In a significant shift for its currency management, Cuba plans to introduce a floating exchange rate by 2025, aligning the value of its currency with market demand and supply. This announcement was made by Prime Minister Manuel Marrero Cruz during the December 2024 session of Parliament. Following the news, the Cuban peso slightly appreciated in the Informal Market's Representative Rate (TRMI), as reported by elTOQUE, which consulted with two experts to discuss the challenges and expectations surrounding this policy shift.
An Unprecedented Change?
Economist Pavel Vidal, an expert in economic policies and a professor at Javeriana University in Cali, highlighted that this new system, managed through Casas de Cambio (Cadeca) and banking windows, marks an unprecedented development in Cuba's economy. While a limited float existed in Cadeca during the 1990s, the introduction of a daily floating rate is novel for Cuba.
Vidal suggested that the government might initially rely on the informal market rate to set the starting value, similar to the 2022 parity of 1 USD to 120 CUP. However, he emphasized the importance of establishing clear and transparent rules to build public trust, a longstanding weakness in Cuba's economic policies.
Structural Challenges and Partial Dollarization
Mauricio de Miranda, a specialist in International Economics and Development, pointed out that the partial dollarization of the economy has weakened the Cuban peso's functionality. The reliance on foreign currency for essential goods and services will continue to pressure the informal market unless measures are taken to boost national production and diversify the economy.
De Miranda stressed that opening a more flexible and transparent exchange market, inclusive of the private sector, is crucial to restoring credibility to the Cuban peso. However, he acknowledged that Cuba's absolute state control poses significant challenges to implementing effective reforms.
Questions Looming on the Horizon
The government's announcement has sparked both expectations and uncertainties. Key questions include how the initial rate will be determined and what criteria will guide daily adjustments. In market economies, exchange rates are set in real-time by supply and demand. Yet, in a system dominated by state monopoly, the effectiveness of a floating rate could be constrained.
Economists agree that a comprehensive effort is needed for the new system to succeed, encompassing economic diversification and increased transparency in monetary management. Without these elements, the announced measures risk becoming mere temporary fixes rather than long-term solutions for Cuba's struggling economy.
Recent changes in the informal exchange market may also be influenced by the influx of foreign currency from Cubans living abroad during year-end festivities. Nonetheless, economists caution that this strengthening of the national currency is temporary and does not reflect a structural improvement in the economy.
Understanding Cuba's Floating Exchange Rate Plan
What is the significance of Cuba adopting a floating exchange rate?
The introduction of a floating exchange rate signifies a major shift in Cuba's currency management, aligning it with market dynamics for the first time. This change is expected to impact how the value of the Cuban peso is determined.
How might the floating exchange rate affect the Cuban economy?
The floating exchange rate could lead to a more realistic valuation of the Cuban peso, potentially enhancing credibility and encouraging economic reforms. However, success will depend on the implementation of clear and transparent policies.