Publication: Monitor Volume: 6 Issue: 99

Early this month, the government and National Bank of Uzbekistan (NBU) moved closer to realizing President Islam Karimov’s promise to restore the convertibility of the som in 2000. Although it did not take steps to liberalize the legal purchase of foreign exchange, the NBU devalued the official exchange rate from US$1 = 150 som to the “interbank rate” (at which commercial banks buy and sell foreign exchange) of US$1 = 231 som. This devaluation could pave the way for broader som convertibility but leaves the official exchange rate well below the black market rate, which in early May was around US$1 = 700 som. And if it is not accompanied by other moves to liberalize the foreign exchange market and foreign trade, the devaluation might achieve little more than inject a fresh dose of inflation into Uzbekistan’s economy.

Although it raised the cost of official dollar purchases, the devaluation did nothing to broaden company and household access to the formal foreign exchange market. The overvalued official exchange rate makes imports cheap, at least for those privileged importers (mostly state and parastatal enterprises) blessed by the government with permits to purchase foreign exchange and imports. Uzbekistan’s restrictive systems of import licensing and foreign exchange controls remain in place. In addition, the NBU’s foreign exchange reserves are critically low, and imports have been cut back severely because Uzbekistan is unable to obtain financing for its current account deficits. These deficits are in turn exacerbated by the overvalued exchange rate and controls on import and foreign exchange that weaken incentives to export and scare away foreign investors.

Restrictions on purchases of imports and foreign exchange were introduced in late 1996 after the cotton harvest–Uzbekistan’s main export commodity, which accounts for some 40 percent of its foreign exchange earnings–failed, triggering a balance of payments crisis. The IMF suspended lending to Uzbekistan in response to these restrictions. Uzbekistan has muddled through since then primarily because it produces around 80 tons of gold annually, most of which is exported. However, the NBU’s foreign exchange reserves have declined to approximately US$1 billion (from US$2 billion in 1996), and debt repayment in 2000 is estimated at US$600-900 million. Recognizing the urgent need to secure balance-of-payments financing, Karimov has softened his tone towards the IMF. However, formal talks between the Fund and Tashkent planned for later this year seem to have only a technical character, and are unlikely to produce quick results (Reuters, May 5).

This suggests that the pressures on Uzbekistan’s balance of payments will continue to grow. By itself, however, the devaluation of the som is unlikely to help much. Instead, by driving up the cost of imports purchased at the official exchange rate, the devaluation is likely to boost inflationary pressures. Moreover, despite Karimov’s promises of liberalization, many people in positions of power seem to benefit personally from the corruption and nepotism inherent in the existing administrative system. For the moment, this “move to the market” seems to have bought Uzbekistan a bit of inflation–and little else.