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When the whole world was in shock after the Soviet Union Collapse in 1991, there was one country which suffered the most and in the midst of the unmanageable tragedy, we witnessed a comedy of errors by Cuba. It launched its second currency at par with the reserve currency of the world i.e. CUC showcasing the foolishness and the unrealistic approach of the Cuban Government. So let’s go into the intricacies of the comedy of errors by the Cuban Government.


In the 1850s, Americans were clearly distinguished between the concepts of Pro-Slavery (who wanted to dominate CUBA and other similar territories or to establish their reign so as to turn them into a new slave state) and Anti-Slavery politics (who often opposed this ideology). This debate became the heat of the moment when Americans backed Cuba to rise against the Spanish and helped Cubans to do so through the Spanish-American War in 1878. But bureaucrats sitting in the USA were aiming to reshape the history of Cuba. Unfortunately, the war ended with the weird split-baby policy, with Cuba winning independence but under quasi-imperial, as the US had taken over Guantanamo Bay (key place in Cuba) and with that it had rooted itself to intervene in Cuban Affairs. Gradually, this intervention became a regular practice through manipulations in trade policies which mainly included sugar policy, acquisition of institutions like Cuban Telephone Company and ever holding control over oil refinery plants. And all that was done to satisfy Americans’ interest.

Baby split policy means that though Cuba could have attained independence by taking some help from America but their decision proved to be a drastic split in Cuba’s economy. So it was the baby split policy that split the economy destructively. The effect was so high that Cuba is still facing the repercussions of the policy.

Luckily, this era ended with the uprising of American President Franklin Roosevelt in 1933 after he declared the end of America’s imperial era (declared neutrality). Although many opposed, something worse still awaited. Over the next 20 years, Cuba remained one of the most friendly democratic nations with the US.

Cuban Revolution, 1959

In 1952, the USA was obsessed with the fears of communism which was mainly instigated by the movement led by Fidel Castro in Cuba and started supporting military leader named Fulgencio Batista, who seized power in a coup and suspended the constitution of Cuba by somewhat allowing American companies to buy up the majority of Cuba’s natural resources. But due to the Guerrilla War and the constant support of Cubans, Castro (a communist by ideology) was able to win the war and that marked the Cuban Revolution of 1959.

Immediate implications:

  1. Castro seized control of the Cuba Telephone Co. and other assets from the US (total seized value = $9 billion). Interestingly, the current value equates to $1.89 trillion. It was one of the first major moves took by his government.

  2. The USA opted for the aggressive look against Cuba and jotted embargo to strangle Cuba’s economy. Particularly the major shock waves included the complete ban of sugar exports to the USA from CUBA.

  3. So eventually Cuba switched to Soviet Union (foe of USA) to meet its economic growth and oil requirements which fastened the US to announce the complete ban on Cuba and thereby, Cuba become part of the Socialist Republic.

Why Cuba Convertible came into existence?

Generally, multiple rate systems emerge after a large shock hits the economy that exerts substantial pressure on the foreign exchange market and calls for a major depreciation of the equilibrium real exchange rate. This shock may constitute a supply shock, such as deterioration in terms of trade that severely weakens the external trade account or an increase in world interest rates that sharply increase the servicing costs of the country’s external debt.

Because of the supply shock that happened after the collapse of the Soviet Union in 1991, Cuba was forced to shift to the dual currency system to stabilise the entire economy. The Cuban economy was severely affected because Soviet countries constituted 85% of Cuban imports and 80% of the investment. GDP fell nearly 35% between 1989 and 1993, the fiscal deficit reached 33% of GDP in 1993 and imports at current prices fell 75% in those four years. As a result, economic policy was implemented to revolve around the need to reduce rising inflationary pressures and improve internal finances by introducing the dual currency system. In addition to this, the Cuban government also legalised the dollar to increase foreign inflows into the country. It opened up dollar stores for Cubans to purchase imported goods. The phase confronted by Cuba after 1991 is fondly called the “Special Period”.

The dual currency constitutes CUBA PESO (CUP)-the national currency and CUBA CONVERTIBLE PESO (CUC).

Here, 25 CUP = 1CUC = 1$ (in case any citizen is buying)

1 CUC= 24 CUP (in case any citizen is selling)

CUP is used for necessity items in Cuba.

CUC is used for luxury goods by foreigners travelling to Cuba or to pay for the services.

What makes Cuba’s case different from the others?

  • The origin of the Cuban dual exchange rate system is primarily real (linked to terms of trade shock) rather than financial (linked to capital flight); it basically amounts to a quasi-fiscal scheme.

  • Second, the spread between the two exchange rates in Cuba, at 2300 per cent, is by far the largest in post-World War II Latin American history. So in case there is a depreciation of CUC, it will result in a wage-price spiral.

  • Third, the Cuban government can exert control over the actions of public enterprises arguably more than in other countries. Hence, it implies that the government does not provide autonomy to its citizens.

  • Cuba has limited access to international finance.

