Uzbekistan's Depreciating Currency
Uzbekistan's Depreciating Currency
The continuing depreciation of Uzbekistan’s national currency, the som, suggests that a managed devaluation may be inevitable.
The gap between the official and black market exchange rates is widening again, after several years in which the government has attempted to manage the official rate at a realistic level. The Ferghana.ru news agency reported on August 2 that the unofficial black market rate had fallen by 4.6 over the previous couple of weeks to reach 1,880 or 1,890 soms to the US dollar. Meanwhile, the rate set by the central bank stood at 1,490 to the dollar
The som has been losing value since early 2009 – but at around 30 per cent, NBCentralAsia observers note that depreciation has been much faster on the black market, seen as more responsive to real market conditions, than at the controlled bank rate, which has fallen by some seven per cent.
Foreign currency is in short supply at the banks, creating demand on the illicit market.
The authorities are trying to cope with the current cash shortage – which affects Uzbek as well as foreign currencies – through tight monetary controls. One consequence of this is a policy of paying public-sector wages and pensions by bank transfer rather than cash.
Depreciation coupled with inflation has also forced the government to raise wages and pensions regularly.
These days, when people draw cash, they have to carry it around in plastic bags to go shopping. A return air ticket to Moscow worth 440 dollars, for example, requires a wad of banknotes weighing two kilograms, even in the largest denomination, 1,000 soms.
Komron Aliev, an economist in Uzbekistan, says this problem could be relieved by issuing 5,000- and 10,000-som banknotes, on condition that notes are withdrawn from circulation to prevent an over-supply.
Even as things stand, said Aliev, there is too much cash in circulation for monetary stability.
Other observers argue for harder-hitting measures amounting to monetary reform.
“The more the Uzbek government postpones addressing this issue, the higher the chances of major financial-sector problems,” said another economist in Tashkent.
As a third analyst noted, the depreciation reflected in the plummeting black market rate may force the authorities into revising the fixed official rate.
They might also consider a redenomination, where a number of zeros would be wiped off the som’s face value.
Tashpulat Yoldashev, an Uzbek political analyst based abroad, doubts that tinkering with monetary policy will have any lasting effect unless wider macroeconomic reforms are launched.
He argues that the som is losing value because Uzbekistan’s closed economy cannot compete internationally. In that environment, he says, the government’s monetary and loan policies have merely created additional distorting effects.
“This is a dead-end situation, and there’s a need to modernise, to give business a free hand, to attract investment, and open the economic borders,” said Yoldashev. “Otherwise, the monetary and credit systems will suffer catastrophe.”
(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 has resumed, covering Uzbekistan and Turkmenistan.)
The gap between the official and black market exchange rates is widening again, after several years in which the government has attempted to manage the official rate at a realistic level. The Ferghana.ru news agency reported on August 2 that the unofficial black market rate had fallen by 4.6 over the previous couple of weeks to reach 1,880 or 1,890 soms to the US dollar. Meanwhile, the rate set by the central bank stood at 1,490 to the dollar
The som has been losing value since early 2009 – but at around 30 per cent, NBCentralAsia observers note that depreciation has been much faster on the black market, seen as more responsive to real market conditions, than at the controlled bank rate, which has fallen by some seven per cent.
Foreign currency is in short supply at the banks, creating demand on the illicit market.
The authorities are trying to cope with the current cash shortage – which affects Uzbek as well as foreign currencies – through tight monetary controls. One consequence of this is a policy of paying public-sector wages and pensions by bank transfer rather than cash.
Depreciation coupled with inflation has also forced the government to raise wages and pensions regularly.
These days, when people draw cash, they have to carry it around in plastic bags to go shopping. A return air ticket to Moscow worth 440 dollars, for example, requires a wad of banknotes weighing two kilograms, even in the largest denomination, 1,000 soms.
Komron Aliev, an economist in Uzbekistan, says this problem could be relieved by issuing 5,000- and 10,000-som banknotes, on condition that notes are withdrawn from circulation to prevent an over-supply.
Even as things stand, said Aliev, there is too much cash in circulation for monetary stability.
Other observers argue for harder-hitting measures amounting to monetary reform.
“The more the Uzbek government postpones addressing this issue, the higher the chances of major financial-sector problems,” said another economist in Tashkent.
As a third analyst noted, the depreciation reflected in the plummeting black market rate may force the authorities into revising the fixed official rate.
They might also consider a redenomination, where a number of zeros would be wiped off the som’s face value.
Tashpulat Yoldashev, an Uzbek political analyst based abroad, doubts that tinkering with monetary policy will have any lasting effect unless wider macroeconomic reforms are launched.
He argues that the som is losing value because Uzbekistan’s closed economy cannot compete internationally. In that environment, he says, the government’s monetary and loan policies have merely created additional distorting effects.
“This is a dead-end situation, and there’s a need to modernise, to give business a free hand, to attract investment, and open the economic borders,” said Yoldashev. “Otherwise, the monetary and credit systems will suffer catastrophe.”
(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 has resumed, covering Uzbekistan and Turkmenistan.)
