On July 3, currency exchange offices opened in Uzbekistan for the first time since 1996, as the country’s authorities took another tentative step towards unifying the som exchange rates and removing capital controls. The government issued a resolution allowing all licensed banks to buy hard currency at free market rates, while the four main state-controlled banks are now allowed to sell hard currency to individuals in certain circumstances. Some firms are also allowed to conduct currency transactions freely, but it is unclear how long the existing quota system for importers will remain in place. Exchange offices in Tashkent were buying dollars at 675 som per dollar and selling at 690 som per dollar.
This is the second step in recent months toward fulfilling President Islam Karimov’s promise of full convertibility by the end of 2000. In May, the authorities scrapped the old official exchange rate by unifying the interbank and central bank rates. This effectively devalued the som to 230 per dollar from the previous 150. At the end of June, the som was trading on the black market at between 660 and 700 to the dollar, while the official central bank rate was 255 (Reuters, July 3).
Currency restrictions were imposed in 1996 after a disastrous cotton harvest and kept in place as world prices for both of Uzbekistan’s main exports, cotton and gold, declined and remained at low levels. The capital controls have been stifling foreign investment in the resource-rich country for the past four years. The system has encouraged capital flight and corruption, contributing to a fall in people’s living standards. Reduced hard currency inflows have caused the country’s foreign exchange reserves to dwindle to US$1 billion, compared to US$2 billion in 1996. External debts have soared to US$4.6 billion with some US$900 million due this year. However, the government is fearful of sparking the social unrest which could follow a sudden devaluation of the som, and Uzbekistan is likely to have difficulties obtaining a substantial foreign assistance package needed to ease the effects of the long-delayed liberalization. Talks with the IMF in June focused on technical issues rather than financial support, but further consultations are expected in the fall. In receive new financing from the IMF, the government will have to formulate a concrete macroeconomic plan and improve transparency (Reuters, June 28).
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