Uzbekistan Promises Currency Liberalisation

Monday, 21 February, 2005

The link has been copied

Galima Bukharbaeva

Uzbek economics minister Rustam Azimov has promised to end his country's tight restrictions on exchanging foreign currency by the end of this year. It is the latest in a series of deadlines which the government has set itself over the past few years, and it remains to be seen whether the change will actually happen.

Freeing the exchange rate between the Uzbek som and the US dollar has been central to recommendations made by the International Monetary Fund, IMF, which sees the move as essential if Uzbekistan is to undertake serious economic reforms. The IMF has not released any new loans to Uzbekistan since 1996, when it suspended its credit arrangement over concerns about stalled economic reforms.

Until now the Uzbeks have chosen to ignore IMF advice and go their own way, with the state playing an important role in controlling the economy. That involves deciding who gets to buy US dollars - the key currency - and at what rate.

Azimov's remarks, made at a press conference held on June 27 after he met a visiting IMF delegation, suggest that things are about to change. He had evidence, too - the fact that the officially-set exchange rate and the black-market rate have moved further together, which is a precondition for making the som convertible.

"You can rest assured that convertibility will start by November. Today we have aligned the black market and official exchange rates," he said.

The minister said his government would take a series of steps in July-August to keep the two rates close together and to prepare the way for full convertibility. He said an action plan had already been sent to the IMF.

In previous years Uzbekistan has discussed getting an IMF loan to help it pay the costs of adjusting the exchange rate. But Azimov said this would not be needed.

"We haven't carried out reforms for the IMF or in order to get credit, but rather for our country's economy. We can survive without a stand-by arrangement [IMF credit line], since the main mechanism is not money, but the right economic policy," he said.

Under the current system the government restricts the right to buy dollars or other currencies. But for those lucky enough to be able to buy dollars, the official exchange rate is deliberately set low, so they get an artificially large number of dollars for their soms. As an IMF study noted in 2001, the rationale behind this is in part to encourage imports of goods which will build the country's industrial base. Companies which earn foreign currency from exports have to exchange it back into soms at the same artificial rate, so they lose out. Effectively, the IMF study said, the government was subsidising importers and taxing exporters.

Since officially-sanctioned access to dollars is limited, many people turn to the illegal black market, where the som has a market value that is far less than the official rate but where they can at least buy as many dollars as they want.

The discrepancy between the official and black-market rates has reduced dramatically from 150 per cent seen 18 months ago. In June this year the difference was at an all-time low - 974 som to the dollar at the official rate, and 990 som on the black market.

Azimov said sound economic policies had produced the change. Independent economic analysts say the government had to take some tough and unpopular decisions to achieve it, and as a result domestic and international trade have slumped. The main tactic was to slash import levels so as to reduce the demand for the foreign currency needed to buy goods.

In May last year the government slapped customs duties of 90 per cent on imported industrial goods and 50 per cent on foodstuffs. These were later lowered to 70 and 40 per cent, but local businessmen say this is still very high and has cut trade levels.

A second measure was to increase border restrictions to make it harder for Uzbeks to spend foreign currency outside the country. The borders with neighbouring Kazakstan, Kyrgyzstan and Tajikistan have been effectively closed since the beginning of the year.

The economy minister, however, dismissed any talk of border closures. "I'm not deceiving you, our borders are open-they are only closed due to sickness, contraband and terrorism," he said.

The government's measures have worked in that they have depressed imports. However, they have also caused inflation because of the shortage of goods and because shop owners are reluctant to reduce prices to match the changing exchange rate. Prices of industrial goods, electrical equipment, clothing and cars are now much higher than in other countries in the region, while monthly wages remain as low as ever.

IWPR looked round the private shops which specialise in imported electrical goods, a popular item. Even though prices have gone sky-high, the owners say they are finding it harder to survive.

"It has become very difficult to bring in stock, and people just can't afford such high prices. These goods will probably disappear soon, too," said a salesman at a television and stereo shop at the Tashkent's Navoi market, nodding at his half-empty shelves.

The head of the IMF delegation, Eric de Vrijer, says the Fund is supportive of the government's plans for convertibility, although he recognises the cost of the measures the government has opted for. "There has been a slump in economic activity in trade, on the services market and in agriculture," he said.

Liberalising the currency market has been the toughest challenge facing the government since 1996, when it ended its cautious attempts to run a market-led exchange rate. The European Bank for Reconstruction and Development, EBRD, says private investors took a wait and see attitude to the government's repeated promises of liberalisation - and then suffered significant losses following last year's trade restrictions.

This time round the Uzbek authorities look serious about moving towards convertibility and bearing whatever costs this incurs. But local analysts say they will suspend judgement to see whether the government is still showing the same resolve nearer its year-end deadline.

Galima Bukharbaeva is IWPR director in Uzbekistan, Viktor Krymzalov is an independent journalist in Tashkent.