Itinerary:
- Days 1-3: Miami, FL
- Days 3-9: Cuba (Havana, Cienfuegos, Santiago de Cuba)
Dates: October 13-23, 2016
Our Odyssey:
Cuba was somewhere around the number 30 for total number of countries visited in the last 3 years, and it was an interesting place to explore for all the reasons any new country is interesting – the history, the culture, the people, the food. One particularly peculiar idiosyncrasy in Cuba is the unique fact that Cuba has two currencies – the Cuba peso (CUP) and the Cuba convertible peso (CUC). These acronyms are important as we move forward.
After learning this and converting 100 US Dollars into 87 CUCs, a 1 to 1 ratio minus a change fee, we happily went out into the city of Havana and enjoyed learning about the history, culture, people, and food.
When it was time to shop things seemed pretty inexpensive to us. Sarah bought 15 Cuban magnets to give away as souvenirs for 5 CUCs. We saw t-shirts for 5-15 CUCs – prices that seemed relatively normal or cheap compared to US Dollar standards.
A few days later we learned more about the Cuban people and how much they make. Cubans are typically paid in CUPs, and they earn on average 470 CUPs a month. Doing the math with the 25:1 CUP:CUC exchange rate, that’s around 19 CUCs per month. With a 1:1 exchange rate between the US Dollar and CUCs, the average salary in Cuba is 19 US Dollars per month.
And we paid 5 CUCs for 15 magnets and saw t-shirts for 5-15 CUCs.
Did you just question what the heck is going on? I sure did. Hence why I’m writing this blog post.
A theory emerged:
- Cuba used two currencies in order to charge tourists a higher amount of money than locals, bringing more money into their economy as a result. If we converted the US Dollar to the CUP, our 100 dollars would have got us around 2500 CUPs (without considering any change fee).
- If locals can live on 470 CUPs per month, they must not be paying the same amount for their consumer goods.
- Then I remembered, our tours, the markets, the cigar shops, the restaurants we ate it – they’re all government run.
- Cuba allows us to convert the US Dollar to CUCs, then makes everything “cheaper” than we’re typically used to in the USA so it feels like a deal, but they still make a TON of mark-up on anything we’re buying. We flood the economy with revenue.
- If this is true, this all sounded pretty smart to me, and I wondered why Thailand, Cambodia, Laos, or other countries with considerably weaker currencies don’t do something similar…
Then I read more and learned that nearly all consumer goods are priced in CUC. This means that locals are paid in a currency that’s worth 25:1 to the US Dollar, but even they have to convert that currency to the CUC in order to buy consumer goods. This means anything consumer goods the locals want to buy are very expensive for them, relatively.
What a wacky and unfair system!
Most of the time.
There are times when it’s not like this though. In state affairs, the exchange rate between the CUP and the CUC is also 1:1. So state run restaurants accept both currencies and the price is the same across the board: if a meal costs one CUC, anyone paying in pesos would also only pay 1 CUP. In absolute U.S. dollar terms, the price of that meal would equate to about $1 USD for those paying in CUCs, and 4 cents for those paying in pesos. This is a dramatic difference, and it explains why locals will wait in line for hours for some restaurants to pay in CUPs – it’s dirt cheap because of the tricks the government is playing with the value of their currencies. It also explains why tourists paying in CUCs, the only currency we’re allowed to get, get treated very well in government owned establishments.
From Dylan Heyden’s article “Cuba: A Tale of Two Currencies” on worldpolicy.org:
“Consider a doctor who makes $64 USD per month. Paid out in Cuban pesos, this equates to $1,675 pesos per month. However, the real value of this salary depends on where it is used. If it is falsely inflated by the state, like it is at La Coppelia (a state owned ice cream parlor), the doctor’s monthly salary will be equivalent to $1,675 CUCs. At an official currency exchange office, however, the doctor could only exchange that monthly salary for $67 CUCs.
Doctors used to be some of the highest paid professionals in Cuba. But now, lesser skilled entrepreneurs that are paid in CUCs have been able to exploit the two-currency system. Taxi drivers, hotel staff, and restaurant owners are perfect examples. For instance, if a typical taxi driver charges 8 CUC to take someone from the Vedado district of Havana to Old Havana, he or she only needs to complete this trip nine times per month to make more than a doctor. The trip takes less than 15 minutes.
The dual currency system has fractured the Cuban society, and it can only be dealt with by uniting the two currencies—which the Cuban government announced it would do back in 2013. But even then there is potential for crisis. If the Cuban government were to announce overnight that one currency was no longer relevant, inflation would skyrocket—precipitating a serious economic crisis. Not to mention this would discourage foreign investment, which the island is so desperate for. Unfortunately, there is no easy solution, these are some of the growing pains that Cuba must endure in order to successfully transition to a full-fledged member of the global economy.”
After learning all of this, I logically asked myself how a dual currency situation came about.
From the article “Cuba Currency: Double Trouble” on economist.com:
“The unusual scheme has been in place since the collapse of the Soviet Union. In 1993, after decades of benefiting from generous trade arrangements with the Eastern bloc, Cuba found itself desperately short of hard currency. With few other options, Fidel made the momentous decision to legalize the American dollar (possession of which had previously been punishable by prison). Dollar stores mushroomed to capture the money flowing in from newly welcomed tourists and Cubans living abroad. Meanwhile, all Cuban state workers were still paid a pittance (less than $20-worth a month) in the old Cuban peso.
Initially the dollar stores sold only “luxuries”, such as perfumes and fancy kitchen utensils, but the Cuban government increasingly took to pricing anything from toothbrushes to cooking oil in dollars. In 2004 the greenback was officially removed from circulation, and replaced by the convertible peso. For Cuban shoppers this amounted to nothing but a name change.”
I find this all fascinating.
I have no idea where the country of Cuba goes from here and what the future looks like with respect to the Cuban Peso and Cuban Convertible Peso, but it’s going to be interesting to pay attention over the next few years or decades.
Also from “Cuba Currency: Double Trouble”:
“The government has declared that the transition will not hurt holders of either currency. Cubans, though, are understandably wary. Any increase in the value of the unified peso would increase their spending power. This could stoke inflation and lead to widespread shortages. The concomitant fall in the value of the CUC, meanwhile, would be fiercely resisted by those with savings in the harder currency.
Unifying the currencies would also end a bizarre anomaly in Cuban accounting, whereby state companies pretend in their balance sheets and domestic trading books that one CUP equals one CUC. The practice has prevented CUP inflation. But it has made imports seem artificially cheap and exports unprofitable. It also obfuscated inefficiencies that plague Cuba’s predominantly state-owned businesses. Ending the charade could have dire consequences for many firms.
Unpicking the bizarre system is a good idea. Cubans will be hoping that the island’s authorities can implement it better than they have socialism.”
For the beautiful people of Cuba that we met, let’s hope so – they deserve a currency system that works and maintains its value through the transition.
Written by Tim Kubichek
Our 21st Century Odyssey 