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Uzbekistan: Tashkent Moves Toward Unifying Currency Rates

Earlier this month, Uzbek authorities lowered one of the official rates for the som to around the black-market rate. The move is seen as a first step toward unifying the various exchange rates and eventually establishing a convertible currency. But it's too early to tell whether Tashkent is sincere in its intentions. RFE/RL correspondent Antoine Blua looks at Uzbekistan's currency problems and the importance that international financial institutions attach to the issue.

Prague, 26 April 2002 (RFE/RL) -- Uzbekistan has recently taken what many see as an important step toward implementing economic reforms recommended by international financial institutions.

Earlier this month (15 April), officials lowered the commercial rate for the currency, the som, to 1,400 per one U.S. dollar from the previous 920 soms. The reduction brings the rate more or less into line with the black-market rate of about 1,450 soms.

The move was widely seen as a first step toward unifying the country's three rates for foreign exchange, with the ultimate goal being to establish a fully convertible currency.

Erik Devrijer, the International Monetary Fund's mission chief for Uzbekistan, says unifying the rates is one of the elements of an IMF reform plan for the country: "The Uzbek authorities are at present in the middle of implementing an IMF staff-monitored program. One of the important elements of this program is the liberalization of the foreign-exchange regime. This action is one part -- but only one part -- of the whole. At the moment, not much progress has been made in implementing these reforms that involve not only the unification of the exchange rates but also the lifting of restrictions on access to foreign exchange."

The three rates include two rates set by the authorities -- the commercial rate and the auction rate -- as well as the black-market rate.

The Uzbek government in the past has kept the two official rates well above the black-market rate, and kept in place a series of restrictions on convertibility, as a way of controlling the flow of foreign currency. The auction rate is currently around 700 soms to the dollar, or about half the black-market rate.

International lenders have been prodding the Uzbek government to free up its exchange rates as a way of encouraging foreign investment. Foreigners are hesitant to invest their capital in a country if they are not certain they can easily transfer their profits out of the country at a suitable exchange rate.

Jean Lemierre, the president of the European Bank for Reconstruction and Development, explained the problem in an interview with RFE/RL earlier this month.

"This is a debate I had with [Uzbek] President [Islam] Karimov. Uzbekistan has a dual-exchange [currency] system that penalizes investment. The investors are very hesitant to invest [in a country] if they are not assured that they will be able to [transfer their profits out] in suitable exchange conditions. And this is an important brake on investment. One can understand the concerns of the Uzbek officials. There are also ways to make step-by-step progress from the current situation."

But it's not clear yet whether the Uzbek authorities are sincere in their aim of creating a convertible som or are only interested in taking small steps to please the IMF.

The London-based Economist Intelligence Unit, in a recent report, cast doubt on Tashkent's long-term intentions, especially as the prices for Uzbek commodity exports decline. The report said devaluing the som too quickly would risk sparking a run on the currency, and a rapid fall of the som on the black market.

The report also said removing currency restrictions could increase the country's external debt. Easing restrictions would also end a ready source of taxes and fees for the government and the Uzbek Central Bank.

The EIU also wonders whether unified rates would really increase foreign investment, given that problems of corruption and bureaucracy remain.

But delaying the process also carries risks. International financial institutions, including the IMF, have made convertibility a major issue in their relations with Tashkent.

Local bankers say the government is moving in the right direction, but say they doubt officials will meet a timetable of this year for introducing currency convertibility.

Hugo Minderhoud, the general manager of the Tashkent-based ABN Amro Uzbekistan bank, tells RFE/RL that this month's decision to reduce the spread between the commercial rate and the black-market rate is a move toward a unified exchange-rate system and economic reform.

But he says he is skeptical the government will be able to implement some reforms by 1 July, as it said it would do: "I think the government is committed to fulfill all the conditions in the [IMF] staff-monitored program. I don't know if they will be able to make the deadline of the first of July. I wouldn't be surprised if would be extended a little bit. But I think the government will continue with fulfilling the conditions."

However, he expresses optimism: "[Officials] have the willingness, and if they go for liberalization and reform, then they will get the required assistance from the international community to make it work for them, so I don't see a major problem there."

Earlier this month, World Bank President James Wolfensohn strongly urged Tashkent to reform its currency system. He said the changes are necessary if the country hopes to capitalize on the attention it has gained by supporting the U.S.-led antiterrorism campaign in Afghanistan.