Uzbek Authorities Try to Stem Capital Flight
Uzbek Authorities Try to Stem Capital Flight
On November 3, Uzbek state media published a decree issued by President Islam Karimov, designed to encourage commercial banks to compete among themselves to attract savings. Banks that bring in new deposits will benefit from a special bonus award fund.
The aim is to mop up spare cash held by the public, thus building up the banks’ capital base and allowing them in turn to issue loans for new investment.
As of the beginning of this year, Uzbekistan had around 30 commercial banks with over 7,500 branches, plus smaller entities – “mini-banks” and savings banks. At that point, official figures suggested that the banks’ deposit base had increased by almost one-third compared with the previous year.
The authorities launched banking reforms in November 2007, with a presidential decree instructing financial institutions to increase the level of savings and reduce the amount of cash in circulation.
However, the banks were unable to make much headway in winning public trust because of their restrictive policies, which for example made it difficult for customers to withdraw or transfer money from their own accounts. (See Thumbs Down for Uzbek Bank Reform, RCA No. 520, 07-Dec-07.)
A second round of reforms followed in February 2008, when banks were exempted from taxes provided that they concentrated spare funds on building up their assets.
NBCentralAsia analysts say that as a result of the government’s actions, the four largest banks – Narodny Bank, Uzpromstroybank, Pakhta-Bank and Galla-Bank – plan to double their assets by the end of 2008, while most commercial banks are already offering high rates of interest of up to 20 per cent a year on long-term deposits.
Currently the major customers for savings accounts are civil servants, other public-sector employees and pensioners, who open deposit accounts in order to receive dividends at the end of the year.
“I put my money in an account… for 18 months at 16 per cent interest per annum. I hope to get more money next summer, unless inflation eats it up,” said one elderly saver with Pakhta-Bank says. “Many people are saving like this so as to buy essential items.”
Analysts in Uzbekistan believe the announcement of an inter-bank competition for savings is a measure the Central Bank has been forced to take as a way of slowing the outflow of money from the country.
According to one observer in Tashkent, “In September and October, bank depositors were scared by reports on the impact the world financial crisis was having on neighbouring countries, and started withdrawing their money and converting it into foreign currency – dollars and euro.”
Although these withdrawals have not reached massive proportions, analysts say that those savers who have taken their money out of the banks are hanging onto it rather than depositing it again. They appear to be waiting to see how the situation looks towards the end of the year.
Other commentators say that shortages of Uzbek currency in the banks appear to indicate a cashflow problem.
Surat Ikramov, a Tashkent human rights activist, said he has seen several cases recently where bank customers found they could not change foreign currency into Uzbek soms.
NBCentralAsia analysts say the Uzbek financial system is vulnerable, and the authorities are therefore moving rapidly to raise additional assets so as to prevent a sudden collapse.
As one economist put it, “If the financial crisis were to suddenly spread, Uzbekistan might find it didn’t have the funds to underwrite a stabilisation programme and ensure deposits could be repaid.”
NBCentralAsia is an IWPR-funded project to create a multilingual news analysis and comment service for Central Asia, drawing on the expertise of a broad range of political observers across the region. The project ran from August 2006 to September 2007, covering all five regional states. With new funding, the service resumed in 2008, covering Uzbekistan and Turkmenistan.)
