top of page

The Aftermath of Monetary Reform in Cuba

Luis R. Luis

The Cuban economy is being hit by two large shocks. The first is an external shock from the pandemic which shut down tourism and sharpened the impact on Cuba of the collapse of the Venezuelan economy and of U.S. sanctions. The second is a policy shock, the monetary reform or “ordenamiento monetario” designed to unify the two national currencies and accompanied by a 2300% devaluation of the Cuban peso and a large boost to wages and prices (Mesa Lago 2021). Easing of infections in Cuba and in tourism markets in Europe and North America will help revive travel to Cuba and bring some relief from the external shock. In this note I focus on the aftermath of the monetary shock and its important implications for the future of the economy. In particular I look at the impact of monetary reform on key variables in the economy: prices, foreign exchange rates, wages and interest rates. A tough challenge is distortions from the monetary reform sustained by a rigid economic system.


The monetary reform is having a massive impact. Large devaluations often have a negative impact on output and income in the short-term as they imply a reallocation of labor and capacity in reaction to powerful price signals in the economy. The more flexible an economy, the easier it will absorb the shock to relative prices, firms and consumers implied by the devaluation and be in a position to soften the costs and distributional impact. Centrally-planned economies such as Cuba face special challenges as the monetary shock shifts prices of inputs and products while key prices and costs are largely set by administrative action centrally or by local authorities.


Sources: ONEI, Indice de Precios al Consumidor and author’s model. a/August

Let’s take a look at consumer prices. According to the Cuban statistical institute (ONEI 2021A) consumer prices (CPI) rose 18.4% in 2020 and 59.7% in the eight months to August 2021. Calculations based on a model of tradable and non-tradable good prices (Luis 2021A) of inflation in 2020 given exchange rates, wages and import prices was 21.1% or just 2.5% higher than the CPI. However, the numbers for 2021 are quite different. The model’s inflation estimate is 291% or about 230% higher than the official number (FIGURE 1). Why such a large difference?

There is a simple answer. The numbers registered by ONEI in the CPI reflect retail prices in the state sector of the economy. These prices are either set administratively or bounded by maximum levels established by local and national authorities. This is not the inflation that will prevail given full adjustment of domestic to foreign prices, and it excludes prices in the private sector. Marino Murillo, the head of economic reforms confirms this when stating that retail inflation does not behave as designed: “the 60% of (reported) inflation does not jibe with that felt by the people. The people are experiencing prices that are seven, 10 times higher (Cubadebate 2021A).” Murillo’s statement places inflation even higher than the model estimate, and he attributes this to prices in the private sector of the economy acknowledging the gap in state prices.

What does the gap between state prices and prices implied by the model mean for the economy? For one, there is a discontinuity between foreign prices and domestic equivalents at the new exchange rates. In other words, even as at Cuba’s ports and airports prices of imported goods have inevitably risen by the amount of the peso devaluation this is not being fully incorporated into the domestic price system. Additionally, insofar as foodstuffs and other imported goods this means that state retail prices are below acquisition cost and are subsidized either directly by the government or by state producers selling their wares at prices below international levels. This acts as a disincentive for producers which often acquire fuel, fertilizer and other inputs priced at international levels. Resulting subsidies must be financed either by taxation or by monetary expansion which fuels demand and places additional pressure on prices.

Exchange Rates

Merging of the two currencies circulating in Cuba the Cuban peso or CUP and the convertible peso or CUC as well as unifying the exchange rates was the main goal of the monetary reform. The merging of currencies went well and is nearly complete (Granma 2021A). Monetary reform succeeded initially in considerably lowering the gap between the official rate of the peso and the parallel or black market from 3100% in December 2020 to about 45% in January 2021. Since January the gap has steadily increased ending at end October 2021 at a multiple of 2.8 times or a gap of 180% (Table 1). The gap signals that the official exchange rate of CUP 24 = $1 is below the equilibrium rate, the rate that balances the FX market.


Monetary reform has not succeeded in unifying the foreign exchange market. The fixed exchange rate for the peso does not help as the government lacks policy tools and has slim international reserves. Also, exchange controls on current and capital account transactions make unification difficult by fostering demand for dollars outside official channels. Controls and balance of payments pressures create excess demand for dollars at the fixed official rate turning up in the parallel market resulting in a gap between exchange rates. The larger the gap the greater the distortion for entities transacting in either market, the official and the parallel market. It means that transactions take place at an overvalued rate in the official FX market while undervalued in informal markets. Some lucky consumers and firms with access to dollars at CUP 24 = $1 get a break while others are hit by the expensive dollar in the black market.

A controversial dollarization policy where imported durable goods and foodstuffs are sold in especial dollar stores known as MLC stores is another variable acting on the FX market. MLC stores operate as a state monopoly on the sale of most imported consumer goods. Dollar deposits in the banking system may be used at these stores by way of magnetic cards which can be either debit cards or pre-paid cards. The latter trade in the parallel market at a premium peso price of around 13% (Vidal 2021). This is roughly the cost of exchanging dollars for euros or other hard currencies needed for deposit in MLC accounts. Dollar currency ceased to be accepted in Cuban banks in June 2021 because of the presumed difficulty of depositing currency in foreign banks according to the central bank (Granma 2021B).

Relative Prices

The disparity in prices in the state sector and prices implied by the January 2021 devaluation and wage increases is striking state firms. Minister of Economy and Planning Alejandro Gil stated in October 2021 that 541 state enterprises or 30% of the total were reporting losses (Cubadebate 2021B). According to figures in Table 1, state prices of consumer goods were equivalent to about 20% of projected prices after the devaluation, taking into account foreign price trends and labor costs. Unofficial accounts report additional state companies suffering losses.

