Cuba is embarking on the biggest devaluation of the peso since the 1959 revolution and the elimination of a dual currency system as the Communist government struggles with its worst economic crisis since the collapse of the Soviet Union.

The peso, which has been artificially set at parity with the US dollar for decades, will be valued at 24 pesos to the dollar from January 1, Cuban president Miguel Díaz-Canel announced late on Thursday. This is similar to the level at which citizens were able to exchange a second currency, the convertible peso. That currency will now be eliminated.

Mr Díaz-Canel, flanked by Communist party leader Raúl Castro during a brief televised appearance, cautioned that the measure was not a magic bullet that would solve the country’s economic problems, but would help pave the way.

“This will put the country in a better position to carry out the transformations demanded by the updating of our economic and social model,” he said.

Cuba’s government is anxious that the devaluation should not fuel unrest, particularly given recent expressions of dissent by artists demanding greater freedoms.

The government plans to increase state wages and pensions fivefold to compensate for the inflation likely to be generated by the devaluation. However, the 40 per cent of the labour force that works in the private and informal sectors, or those living off the land, will have to deal with the salary hit on their own.

“They are going with a ‘big bang’ exchange rate adjustment, although they will try to regulate the impacts with administrative measures and repressing inflation,” said Pavel Vidal, a former Cuban central bank economist who teaches at Colombia’s Universidad Javeriana Cali.

“There is no complete unification of currencies, because the economy is dollarising, but they are going to advance a great deal in the unification of exchange rates,” he added.

The devastating effect of coronavirus on tourism, a fall in foreign earnings from the export of medical services and tougher US sanctions have created the worst cash crunch in Cuba since the early 1990s.

In 2019 the government began opening hard currency shops to capture tradeable currency in the retail sector, arguing it had no money to import many goods and then sell them in pesos.

As part of the new reforms, Havana has unveiled cuts in subsidies to state companies. They will be hit by the scrapping of the convertible peso, because they were permitted to use it at preferential exchange rates, flattering their accounts.

Neither the peso nor the convertible peso currency are tradable outside Cuba, and economists have long argued that the dual currency system is so unwieldy that it stymies the country’s exports, encourages imports and makes it difficult to analyse corporate profits.

As part of the transition, Cuba’s government has said it will accept convertible pesos at the current 24-to-one rate for six months and convert bank accounts priced in convertible pesos.

Alejandro Gil, economy minister, has said he expects further devaluation in the future.

Scarcity of basic goods and long queues at shops have been a feature of life in Cuba since Donald Trump’s administration tightened sanctions against the country in 2019.

The shortages have been exacerbated by the pandemic, because Cuba imports about 60 per cent of its food, fuel and inputs for sectors such as pharmaceuticals and agriculture.

The Cuban government has yet to provide economic data this year but the UN Economic Commission for Latin America and the Caribbean predicts the economy will contract 8 per cent after a sluggish performance over the past four years. Most other foreign analysts said trade was down by at least a third.

The long-awaited monetary reform is key to the success of numerous other market-oriented reforms under way on the Communist-run island as it tries to move away from a Soviet-style command economy. It is viewed positively by foreign businessmen, diplomats in Havana and analysts abroad.

“If the Díaz-Canel administration can successfully implement a unification and devaluation, sources for direct foreign investment will be supportive, as will governments,” said John Kavulich, president of the US-Cuba Trade and Economic Council.

“United States companies will remain idled [by the sanctions], but ready when opportunities emerge,” he added.