Cuba’s Currency Reform Could Ease Its Covid-19 Blues

(Bloomberg Opinion) -- Cuba wants you. Really. In July the government waived health restrictions for incoming visitors, becoming one of the few countries to do so. No doctor’s affidavits, no lab tests required; travelers need only to land with health insurance, get swabbed for Covid-19 on arrival and chill overnight at a hotel. If 24 hours later the test comes back negative, the sands of Playa Varadero await.

A safe harbor in a pandemic sounds too good to be true for a world with cabin fever. For Cuba, it’s a lifeline. While the island regime has mostly contained the coronavirus pandemic — 6,000 cases and 123 deaths — the economy is on respirators. Foreign arrivals are down 60%, exports by 19% and gross domestic product is set to shrink by 8.7%, according to the independent economic and business news portal Cuba Standard. Given the National Statistics Office’s near-total data blackout on this, the pandemic’s impact could of course be even worse. Round-the-block food lines and empty stores, bad memories from Cuba’s Special Period after the collapse of the Soviet Union, are back, prompting President Miguel Diaz-Canel to call on Cubans to plant gardens.

That will not fill 11.3 million Cuban plates. Last year, with the economy already ailing, Diaz-Canel proposed a constitutional overhaul to free the animal spirits of nascent empresarios. Thousands of mom & pop stores, eateries and bed and breakfasts stand to benefit. Yet the buzz of the moment is over more drastic moves, starting with making good on unfulfilled promises to lose the country’s cockeyed one country, two currency systems, perhaps even this year. “Let’s welcome the monetary overhaul because the country needs it,” Deputy Prime Minister Alejandro Gil, who doubles as Economy Minister, said Tuesday night. “We must have a practical and optimistic vision. It will be to the benefit of all.” 

Cubans have heard this serenata before. The island has long been a laboratory for social engineering and command economics. Since 1994, it has maintained two legal tenders — a convertible peso for those with access to hard currency and the Cuban peso for mere mortals. Neither will buy you a mojito outside the island, and never mind the country’s chronic soft spot for the greenback. Talk of unifying the peso was first aired at a Communist Party confab in 2011 and became part of the official agenda in 2013; it has been recycled regularly ever since.

A makeover is long overdue. Cuba has dealt with the coronavirus without reverting to total economic lockdown: Only 5% of business owners told pollsters they planned to shut down. What’s needed is follow-through with bold reforms to scythe back red tape and unleash island enterprise.

That won’t happen as long as the country props up its dual currency and the vexatious multiple exchange rate system. Under the current arrangement, consumers spend ordinary pesos (the CUP), which don’t buy much. They may boost their purchasing power by swapping them for the so-called convertible peso (CUC), which trades at a hefty 24 to one, but has been slipping in street value as the economy careens.

But since not all companeros are equal, state-sanctioned importers may purchase their wares at the gift rate of one peso to the dollar. That amounts to a huge subsidy for foreign-bought groceries and personal goods, and a crippling disadvantage for domestic producers and exporters. “The state importers are making out like bandits,” said William LeoGrande, a Cuba expert at American University.

This arrangement is one big reason why the budget deficit is set to reach 11% this year. It also helps to explain why the tropical island with a year-round growing season imports 60% of its food. Hence, Diaz-Canel’s recent warning that a steep devaluation of the CUC — and so the end of the one-country, two currencies canard — was imminent.

Don’t light your Cohiba with those spent convertible pesos just yet. In July, the government authorized 72 retail stores that bypass official exchange controls by selling goods priced in dollars to anyone lucky enough to have them. (This is in addition to the 4,800 official “dollar stores” where customers can pay for imports with bundles of pesos, if they have enough of them.) As an added incentive, it will drop the surcharge for dollarized purchases. So instead of the heralded unified peso, the devaluation could lock in the preference for the greenback. “This is like opening Pandora’s Box,” said Pavel Vidal, a former Cuban central bank economist who teaches at Javeriana University in Cali, Colombia. “From now on, every company and foreign investors will prefer to operate in dollars.”

Cubans need a more realistic exchange rate to end the cushy subsidies to inefficient businesses and make the economy competitive. A market-anchored exchange rate will bring transparency to the balance sheets of government enterprise, one of the economy’s murkiest and most inefficient sectors. Yet since the state still generates nearly 7 out of every 10 jobs, shutting down deadbeats could have dire consequences. “It’s a risky move,” said LeoGrande of the currency reform. “But Cuban officials finally decided that the economic risk of not doing this is too great.”

The government has vowed to cushion the impact of adjustment by increasing state sector wages, eliminating wasteful food subsidies and giving private business operators a longer leash. But as the growing lines at banks and grocery stores suggest, few Cubans are betting on a smooth transition.

Cubans have survived worse. The collapse of the Soviet Union threw the island economy into depression. The rolling disaster in Venezuela has crimped the supply of cut-rate crude oil, which Cubans resell abroad for cash. Donald Trump, in his play for the conservative Cuban-American vote, has blacklisted more than 400 hotels controlled by the government, the Communist Party or fellow travelers. The Inter-American Dialogue projects a 16% decline in dollar remittances to Cuba this year.

The pandemic has hastened the misery. Dollars generated by the country’s vaunted flying physicians dispatched to outbreak hotspots have not compensated for the ravaged domestic economy or the rout in international tourism, the island’s second largest source of foreign exchange.

But in debacle lies an opportunity. Cuba’s currency meltdown not only makes fixing the price-warping exchange rate inevitable. It ought also to force Havana to roll back decades of top-heavy management that has smothered initiative, chaperoned enterprise and held investors at bay.

Deeper reforms will be on the table at next year’s party congress, where octogenarian Raul Castro will preside over Cuba’s potentates. The question is, will the CUC stop there?

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”

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