Cuba faces challenges in push to end dual currency

Posted on Tuesday, 10.01.13

Cuba faces challenges in push to end dual currency
BY PETER ORSI
ASSOCIATED PRESS

HAVANA -- Cuba is the only country in the world that mints two national
currencies, a bizarre system that even President Raul Castro
acknowledges is hamstringing the island's socialist economy and must be
scrapped.

Exactly how to do that is the problem.

Months after Castro made currency unification a centerpiece of a
forceful address to parliament, no details have been made public. But a
pilot program operating under the radar might hold clues to a way out.

Since the system was created in 1994, most islanders have been paid in
national pesos worth 24 to the dollar in exchange houses, while tourists
and the Cubans who attend to them receive a much more valuable peso
pegged at 1-to-1 with the U.S. greenback.

The imbalance means doctors and physicists can make more money driving
taxis or renting rooms than they can working in the professions for
which they spent years preparing. In his July speech, Castro denounced
the setup as having a warping effect on the economy and society in general.

Shaking up the dual currency system risks spiking inflation and creating
new winners and losers, always dangerous on an island that embraces the
goal of egalitarianism. It would also force a change in accounting rules
that would eliminate a huge subsidy to state-run enterprises at a time
when cash is so short.

But there are signs that change is coming, and hints at how the value of
the currencies might meet in the middle.

Pavel Vidal, a former Cuban Central Bank economist now at Colombia's
Javeriana University, told The Associated Press that a pilot program is
being launched with select state businesses operating at a 10-to-1
exchange rate.

The businesses are in key sectors such as sugar, hotels and
non-agricultural cooperatives. There has been no mention in the official
media, but Vidal said it is happening and it's a good step.

"I think it's great because the elimination of the double currency must
be gradual," he said.

Even incremental change may be tough to pull off, and requires the
unraveling of Byzantine accounting practices that effectively allow
state companies to purchase dollars at a fraction of what ordinary
Cubans pay for them.

While the rate in exchange houses is 24 pesos to 1 convertible peso, or
CUC, the Cuban government treats them as equal in official accounts,
meaning state entities are getting them at a 1-to-1 subsidized rate.

"Whoever is getting these dollars at one-to-one is doing well, and
that's the official sector," said Rafael Romeu, former president of the
U.S.-based Association for the Study of the Cuban Economy.

Despite reforms under Raul Castro, the state still may be too
inefficient to quit the subsidy cold-turkey.

"They would be basically confronting their budget constraint in a
serious way, and I don't think they are ready to do that," Romeu said.
"They would have to cut a lot of social services."

The two Cuban pesos have been circulating in parallel since 1994, when
the loss of billions in Soviet trade and subsidies forced Cuba to
reluctantly open the economy to tourism, while trying to insulate most
islanders from its capitalist effects.

The idea seemed simple: Canadian and European travelers would spend hard
currency at government CUC shops catering almost exclusively to
foreigners, while Cubans would keep living a socialist ideal in the
other currency.

It hasn't worked out that way. As authorities pulled back on subsidies
that once covered almost all of islanders' housing and food needs,
people grew increasingly dependent on the added CUC income —
moonlighting in the tourism industry or receiving remittances from
relatives abroad.

The result is the upside-down wage structure where low-skill workers
like hotel chamber maids earn more from travelers' tips than
professionals. A 53-year-old doctor recently left the medical profession
after 25 years because his $25-a-month salary was putting food on the
table for just two days a month. He now helps his mother rent rooms to
tourists paying in convertible pesos.

"Professional salaries are in a desperate situation," he said, speaking
on condition of anonymity because doctors generally are not authorized
to talk to foreign media. "There's no motivation, and every day they ask
more of you."

Contrast that with Rigoberto Sanchez Beltran, who pulls in about
$70-$100 a month in tips for watching over parked cars at a tourist
complex in Havana. Getting by is still tough, but he knows the job gives
him a leg up on many of his more-educated neighbors.

"You get to know the regulars, and they give you a little more," he said.

Since 2010, Cuba has seen reforms including the legalization of a real
estate market, increased private small businesses and creeping
decentralization of state enterprise.

In July, Castro vowed that the dual currency was "one of the most
important obstacles to the progress of the nation."

He did not say, however, how the cash-strapped state would manage to pay
white-collar workers more.

Cuban officials have long argued that state salaries are effectively
much higher than the often-reported average of $20 a month if you factor
in things such as free health care, education and monthly food ration cards.

But today just about everyone acknowledges that low pay has been the
enemy of efficiency, doing little to inspire hard work. Employees often
pilfer supplies to resell or barter, or spend work hours on side
projects that bring in CUCs.

At stores that still offer cheaper prices in national pesos, goods from
soap to mops sell out quickly, snapped up by hoarders or black
marketeers. So finding basics such as cooking oil and eggs often entails
a trip to a CUC store.

"It's totally absurd that you get paid in one currency, but in order to
live you need to pay with another," said Margarita Nieves, 69. "Until
they fix that, they can't keep telling people there's no productivity."

---

Associated Press writers Andrea Rodriguez and Anne-Marie Garcia
contributed to this report.

Peter Orsi on Twitter: www.twitter.com/Peter-Orsi

Source: "HAVANA: Cuba faces challenges in push to end dual currency -
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