Monetary restructuring in Cuba, essential to transforming economy

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Cuba, money ordering, wages

The complexities and objective conditions that make monetary and exchange rate re-ordering essential, were explained recently by Marino Murillo Jorge, Party Political Bureau member and head of the Policy Guidelines Implementation Commission, and Alejandro Gil Fernández, deputy prime minister and minister of Economy and Planning, during an appearance on the Mesa Redonda Cuban television program..

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The first thing made clear was that the country’s monetary and currency exchange structure has an interdisciplinary and transversal character; its re-ordering includes monetary and exchange rate unification, the elimination of unwarranted subsidies and the provision of some goods and services free of, as well as transformation of salaries. The process is a necessity that cannot be postponed and an essential prerequisite to advancing implementation of the country's economic strategy.

Introducing his presentation, Gil Fernández recalled the statement made by the first secretary of the Communist Party of Cuba, Army General Raúl Castro Ruz, during the closing of the tenth ordinary session of the National Assembly, in December of 2017, "Although the elimination of the dual currency and exchange rate, in and of itself, will not magically solve all the problems accumulated in the Cuban economy, but it constitutes the process that is most decisive to the updating of the Cuban economic model, given the impact it will have in all spheres of the nation’s economic and social affairs. Without resolving this, it is difficult to move forward properly.

"We must find ways to overcome existing distortions in subsidies, wholesale and retail prices and fees, and, of course, pensions and salaries in the state sector, while at the same time unifying the monetary system.”

The Minister noted that the Cuban state sector has achieved a certain level of development, thanks to strategic work that has been conducted over the last several years, and insisted on the importance of creating productive chains, including both the state and non-state sectors under similar conditions, and providing incentives to encourage exports.

This process has a transversal character within the economy, Murillo Jorge reiterated, and requires working with care and technical rigor on each of the proposals. With this objective in mind, 14 working subgroups are functioning, he said, with the participation of more than 200 colleagues from different organizations and academic institutions.

"We have even consulted international experiences. This is the first time we have addressed these issues in public, and this is not sufficient, we will need to explain and clarify the process little by little, along the way."

"What we will report now are initial ideas about the process of the monetary re-ordering. We ask (the population) for understanding; not everything can be said today. This is a necessary process that also implies risks," he said.

WHY IS MONETARY RE-STRUCTURING SO CRUCIAL?

In response to this question, the leader of the Policy Guidelines Implementation Commission pointed out that Cuba faces a very difficult monetary environment, which prevents the economy from functioning naturally and leads to its administrative management. The specific problems noted included:

-Deformations in the establishment of prices (Clear market signals do not reach producers)

- Serious salary problems (increases delayed over a long period of time, leading to the implementation of measures that, at the time, were positive, but represented only partial, not comprehensive, solutions)

-Inefficiency in the enterprise system that must be taken into account.

-Problems in providing incentive to increase exports.

-Macroeconomic imbalances in the economy (high fiscal deficits, which we were obliged to approve, making state budget transfers to the enterprise system is very high, a pattern which must be reversed).

-Comparing Cuba's economy to the rest of the world is difficult.

-All of this generates a significant institutional burden.

"The institutional framework that the dual monetary system has generated cannot be resolved in a short period of time since it affects people. Cuban society has always been very equitable, and shock therapies, high unemployment rates, among other extreme measures, are not an option," Murillo Jorge insisted.

He pointed out that this process had antecedents within the Guidelines approved during the Sixth and Seventh Party Congresses:

-Sixth Congress, Guideline No. 55: Progress will be made toward monetary unification, taking into account the productivity of labor and the effectiveness of distributive and redistributive mechanisms (...)

-Seventh Congress, Guideline No. 40: Conclude the process of monetary and exchange rate unification as a decisive step in the country's monetary re-ordering.

We have been immersed in this process almost ten years, he said.

WHAT IS THE CONTEXT IN WHICH THE PROCESS IS UNFOLDING?

The world crisis, exacerbated by the COVID-19 pandemic, has created tensions in the economy at the global level, thus, from both the macro and microeconomic point of view, the need to take decisive action to advance in updating the economic country’s model cannot be postponed.

"It is not possible to continue advancing in transformations of the economy if the re-structuring is not completed," Murillo Jorge said.

