dollars for CUCs, although bank accounts denominated in USD would not be penalized or converted. Cuba credited this change in currency policy to the declining value of the U.S. dollar against other currencies like the Euro, rising gasoline prices traded in USD and economic difficulties within Cuba. The exchange of dollars to CUCs to avoid the transaction fee brought a large influx of hard currency as dollars were converted into the national convertible currency.

Why Does Cuba impose a 10 percent exchange fee on converting USD to CUCs?

The Cuban government explained that this fee covers the risk of exchanging U.S. dollars on the international market, which the Cuban government assumes when making that conversion.[1] The Cuban government gave people one week to convert their USD without the 10 percent service charge. After Nov. 8, 2004, however, no new dollars were allowed to be deposited into bank accounts. This motivated those with private stores of hard currency to deposit it into Cuban banks, putting large amounts of hard currency at the government’s disposal. The 10 percent exchange fee also benefits the Cuban government by earning it money on all remittances sent in dollars to relatives in Cuba. The United Nations Economic Commission for Latin America estimated that figure to be $900 million in 2003, or three percent of Cuba’s GDP. Access to part of these funds has been a significant economic boost to the Cuban government.

Were there noneconomic reasons for this change in monetary policy?

Although there were economic incentives for this change in monetary policy, political factors also contributed to the decision. Castro’s announcement came at a time when the United States began tightening restrictions against Cuba, including eliminating “people to people” exchanges, limiting family travel by Cuban-Americans to once every three years rather than once a year, limiting the amount of remittances people could send and penalizing companies that conducted any form of business with Cuba. The United States imposed a $100 million fine on the Swiss bank UBS in May 2004 for providing the Cuban government with U.S. dollars, thereby violating an agreement with the Federal Reserve to prohibit the movement of U.S. currency to Cuba through international markets. The Cuban leadership interpreted this move as a bullying gesture to international financial institutions, leading them to withhold services and, thereby, jeopardize Cuba’s ability to import goods. The 10 percent conversion fee encourages family members to send remittances in other currencies, making them harder for the U.S. government to track, and, thereby, making international transactions less risky for institutions to broker.

What was the process of discontinuing use of the U.S. dollar?

Two years before the U.S. dollar was outlawed, U.S. coins were retired from circulation and no longer accepted. Then, over a year before Cuba phased it out, the leadership passed a regulation prohibiting the use of the U.S. dollar in inter-firm transactions. Companies were required to use the Cuban convertible peso only. In May 2004, stores that sold goods in hard currency temporarily closed and raised the prices of all goods priced in USD 10 percent to 30 percent. Finally, Fidel announced on Oct. 26, 2004, that beginning on Nov. 8 of that year the U.S. dollar would no longer be accepted as legal tender in Cuba.

How about other foreign currency?

Stores in Cuba do not legally accept other forms of currency. However, they may be exchanged for Cuban currency without a penalty, unlike the U.S. dollar. Euros or other convertible currencies could still be deposited into bank accounts, as well.

What are some problems that arise with two currencies?

The main complaint against the dual currency system from within Cuba is that state salaries, which account for the vast majority of salaries in Cuba, are paid in Cuban pesos (CUPs), whereas many goods are only offered at special hard currency stores that deal only in CUCs. Although most daily necessities, like food and most pharmaceuticals are sold in Cuban pesos at a subsidized price, many struggle to buy certain necessities that are only available at hard currency stores, like toilet paper, toothbrushes and clothes. Since these goods are priced in convertible currency, they are abnormally expensive and often out of reach for those earning wages in Cuban pesos. The sale of goods and services in CUCs also creates a socioeconomic divide between those who have access to hard currency and those who do not. Only Cubans who get remittances or are paid in hard currency can buy the few imported consumer goods sold in hard currency stores. Since fewer blacks and mulattos have family members living in the United States or other countries, the currency divide separating the 60 percent of Cubans who receive remittances from the 40 percent who do not tends to be a racial one, as well. There is also resentment amongst certain professionals who feel that their salaries are dwarfed by often unskilled workers working in the international or tourist sectors. A doorman can make as much money in tips in one day as a doctor can in one month. This gives Cubans the incentive to leave the CUP economy for the hard currency one. Many take second jobs as taxi drivers or doormen. Others sell arts and crafts for tourists on the street, or participate in black market activities to earn hard currency. Stores selling goods in pesos often run out of supplies very quickly because the prices are subsidized by the government to be affordable on state-controlled salaries that average $19.50 per month. Supplies are not refilled often enough to meet consumer demand, making basic goods, like food and coffee, difficult to procure.

What are future plans for Cuba’s currencies?

Raúl Castro, upon taking over presidential duties, encouraged nationwide discussions so that Cuban citizens could air their grievances with the existing system and suggest improvements. One of the most common grievances was the dual currency system that many blame for their financial hardships and the socioeconomic divide in Cuba. In a town hall meeting conducted at the University of Computer Science, one student, Eliécer Ávila, questioned president of the National Assembly Ricardo Alarcón on the dual currency system, drawing the most applause of any topic broached. He explained that an average Cuban must work two days just to buy a toothbrush. Ávila was only one of many across the country that called for an end to the dual currency system. Raúl Castro responded to these critiques, saying that it was a complicated issue that would take time to resolve. It is clear, however, that the current monetary system must undergo some changes. Since Raúl came to power there have been rumors of an increase in value for the Cuban peso, from 24 CUP to the convertible peso, to 20, 15 or even 13 CUP to the convertible peso. These rumors sparked brief runs on exchange banks, when people tried to exchange their CUCs for Cuban pesos in hopes of profiting from this increase in value. The current exchange rate between CUPs and CUCs has not yet been changed, however.

What might be the consequence of switching to a single Cuban currency?

If the Cuban government were to change the value of the CUP to approach that of the convertible peso by making one CUC worth eight CUP, thereby increasing all state salaries dramatically, Carmelo Mesa-Lago, an expert on the Cuban economy and a University of Pittsburgh professor, predicts that there would be a nationwide shopping spree for previously prohibited consumer goods that, although now legal to own, are outside the budget of a large majority of Cubans. The resulting draining of supplies would be even more disheartening for those who would just recently have acquired the money to buy goods, but would then have no more goods to buy.[2] The Cuban government would also have to deal with a three-fold increase in all state wages, which are paid to the majority of its citizens. The Cuban leadership is struggling to improve domestic productivity in all sectors, which has long been a concern, and claims that economic conditions will only pick up once this happens. Without increased production, it is unlikely that the Cuban government would be able to handle the economic burden of increasing state salaries and the value of the CUP.

Written By: Danielle Barav

For more information:

“De-Dollarization.” Lexington Institute. Issue #13: Sept. 29, 2004. http://lexingtoninstitute.org/911.shtml#top

Michael A. Lebowitz. “Points concerning the Cuban measures in relation to the U.S dollar.” Cubanews.  October 27, 2004.

Archibald R. M. Ritter and Nicholas Rowe. “Cuba: From ‘Dollarization’ to ‘Euroization’ of ‘Peso Re-consolidation?’” Carleton University. March 9, 2002. http://www.carleton.ca/economics/cep/cep00-13update.pdf

Anita Snow. “Cuban Demand: Power to the peso!” Associated Press. April 3, 2008.

Michael Voss. “Stepping into beg brother’s shoes?” BBC News. Feb. 24, 2008.