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Currency Reform Chaos, it’s Not the Cuban Blackbird’s Fault

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(Foto: elchago)

By Mauricio De Miranda Parrondo (Joven Cuba)

HAVANA TIMES – An ad by the Cuban President and Government recently went viral, including several phrases from the Economy and Planning Minister, Alejandro Gil, made during the National Assembly session in December. This piece of propaganda says: “It isn’t true that the reason for inflation in Cuba is the wrongful design of currency reform and that the Government decided to implement it at the wrong time. It just isn’t true. This would have all existed with or without currency reform.”

He then goes on to say:

“We would still have shortages, a drop in the purchasing power of wages, higher prices without currency reform, and that’s because we have a production deficit. All of these phenomena, which is the basis of inflation, are not the result of Currency Reform, they happened regardless of currency reform, and we are the first ones to admit that there were problems in its design and a lot of problems with its implementation (…).”

Currency Reform or chaos?

Cuban leaders insist on defending what they call “currency reform,” at all costs, but in reality it was nothing but a 2,300% devaluation of the Cuban peso’s official exchange rate, to bury the dual-currency system that existed beforehand.

Currency reform needed many other things to have been done first, including: 1) getting rid of the dual-currency system to establish the Cuban peso’s full sovereignty in national transactions; 2) outline a relatively flexible exchange rate to contain certain external shocks; 3) get rid of more than one exchange rate, unifying them for all transactions with a financially solid rate based on market conditions; 4) adjusting prices, wages and pensions.

However, all of the above form part of the circulation cycle, so before going ahead with this course of action – which would imply a considerable issuance of cash because of how it was conceived, and this would have an impact on exchanger rates-; conditions need to be guaranteed to increase the production of goods and services with radical structural reform in the business sector, in property and the authorization of private ecconomic actitivies with very few restrictions.

Before promoting much-needed change in the financial system, conditions need to first be created for widespread growth of production, regardless of whether this happens in the public, private or cooperative sectors. In economic policy, the order of factors does change the result.

That said and casting aside sequential problems – which many economists have insisted on – the currency unification process that was adopted is far-off from constitutiong currency reform. In fact, we are seeing new chaos, which not only affects the financial system, but the entire economy.

It was decided that a fixed exchange rate of 24 Cuban pesos (CUP) for 1 US dollar (USD) would be adopted, which didn’t reflect market conditions, and was affected by a serious shortage of dollars linked to the collapse of the tourism industry and the chronic crisis of exports. Meanwhile, the illicit market quickly adjusted itself to the supply-demand relationship and the dollar was selling for 35-40 CUP since late 2020 and in early 2021. A year after this measure was adopted, the US dollar is now worth more than 70 CUP.

How can you carry out currency reform when neither the banking system or official bureaus de change are in a position to sell foreign currency? The only thing it’s really done is replace one kind of currency (the CUC) without any economic rationale for another (USD), which is less far-removed from reality than its predecessor, but still removed, which stops it from serving its function as a bridge between the domestic and international economy, nor does it contribute towards establishing proper relative prices.

As a result, relative prices which are set at the 24:1 exchange rate are not real and, therefore, a distortion continues that both affects the determination of production costs, domestic prices of goods that contain imported supplies, as well as export/import prices, and it prevents any real convertibility of Cuban currency. What good does introducing fictitious prices into an economy do? None. But when this fictitious price is in foreign currency, the connection between the national and global economies is seriously compromised.

Plus, as I’ve explained many times before, the existence of a larger gap between official and informal exchange rates (the latter being higher than the former) translates into an artificial overvaluation of national currency that affects the competitiveness of exports, making them more expensive, and making imports artificially cheaper too.

Furthermore, what the Cuban Government has called the “Reforms Process” came into effect at the same time as a partial dollarization of the economy, creating a market where freely convertible currencies could operate via bank deposits, most of which come from abroad.

While this market was reserved for “top range products” in this market, it slowly added food and a growing assortment of essentials which families need. That is to say, the case of the ‘90s has made a comeback, which led to the dual-currency system, divided markets and, at the end of the day, not only wreaked financial crisis, but also aggravated the national economic crisis.

Thus, the “Reforms Process” hasn’t led to currency unification, which was much needed and would have allowed the Cuban peso to be the only currency in circulation to carry out domestic transactions…

Read More: Currency Reform Chaos, it’s Not the Cuban Blackbird’s Fault

2022-01-13 22:29:05

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