Cuba’s Day Zero: Currency reunification and devaluation eighteen months on
How has Cuba fared in the eighteen months following the start of its currency reunification, known as Day Zero?
On the 1st of January 2021, Cuba underwent Day Zero, when its 28-year-old dual currency system came to an end with the reunification of the Cuba national peso (CUP) and convertible peso (CUC). However, in the eighteen months that followed, the reunified CUP has faced considerable currency devaluation, in part due to a host of macroeconomic factors.
In this short report, we review the current state of forex in Cuba, and how it has fared in the aftermath of Day Zero.
Day Zero: The reunification of Cuba’s dual currency system
Cuba has been operating a dual currency system for three decades with the CUP and CUC. In the years of this system, the CUP was used to pay state salaries, pensions and social benefits, as well as for the purchases of basic goods. The CUC, meanwhile, was introduced in 1993 to substitute the use of USD, which had become very popular on the black market, particularly after the collapse of the Soviet Union, to purchase luxury goods and supplementary basic goods from special ‘dollar stores’. The exchange rate of the new CUC was pegged to the dollar at 1:1 rate.
The beginning of January 2021, Day Zero, was a new start for the country as the CUP and CUC were unified into a single currency, also known as the CUP. At that point, the central bank fixed the exchange rate of CUP to USD at 24:1.
Cuba’s informal currency devaluation since Day Zero
However, due to the harsh sanctions against the country and pandemic-induced shortages, the parallel exchange rates on the black market have been continuously devaluating since the reunification.
Despite enjoying a period of relaxation under the Obama administration, sanctions against Cuba became more severe during the Trump administration, with the addition of 240 new punitive measures. These put a significant strain on the country’s ability to participate in international trade and payments. Amongst these sanctions were the reinstatement of a limit on money transfers of $1,000 per quarter and a ban on money transfers to non family members, which limited remittance flows into Cuba.
Additionally, since 2019 the Covid-19 pandemic has caused export revenues and the import of goods to contract, and one of the main sources of foreign currency, tourism, to plummet.
The resulting demand for goods largely overwhelmed supply and those with foreign currency could purchase additional goods in dollar stores or, as they are now known, ‘MLC stores’, which sold imported goods in foreign currency only. The decreasing inflow of foreign currency and increasing scarcity of goods created inflationary pressures on prices and weakened the value of the CUP in the informal market, while the official CUP:USD exchange rate remained fixed.
The chart below shows the devaluation of the CUP in the informal market since Day Zero, when the rate was fixed at 24 CUP to 1 USD. The rate peaked at 114 CUP in May 2022.
Domestic payment and remittance options in Cuba
Since the currency unification, only CUP is used as a national currency in Cuba, however, foreign currencies such as EUR, USD and even CAD, GBP are still widely used, particularly by the tourism industry.
Another way to make payments in Cuba is through Moneda Libremente Convertible (MLC) cards, which translates as freely convertible currency cards. These are a type of prepaid bank card that is used to hold foreign currencies, and require Cubans to make a cash deposit in a bank in order use them. They are used to make payments at foreign currency-only MLC stores, and are also a convenient and popular means of remitting money to Cuba from abroad, as many providers enable customers to reload these cards from other countries.
For remittance providers, operating in Cuba comes with the challenge of constant uncertainties. Western Union, having had a presence in the country for over 20 years, was forced to stop all money transfers to the country in October 2020. This was the result of the US rolling out new sanctions, including a ban on US firms sending remittances through military-controlled Fincimex, WU’s main partner in Cuba.
WU has now reinstated its services but the choice of money transfer operators is limited. AisremesasCuba states that the services are not available since 18th November 2021 due to website maintenance, though this may also be due to the sanctions, and Sendvalu states that “for banking reasons, we are currently unable to maintain our distribution service in Cuba”.
The chart below shows an overview of providers of money transfer services, including MLC reload services, from US and Canada to Cuba.
US foreign policy’s impact on Cuba’s forex situation
The forex situation in Cuba is highly dependent on the relationship with the US, which often changes with the election of a new president and their policy on easing or restriction of sanctions. The quarterly limits on remittances is one of the measures that has been implemented and removed repeatedly; the latest change was announced by president Biden in May 2022, which saw these limits lifted once again.
Similarly, in 2004 Cuba introduced a 10% tax on remitting and exchanging USD to deter people from using the currency and incentivise them to remit money in other currencies such as Euro. This was in response to the new restrictions placed on dollar remittances by the Bush administration, although the tax was removed in 2020 to alleviate the consequences from the pandemic.
These policies have a further impact on international businesses’ ability to operate in the country. Their presence in Cuba is often subject to their ability to circumvent sanctions in order to trade and make payments through the international banking systems.
Looking forward, then, Cuba’s currency volatility is likely to be closely linked to the results of future US presidential elections. Day Zero may have removed the two-currency system, but while strict limitations remain the black market is likely to continue to play a key role in the country’s economy.
