The Cuban Dual Currency System and Its Likely Imminent Demise

By Abby Neiser

When I studied abroad in Cuba, I received convertible pesos, known as CUC, in exchange for my dollars when I arrived on the island.  Aside from a small fee for using American dollars, the exchange rate between these two currencies is essentially one-to-one.  The CUC is considered the more useful currency for outside visitors, as most restaurants in tourist-heavy destinations such as Old Havana, taxis, and popular attractions list their prices in CUC.  However, one of the biggest “hacks” to save money that I encountered on travel blogs and websites before I departed was to find restaurants that accept Cuban pesos, often referred to as CUP or moneda nacional, each of which is worth approximately four cents in U.S. dollars.  Indeed, while restaurants that charge in CUC often have prices on par with an inexpensive restaurant in the United States, finding a decent meal for less than a dollar while paying in CUP is not hard to do, and my fellow students and I often challenged ourselves to spend as little money as possible.  While my wallet certainly enjoyed it as a college student studying abroad, upon returning, I found myself asking the question that few visitors of Cuba stop to think about—why is the cost difference between using the two currencies is so stark and what consequences does this have on the Cuban people and economy?

The dual currency system was first introduced in the 1990s (Double Trouble, 2014).  The decade is known in Cuba as the Special Period because of the immense economic hardship it suffered during the aftermath of the collapse of the Soviet Union, its primary economic lifeline after the Revolution in 1959.  During this time, Cuba had to reorient itself toward the global economy, and the dual currency system allowed them to do this (Double Trouble, 2014).  The current currency system is credited with fostering the tourism industry and stimulating domestic market growth (Double Trouble, 2014).  As a result, Cuba was able to overcome the worst of the Special Period.  Today, the tourism industry operates primarily in CUC and pumps much more money into the economy than would be the case if everything operated in CUP.  

Nonetheless, the dual currency is not without its negative consequences.  In a way, it has created a dual economy, as most Cubans outside of the tourism sector receive their salary in CUP, sometimes earning less than 20 U.S. dollars a month (Knobloch, 2020; Zurbano, 2013).  Someone working as a waiter at a restaurant in Old Havana, on the other hand, might receive this much in an hour in tips.  Thus, the divide between the internally oriented economy and the externally oriented economy is stark.  This gap is even more concerned upon looking at who is concentrated in which sector.  Afro-Cubans are grossly underrepresented in this lucrative tourism economy and therefore missing out on the benefits that Cuba’s limited economy opening has provided (Zurbano, 2013).  Moreover, many credit Cuba’s economy staying afloat due to remittances from family abroad.  Approximately $3.4 billion in cash and $3 billion in goods flowed into the Cuban economy in the form of transfers known as remittances in 2016 alone (Morales, 2018).  However, this money is not distributed equally among the Cuban population.  As one motivating factor for leaving the island after the Revolution was for richer white Cubans to not lose their wealth under the Castro regime, many Cubans who receive remittances are white and therefore likely already better off to start (Zurbano, 2013).  In a nutshell, white Cubans are more likely to receive a salary in CUC and remittances from abroad that would be converted into CUC upon arrival, while Black Cubans are more likely to receive a salary in CUP and not receive remittances.  Therefore, the dual currency and resulting dual economy is worsening racial inequalities in a country in which race is perhaps the most taboo topic.

Another issue with the dual currency is that it likely is doing more harm than good to exports out of the island (Double Trouble, 2014).  Several reasons explain this.  First, it artificially increases the prices for international buyers compared to what they would be if the prices were in CUP (Double Trouble, 2014).  Second, this conversion rate makes it so money brought in in CUC or dollars is recorded as a peso (Frank, 2020a).  However, this is only true for certain types of businesses, and the rules for determining what exchange rate a company should use are convoluted and perplexing (Frank, 2020a).  The confusion around this rule makes it difficult to measure a company’s success, as profitability may depend on which exchange rate they are using (Frank, 2020a).  The dual currency adds unnecessary complexity to an already difficult economic situation that is in desperate need of improving.

The urgency of resolving Cuba’s longstanding economic problems has increased dramatically because of recent developments.  Outgoing President Donald Trump’s administration took a hardline stance on Cuba and reinstated many of the economic and travel barriers that had been removed under the Obama administration.  Taxi drivers and business owners who I spoke to in Havana while this was happening in the summer of 2019 reported that they noticed an almost immediate difference in their business traffic, particularly because American cruise ships were prohibited from docking in Cuban ports.  Trump more recently exacerbated the already tumultuous financial situation in October by ordering Western Union, the primary means through which money is wired from the United States to Cuba, to end its operations in Cuba (Semple, 2020).  This means that the massive flows of remittances will significantly decrease, further putting a stranglehold on the economy.  The move to close down Western Union comes in the midst of a pandemic that has pummeled Cuba’s tourism-centered economy.  The pandemic has decreased the tourist flow by 60%, and the economy is projected to contract by around 10% (Margolis, 2020).  President Miguel Díaz-Canel has even suggested that his citizens should plant their own gardens to try to mitigate the food shortages that have ravaged the country (Margolis, 2020).

As a result of its current economic plight, the government has decided to finally act on the idea of currency unification that it has been flirting with for years.  Cuba’s economic minister Alejandro Gil argued that currency unification is necessary for the economy to recover from the pandemic (Frank, 2020b).  The biggest concern for unification is what sort of economic fallout it may cause, such as rapid inflation (Frank, 2020b).  Government officials are assuring that affected Cubans will be taken care of during the transition, though as of the time of this article being written, no specifics have been given on how exactly that was going to happen (Frank, 2020b).  While the CUP is expected to become the singular currency, what the exchange rate will be at this point is still speculative (Frank, 2020b).  Currency unification is being coupled with other reforms that will loosen the central government’s grip on the economy, receding from a long tradition of communist central planning that has dominated since 1959 (Frank, 2020a).  Many of these reforms have been in the works for well over a decade, but the pandemic is forcing the government’s hand to act on them (Frank, 2020a).

The question of currency is just one tenet of the huge question of what the future holds for Cuba.  Some speculate that once tourism is up and running again that, regardless of currency unification, the dollar might come to play a more powerful role in the Cuban economy (Knobloch, 2020).  Indeed, in 2019, the government allowed stores that use exclusively dollars to open and operate, and the possibility exists that this becomes more common going forward (Frank, 2020a).  Another issue that hangs in the balance for Cuba’s future is how far economic opening goes.  Only some opening is expected and is in the hands of the Communist Party, though history in Eastern Europe suggests the possibility that opening a little can lead to demands to open completely.  Whether or not this happens and how the government responds if it does is an open question.  Finally, the specter of the island’s neighbor to the north looms large as Joe Biden’s presidency begins, likely bringing a dramatically different policy on Cuba to the White House.  As previously mentioned, outgoing President Trump has been aggressive in sanctioning Cuba to force regime change.  However, President Biden was part of the Obama administration that thawed relations with Cuba, raising some hope that he will take a softer stance than Trump has.  Nonetheless, opinions are still mixed on whether Biden will return to an Obama-era cool or try a different approach (Acosta, 2020; Tester, 2020).  What approach the new administration ultimately takes on Cuba could heavily restrain, relieve, or even bolster the Cuban economy.

What is clear in all of these uncertainties and open questions is that the status quo is not working.  For a variety of factors, both internal and external, Cuba’s economy has been teetering for years, and the COVID-19 pandemic was enough to offset this delicate balance.  Serious change will need to be implemented to ensure the welfare of the Cuban people going forward.  Currency unification is a good start, but it must be just that—a start to more drastic changes that improve the lives of the island’s residents.

 

Abby Neiser is a senior at the University of Pittsburgh majoring in Political Science and Spanish with a minor in Portuguese and a Certificate in Latin American Studies.  During the summer of 2019, she studied abroad in Cuba as part of the Pitt in Cuba program.  She is also the President of the Luso-Brazilian Student Association at Pitt.  Abby is primarily interested in Latin American politics, international relations, social movements, and the intersection between politics and artistic expression.  Upon graduating, she plans to pursue a career in public service or international relations.

 


References

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Frank, M. (2020, Oct. 12). Cuban government urges calm as government prepares to unify dual currency system. Fox Business. https://www.foxbusiness.com/money/cuban-government-urges-calm-as-governm...

Knobloch, A. (2020, July 10). How many currencies does Cuba need? Deutsche Welle. https://www.dw.com/en/how-many-currencies-does-cuba-need/a-55183714

Margolis, M. (2020, Oct. 15). Cuba’s Currency Reform Could Ease Its Covid-19 Blues. Bloomberg Quint. https://www.bloombergquint.com/business/cuba-s-currency-reform-could-eas...

Morales, E. (2018, Aug. 26). The importance of remittances in the Cuban economy. The Havana Consulting Group. http://www.thehavanaconsultinggroup.com/en-Us/Articles/Article/68?AspxAu...

Semple, K. (2020, Oct. 28). Cuba Says U.S. Restrictions Will Force Western Union Offices to Close. The New York Times. https://www.nytimes.com/2020/10/28/world/americas/cuba-western-union-rem...

Tester, H. (2020, Nov. 13). Cuba Expert Says Don’t Expect Any Big Relationship Change When Joe Biden Takes Office. CBS Miami. https://miami.cbslocal.com/2020/11/13/cuba-expert-says-dont-expect-any-b...

Zurbano, R. (2013, Mar. 23). For Blacks in Cuba, the Revolution Hasn’t Begun. The New York Times. https://www.nytimes.com/2013/03/24/opinion/sunday/for-blacks-in-cuba-the...

 

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