Cuba devalues peso for first time since 1959 revolution in bid to save collapsing economy

Cuba's economy has been hit hard by the coronavirus crisis

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Cuba will start its long-awaited monetary reform in January, eliminating its dual currency and labyrinthine multiple exchange-rate system in a bid to improve business conditions in the crisis-stricken economy.

In a televised address to the nation, President Miguel Diaz-Canel said the Cuban peso would be fixed at a single exchange rate of 24 per dollar in the first devaluation of the peso since the country’s 1959 revolution.

"We consider the conditions have been created to enable us to announce the start of the task of (monetary) ordering from January 1," said Diaz-Canel, sitting next to Cuban Communist Party chief Raul Castro.

For more than three decades, two currencies have circulated in Cuba’s state-run economy: the peso and the convertible peso (CUC), pegged to the dollar.

These have been exchanged at various rates: 1 to 1 for state-owned businesses, 24 pesos for 1 CUC for the public and others for joint ventures, wages in island’s special development zone and transactions between farmers and hotels.

President Miguel Diaz-Canel, right, announced the plans beside Raul Castro, the Communist Party leader

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The government has said it will eliminate the CUC as part of the currency reform, although Mr Diaz-Canel did not refer explicitly to it on Thursday, simply saying there would be just one exchange rate from January of 24 pesos per dollar.

Economists say the reform spells short-term pain for Cubans but is important in the long-term as varying exchange rates have obscured the real functioning of the economy and effectively subsidised some sectors.

Mr Diaz-Canel said it was no "magic solution" to the cash-strapped country’s economic problems.

"However it will favour the creation of the necessary conditions to advance in a more solid manner," he said.

Economists expect triple-digit inflation, and government announcements in recent months suggest it does too. It has said the initial devaluation will be accompanied by a five-fold increase in average state wages and pensions even as many state-controlled prices are increased or allowed to respond to demand.

The peso has not been devalued since Fidel Castro took power more than half a century ago

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But the wage increase does not apply to around two million of the seven million-plus labor force in the private sector, informal sector or who simply do not work.

"The task is not void of risks," said Mr Diaz-Canel, saying it was one of the most complex challenges the country had faced but promising that "no one will be left destitute".

Those who raised prices unduly would face severe sanctions, he said.

The government has said some companies will be given a year to get their books in order before ending subsidies, and it will continue to provide universal and free healthcare and education, some subsidised food and other social gratuities.

Cuban economists estimate around 40 per cent of state companies operate at a loss and though some will benefit from the monetary reform, such as those tied to the export sector, others will fail.