Q&A: Cuba's economic changes

Car and bicycle-taxi in Havana The Cuban government has already allowed the expansion of private taxis

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Cuba is devaluing its hard-currency convertible peso, used mostly by tourists and foreign firms, by about 8% as part of efforts to revive the economy.

It will now be on a par with the US dollar, although it will still equal 24 of the standard pesos in which most Cubans are paid under the communist island's two-tier currency system.

The devaluation, the first change in the currency's value for six years, comes as the Cuban government is taking steps to reduce the state's role in the economy and encourage private enterprise.

In September last year, it was announced that one million public sector employees would be laid off, although the job cuts are now expected to take longer than initially planned.

BBC business reporter Robert Plummer looks at the implications for Cuba's centrally planned socialist economy.

What difference will the currency devaluation make?

It will make Cuba more affordable for tourists, who now constitute an important source of revenue for the country.

The convertible peso came into existence in 1994 and was pegged to the US dollar until 2005, when its worth was increased to $1.08. By this time, Cuba had already banned commercial transactions in dollars, as a response to a tightening of US sanctions.

The latest move brings the convertible peso back to its original exchange rate. However, tourists and Cubans exchanging dollars will still have to pay a 10% commission.

Why is Cuba enacting these changes now?

The changes are taking place in the run-up to the ruling Communist Party's first Congress in 14 years, which starts on 16 April.

This is expected to endorse President Raul Castro's economic reform plans, which call for more decentralisation of decision-making and increasing government revenues, while cutting social benefits and subsidies.

But why does the government feel changes are needed?

Because it simply cannot afford to maintain the old system any longer. Cuba's revolution has always been bankrolled by some external power and the credit has now run out.

During the Cold War, it was the Soviet Union which offered the island cheap crude oil in exchange for Cuban sugar, as well as loans and credits. It is estimated that Cuba still owes present-day Russia some $20bn as a result.

After the collapse of the Soviet Union in 1991, President Fidel Castro decreed a "Special Period" of hardship and allowed a modest expansion of independent businesses, such as restaurants and farms.

But the state's grip tightened again when China and Venezuela became Cuba's new benefactors.

Now Cuba is in hock to both of them as well - and the Chinese are pressing Fidel Castro's successor, his brother Raul, to follow their economic reform path.

What are the main implications of the changes?

Well, if the planned cuts go ahead in full, one in five of the workforce will no longer have a government job to go to. At present, the government employs about 85% of all workers.

But that does not mean they will be jobless. Many of them will continue doing what they do now, but the state will no longer be their employer.

Taxi drivers, hairdressers and those in small workplaces, for instance, will become self-employed and support themselves, rather than letting the state do it for them. Others will be encouraged to set up their own businesses or change jobs.

Cubans will also be able to rent out rooms to tourists, work as self-employed gardeners, iron clothes and shine shoes.

They will even be allowed to employ other Cubans who are not their relatives - something which has been banned since the Revolution.

Raul Castro has said the aim is to reduce the "overloaded" government payroll, but has also pledged that "no-one will be simply left out in the cold".

What other changes are being made?

The whole system will be less paternalistic in future. Subsidies that kept down the prices of basic foodstuffs, such as sugar and rice, are being removed. In fact, the whole ration book system, which has been providing Cubans with a guaranteed minimum of cheap basic goods since the US embargo began in 1962, is due to be phased out.

At the same time, the newly self-employed will be subject to income tax, ranging from 25% for those earning more than 5,000 pesos ($225; £142) a year to 50% for those earning more than 50,000 pesos.

Like many others before them, Cubans will be discovering that when government grants them rights, it also imposes responsibilities on them.

Is this the end of socialism in Cuba?

In an word, no. Ever since the ailing Fidel Castro stepped down as president in February 2008, observers have been predicting that Raul Castro would produce major reforms.

But it looks like this is as far as it goes. The president has ruled out across-the-board changes and wants the state to continue in its role as the central economic planner, although some control has been, in effect, devolved.

Cubans can no longer expect the same level of cradle-to-grave state care and will have to become more self-reliant, but the country will remain a one-party state.

In fact, the very timing of the Congress shows the centrality of the Cuban Revolution in Raul Castro's thinking. It is due to begin on the 50th anniversary of the battle of the Bay of Pigs, in which a US-backed force of Cuban exiles was defeated in an attempt to invade the island and overthrow communist rule.

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