CUBA
COUNTRY: CUBA
Timeline of Cuba’s Foreign Exchange Rate Regime
Cuba’s Exchange rate regime
Among the dimensions of the impossible trinity, Cuba only has the autonomy of an independent monetary policy.
Cuba has dual exchange rates, which mainly consist of two official currencies, Cuban Peso (CUP) and Cuban convertible peso (CUC)
Majority of Cubans receive wages in the form of CUP, while nearly all consumer goods are priced in CUC.
Problems of dual currency
Inequality
There are some psychological issues of the divide between those who have access to CUC and those who do not. The dual currency has created special privileges for workers in the tourism sector and resentment among those who do not.
Income distortions
The CUC functions as the currency of the tourism industry, while CUP is the currency in which most state workers are paid. Consequently, workers who receive salaries in CUC tend to enjoy a higher income than workers who solely depend on salaries paid in CUP (Sweig, 2013). Hence, professionals may have less incentive to work in CUP salary jobs compared to better paying tourism jobs. This may lead to a decrease in efficiency of resource allocation in the economy.
Price distortions in the Exports
Business enterprises uses a 1:1 CUP/CUC rate for foreign exchange transactions. This severely distorts the pricing of goods in the export industry because the export sector receive CUP converted at the official exchange rate for its foreign currency earnings, making an industry seem less profitable than it is. The sugar industry, for example, receives earnings for its exports converted at par, but must purchase many inputs in dollars (Dreher, 2009).
Originally, the purpose of dual currency was to allow Cuba to receive hard currency needed for international trade from the outside world while insulating the rest of the communist economy from market influences.
However, Cuba’s exchange rate arrangements had caused
Timeline of Cuba’s Foreign Exchange Rate Regime
Cuba’s Exchange rate regime
Among the dimensions of the impossible trinity, Cuba only has the autonomy of an independent monetary policy.
Cuba has dual exchange rates, which mainly consist of two official currencies, Cuban Peso (CUP) and Cuban convertible peso (CUC)
Majority of Cubans receive wages in the form of CUP, while nearly all consumer goods are priced in CUC.
Problems of dual currency
Inequality
There are some psychological issues of the divide between those who have access to CUC and those who do not. The dual currency has created special privileges for workers in the tourism sector and resentment among those who do not.
Income distortions
The CUC functions as the currency of the tourism industry, while CUP is the currency in which most state workers are paid. Consequently, workers who receive salaries in CUC tend to enjoy a higher income than workers who solely depend on salaries paid in CUP (Sweig, 2013). Hence, professionals may have less incentive to work in CUP salary jobs compared to better paying tourism jobs. This may lead to a decrease in efficiency of resource allocation in the economy.
Price distortions in the Exports
Business enterprises uses a 1:1 CUP/CUC rate for foreign exchange transactions. This severely distorts the pricing of goods in the export industry because the export sector receive CUP converted at the official exchange rate for its foreign currency earnings, making an industry seem less profitable than it is. The sugar industry, for example, receives earnings for its exports converted at par, but must purchase many inputs in dollars (Dreher, 2009).
Originally, the purpose of dual currency was to allow Cuba to receive hard currency needed for international trade from the outside world while insulating the rest of the communist economy from market influences.
However, Cuba’s exchange rate arrangements had caused
References: Dreher, S. (2009) ‘MONETARY POLICY IN CUBA’, ASCE Available at: http://www.ascecuba.org/publications/proceedings/volume19/pdfs/dreher.pdf [Accessed 12/02/14] CTVNews (2013) ‘Cuba to eliminate currency pegged to U.S. dollar’, CTVNews The Associated Press, Available at: http://www.ctvnews.ca/world/cuba-to-eliminate-currency-pegged-to-u-s-dollar-1.1603325 [13/02/14] Mario, A. (2006) ‘Cuba’s De-Dollarization Program: Principal Characteristics and Possible Motivations’, ACSE, Available at: http://www.ascecuba.org/publications/proceedings/volume16/pdfs/gonzalezcorzo.pdf [Accessed 12/02/14] Torre, A.D.L and Ize, A. (2013) ‘Exchange Rate Unification: The Cuban Case’, World Bank Available at: http://thecubaneconomy.com/wp-content/uploads/2014/01/exchange-rate-unification-cuban-case-torre-ize-pdf.pdf [Accessed 12/02/14] Sweig, J.E. (2013) ‘Cuba After Communism: The Economic Reforms That Are Transforming the Island’, Foreign Affairs, Available at: http://www.cfr.org/cuba/cuba-after-communism/p30991 [Accessed 12/02/14]