Cubans fret as government prepares currency unification

Cubans fret as government prepares currency unification
Published: Monday, 17 Mar 2014 | 2:15 PM ET

Cuba is laying plans to move to a single currency, a reform that many
feel is one of the toughest challenges facing President Raul Castro as
he tries to kick-start the Communist country's moribund economy.

For years Cuba has had two currencies—the peso (CUP), in which most
wages are paid and local goods priced, and the convertible peso (CUC),
used in tourism, foreign trade and some stores carrying imported goods.

The peso, says the government, will remain and the CUC will become history.

Economists applaud the government plan, but secrecy over the
all-important details of how and when the change will come is causing
some anxiety in the country.

News this month that state companies were ordered to prepare for
unification and that personnel are being trained for what the government
dubs "Day Zero" has added to the worry.

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Cuba is a country where almost the entire economy is in state hands and
most prices fixed. Companies must exchange convertible currency and
CUCs, pegged to the dollar, with the government at the official exchange
rate of one peso, while the CUC has been valued for years at 24 pesos by
state-run exchange offices.

Which currency to hold on to, if any, has become the talk of the town.

"Since I have no idea what is going on I have decided to spread my money
among many currencies, like the dollar and euro," Raul, who runs a
Havana restaurant, said, refusing to give his last name as by law he can
only accept local currency.

"The clients pay with whatever money they have, and I work out the
exchange rate," Raul said with a laugh as he stood at the door of his
Havana business.

Foreign and domestic economists are unanimous that the current monetary
system and fixed exchange rates mask inefficiencies, make accounting
difficult and undermine other reforms.

But they also believe unifying the currencies is perhaps the most
difficult and socially disruptive of a series of market-oriented reforms.

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"The elimination of the dual currency, which is based on a devaluation,
means there will be an initial shock ... There won't be initial benefits
but short-term costs (inflation) and benefits in the mid-term," Pavel
Vidal, a former Cuban central bank official now at Javeriana University
in Cali, Colombia, said in an e-mail interview.

Trusting the dollar

Manuel Hernandez, a 67-year-old Havana resident who repairs gold and
silver jewelry, said he trusted the dollar more than either Cuban currency.

"Now I'm holding dollars, which go up and down, but leave me more at
ease and can be used outside Cuba," he said.

Raúl Picard, a member of a peasant livestock cooperative on the
outskirts of Havana, said he planned to keep his money in pesos but
believed the best bet was to invest in new technology and supplies until
the currencies are unified.

The experts admit they are not sure how the government will proceed, nor
how it will keep Castro's promise not to create further hardship for
Cuba's 11.2 million inhabitants who worry that the little money they
have will be devalued directly or through inflation when unification occurs.

Vidal believes the process of unification has begun with the devaluation
of the official one peso to the dollar or CUC exchange rate. He says the
government is currently testing a 900 percent devaluation with a number
of companies, trading on average 10 pesos for a CUC or dollar.

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"From what I can tell, the disappearance of the CUC will come quickly
for the companies this year. I don't know about the population, but I
think not as it would create too much uncertainty," he said.

Some Cubans aren't taking any chances and are cashing in CUCs at the 24
peso rate now, questioning Castro's promise to make good on its value
when "Day Zero" arrives.

Omar Laviña, owner of a sandwich store in Old Havana, was still showing
prices in CUC and pesos.

"Many people are going to convert their money into dollars and euros
because they will always be around," he said. "In my case I'm keeping it
in local currency."

—Reuters

Source: Cubans fret as government prepares currency unification -
http://www.cnbc.com/id/101500561