‘Day Zero’ in Cuba

Cuban medical workers pose in front of the Cuba flag

As well as marking the 62nd anniversary of the Cuban Revolution, 1 January 2021 was known as ‘Day Zero’ in Cuba. After almost three decades of operating with a dual currency, Cuba’s national peso (CUP) and its convertible peso (CUC) were unified as part of a broader process of ‘monetary ordering’ which also involves major price adjustments, the elimination of ‘excessive [state] subsidies and undue gratuities’ and significant changes in salaries, pensions and social assistance benefits. The endeavour is without precedent, both because the US blockade restricts Cuba’s access to external finances and revenues, and because the process is underscored by the state’s commitment to cushion the population from the trauma of restructuring. It is also being carried out during a global economic recession resulting from the Covid-19 pandemic. HELEN YAFFE reports. 

In January 2021, Donald Trump became the 12th president of the United States to leave office without accomplishing regime change in Cuba. It was not for want of trying. The Trump administration unleashed over 240 new measures to tighten the world’s longest and most punitive blockade. Even in the context of the pandemic the pressure on Cuba intensified; Washington imposed suffocating sanctions while the Miami-based opposition promoted political instability and civil strife. In a final act of spite, on 12 January, the Trump administration restored Cuba to the US list of state sponsors of terrorism, a move designed to obstruct efforts by the new Biden administration to improve relations with Cuba. 

Incrementally since 2019, Cuba’s access to food and fuel have been severely impeded, export earnings have been slashed and foreign investors have been scared off. Measures to tackle the Covid-19 pandemic have demanded additional resources, while the economy was shut down and tourism revenues plummeted as borders were closed.1 Goods shortages have made long, exhausting queues part of life’s daily grind, with Cubans rising at 4am to get in line. Poor agricultural production and the pandemic have exacerbated scarcity. 

Cuba’s GDP fell by 11% in 2020.2 Hard currency receipts were just 55% of planned receipts and imports fell 30% compared to 2019 (which was already 15% below 2018). Cuba needs hard currency to purchase on the international market; over half the food, fuel, medicine and other vital resources consumed on the island are imported. Hence the unfilled shop shelves and long queues. This scenario both complicates and gives urgency to the process of monetary ordering. 

Why the dual currency?3

Cuba’s dual currency dates back to 1993, the worst year of the Special Period, when the US dollar was reluctantly legalised to operate alongside the CUP. Black-market use of US dollars had become so widespread that prohibition was unworkable. Legalisation transferred the benefits of using dollars from individuals to the state. It accompanied the opening up to tourism and facilitated the inflow of remittances. Most basic necessities continued to be purchased in CUP, but luxury goods and supplementary basic goods available outside the ration book allotment were sold at ‘dollar shops’, at prices that included steep taxes. The value of the dollar fell against the CUP, from $1 = 150 CUP in 1994 to $1 = 18 CUP by mid-1996, eventually stabilising at $1 = 24 CUP. In state enterprises, however, accounting and exchange operations functioned with an official exchange rate of $1 = 1 CUP. This was problematic because it obscured losses and surpluses from their accounts, and removed incentives to increase exports. The economic results appeared the same whether produce was sold internally for CUP, or exported for hard currency, even though the monetary value to the Cuban state was significantly different. 

In 1994, the Cuban government introduced a new ‘convertible’ Cuban peso (CUC) to substitute the US dollar for use in Cuba at an exchange rate of $1 = 1 CUC. The CUC was printed and controlled by the Cuban Central Bank. Then, in 2004 the US dollar was removed from legal tender. ‘De-dollarisation’ was a response to US President Bush setting up the Cuban Assets Targeting Group to stop US dollar flows into and out of Cuba. The dual currency remained, however, with the CUC still pegged to the dollar, exchanged at 1 CUC to 24 CUP for Cuban consumers and 1 CUC to 1 CUP for state enterprises. 

The dual currency divided the economy into two parts. Which branch any Cuban operated within depended on whether their income was exclusively from a state salary paid in CUP, or if they had access to dollars or CUC. Many Cubans had a foot in each sector. It also entrenched inequality and broke the link between work and remuneration. Incomes no longer reflected skills level, or the quantity or quality of formal work. Those with access to dollars could buy subsidised peso goods for a fraction of their market price and consume additional goods from dollar shops. Those dependent on CUP incomes could not afford non-subsidised markets. State workers, including the most highly skilled, earned the lowest incomes. In pursuit of higher levels of consumption, many Cubans left their professions for jobs with access to CUCs, such as tourism, taxi driving, or joint ventures. 

Eliminating the dual currency was a priority for Cubans, according to the national consultations held during Raul Castro’s mandate as president. It was a key objective in the Guidelines for Updating the Economic and Social Model approved in 2011 and updated in 2016; and confirmed in the 6th and 7th Congresses of the Cuban Communist Party (2011 and 2016). In October 2013, the government announced that the process of reunifying the currencies was underway. The news was greeted positively. Many Cubans identified income inequality with the dual currency system, and assumed that monetary unification would see inequalities disappear. However, the government warned that monetary unification would not resolve all the country’s economic problems, but it was vital to re-establish the value of the national peso and help foster ‘conditions which would lead to increased efficiency, more accurate measurement of economic activity and incentives for those sectors which produce goods and services for export and to replace imports.’4 That statement was echoed in 2020 as ‘Day Zero’ approached. 

