Institute for War and Peace Reporting | Giving Voice, Driving Change
Uzbeks Loosen Banking Restrictions
After 17 years of maintaining a tight grip on all aspects of economic policy, the government appear to have recognised a need to offer greater freedom to bank customers.
In the latest move, on February 21, President Islam Karimov signed a decree promising rights for savers that might be taken for granted in other countries, but have been notably absent in Uzbekistan until now.
Account-holders will no longer have to declare the source of their money, as used to be the case. Banks are required to maintain confidentiality, and the police and tax agencies are specifically forbidden from demanding information about customers’ accounts.
In the past, commercial as well as state banks have handed over client details to the country’s powerful security services unquestioningly, giving the latter a ready-made instrument for pressuring and even prosecuting civil rights activists, businessmen and others.
Under the new rules, account-holders can maintain anonymity. there are no limits on the size of deposits, and they can be in foreign currency as well as Uzbek soms.
Furthermore, account-holders can withdraw or transfer any amount of money whenever they like. If that is implemented, it will again be a significant step forward from past practice, where people have periodically found themselves unable to withdraw more than a certain amount of their own money.
Finally, individual savers are exempted from paying tax on their deposits for a year from April 1.
The decree said the measures were designed to increase public confidence in Uzbekistan’s banks, thereby drawing more of the money now circulating in cash into the financial system, where it can be used to invest in economic growth.
An official commentary that accompanied the decree acknowledged that the public remained mistrustful of the banks.
It also suggested that the package of measures was analogous to the blanket “amnesties” that the authorities in neighbouring Kazakstan and in Russia have offered to encourage people to deposit earnings without fear of being questioned about their source.
Until now, the Uzbek government has imposed highly restrictive policies on the financial sector. Limits on the amount of cash firms could withdraw from banks, for example, drove some local firms out of business and left others operating in the grey economy. Foreign companies have found it increasingly difficult to operate.
However, the new decree applies only to private individuals, not commercial entities.
Jazgul Ismailova, an economist in Kyrgyzstan, said the reforms amounted to a de facto admission by the president that his central policies of state control and economic isolationism had failed.
“The [tax] amnesty is testament to Uzbekistan’s frustration with economic policies and the general state of affairs,” she said.
“Uzbeks now see that their regional archrival Kazakstan has successfully transformed its economy and is enjoying a boom thanks largely to its world-class financial system.”
The change of heart appears to date from last spring, when the Uzbek authorities started backtracking on some of the strict rules on banking.
In March 2007, Karimov abolished the prosecutor general’s right to force banks to hand over information on clients’ transactions. In November, shortly before his re-election as president, Karimov issued a decree designed to encourage Uzbeks to have more confidence in the privacy of their bank accounts. (See Thumbs Down for Uzbek Bank Reform, RCA No. 520, 07-Dec-07.)
An economist in the Uzbek capital Tashkent said one reason the authorities had started talking about liberalising the banking system was that they were running increasingly short of money as so much of economic activity is untaxed.
“The informal economy, coupled with widespread corruption and bureaucracy, have created a chronic budget deficit,” said the economist.
Analysts say the uncertain global economic outlook has made the Uzbek economy look even more vulnerable. Uzbekistan’s main export revenue comes from raw commodities – cotton, gas and gold – demand for which is sensitive to changing external conditions, while changes in import costs have a serious effect on inflation.
For comparison, Kazakstan, which is in much better shape than Uzbekistan thanks to its oil wealth, has nevertheless embarked on an austerity programme for government spending this year. This is a direct response to last year’s turbulence on world financial markets, in which Kazak banks which had been borrowing heavily abroad to fund a construction boom suddenly found themselves in a changed environment. (See Kazak Budget Cuts Could Backfire, RCA No. 536, 08-Mar-08.)
The Tashkent-based economist cast doubt over whether tentative moves to relax controls over banking would make much difference at this late stage.
“The latest measures look like a desperate attempt to save Uzbekistan’s shaky economy, which of course hasn’t the strength to withstand major external shocks coming from the international financial system,” he said.
He predicted that a continuing lack of confidence in the banks would stop people taking advantage of improvements to the system.
People involved in business and banking said they had yet to be convinced that Karimov’s strongly-worded decree will actually translate into confidentiality.
“Everyone knows that every visible business in Uzbekistan, including the banks, is in the hands of top [government] officials,” said one bank clerk in Tashkent. “If they need information on your account, it is unlikely that they [the banks] will hesitate to violate your rights.”
A banker in the city said the fact that the bank regulations were changed by presidential decree served to underline how all key policy matters are decided by Karimov, who could just as easily change the rules back on a whim.
“Karimov is constantly issuing decrees,” said the banker. “First he relaxes the rules for banks, then he toughens them. It makes any business transaction in Uzbekistan impossible”.
“I doubt they will have much effect,” he said, referring to recent presidential decrees. “They could only succeed if people felt at least some confidence in Uzbek banks,” he added.
(Names of interviewees have been withheld out of concern for their security.)
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