Cuentapropistas and other private entrepreneurs face an array of price distortions. Cooperatives, entrepreneurs and farmers who sell products to state firms or to the state wholesaler Acopio face unrealistic prices even as the government is trying to operate more flexibly with wholesale prices. At the same time people in the private sector face the parallel FX market which at the end of October trades at a 2.8 times premium to the official rate as seen in Table 1. These price relations make unprofitable many private occupations and boost under-employment and unemployment.

Dollar prices in the economy take place in two distinct markets. The formal market is the state monopoly of MLC stores. Informal parallel markets operate with prices at a dollar premium over MLC stores reflecting scarcity and the inability and unwillingness of these stores to meet demand. MLC stores have monopoly pricing power. A sample of four items in these stores compared to their price in Walmart stores in the U.S. yields a 60% premium in MLC stores before and after the monetary reform (Luis 2021B). One implication is the loss of consumer welfare resulting from monopoly pricing. Another is the inability of the MLC store system to match product supply to remittances, the main source of personal dollar deposits in the banking system.

Interest Rates and Wages

There are no operating financial markets in Cuba. Interest rates for both deposits and loans are set by the central bank. For most of the century until 2020 interest rates were positive in real terms given low and even negative inflation (in 2016 and 2019). The surge in inflation after large wage increases in the state sector in 2020 made real rates negative. For example in 2020 the 12-month lending rate was 7% compared to one-year CPI inflation of 18.5% or a ratio of 0.38 (Table 1). This ratio became 0.12 in October 2021 measured against the CPI and much less compared to effective inflation. All of this is to say that interest rates are very distorted, providing negative real returns to savers and having little function in the allocation of investment. The post-reform inflation environment has made matters more difficult for households and is disintermediating the financial system.

State sector wages were raised on average about five times at the outset of monetary reform. This followed an increase of 36% in 2020 which translated to a 95% increase over CPI inflation in that year. A tripling of real wages took place in 2021 when measuring inflation by CPI index. Workers know that measured inflation sharply understates actual inflation as confirmed by Minister Murillo. Even using the projected inflation from the model, there has been a surge in wages over inflation which is not realistic. After all real GDP is falling 13% in 2020-2021 according to government estimates, and productivity, real incomes and consumption are declining.

Concluding Comments

The Cuban economy is not wired to use price signals in the allocation of resources. Administrative control of prices, consumption, labor and capital allocation drives important decisions in the economy. This is a roadblock to poverty alleviation, efficiency, consumer welfare and growth. While the monetary reform has reduced divergencies in exchange rates, it has failed to unify the FX market maintaining the main distortion targeted by policy action. This is in part the result of the adverse external environment. More importantly, it derives from the rigidity of the economic system, especially sticky prices, exchange controls and a fixed exchange rate. This jeopardizes achieving the aim of large devaluations: turning around a country’s exports and external accounts. Cuba’s statistics show surpluses in the current account in 2014-2018, the last available five years (ONEI 2021B). This is expected in a country that lacks access to foreign credit and import finance. Yet, current account surpluses take place at unsatisfactory levels of exports, imports and national income.

The inflationary environment initiated by an expansive fiscal policy in 2020 and compounded by the mega-devaluation of the peso poses a more severe test for the economy than the 2008-2009 financial crisis. The combined shocks to the population from inflation and external events approach the shock following the break-up of the Soviet Block in the early 1990’s. Controls on prices, the exchange rate and interest rates compound distortions and present an unwieldly system for state and private businesses to operate, and for foreign investors assessing deploying capital into the country.

This note does not aim to offer detailed policy recommendations to address the present crisis. These are being discussed by economists and other social scientists inside and outside of Cuba. Suffice it to say that the solution lies in elimination of the severe distortions in the economy. This involves liberalization of prices and interest rates as well as establishment of agile markets for domestic and internationally traded goods and services. I doubt Cuban authorities are anywhere near to move decisively in this direction.


Cubadebate (2021A), “Alejandro Gil: Economía cubana ha perdido 13% de su PIB entre el 2020 y lo que va de 2021.”,October 27,2021.

Cubadebate (2021B), “Tarea Ordenamiento: La inflación minorista ha sido la principal desviación, afirma Marino Murillo.”,October 27,2021

Granma (2021A), “Destaca Murillo efecto positivo de la unificación cambiaria para la economía cubana.”, March 06, 2021.

Granma (2021B), “Banco Central de Cuba informa suspensión temporal de la aceptación de depósitos bancarios en efectivo de dólares de Estados Unidos.”, 6/11/2021.

Luis, L (2021A), “Inflation in Cuba 2010-2021.”, May 19, 2021.

Luis, L. (2021B), “Cuba: Dollarization and Devaluation.” Paper to be delivered to the ASCE session of the Annual Meeting of the American Economic Association, January 2022.

Mesa-Lago, C. (2021), “La unificación monetaria y cambiaria en Cuba: normas, efectos, obstáculos y perspectivas,” Real Instituto Elcano, Documento de Trabajo, February 5, 2021.

ONEI (2021A), “Indice de precios al consumidor Septiembre 2021.”, September 2021.

ONEI (2021B), Anuario Estadístico de Cuba 2020 – Sector Externo. Edición 2021.

Vidal, P. (2021), “Causas y predicciones de la tasa de cambio informal en 2021.”, October 07, 2021.

64 views0 comments

Recent Posts

See All

Inflation and Macro Policies in Cuba

After moderate price increases in the last two decades the 2300% devaluation of the peso in January 2021 and lax macro policies brought high inflation to Cuba which is cutting real salaries and wages.


bottom of page