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Thumbs Down for Uzbek Bank Reform

The government wants everyone to open a bank account, but many people are too poor or too canny to trust an institution with their hard-earned cash.
By IWPR Central Asia
New measures designed to encourage people to put their money in Uzbekistan’s banks are likely to come up against resistance from a population that deeply distrusts both the financial sector and any official attempt to monitor their incomes.



In early November, Uzbek president Islam Karimov issued a decree requiring banks and other financial institutions to take steps to encourage savings and reduce the size of the cash economy.



The plan focuses particularly on funding in the agricultural sector, where banks are instructed to do a range of tasks from offering loans and insurance to farmers to establishing money exchange points and “mini-banks” at the markets where farm produce is sold.

It all seems like a laudable attempt to encourage Uzbeks to open savings accounts and adapt to modern, cashless transactions.



The problem for those tasked with implementing it, though, is that there is very little public confidence in the banking system.



Karimov’s decree talks about a “liberalised” financial sector. But some suspect that the decree will be interpreted as an instruction to force rather than encourage people to open accounts, and that the latter will be subject to intense scrutiny by external agencies like the tax service.



“Coercing people to make cash deposits has nothing to do with the word ‘liberalisation’ said Jazgul Ismailova, an economics lecturer at the American University of Central Asia, based in the Kyrgyz capital Bishkek. “You need to create market mechanisms to attract money.”



Karimov called on banks to ensure their customers had “unrestricted and full” access to their cash. Uzbekistan’s banks have a poor record in this area. Subservient to the government, they have in the past have restricted customers’ rights to withdraw money whenever fiscal policy dictated this. In addition, many people suspect that the banks release confidential account information to the secret service.



The market traders who sell agricultural produce – one of the main targets of this decree – are unimpressed, and doubt they would see their money again if they entrusted it to the banks.



“I buy a bullock for a thousand dollars, but I don’t earn much from selling the meat,” said a butcher at a Tashkent market. “If I deposit the money, I don’t think they’ll give it back to me. If they’d give me a loan that would be a different story.



“No one trusts the banks these days. We don’t see what relevance they have to our lives.”



“Even if they put a gun to my head, I won’t use the banks,” said a woman selling carrots at the Farhod bazaar, one of the biggest in the capital Tashkent.



“Look, I earn nearly two dollars a day and it’s barely enough to support my five children. No one welcomes these measures. We’ve got enough problems with the taxman as it is.”



Like many people in Uzbekistan, another woman trading at the market is hardly in a position to open a bank account.



“Every day I buy six eggs and two loaves of bread. That’s with the money I earn in a day. It’s the same for thousands of other traders at this market,” she said. “If the authorities force everyone to start using the banks, there will be a revolt. Everyone is living on the poverty line, on the verge of ruin.”



Uzbek banks have remained tight-lipped about the move, although one employee who asked to remain anonymous said the institutions “haven’t had any instructions and don’t know anything about any decree.” He added, “It won’t really change anything anyway – they’ll carry on as usual”.



Analysts offer various explanations for why Karimov has issued this decree. One is that because the government runs a strongly interventionist economic policy, it believes it can curb inflation if it can only get full control over the circulation of money - especially if it can mop up some of the cash floating around and keeping the informal economy running.



“The decision may be designed to curb inflation and reduce the shadow economy,” said Ismailova.



She cited a report from the Fergana.ru news site which compared prices in October with the same month in 2006, and indicated that real prices had risen by between 30 and 100 per cent for housing, basic foodstuffs and consumer items.



Ismailova predicts that further inflation will result from a public-sector wage increase the authorities have announced as a sweetener for the December 23 presidential election, which Karimov will almost certainly win.



A commentator in Tashkent argued that placed in the context of the whole economy, cash transactions at the country’s bazaars are insignificant.



“The circulation of money from person to person at the markets isn’t that big…. That indicates that the country’s economic policy is in poor shape,” she said.



A second reason for bringing in the new system is undoubtedly to try to stamp out the thriving black market, by forcing traders to go through the banks so that the tax service can catch up with them



The informal economy in Uzbekistan is a direct consequence of years of economic policies designed to block imports and maintain the national currency at an unrealistic rate of exchange.



“Total regulation of the economy, including the fixing of prices, has lead to the creation of an immeasurably large informal market,” said Ismailova.



Over the years, repeated heavy-handed measures to curb smuggling, black market money-changing and unlicensed market trading have failed.



The latest interventionist policies leave the authorities at risk of creating as many problems as they solve, analysts say.



“It’s hard to envisage what mechanisms can be put in place to implement this set of instructions – perhaps tighter regulation of cash registers, or imposing specific conditions before people are allowed to trade at the markets,” said Kamran Aliev, a Tashkent-based social scientists. “In any case, it will lead to rising prices, and once again the man in the street will be hit.”



Ismailova agreed, saying that as traders were forced into the confining grip of the state bureaucracy, they would have to factor bribes as well as taxes into their costs. As a result, retail prices will go up and the availability of goods will decline.



In the end, the impact of government attempts to control the way Uzbeks earn and spend their money may be diluted by people circumventing or ignoring the rules.



“It is a real irritant for small-time entrepreneurs at the bazaars,” said Dinara Dyikanova, a Kyrgyzstan-base legal expert who has worked on business development in Uzbekistan in the past.



“It’s more than likely that retailers will pay bribes to the tax, police and a host of other agencies to avoid these complex procedures and hold onto the meagre amounts of cash they earn.”



A Tashkent-based economist agreed, saying, “I think this over-hasty decision fails to take into account the real state of affairs – and the mood – at the markets.



“This one-sided move by the government could have consequences that are hard to predict, but I think it will remain just a piece of paper that it would be neither realistic nor sensible to put into practice.”



(Names of interviewees have been withheld out of concern for their security.)

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