Understanding Cuba’s Two Economies

Cuba Havana

In our complicated global economy, countries need to develop an economic system that works in their best interest. Most economies tend to be consistent across the board, but others have stepped out and tried something new entirely. We see this to be true when studying Cuba.

Cuba’s economy is unique in that it consists of two separate economies. To simplify things, this means that Cuba has two separate currencies used for two unique purposes. The first, the Peso Convertible (CUC), is the main currency used by Cuban tourists. The second, the Peso Cubano (CUP), is what’s used by most Cubans at retail stores and government facilities intended to serve the Cuban population.

What purpose do these two economies serve?

The CUP and CUC are both legal tender in Cuba. The CUC is typically pegged to the dollar and is worth approximately 25x more than the CUP. It’s important to note that, while the currencies each serve a different purpose on the island, neither are exchangeable in foreign markets.

The dual-currency plan has been in place since around 1993 – closely following the collapse of the Soviet Union. Originally, the two currencies were intended to bolster Cuba’s weak economy. However, over time, it has caused confusion and class divide in the country. In terms of the US dollar, Cuban pesos are worth about 4 cents, while the peso convertible (CUC) is worth 1 USD. That being said, the Cuban state falsely inflates these numbers – and they don’t represent the accurate exchange rate.

Not all Cubans have access to CUCs, which creates a class divide. They may be willing to pay less for everyday items, as both tenders are accepted at stores and markets, but those paying with pesos tend to be subjected to long lines, lower quality products, and more.

Of course, the two currencies do technically serve an existing purpose in today’s Cuban culture. The CUP is largely used in the domestic economy, while the CUC is used for tourists. Residents and tourists alike can purchase CUC at the exchange offices in Cuba. However, this is further complicated by the fact that official exchange houses exchange 1 CUC for 25 CUP – while state and foreign companies exchange CUCs and CUPs at a one-to-one ratio.

What are the drawbacks?

Although it was originally intended to positively impact the Cuban economy, the two-currency system has essentially broken Cuban society. Because people who are able to access CUCs (primarily those working in industries that serve tourists – like taxi drivers), are able to exploit the higher-valued CUC in comparison with pesos, the economy has been tilted on its access.

For example, some doctors may make $64 USD each month. At a state-run market, this could be worth as much as $1,675 CUCs. However, at CADECA (the official house of currency exchange), it would only be worth $67 CUCs. This creates a problem where skilled professionals are underpaid and essentially impoverished, while businesses who are state-run and accept both currencies further deepen the divide between cultures and class.

What is being done?

As of 2013, the Cuban government decided they were going to attempt to combine the two currencies. However, since then, the transition has been slow. This is largely in part to hesitancy among Cuban citizens. This is reasonable, as many of them are either fully using the CUC or the CUP. It’s also going to be an inherently messy process, as there is an unusual method of accounting in Cuba that lists one CUP as equaling one CUC – which isn’t accurate.

A Global View

It’s been rumoured for the past several years that Cuba is looking to end the dual-currency system, which has had some impact on the CUC. Cuba’s GDP annual growth rate has slowed significantly in recent years, and has failed to keep up with global economic growth.

Currently, 1 CUC is convertible to 1 USD. It currently has a 4.5% inflation rate. However, the most recent annual GDP growth rate for Cuba was -0.9, while in comparison, the United State’s most recent annual GDP growth rate was 2.3. Some experts speculate on Cuba’s economic future as they attempt to unify the two separate currencies – but for now, things aren’t looking stable.

What’s Next?

Although Cuban leaders have said for years that they intend to unify their two currencies, it remains a possibility that it won’t happen. The legacy of bizarre accounting disparities and trade systems at work within Cuba’s economy could make unifying the two catastrophic. However, if they choose not to do so, Cuba’s economy will continue to be fissured and won’t operate well on a global scale.

It will be important in years to come for global economic experts to keep a mindful eye on Cuba’s leadership and to watch their method of either unifying their currency – or moving forward with the two currencies.