Zero day, zero option

The perils and potential of currency unification in Cuba.

The Cuban government formally ended its dual currency system on January 1, 2021. The Cuban Convertible Peso, (CUC), is being phased out over a six-month period and the Cuban Peso (CUP) will be restored as the nation’s sole official currency.

The dollar-pegged CUC was introduced in 1994 as a means of capturing foreign currency during the so-called ‘Special Period’ after the fall of the Soviet Union. Intended as a temporary measure, only in 2013 did the government announce the planned phasing out of the CUC. This was to be achieved by ‘Zero Day’, originally scheduled for 2016, repeatedly delayed, and suddenly announced only weeks before its implementation. 

The issue is complicated by the fact that neither the CUC nor the CUP are traded internationally, and that Cuba has utilised a ‘hall of mirrors’ system of multiple exchange rates. For example, for consumers, the rate is 24 CUP to 1 USD/CUC, however for many state entities the CUP is valued at parity with the USD. The resulting distortions have both enabled and exacerbated economic mismanagement, allowing balance sheets to cloak ongoing financial losses. 

A Professor of Latin American studies with a focus on Cuba explains, “From an economic perspective, ‘Zero Day’ is long overdue. Currency reunification will result in a devaluation of the exchange rates for many state entities by up to 900%. It will, however, encourage foreign investment, which is needed more urgently in Cuba now than in decades.” 

Zero Day’ is long overdue. Currency reunification will result in a devaluation […] it will, however, encourage foreign investment, which is needed.”

Professor of Latin American studies with a focus on Cuba

Underscoring this is the Cuban government’s parallel announcement allowing foreign firms to have majority interests in certain joint ventures, such as tourism and biotechnology. The pandemic has not only effectively shut down Cuba’s tourism industry, but it has also reduced remittances from abroad.  

Foreign exchange revenues have also been constrained as a result of a decline in Cuba’s export of services, especially health professionals. This triple blow to the government’s three primary foreign exchange sources has left them with little room for manoeuvre. Indeed, just like the “updating” of the revolution led by Raúl Castro which began in 2008, ‘Zero Day’ reflects zero options. 

“Prices have already begun increasing for basic goods, and shelves are increasingly empty in government-run dollar stores.”

Business executive, Cuba

While ‘Zero Day’ marks one of many necessary steps towards economic common sense in Cuba, it is fraught with political risk. Inflation is not only inevitable, it has already begun in the context of pre-existing scarcity, and will not be offset by announced wage and pension increases. As one local business executive noted, “Prices have already begun increasing for basic goods, and shelves are increasingly empty in government-run dollar stores.” 

Important Notice
While the information in this article has been prepared in good faith, no representation, warranty, assurance or undertaking (express or implied) is or will be made, and no responsibility or liability is or will be accepted by Deheza Limited or by its officers, employees or agents in relation to the adequacy, accuracy, completeness or reasonableness of this article, or of any other information (whether written or oral), notice or document supplied or otherwise made available in connection with this article. All and any such responsibility and liability is expressly disclaimed.
This article has been delivered to interested parties for information only. Deheza Limited gives no undertaking to provide the recipient with access to any additional information or to update this article or any additional information, or to correct any inaccuracies in it which may become apparent.

Most recent in Financials

Shallow Pockets

Cuba’s economic challenges (and there are plenty).

I wouldn’t bank on it 

Peru's economic landscape amidst interest rate cuts and uncertainties. 

Bolivia’s economic challenges 

Navigating political turmoil and market uncertainty. 

SoftBank’s Latin America investment strategy

Opportunities and challenges as investors divert their attention to LatAm.

From Global-isation to Local-isation

Nearshoring in Mexico and Central America.

Glimpses of hope

Argentina toils through economic turmoil with light at the end of the tunnel.

Desperate for dollars

Bolivia seeks to sell off remaining gold reserves to alleviate economic crisis.

Contagion risk

Is Latin America exposed to the recent banking turmoil in the US and Europe?

Trading places

Can the EU, led by Spain, compete with China for Latin American trade?

Debt doubts

Lula plans to fulfil election promise and restructure some Brazilian household debt.