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Reforms could bridge gap to stronger Cuban peso

HAVANA, Feb 26 (Reuters) - Cuban President Raul Castro needs time to strengthen the peso and unite the country’s two currencies but there are faster ways he could boost purchasing power and ease public disaffection, economists said.

The 76-year-old general, who formally succeeded his ailing brother Fidel Castro on Sunday, said in his inaugural speech that he was studying a “gradual and prudent” revaluation of the peso.

But he focused more firmly on improving production in the state-dominated economy and reforms to cut some of the red tape that entangles almost every aspect of life on the communist island.

Since he took over power temporarily in July 2006, Castro has invited Cubans to air their woes and received a torrent of complaints that an average government wage of around 350 pesos ($15.75) a month is nowhere near enough to make ends meet.

Cubans earn in pesos but have to buy goods from soap to shoes in a hard currency called the convertible peso, which is pegged at $1.08. There are 24 national pesos to a convertible peso.

“You can work all day, but in the end you have to ask tourists for clothes because it’s not enough. It’s humiliating,” said Rosa Elena, a middle-aged street sweeper taking a break in Havana’s colonial district.

To make matters worse, goods sold in state-run convertible peso stores carry a mark-up of at least 240 percent, the profit ostensibly used to subsidize food for poorer Cubans.

“One way to increase purchasing power without increasing salaries would be to lower the mark-up and thus prices at the convertible currency stores, at least on basic products,” economist Juan Triana said.

“That way no more pesos would go into circulation, a major concern,” he told the Cuban United Nations Association on Monday.

NO. 1 GOAL: PRODUCE MORE

Other economists agreed with Castro that the priority was to improve output and produce more food, which would rebalance purchasing power under the laws of supply and demand.

“Our problems are due to a scarcity of products. The price of a tomato or pork won’t go down unless we produce more,” said Cuban economist Omar Everleny.

“A revaluation has to be gradual because the fundamental issue is productive, not financial.”

Some 60 percent of Cuba’s 11.2 million inhabitants have some access to hard currency through family remittances and other sources. The rest have to covert their peso wages into convertible pesos to buy more than the basics.

Simply lowering the number of pesos needed to buy convertible pesos or linking the two without strengthening the economy would be both destabilizing and inflationary, economists said.

“If full currency unification is not yet in reach, the government could alter subsidies, prices and wages to boost real purchasing power now,” said Phil Peters at the Lexington Institute, a think tank in Arlington, Virginia.

“That would begin to address the political grievance, and perhaps prepare the ground for a single currency later.” (Reporting by Marc Frank; editing by Jan Paschal and Jane Barrett)

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