Class conflict

Existence of double currency also increased the level of income inequality in Cuba. The GINI Coefficient was 0.24 in 1984 but it increased to 0.40 by 2013.

Gini Coefficient is a measure of statistical dispersion which represents the income or wealth distribution of citizens of a country and is the most commonly used measurement of inequality.

In addition to this, the double currency system creates a two class system:

  1. One which has CUC

  2. Another which does not have CUC

This meant that those people having CUC already possess 24 pesos. It gave rise to a new class of people “The New Rich” as Fidel Castro stated. Remittances from White Cubans added to their wealth and this helped in the re-creation of racism which was said to have vanished after the Revolution.

Very less Afro Cubans were a part of the flourishing tourist industry. As a result, the light-skinned Cubans earned more CUCs than them, hence encouraging class conflict.

During the Special Period, Cuba suffered from a severe economic crisis. Its main ally, the Soviet Union had collapsed and it needed a hard currency. Hence, to acquire the hard currency, the leaders decided to revive the tourism industry to increase the inflows into the country. In fact, during the Special Period, 20% of the total investment was used to revive the tourism industry.

(FUN FACT: Many qualified people in Cuba wish to leave their professions like medical sciences and wish to drive a taxi or serve in a restaurant.)

When the government legalised dollar in Cuba in 1994, the relatives of citizens who lived abroad started sending them remittances in the form of dollars. When the US government got to know about this, family visits were reduced to 1 in every 3 years along with a transfer of a maximum $300 in a quarter.

After the Cuban Government illegalised dollar in 2004, if someone wished to exchange Cuban Peso for 1 dollar, 10% commission was charged whereas no such commission was charged for other currencies like Euro or Pound. For example, for every $1 billion, the Cuban Government would be earning $100 million.

La Coppelia is a famous ice cream parlour in Cuba. It has 29 flavours of ice cream which might seem delicious but the interesting part about it is that it has two queues for its customers. One queue where there is only one flavour and the payment is to be done in CUP whereas the second queue has the other 28 flavours and the payment is to be done in CUC. CUP has a bigger queue but CUC has no queue and you’ll be addressed immediately.

A cab driver’s earnings in a single day is equal to the earnings of a doctor of a month. This is because a cab driver receives payments in CUC and if he gets an additional tip, it is the icing on the cake. Whereas, the doctor receives payments in CUP.

Exchange Rate Unification

Now when we talk about unification of the currency in Cuba, the value of every imported product will rise. A survey stated that on an average, each Cuba citizen earns about 30$. So, if the prices rise, then the expenditure of the families will increase significantly. (Fun Fact: Out of 30$, they use 10$ for buying mosquito repellent.)

To make the unification successful, Cuba needs to consider the following aspects:

  • Limiting the short-term pains until efficiency gains materialize and come to the rescue

  • Boosting the pace at which such efficiency gains materialize

What is Raw Big Bang?

It refers to implementing the unification in one stroke. This implies that CUP would remain equated to 1/24 dollar to limit the initial economy effects (shift in the balance of payments situation or trade deficit) and CUC exchange rate would then be eliminated. And the conclusion is that all the new exchange rate transactions would take place using a single new rate.

Analysing it critically, we can say that the other side would create short term pains and after the revaluation of Cuban Peso, the economy would tend to see the economic crises or inflationary trends in the economy.

Present Scenario

So, if we talk about the present scenario of the Cuban Convertible Peso, it is more likely on the verge of becoming a source of damage for Cuba. Since 2013, the Cuban Government is trying to figure out as to how it can unify its currencies without affecting its economy. An economy whose major income depends on sugar exports and tourism will face a difficult task in unifying its currency. One of the major effects being the rise in inflation rate after the unification of currencies like those faced during the unification of currencies in Latin America.

Cuba has been facing a tough financial situation since 2016 when the financial crisis hit Venezuela, its main trade partner and supplier of oil at preferential rates. It is also facing other problems like low productivity and losses due to hurricane Irma in September 2017 which caused a lot of destruction in the economy.

By adopting a currency which is equal to the US Dollar, it has tried to challenge the existence of dollar and at the same time, Cuba tried to prove that it can exist without any world power support. But it failed to realize that without any strong trade policies or exports receipts, it was never financially strong to support CUC. At the same time, this was a very short-sighted approach by Cuba to immediately launch CUC after the Soviet Union collapse. Although the dollar was legalized in 1994, having two currencies of similar value in one country divides the share of each currency. After the 2016 elections of USA, the dollar is strengthening bit by bit against all the currencies in the world. It implies that Cuban Convertible Peso is also gaining its value but the dollar is gaining because of USA’s strong trade policies and financial stability but CUC is also gaining because the dollar is increasing in its value without any financial or political support to it.

So Cuba has got little international support with its maximum income from sugar exports. The challenge for Cuba is how long it would be able to survive with 2 currencies and if it tries to unify them, what will be the implications?

By Ayush Singla and Ayush Bansal


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