Tuesday, October 22, 2013

A heads-up on currency reform

The process of unifying Cuba’s two currencies is set to begin, according to a Nota Oficial in today’s Granma. 

But no details about the process were given.

A timeline of actions that will lead to monetary unification was approved last Saturday by the Council of Ministers, the note says.  As steps are taken in the process, the public will be informed.  The initial changes will affect mainly businesses and other institutions, which seems to imply the use of interim exchange rates among state enterprises and government units.  The purpose, the note says, is to re-establish the “value of the Cuban peso and its monetary functions as a unit of account, means of payment, and store of value.”  It also assures Cubans that the changes will not harm those who earn an honest living in either currency.

In that the details are not known, it is impossible to figure the economic impact of today’s announcement.  But Cuba has a lot to gain by ending its dual-currency system.  It creates two tiers of wage-earners and distorts incentives in the labor market.  In Cuban businesses, it creates an accounting fiction that favors imports penalizes exports.  And in general, it denies all actors in the economy the clear price signals that are necessary to make sound economic decisions.  Fixing the currency is only one part of a puzzle that also includes wage and salary policy, price policies in the state retail sector, and a decision on whether or not to allow state enterprises to import and export without prior permission from the government.  Those details will tell whether there are winners and losers in this process, and who they are.

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