WHAT ELEMENTS DOES MONETARY RE-ORDERING INCLUDE?

The process includes four fundamental elements:

01. Monetary unification.

02. Exchange rate unification.

03. Transformation of (excessive) subsidies and (unwarranted) free-of-charge provisions

04. Transformation of salaries (a full reform is needed)

Each one of these aspects must be addressed at the same time, with the objective of achieving the comprehensive transformation required.

During his presentation, Murillo Jorge reiterated that, once the process is completed, workers will be “in better conditions than they are now.”

"Monetary unification entails a devaluation and that requires adjustments. It generates pressure on the enterprise system in the search for efficiency, without shock therapies."

WHAT GAVE RISE TO THE COUNTRY’S DUAL CURRENCY SYSTEM?

A specific situation that affected the productive system and prevented the national currency from playing its role led to the current system.

BASIC CONCEPTS

Monetary duality:

Situation in which two currencies coexist and legally share, to some extent, the functions of money in the national economy.

Money should serve as:

-A means of payment

-A unit of accounting

-A reservoir of value.

Exchange duality:

Situation in which there are two exchange rates for the same currency.

Exchange rate:

Price of a currency expressed in terms of national currency (amount of national currency per unit of currency).

In the current Cuban monetary environment there are two exchange rates:

-In institutional/enterprise circulation (wholesale): 1 CUP=1 CUC and 1 CUC=1 USD (currently with central allocation).

-Circulation within the population (retail) 25 CUP=1 CUC and 1 CUC=1 USD.

MONETARY UNIFICATION

"The monetary unification is intended to ultimately remove the CUC. A period of time will be established for the state to collect the currency in circulation. People will have a period of time to make the change. The Cuban peso would be the only legal tender in Cuba," Murillo explained.

Several concerns about this stage have arisen within our population, especially related to what will happen to the CUC they have in their possession, either as money deposited in the bank or kept at home, he noted.

As part of the process, we have then defined a period of no less than six months for the population to exchange or spend this money, he reported. "The state will collect the CUC that will continue to circulate, it until it runs out.”

Murillo explained that, during the period of time established to make the change, people will be able to go to stores and acquire the products they need and pay in CUC, but any change from that purchase will be made in CUP, as some commercial establishments are doing already in their management of sales, "Thus, the CUC that is left in the hands of the population will also be removed.”

Likewise, the exchange rate in effect prior to the unification will be respected. Whatever the new exchange rate, the population will be able to exchange the CUC they have at the current rate (24 CUP).

In the case of the enterprise sector, accounts in CUC will become CUP, 1x1, maintaining their current value.

Murillo stated that the exchange rate unification will not be a long process and will imply a significant devaluation.

The issue has been studied and the measure will go into effect on the first day of the month, to allow companies to close their financial records.

"What we must make clear is that the currency is being devalued to make our economy more competitive, which means a level of pressure on the enterprise sector, which will be obliged to face the effects of the devaluation, especially in terms of the processes related to imports and wholesale pricing."

In this sense, he stated that all the wholesale prices in Cuba are going to rise in correlation with the increase that imported products will experience. "There is no human way to devaluate without increasing wholesale prices."

According to Murillo, this rise in wholesale prices will also be influenced by the salary reform that will be conducted in the country, since companies will be adding the salary increase to their costs.

"Devaluing the currency and raising wages is synonymous with higher prices, which means inflation. The issue is how long it takes for the increase in wholesale prices to be reflected in retail prices."

He said that the process of devaluation will occur over the course of six to 12 months, although some products will be affected day one. "If there were no increase in wholesale prices, enterprises would experience significant losses," Murillo said.

"The challenge is to ensure that price increases do not exceed the design of wage increases, since that would be inflation beyond the design. Regardless of market signals, the very characteristics of the economy allow for the creation of conditions that ensure this does not happen," he stated.

IMPACT ON THE ENTERPRISE SYSTEM

A number of of companies in Cuba will be obliged to make an effort to increase efficiency to remain solvent following the devaluation process, but there are others we have identified that will not be able to assume it and could experience losses, at least during the first year, Murillo continued.

That is why a strategy has been designed to monetarily protect these not-so-efficient enterprises; in other words, we will be subsidizing the losses of these enterprises. But we will come out ahead, because we will avoid their closure, and consequences like unemployment and the loss of the essential services some of these companies provide the population, he explained.

