Ending Cuba’s Currency War

The past decade has been a momentous one for Cuba. It began with a Castro leading the nation, but his name wasn’t Fidel. Then, not long after Fidel’s brother, Raúl, brokered a deal for a ‘thaw’ of relations with the United States under the Obama administration, attention turned to the elevation of Cuba’s new president, Miguel Díaz-Canel.

As the first non-Castro to lead Cuba post-revolution, expectations were that Díaz-Canel would introduce numerous reforms to modernise Cuba, and secure the future of the nation and the ruling Communist Party of Cuba. Though there’s no shortage of reform targets for Havana, bringing an end to Cuba’s ‘currency war’ is among the most critical priorities. 

So can the Cuban government get it done?

Coin Collecting in Cuba

Dual or multiple currency systems within a nation are rare. Where they do exist, it is usually intended for a temporary time period, a specific purpose, or both. An example is the two-month period in early 2002 when nations adopting the Euro saw the new currency introduced but were permitted to continue using their (soon to be former) national currency before it became obsolete. 

Cuba’s experience, by contrast, has been one of frustrating red tape and dire necessity. Right now its system uses the following:

Cuban pesos (CUP) – the national currency, used in the state sector; the source of payment for Cubans who work for the many state-run services and operations of the Cuban government;

Convertible pesos (CUC) – commonly regarded as the ‘tourist currency’ for its popularity among visitors. Pegged to the USD, worth a whopping 24 times more than the CUP, and used commonly in private business within Cuba.

In the early 1990s the devastating collapse of the USSR extended far beyond Moscow. The end of the communist empire imperilled Cuba’s economy and, in response to a hard currency shortage, Fidel Castro reversed a policy that previously banned the USD, and legalised its use. A decade later the Cuban government would pivot once more and announce that the greenback would no longer be accepted. 

The decision to embrace the USD in the early 1990s is seen as the starting point of the nation’s present complicated currency system. Ironically, it has been compounded by the thawing of relations with the US because private business has grown and wages in this sector of the economy, paid by convertible pesos, far outpace those that an employee of a public employer earns under the national peso. 

The root of the problem has long existed. It has created a radical imbalance in the economy where private sector workers in jobs with low entry barriers, such as taxi driving, can exponentially outearn the wages of a public employee, like a medical GP, who must complete years of study before qualifying. Economic segregation persists nationwide between public workers who use CUP and those who earn private money using CUC in daily life, often through interaction with tourists. In practice, there is some fluidity between this divide but the scale of the problem is immense and creates an abundance of inefficiencies.

The Rigid Revolutionaries

The Cuban government recognises the problem. In the final weeks of his governance during 2018, Raúl Castro announced plans to scrap the two-currency system. With Castro on the way out, responsibility for change lay with the next president, Díaz-Canel, but the secretive nature of Cuba’s government did it no favours here. Rumours that it would suddenly end the CUC’s use overnight saw some Cubans ‘do a run on the banks’. 

The past year has seen the Cuban government engage in numerous constitutional reforms that critics see as highly indulgent, taking the time and resources to codify socialism as ‘irrevocable’, while rationing food and toiletries. This has left many in Cuba and beyond unimpressed by the direction of its new leadership and its priorities in modernisation. 

These events are largely indicative of the Díaz-Canel era so far. Although there has been some positive change, it has been timid. Recent internet reforms encapsulate this dynamic well. In May the Cuban government announced that Cubans could have Wi-Fi routers in their home, opening the door to greater personal access and the emergence of related businesses like internet cafes. Despite this, there was no change to the nation’s restrictive internet censorship, affirming that while Díaz-Canel is, in some respects, driving positive change, overall it seems it’s business as usual for the Cuban regime.

Neighbourhood Disputes

Any assessment and contemporary understanding of Cuba’s economic future must factor in not only the mechanisms of government in Havana, but also Washington DC, owing to the tempestuous relationship between the USA and Cuba for the better part of a century. 

It must also recognise that the economic downturn of Venezuela – another nation with few fans in Washington, and a close trading partner of Havana, which has delivered a knock-on effect to Cuba’s economy – has played a role in recent woes. It would be a mistake, however, to lay all blame at the door of the American government or Venezuela’s recent troubles. 

For a government born in a revolution and embraced by Cubans for its promise to govern for all Cubans and free of foreign intrusion, Díaz-Canel and compatriots cannot have it both ways. The answer to resolving the currency crisis is the pursuit of a more free and open Cuba. It’s not just a question of politics, but simple pragmatism as a policy of economic protectionism and isolationism is clearly not sustainable any longer.

A New Currency Crisis

The Cuban government has a real currency challenge on its hands. Not only is the dual currency system proving painful, but any ambition by Havana to simply try and contain the problem is unlikely to be successful. 

Currently cryptocurrency swirls around Cuba’s grey economy. That it does so is not a fault of cryptocurrency technology itself, but instead a basic recognition that, just as surely as cryptocurrency use is set to grow in future, so too does the Cuban government have new ordeals rapidly emerging in its currency war.