Should Cuba’s Central Bank continue to devalue the Cuban peso in 2021?

Cuban economic authorities took many years to prepare the monetary strategy that eliminates the convertible peso (CUC) from circulation and unifies official exchange rates in 2021. The strategy that was finally set in motion can be described as audacious not only because of the magnitude of the devaluation of the Cuban peso with which it is being implemented (24 times in relation to the dollar in the business sector), but because it goes far beyond the monetary and exchange rate policy, by contemplating the generalized rescaling of wages and wholesale prices in the state sector, a reorganization of the subsidy system, pension adjustments, and could add another group of changes of a structural nature on the productive apparatus in the coming months.

At some point in the past it seemed that they were waiting for the best macroeconomic moment to launch the reform, but now we know that the wait was to organize and prepare all the operational and regulatory framework elements, and, above all, to convince and bring into agreement a critical mass of technicians, businessmen and politicians. When they had it ready, it did not matter that the economy was in its worst moment in thirty years.

With the GDP falling at 11 percent, with practically no income from tourism, foreign currency liquidity at minimum levels and all the uncertainty caused by the pandemic, the monetary reform planned for so many years is not going to unfold as it was designed on paper. The government is partly aware of this, but it also knows that progress in the monetary ordering is indispensable for the rest of the reforms to work. Moreover, it hopes that wage movements will tilt incomes a little more in favor of employees of state-owned enterprises and the entire bureaucratic sector of government, which has been less favored by the transformations of the last decade.

In the deteriorated and unbalanced macroeconomic environment of 2021 and with very few dollars entering the balance of payments, the 2,300 percent devaluation of the Cuban peso in the business sector has been insufficient to guarantee its convertibility into foreign currency. That is to say, for the time being, neither companies nor individuals will be able to freely exchange Cuban pesos into dollars, euros or other international currencies in banks and exchange houses.

It is evident that the designed reform has not fulfilled all its objectives when it is necessary to keep using liquidity certificates (LC) in the business system and dollarization is the solution to revitalize certain markets and production chains. If the monetary reform had unfolded as was planned, it would not be necessary to specify that only corporate bank accounts backed with LC are convertible and can be used to pay imports and international debts.

As the monetary reform begins, national currencies and official exchange rates have been unified, but the dual economic scheme is maintained, where companies and citizens with access to foreign currency retain a disproportionate advantage over those who are not connected to these flows. For now, the monetary order still does not guarantee the full integration and progress of multiple actors that create value in the economy even when they are not connected to exports, remittances or dollarized markets.

If the monetary system had ensured the convertibility of the Cuban peso, as was always intended, the final consumer goods that are now traded in dollarized markets could operate in Cuban pesos, and the same foreign exchange effect could be achieved through exchange offices and banks. In a balanced monetary and exchange rate scheme, domestic consumer markets can operate normally in the national currency and remain stocked (and no one has to go to Panama to go shopping). Under this scheme, the foreign currency income continues to come in, but it takes a different path, going in the first instance to the purchase of local currency in banks and exchange offices.

The re-establishment of dollarized consumer markets since 2019 is not only caused by the US sanctions and then the pandemic, and even less is “due to the country’s need to collect foreign currency.” It is due, above all, to the systematic mistakes made in the management of monetary and fiscal policy after the de-dollarization in 2004 (which led to the excessive printing of CUCs) and to the delay in implementing the announced reforms. The imbalances in 2021 are so big and the economy accumulates so many distortions that not even a 24-fold devaluation of the Cuban peso will correct the imbalances.

Nor do I believe that they will be solved only by further devaluating the currency. In fact, I would not propose further devaluations in the short term. Such a move would further accelerate an inflation that is already excessive, and would add confusion and distrust at a time when expectations have yet to find an anchor. It seems preferable to wait awhile so that the state and non-state business system, the different markets and the population can process and adjust to the new price and income vector. It also seems sensible to wait for a little more clarity on the future of the pandemic and the new equilibrium that the economy will have to go through.

What is needed now is to accelerate and deepen the changes in the productive system, which, like the monetary unification, have been postponed for too many years, but with the difference that we do not know if a critical mass of technicians, businessmen and politicians can be convinced and reach an agreement now. At least a start should be made with the things that were announced a few months ago: making self-employment more flexible and authorizing small and medium-sized private enterprises.

With the devaluation of the Cuban peso in January, even if it is insufficient, much is gained in terms of accounting transparency of the entire economic system. The absolute and relative corrections of prices, subsidies and salaries further expose the inefficiencies of the economic system, and reveal the cost of continuing to postpone the necessary structural reforms. Starting this year, we will be able to better visualize which companies are actually competitive and how much it entails to keep subsidizing companies that are not. State budget accounts change radically in the new monetary fabric, which facilitates a more informed conversation about the use of public resources.

Cuban economic authorities have taken a high risk by implementing a drastic adjustment of the exchange rate, prices and real incomes in a highly complicated macroeconomic (and social) scenario. The positive financial effects associated with the full convertibility of the Cuban peso will not be seen for the time being. The risk taken seems to be worth it only if the accounting effects on the corporate balance sheets and the State budget lead to a consensus in favor of the necessary structural changes.

The parallel foreign currency market at the beginning of the year operates at an exchange rate of around 50 pesos per dollar, which doubles the new unified official exchange rate. It reflects the shortage of goods and dollars, the excess of national currency in circulation and the expectations about the evolution of the economy and associate policies. The future of the exchange rate will depend on how these factors evolve. The economist Luis Luis has rightly stated that it is preferable to let this market alone in order to provide liquidity and reduce the premium of the black market over the dollar. In the same way as in the nineties, when the exchange houses (CADECA) were established, the parallel foreign exchange market will serve as a reference for the Central Bank to know how far it has to take the exchange rate. But my opinion is that it would be better to wait until that market can process all the changes that are occurring and those that are in the offing so the price of the currency incorporates a more accurate information about the future of the Cuban economy.

PAVEL VIDAL
PAVEL VIDAL
Pavel Vidal. He specialized in macroeconomics and monetary policy. Since 2012 he lives in Colombia and works as a professor at the Pontificia Universidad Javeriana. He served as a visiting researcher at Harvard University, Columbia University, the Universidad Complutense de Madrid, and the Institute for Developing Economies (Japan External Trade Organization). He has been a consultant to the Inter-American Development Bank, World Bank, Brookings Institution, Atlantic Council, UNDP and Banco de la República de Colombia. He received training from many central banks in Latin America (1999-2006). One of his expertise is the time series econometric models to develop forecasts and estimate economic indexes. He was professor of the Center for the Study of the Cuban Economy at the University of Havana (2006-2012) and worked in the Monetary Policy Division of the Central Bank of Cuba (1999-2006).

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