"This is a government aid program, with very clear commitments made regarding how and when these losses will be reduced and the company becomes more competitive.”

On another front, he indicated that devaluation should facilitate a theoretical process known as the correction of relative prices, which means that domestic raw materials become less expensive for Cuban industry than those imported.

We must ensure that this is the case, and that much-needed productive chains are created, he said.

"The correction of relative prices is the most significant effect we will be creating, because it will lead to a change in wages and there will be more motivation to produce. Although these measures are not the magic wand that will change everything, they do create the conditions for a positive reaction from producers in the enterprise system, and support the country's policy of exporting more and replacing imports. With this, the market will begin to give different signals to the economy.

"This is the biggest effect we are expecting, a correction in relative prices, an increase in wages and greater motivation to work, although it won't happen overnight.”

He acknowledged in his remarks that there will be inflation, but in a good way, since if we have a devaluation, prices increase, but the important thing is that this does not exceed the indicators that have been designed, he reiterated.

To control this, he said, we are proposing that a small group of products which are key to all sectors of the economy, like fuel, have centrally established prices. At the same time, the enterprise system will be given the authority to set other prices that are not centralized, but within certain limits, he added.

RETAIL PRICES

Regarding retail prices of the population's basic consumer products will remain centralized; some of which will have subsidies and others not, Murillo reported.

"For example, in the case of the regulated family basket, we will keep some products with centralized prices and also subsidized, such as milk for children from 0 to 7 years of age. Others will have set prices, but without subsidies, although they will be regulated via the libreta (supply book) as a distribution mechanism, to ensure that everyone has access to them.”

Another indirect way to control inflation is, of course, to guarantee greater supply, but this is not always feasible in the current conditions of the Cuban economy, he clarified.

It cannot be forgotten that any price increase puts pressure on the population’s income, hence the importance of wage reform, he reiterated.

HOW WILL THE NEW WAGE SCALE BE FORMULATED?

We have established as a reference, an assortment of basic goods and services, not the same as the regulated food basket, which will be the reference point for setting the minimum wage and, on the basis of the first, a 32-level wage scale will be established, Murillo stated.

There are some state sector 29,000 workers in the first group earning the minimum wage, of the almost three million Cubans employed, he added.

As basic concept considered is that a worker’s salaries must cover the cost of his or her individual and family consumption, and therefore, the minimum salary must be a little higher than the reference basket.

"Based on the studies conducted, we know that the composition of households in Cuba is statistically three persons and, on average, two work.

"It may be that in three-person households, of the two who work, perhaps one earns the minimum wage, but the other may have a salary of four or five times the minimum wage, so the family's expenses can be covered.”

When this is not the case, and these two people both earn the minimum and cannot afford basic goods and services, then social security comes into play, he said.

The plan, he stressed, is to subsidize these Cubans and not products, under the principle that in this process no one will be left unprotected.

He indicated that the total of salaries paid in the country will increase by 4.9 times, while social security expenditures will increase by five. While the price increase in the state sector is expected to be well below these figures.

Murillo emphasized that this is the most important issue in the wage reform. "If the rate of wage increases is higher than that of prices, then those of us who work with the state will be in a better position. This is another objective of the plan," he stated.

The wage reform seeks a better distribution of wealth, since in practice no new earnings are created, he noted. "While it is necessary to eliminate subsidies and free of charge provisions, in this process, we will always protect children and pregnant women, citizens unable to work, and services of key national consumption, such as electricity.”

Referring to Murillo’s presentation, Deputy Prime Minister Alejandro Gil Fernández reiterated the importance of completing the four tasks involved in the monetary order simultaneously, as the only way to achieve a true transformation.

Let us not see this as a necessary evil or a step backward. The proposed changes will allow us to be in better conditions to move forward," he insisted.These measures, he added, are for the good of all. "Those of us who work with the state are going to be grateful for the salary increase and that our work is our main source of income. In this context, it will be difficult to live in Cuba without working, but we will provide full support to those who are vulnerable or unable to work. The monetary re-ordering will generate important benefits," he concluded. / Leidys Maria Labardor and Yaditza del Sol Gonzalez - Granma.

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