Monday, March 14, 2011

Cuba devalues convertible peso by 8 percent

Mon Mar 14, 2011 12:21pm EDT

* Convertible peso pegged and put on parity with dollar

* Aims to improve foreign exchange balance, boost exports

* Foreign firms had long complained of overvalued currency

By Marc Frank

HAVANA, March 14 (Reuters) - Cuba has devalued its convertible peso by 8 percent in a move aimed at attracting more foreign exchange and stimulating exports, according to a central bank resolution published on Monday in the official daily Granma.

The convertible peso (CUC) had been valued at $1.08 since 2005, but will now be valued one-to-one.

"This decision is a discrete step toward an improved balance of foreign exchange ... and will help improve conditions in our foreign financial relations," the resolution stated.

Foreign and local economists welcomed the devaluation.

"This is a very important measure that Cuban economists and foreign experts on Cuba have been recommending for years," said Cuban-American economist Carmelo Mesa-Lago, a professor emeritus at the University of Pittsburgh.

"It should reduce the significant overestimation of the CUC that causes all kinds of distortions, make cheaper tourism for Cuban Americans, Americans and Latin American countries in the dollar area, and stimulate sending of remittances," he said.

Cuba is just now emerging from a grave liquidity crisis that began at the close of 2008 and saw it freeze hundreds of millions of dollars in foreign company bank accounts on the grounds that it did not have the foreign exchange to meet the CUC deposits.

The bank said hurricanes in 2008, the international economic crisis and "volatility in monetary markets" led to the decision "to establish parity between the convertible peso and U.S. dollar."

Though most of the money has since been paid out or payment agreements signed, the freezing of foreign accounts destroyed confidence in the CUC and state banks. Most companies now do their business offshore.

Foreign companies that do business with the island have long complained the CUC was overvalued.

Cuba has a dual monetary system which pegs the peso at 24 pesos sell, and 25 pesos buy, to the convertible peso.

The resolution said the domestic exchange rate remained unchanged, as did the one-to-one exchange rate used for business accounting purposes.

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