Cuba Says It's Likely to Increase Money Supply

Cuba Says It's Likely to Increase Money Supply
HAVANA — Oct 1, 2014, 5:30 PM ET
By ANDREA RODRIGUEZ and MICHAEL WEISSENSTEIN Associated


The planned elimination of Cuba's unusual dual-currency system will
likely mean printing more of the single currency that remains, the
country's central bank chief said in a report published Wednesday.

Elimination of the double currency was announced last year, although no
date has been set for the monetary unification.

Cubans have been watching closely for clues as to how the government
will avoid high inflation, a danger for a weak economy where many
citizens struggle to pay for daily purchases despite the widespread
subsidization of services like housing and health care.

Most Cubans earn and buy goods in local pesos worth about 4 U.S. cents
apiece. Tourism, one of the island's main sources of foreign exchange,
operates on the convertible peso, a special currency worth roughly one
U.S. dollar.

The double currency allows Cuba to theoretically split the country
between a realm of highly subsidized prices in Cuban pesos and a tourist
economy where prices more closely resemble those of U.S. or European
cities. But the system has inadvertently created a new class of
privileged Cubans with access to convertible pesos. And it has led to
economic distortions like a special exchange rate for state enterprises
that effectively subsidizes them with cheap convertible pesos.

Central Bank President Ernesto Medina told the state National
Information Agency that authorities were studying unspecified indicators
"that offer clues about whether the existing money supply in the general
population and the business system is correct or not."

The agency described him as saying it was logical to assume that making
Cuban pesos the sole national currency will require increasing the
amount of money in circulation and that officials are studying the
possibility of printing banknotes of higher value than those currently
available. Today's biggest Cuban peso bill, the 100, is worth about four
U.S. dollars.

Printing more money could simply mean replacing the convertible peso
supply with the equivalent value in Cuban pesos, said Pavel Vidal, a
Cuban economist and professor at the Universidad Javeriana in Cali,
Colombia. But if Cuba adds too many Cuban pesos to the system, there is
a real risk of inflation, experts said.

Reducing the supply of cheap convertible pesos for state businesses also
could force Cuba to choose between passing higher prices to consumers or
spending more money on subsidies for basic goods, a difficult measure
for a government already desperate for foreign exchange.

"Inflation is possible, but I can't say for sure because that will
depend on the policy that the state adopts when monetary unification
occurs," said Cuban economist Carmelo Mesa Lago, a professor at the
University of Pittsburgh. He said the state could relatively easily
implement price controls, but the effects of inflation may be more
easily seen in the country's new private business sector.

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Associated Press writer Anne-Marie Garcia contributed to this report.

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Andrea Rodríguez on Twitter: www.twitter.com/ARodriguezAP

Michael Weissenstein on Twitter: www.twitter.com/mweissenstein

Source: Cuba Says It's Likely to Increase Money Supply - ABC News -
http://abcnews.go.com/International/wireStory/cuba-announces-details-currency-unification-25891608