Eurasianet
November 8
resident Islam Karimov's government in Uzbekistan is taking a significant step towards the free convertibility of the national currency. Analysts say the move could help stimulate domestic economic activity over the medium term. However, the currency reform is expected to cause a significant rise in domestic consumer prices.
A government resolution, which took effect November 1, aims to liberalize currency dealings by unifying the commercial and official exchange rates for the Uzbek som, establishing a free foreign currency exchange rate for off-exchange operations.
According to an Uzbek National Bank manager, the reforms should encourage business activity. "This makes book-keeping and price formation easier for businesses, as they will be making all calculations at one rate. And also, there will be a more realistic currency exchange rate now," she said.
Other analysts expressed cautious optimism, welcoming the reform in principle, but taking a wait-and-see approach on implementation. "The good news is that it is a further move towards a free exchange rate. The entire economy is going to work on the basis of a single exchange rate now, if we leave aside the cash rate. However, it is not known yet how the new rate is going to be determined," a Tashkent-based Western banker said.
"Another question is if they are going to abolish or restrict the system of quoting and licensing the exchange of currency for enterprises which, at the moment, gives [an advantage] to state enterprises," the banker added.
The currency reform is significant because it signals a desire by Uzbek authorities to curtail the state's extensive control over the economic sector. Karimov's willingness to relinquish economic control could potentially help break an escalating cycle of repression that has gripped Uzbekistan since the collapse of the Soviet Union in 1991.
Economic development has lagged during the last decade in Uzbekistan, due in part to the government's reluctance to unleash market economic forces. Poor economic conditions, in turn, have contributed to a rise of popular frustration. Growing discontent, manifested by a rise of Islamic radical activity, has caused the government to intensify its crackdown on individual liberties, including freedom of expression and religious worship. [For background see the Eurasia Insight archives].
Although the Uzbek government was mulling currency reform before September 11, it had been tentative in its approach. Some observers attribute Karimov's hesitation to concern that economic reforms could spark challenges to his political control. Uzbekistan's military cooperation with the United States under the aegis of the anti-terrorism campaign may be providing the necessary element of security that Karimov wanted in order to undertake reforms with potentially painful social side-effects.
Before 1 November, businesses were paying customs duties and taxes at a rate established by the Central Bank, called official, and exchanging currency (i.e. buying dollars) at a different, so-called "commercial" rate. The commercial rate was almost twice as high as official rate. At the end of October, the official rate was around 450 soms to the dollar and the commercial one was around 690 soms.
Under the November 1 reforms, the Central Bank set the new unified rate a 680 soms to the dollar. For Uzbek consumers, this unified rate will mean higher prices for imported goods, as customs and other duties will almost double. The bulk of durable goods available in Uzbekistan are imported, as domestic production has suffered from a lack of investment and poor quality control.
Consumers and business that rely on imports are bound to feel pinched by the reform, at least over the short term. "Prices will go up and this will have an impact on people. … Sellers will have to artificially raise prices to avoid losses and people will not be able to buy, as their incomes are not going to increase," said a manager of a Turkish company that operates a supermarket and fast-food chain in Tashkent.
Even after the currency reform, Uzbekistan will still have two currency exchange rates: a free off-exchange rate, and a cash rate at which individuals can buy and sell foreign currency at authorized banks - at rates established by these banks.
There is also a currency black-market that is likely to remain in place for at least the near term. The changes on the official currency market do not seem to have affected the black market yet. The black market rate, which is widely viewed as the most accurate method of judging the strength of the som, has remained at around 1,300 soms to the dollar.
Although Uzbek newspapers carried extensive coverage of the currency reform, it has failed to attract much public attention so far. Most people are concerned only about the black market rate, and that has not changed. Most likely, awareness will begin to spread only as prices begin to rise.
The government is aware of the potential that higher prices could fuel popular discontent, and has taken steps to limit the consequences of currency reform for the most vulnerable sectors of the population. On the same day the currency reform took effect, the government issued an order imposing limits on the surcharge for "socially important" food items, including flour, vegetable oil and sugar. The retail price of such items now cannot exceed the producer price by more than 25 percent. Officials also announced that they are developing social welfare programs for "socially-vulnerable" groups of people "in conditions of the liberalization of economy." This announcement hints that more moves to liberalize the economy are in the offing.