Following a package of changes to its foreign exchange rate regime this summer, Uzbekistan has taken further steps to liberalize cross-border transactions, including a sharp devaluation of the official exchange rate. Supplementary price controls are supposed to protect consumers from the possible inflationary impact of the changes. Like earlier policy packages, the newest modifications to the exchange rate regime fall short of totally eliminating the system of controlled exchange rates in place since 1997, and the curb market will remain. Nonetheless, additional transactions will move to a more economically rational basis.
To date, Uzbekistan has had a three-tiered exchange rate regime. The official rate, or central bank rate, has been the most overvalued of the three. The curb rate has been set freely by market forces, while a commercial bank rate, or interbank rate, has been somewhere between the two. Government regulations have stipulated which transactions were to take place at the official rate and which at the commercial bank rate. As of October 25, the official rate was 432.2 soms per dollar, against a commercial bank rate of 684.0 soms. The curb rate has been over 900 soms per dollar since the beginning of the year, a level widely regarded to be overdepreciated owing to the premium charged in the context of other currency controls.
The latest changes flow from two government resolutions and an administrative adjustment to the official exchange rate with an emphasis on shifting transactions from the official rate to the commercial bank rate. As of November 1, the official rate was 680.9 Uzbek soms per dollar, down from 433.7 at the end of October. The devaluation of the official exchange rate amounts to a 57-percent drop versus the U.S. dollar in nominal terms. This brings the official exchange rate down to the level of the commercial bank rate, substantially more in line with free market rates.
A resolution dated October 25 of this year expands the list of transactions taking place at the more liberal commercial bank exchange rate by two. As of November 1, the surrender of export earnings by exporters of so-called centralized resources and the servicing of government and government-guaranteed debt accrued prior to July 1, 2001 have moved to the less overvalued rate. That can be expected to improve production and export incentives for many businesses while making service of the country’s external debt more expensive in local currency terms. So-called centralized resources are goods that are exported mainly by state-owned firms under government regulation. The most prominent of these goods in recent years have been cotton and gold. A second resolution, dated October 31, aims to stave off the potential inflationary impact of the associated devaluation of the official exchange rate. The document calls for the establishment of a ceiling on the markup for staple food items. This markup is to be no greater than 25 percent of a selected good’s declared value at customs and will apply both to firms and to individuals engaged in cross-border shuttle trade. Further, the right to import three staple items–sugar, flour and vegetable oils–is to be limited to legal entities.
Introduced in early 1997 in the context of a poor cotton harvest and falling world cotton and gold prices, the convertibility controls have served several purposes. Most important, they have played a critical role in the government’s program of import substitution. The government has used the overvalued currency to permit favored enterprises to import capital equipment and other priority goods at a more favorable rate than they otherwise could. Progress on liberalizing the exchange rate regime has been a bone of contention between the Uzbek government and international financial institutions. In April, the IMF followed through on its earlier threat to shut down its Tashkent mission, largely due to a lack of progress in Uzbekistan on convertibility and other policy issues.
Uzbekistan has been under pressure to unify its exchange rates in recent years. Beginning in 1998, persistent negative pressure on the balance of payments became evident, and the distortions caused by the exchange rate regime have been estimated to have cost the country as much as several points of GDP in welfare losses in recent years. Financing of the current account deficit has been difficult as a result of the exchange rate regime. Overvaluation of the Uzbek som combined with external shocks including the 1998 Russian crisis forced the country to draw down foreign exchange reserves in 1998 and 1999.
The government has already undertaken a number of other liberalization measures this year, mainly in July. Among other things, it liberalized the rates at which exporters of decentralized products had to surrender foreign exchange to the authorities and at which foreign companies could repatriate profits. Additionally, small and medium-sized businesses were freed from the foreign exchange surrender requirement altogether.
The full impact of this week’s changes on the exchange rate regime remains uncertain. The devaluation brings the official exchange rate to the level of the commercial bank rate, a significant step. However, a similar measure adopted in May 2000 kept the two rates together for only about two months, before the authorities allowed them to diverge again (Uzbekistan National News Agency, October 25, 31; Interfax Weekly Business Report, October 30).
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