Unification was delayed while Cuba dealt with other pressing problems, but initial steps were taken. ‘Day Zero’ is the culmination of years of preparation, consultation and, in the final months, of training. It was preceded by a public information campaign with government ministers appearing on television daily. This continued into January 2021. 

Impact

The minimum monthly wage for state employees (two-thirds of total employees) has increased by 525% from 400 CUP ($17) to 2,100 CUP ($88); the new maximum, based on hours worked and excluding additional payments available, is 9,510 CUP ($396). Higher salaries are linked to educational qualifications and other specialist criteria. The minimum pension is raised by 450% to $1,528. These rises cushion Cubans from inevitable price rises, which were anticipated at an average 160% for state-controlled prices and 300% for private businesses.5 Nonetheless, there is scarcity due to the broader economic crisis and that threatens to fuel an inflationary spiral. Higher salaries serve to incentivise Cubans to improve their qualifications and skills. The adjustments will also push into work a large layer without formal employment, who benefit from state provision and subsidised consumption. By December 2020, thousands of Cubans had applied for positions in the state sector. The ‘ration book’ will continue as a means for distributing highly subsidised food products, but subsidies for other goods in the family basket will be gradually removed as the emphasis shifts to subsidising people, not products, so that state support is targeted to those in need. 

‘Day Zero’

Nothing dramatic happened on ‘Day Zero’. Cubans have six months to spend or exchange their CUCs at the existing rate of one to 24 CUP. The CUP will not be the only legal tender in Cuba, however. In 2019 the government ‘temporarily’ opened stores in freely convertible currency (MLC), including the dollar. These were extended in July 2020. They are known to be unpopular but are a means to provide the state with urgently needed hard currencies. These MLC stores accept bank cards only, which depends on Cubans having cash deposits, mainly from remittances, in Cuban banks. Unfortunately, remittances have been targeted by US sanctions and hit by the global recession. 

All Cuban state enterprises now operate with an exchange rate of USD $1 = 24 CUP, a devaluation of 2,300% from the one-to-one rate. This will force enterprises to increase efficiency and productivity to stay solvent. The state has committed to protect enterprises by providing subsidies and credit for one year. However, the drive to raise productivity is bound to reduce job security and increase unemployment; difficult for a workforce accustomed to extensive protections irrespective of performance. 

State enterprises have been granted greater control over management decisions: setting prices, raising salaries, distributing profits, and securing foreign exchange. State or non-state entities that export can keep 80% of revenues. Those supplying the MLC stores can keep 100%. ‘Monetary ordering’ should benefit entities that export, while importers will struggle. This should serve as an incentive to substitute domestic products for imports, foster national production linkages, save scarce hard currency, and increase foreign exchange receipts. 

For foreign investors, the monetary and exchange unification will simplify the process of negotiating, evaluating, and managing businesses in Cuba. The positive impact is blunted, however, as the US treasury threatens to fine foreigners engaging with Cuba. Cuba is struggling to combat US measures that scare off foreign investors. In December 2020, it announced that restrictions on foreign business ownership would be lifted (except in extractive industries and public services). 

Speculation about monetary unification, along with goods scarcities, saw prices rise in late 2020. The government responded by raising state salaries and social assistance in December 2020, earlier than planned. To counter inflation, prices of dozens of key products and services remain centrally set, but these limits have to be enforced. New, higher tariffs on electricity consumption intend to reduce state spending and promote energy saving; 95% of the electricity Cubans consume is produced from fossil fuels; 48% of that is imported at high prices. However, the government reduced planned tariffs increases in response to complaints from the population. 

Moving forward

Although the ‘monetary ordering’ exposes Cubans to greater market mechanisms, it does not represent a break with Cuba’s socialist system. In the context of US aggression, trade dependence, economic crises and scarcity, it adopts greater material incentives in the long-standing battle to raise production and productivity within the socialist framework. Back in November 2005, Fidel Castro talked about ‘the dream of everyone being able to live on their salary or on their adequate pension’ without need of the ration book, which allows a ‘parasitic’ layer in Cuban society to refuse to work while benefiting from state subsidies. From 2007, Raul Castro constantly referred to the ‘socialist principle’ of ‘from each according to their ability, to each according to their work’ as an aspiration in Cuba. He has repeated it in relation to the monetary ordering. 

Cuba delayed ‘Day Zero’, hoping to create propitious conditions for its implementation. However, with the pandemic raging and a global economic recession just beginning, nothing was to be gained from further delay. The process may alarm Cubans, but as the adjustments filter through the economy, and with the state’s promise that no-one will be left behind, it should prove to be a vital step for Cuban development. Even if the Biden administration lifts some sanctions, this year promises to be another tough one for Cuba.

Fight Racism! Fight Imperialism! 280 February/March 2021


NOTES

  1. Nonetheless, Cuba sent medical specialists to over 40 countries to treat Covid-19 patients.
  2. The 11% fall in GDP is nearly one-third of the total fall Cuba experienced between 1990 and 1993, during the ‘Special Period’, the economic crisis following the collapse of the socialist bloc. 
  3. See Helen Yaffe, We Are Cuba: How a Revolutionary People have Survived in a Post-Soviet World, 2020.
  4. Granma, ‘Nota Oficial’, 22 March 2013
  5. The greater proportion of their income spent in the non-state sector, the greater the impact of price rises on Cubans.