Exchange Rate Unification : The Cuban Case

This paper reviews from an international perspective the challenges faced by Cuba in unifying its exchange rate and compares various options to meet this objective. It argues in favor of a fast unification approach but cushioned during a pre-announced transition period by lump-sum taxes and subsidies applied on an enterprise-by-enterprise basis. By allowing for relative price changes to operate in full from the start, the immediate unification would maximize efficiency gains. At the same time, by cushioning the Cuban economy from potentially large transitional pains — including fiscal revenue losses, productive dislocations, inflationary outbursts and distributional effects — the lump-sum taxes and subsidies (to be gradually phased out) would ease the transition, thereby boosting policy credibility. However, to ensure the viability of the scheme and the rapid materialization of the efficiency gains, important habilitating reforms would be needed, particularly as regard the governance of state enterprises