Cuba’s economy and monetary policy

The Republic of Cuba is one of the last countries in the world where communists remain in power. In 1959, communists came in power as a result of the uprising. It is worth mentioning that Cuba survived the fall of the Soviet Union. Due to various internal and external factors, the local economy is in a difficult situation.

Another problem that harmed the economy is the country’s monetary policy. Many Cubans are struggling to acquire the hard currency they need due to the lack of money. The situation deteriorated in the last couple of weeks as it is practically impossible to obtain the hard currency at the banks and exchange houses.

According to analysts, the lack of hard currency is connected with the economic situation in the country. However, they also mentioned another factor that has to do with Cuba’s government, which is trying to end the dual currency system currently in use.

In this situation, Cubans want to protect themselves from any kind of possible depreciation which may follow this complex process. Some Cubans decided to exchange their pesos as a measure of precaution. Another reason is that Cubans who would like to travel abroad, they also need hard currency.

It is important to mention that neither of Cuba’s two currencies is legal tender outside of the country. It means that it will be impossible to exchange the peso or the dollar-equivalent convertible peso (CUC) abroad.

Foreign exchange earnings and economy

In recent years Cuba’s foreign exchange earnings declined, and economic problems of Venezuela which is Cuba’s ally exacerbated this problem. Moreover, the U.S. trade embargo imposed by the Trump administration affected the local economy. Current administration increased restriction on U.S. travel. Diminishing profits from the tourism industry is a severe challenge to the local economy.

There are other problems, as well. Several countries such as Brazil, Bolivia, and Ecuador ended the contracts which helped to increase the profits. According to the contracts, these countries hired thousands of Cuban doctors from the state. Such service exports play important as they make up most of the hard currency earnings.

In October, the government opened stores selling appliances, car parts and other items for dollars. Customers have to pay with a bank card. Economists said that decision should help to earn some hard currency. Also, by opening the “dollar stores,” the government may reduce capital flight. As a result, people will be less inclined to go shopping abroad.

Another explanation of why the government decided to open the stores relates to Cuba’s two currency systems. By using U.S. dollars, the government may limit the problems caused by the elimination of the two currency systems.

Both currencies circulated on the island at multiple exchange rates since the decline of the Soviet Union. The purpose of this move was to protect the local industry and citizens.

However, this system is unsuccessful and had a negative impact on the economy. According to the information, the government is expected to eliminate CUC in 2020.  In November, it banned the export and import of the dollar-equivalent convertible peso.