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Uzbekistan: Currency Restrictions Surprise Experts

  • Charles Recknagel

Washington, 19 November 1996 (RFE/RL) -- After five years of efforts by many Central Asian countries to make their currencies more convertible, Uzbekistan has surprised financial experts by tightly limiting the exchange of its currency into dollars.

Tashkent last month passed a decree restricting the number of banks where Uzbek citizens and foreign companies can convert the som into hard currency from 14 banks to two. Correspondents say that the decree has left both small and large companies able to legally obtain only a fraction of the hard currency they previously used for trade within the region and abroad.

The action has surprised many foreign observers because Uzbekistan, like Kazakhstan and Kyrgyzstan, has previously sought to move towards full currency convertibility. Roger Kangas, an analyst at the Central Asian Institute in Washington, D.C., says Tashkent's goal had been "to approach, if not hard currency status, then at least convertible currency status within the next two years."

Analysts say the decision to cut off most legal private access to hard currency may be related to recent setbacks in the state controlled agricultural sector which are putting a strain on the government's hard currency reserves.

Uzbekistan's principal export commodity -- cotton -- produced a lower-than-expected harvest this year, threatening the government with a shortfall in hard currency income. At the same time, Uzbekistan's wheat harvest -- needed to feed the country -- has fallen short for the second year in a row, forcing Tashkent to spend more hard currency on buying wheat abroad.

Often, such circumstances would force a government to choose between two difficult steps: sell precious gold reserves, or lower the exchange rate of the national currency. Tashkent is considered to have sizeable gold and hard currency reserves, enough to cover all the country's imports for some ten months. But instead, for reasons analysts say are unclear, the Uzbek government chose an unorthodox third solution. It closed almost all of the country's official exchange counters, guaranteeing enough hard currency remains in the state banks to meet its needs, but putting the burden of any hard currency problems on the business sector instead.

The action has left business, including some of the biggest foreign investors in Uzbekistan, holding millions of dollars worth of unconvertible soms and has sent the black market dollar rate soaring. News reports say many importers of Western goods and equipment have now begun to either increase their prices to cover the black market cost of the dollars they need to do business, or have simply suspended doing business altogether.

Development experts speaking on condition of annonymity in Washington, D.C., call Tashkent's decision mistaken. They say that other countries with developing markets have tried tighter currency restrictions to control economic developments, but that the strategy shows a poor understanding of -- and too little faith in -- the ability of free market measures to solve problems. They also say that it is extremely rare for a country which has already begun liberalizing its currency exchange -- as Uzbekistan had -- to suddenly reverse direction.

Kangas says if Tashkent's new currency policy remains in force it could risk lowering long-term confidence in the Uzbek economy among Western companies and possibly cause "a slowdown in their ability and desire to invest there." The currency decree gives no time frame for how long it will remain in effect.

As businesses in Uzbekistan try to cope with the new hard currency restrictions, analysts say Tashkent's action is a sign of how fragile the committment to market economics remains in Central Asia.

Uzbekistan's new exchange rules now make it, along with Turkmenistan and Tajikstan, one of the most conservative Central Asian countries in regard to monetary policies. Turkmenistan favors a policy of delaying progress toward a convertible currency until its still largely unexploited natural resources begin attracting hard currency income. Tajikstan, with an economy damaged by civil war, still has too little foreign currency to speak of an exchange market.

But Kazakhstan and Kyrgyzstan remain committed to making their currencies freely convertible. Kazakhstan, which has already attracted large-scale foreign investment, signed an agreement with the International Monetary Fund (IMF) last year to refrain from imposing restrictions on hard currency transactions. Kyrgyzstan did the same this summer. The IMF considers liberal currency exchange practices essential for promoting the growth of world trade.