Anyone who visited Cuba surely knows of the Cuban currency system, which is very particular.
In Cuba, there are two parallel currencies, both official and regularly used simultaneously, which are:
· The Cuban Convertible Peso (code: CUC)
· The Cuban Peso (code: CUP)
Why are there two currencies in Cuba?
First of all, let us remember that Cuba is a communist country.
Unlike other communist countries, such as China or Vietnam, it has not yet opened up the economy.
After the fall of the Soviet Union (1991), there have been some years of severe economic crisis, known as the “Special Period.”
The Soviet Union was the largest importer of Cuban products, but also the principal exporter, also providing products at controlled prices (such as petrol).
Due to the crisis of that period, the Cuban government allowed the circulation of American dollars on the island, which were used by tourists.
The dual currency system has been introduced in 1994 with the creation of the Cuban Convertible Peso (CUC). The new currency was pegged with the USD dollar ( 1 CUC = 1 USD).
The Cuban Convertible Peso (CUC) is the currency used mainly by tourists.
The other currency, the Cuban Peso (CUP), continued to circulate. It is mainly used by local people for everyday transactions.
The dual-currencies system continued to exist for more than 25 years.
What will change from 2021? And why?
Starting in 2021, the Cuban government has decided to eliminate the Cuban Convertible Peso (CUC) and keep the CUC as the only currency.
Cuban Convertible Peso (CUC) will be converted into Cuban Pesos (CUP). The government has set the exchange rate at 1 CUC = 24 CUP.
The change will be effective from January 1, 2021, but a transitional period is planned for which the complete removal of the Cuban Convertible Peso (CUC) should only take effect in June 2021.
Why was this choice made? What will the consequences be?
The reasons are different.
First of all, Cuba has been experiencing a severe economic crisis in the last two years due to various causes, in particular:
· New sanctions by the United States.
Cuba and the United States of America have been in a conflicting relationship since the 1960s.
In 2014 Obama and Fidel Castro embarked on a path to normalize relations between the two nations. The United States has lifted several sanctions, among other things, US citizens have been allowed to travel to Cuba for tourism.
A few years later, President Trump reintroduced new sanctions on Cuban products. Particularly, it focused on: blocking US tourism to Cuba, reducing remittances from Cubans working in the United States, and blocking imports of alcohol and tobacco from Cuba (read Rum and cigars).
· Stop cheap oil from Venezuela (partly linked to US sanctions)
· Tourist sector crisis due to the pandemic
The sector was already in trouble, and the global pandemic has further accentuated the crisis.
The bad economic situation has had deep consequences on Cuban currencies.
In Cuba, it is possible to pay only with local currencies by law.
In theory, economic activities (shops, restaurants, etc.) could not accept payments with foreign currencies. In practice, however, there is a black market in which foreign currencies are accepted (especially US dollars).
In the black market, USD Dollars were traded at a much higher price than the official $ 1 = 1 CUC. The crisis has exacerbated an already present situation.
So the government decided to eliminate this complex dual-currency system starting from 2021.
It is not easy to predict what the consequences of this transition will be.
The Cuban currency should suffer a strong depreciation.
From one side, it will be positive from a business perspective.
Cuban companies (owned by the state) should improve the export.
Moreover, It will also make Cuba a more attractive place for foreign tourists and foreign investors (especially if the economy is more open to private individuals).
On the other side, a strong devaluation of the currency will decrease the purchasing power of Cuban citizens (that already live on a low income).
We do not have to forget that Cuba imports large quantities of food from outside. The devaluation of the Cuban currency will bring even primary goods more expensive.
The government has already planned an increase in wages, however, it is difficult to predict how this revolutionary change will evolve.
Globartis Research
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