Cuba to float peso - December cost of living review

The Cuban and Bolivian governments would probably prefer to keep controlling the value of their currencies but economic crises in both countries look like forcing big changes. 

In December, Cuba announced it was planning to float the peso sometime in 2025 - an astonishing prospect for a country whose economy has been planned by the state, Communist style, for decades. Reforms in recent years have opened up some sectors to private enterprise but, partly because many government controls remain, the changes have not worked well and a deep economic crisis, characterised by goods shortages, high prices, job losses, bankruptcies and protests, has persisted. More drastic action is required, therefore; hence the mooted peso flotation. If it happens, it is sure to involve another big devaluation.

Bolivia, meanwhile, has fixed the value of its currency, the boliviano, to the US dollar since 1987. This policy worked fine while the country enjoyed its commodity export boom, selling huge quantities of oil and gas, plus zinc, silver, gold and lithium, all of which are priced on international markets in dollars. Unfortunately, commodity prices dived in 2014/15 and have not fully recovered since, while production of oil and gas has been falling, leaving big budget deficits made worse by economic mismanagement. Keeping the boliviano pegged to the dollar is expensive and foreign exchange reserves have become so depleted that the government at times cannot afford to import enough fuel, leading to shortages and further harming the economy. The political system is also in crisis, meaning little action is being taken to solve the economic and currency problems. Once more stable governance is established, the currency fix with the dollar has a high chance of being abandoned - a move which would spark a big devaluation of the boliviano.

Interestingly, China also announced last month that it was considering weakening its own currency's value, to combat the threats posed by incoming US President Trump's proposed trade tariffs. If it does so, any devaluation is likely to be modest.

The Iranian rial (open-market rate) was the world's weakest currency in December, as Iran's economic woes deepened. The hopelessness of the economic situation in Venezuela, where President Nicolas Maduro is set to be sworn in for a third term, after allegedly rigging the latest election, is behind another big fall for the bolivar (see table above).

Cuba and Bolivia might take comfort from Nigeria's improving economy since it floated and devalued its currency last year. The naira was almost the world's strongest currency in December (see next table) as investors piled into short-term Nigerian government debt, lured by high yields, business environment reforms and a better outlook for the naira, after the central bank continued to raise interest rates to cool inflation. 

The Tanzanian shilling beat the naira, gaining 10% against the euro, benefitting from greater export revenues, growth in tourism and initiatives promoting use of the local currency.

Ukraine was the only addition to our double-digit inflation club this time (see next table), with its latest annual consumer price inflation jumping to 11.2% in November from 9.7% in October. Higher prices for electricity and fuel as the war drags on were the main drivers behind the change.

With the euro having generally been weak in the last two months, the figures in the right-hand column have changed considerably. Previously, nearly all countries with high inflation also saw their currency values drop, offsetting the price factor (as far as expatriate cost of living is concerned). Now, several have seen their currencies gain value against the euro. If this trend persists, it could lead to significant cost of living adjustments for international assignees from Eurozone countries in locations affected. As always, ECA's next cost of living survey (March 2025, to be published in May) will reveal all! 

In other news, El Salvador has reformed its flagship bitcoin policy to secure a loan from the International Monetary Fund. In 2021 President Nayib Bukele made the cryptocurrency legal tender, but the new deal means acceptance of bitcoin in the private sector is voluntary. 

Curacao and St Maarten are set to adopt a new common currency, the Caribbean guilder, on 31 March 2025. It will be pegged to the US dollar at a rate of USD1/1.79 Caribbean guilders. Until its introduction, the Netherlands Antilles guilder (ANG) will remain legal tender.

Finally, here is this month's selected currency movements table: