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Uzbekistan: Will Currency Finally Be Made Convertible?

Uzbekistan has announced that it will introduce full currency convertibility by the end of the year. But analysts both in Tashkent and abroad are skeptical, noting that Uzbek leaders have promised before to remove all currency restrictions.

Prague, 10 July 2003 (RFE/RL) -- Rustam Azimov, Uzbekistan's deputy prime minister and economy minister, recently told journalists in Tashkent that Uzbekistan will introduce full currency convertibility by November.

Interfax quoted Azimov on 27 June as saying: "Uzbekistan plans to wrap up the process of fully liberalizing the currency market by the end of the year. Then, it will make commitments on conversion in current international transactions."

This is not the first time that a top Uzbek official has promised to abolish all currency exchange restrictions, however.

President Islam Karimov pledged to restore currency convertibility in 2000 but failed to do so. As a result, the IMF closed its Tashkent office in April 2001.

Uzbekistan also missed two other deadlines last year to introduce convertibility and make other changes to liberalize trade and agriculture. The International Monetary Fund (IMF) consequently declined to renew an economic reform program in Uzbekistan.

Uzbekistan's decision is part of the latest economic action plan unveiled by the government in an effort to satisfy the demands of the IMF. Under the plan, all barriers to currency convertibility will be lifted, including exchange limits and trade restrictions. The current requirement that companies pre-register import contracts with the government also will be lifted. The plan is expected to be approved by mid-September, when an IMF mission is due in Uzbekistan.

In an interview with RFE/RL, the head of the IMF mission in Tashkent, Erik de Vrijer, points out that Uzbekistan has already taken the first steps toward convertibility.

"In 2002, in early 2002, the Uzbek authorities decided to open access to the foreign exchange market in the context of the staff-monitored program which covered the period January-August 2002," de Vrijer says. "This was meant to be a first step toward currency convertibility for current international transactions. Some progress was made in 2002, in particular by streamlining documentation requirements for the over-the-counter or noncash market and also by loosening restrictions to access in the cash markets for foreign exchange."

The lack of a freely convertible currency is frequently cited as the single greatest barrier to Uzbekistan's economic development. Lack of convertibility means that foreign businesses are unlikely to open factories in Uzbekistan, for example, as long as it is not possible to convert any profits from soms to dollars or euros at a rate set by the market, not by the Uzbek government.

De Vrijer is optimistic that the Uzbek government will deliver on its promises this time. "Convertibility is now within reach for Uzbekistan, and the current plan of the authorities is realistic, provided they follow through with implementation," he says. "By now, the over-the-counter and cash market exchange rates have been de facto unified, and the spread with the below-market exchange rate has been reduced to about 1.5 percent. Nevertheless, this is a very good time to remove all exchange restrictions. The international reserve's position of Uzbekistan is comfortable, and can easily support moving to full convertibility."

At the same time, he noted full convertibility will not resolve all of the problems facing the Uzbek economy.

"Introducing currency convertibility is an important step for Uzbekistan, but it is not a panacea for all the problems besetting the Uzbek economy," he says. "An important thing it will do is to clearly expose the problems that need to be addressed, instead of hiding them behind the veil of an overvalued exchange rate."

But U.S. analyst Adam Albion points out in the most recent issue of "RFE/RL Central Asia Report" (7 July) that following Tashkent's failure to keep its promise to introduce currency convertibility in 2002, "few financial analysts in Tashkent sound sanguine about Azimov's latest pledge."

Of the five Central Asian states, only Uzbekistan and Turkmenistan do not have full currency convertibility.

Kyrgyzstan was the first to abandon the ruble and introduce its own currency, the som, on 10 May 1993. Central Bank President Ulan Sarbanov says people trust the som and that the Kyrgyz economy is making progress, although at a "steady pace" rather than at a gallop.

The som has fallen in value -- from four against the U.S. dollar when it was introduced, to 12 in October 1996, to 41.6 today.

Kazakh President Nursultan Nazarbayev, by contrast, had bank notes in a new currency, the tenge, printed during the early months of 1993. But ignoring advice from his economic advisers, he hesitated that summer to abandon the ruble. Nazarbayev finally switched to a national currency only after inflation skyrocketed.

The tenge was fully convertible from the start, which is one of the reasons why Kazakhstan has attracted far more foreign investment in sectors other than oil and gas than has Uzbekistan.

Tajikistan introduced the Tajik ruble in 1995. That was replaced by the somoni in October 2000, three years after the signing of the peace agreement that ended the five-year civil war and when the country's economy was showing signs of recovery.

In a recent interview with Radio Liberty, independent Tajik economist Sobir Qurbanov said that, "from the beginning, the Tajik government maintained a floating course for the national currency, under a program supported by the IMF from 1996, which means that the course of converting the currency is decided by the market."

This system gives equal opportunity to international trade and local business exchanges, he said. One of the problems, he noted, was that the country has not been successful in using this situation for the development of the economy and the flow of investments.

When the somoni was introduced in 2000, President Emomali Rakhmonov said the introduction of the new currency was intended to strengthen the national banking system. The IMF supported the introduction of the new Tajik currency, which it believed would contribute to macro-economic stability and expedite the transition to a market economy.

Turkmenistan's manat, however, is still not fully convertible, and according to a senior analyst with the London-based Economist Intelligence Unit, it is likely to remain that way. Dafne Ter-Sakarian explained to RFE/RL that convertibility of the Turkmen manat would require a systemic change of the whole regime.

"The prospects [for full convertibility] are entirely tied to the prospects for the president. As long as the president is in place, it is very unlikely that we will see any kind of economic change, certainly not a fully convertible currency. I mean, already in Uzbekistan, you see the problems that they have in a slightly more liberal regime of moving to full convertibility. So in Turkmenistan, it is highly unlikely that it will happen," Ter-Sakarian says.

Ter-Sakarian was asked to compare the situations in Turkmenistan and Uzbekistan.

"Political conditions in Uzbekistan are less severe than in Turkmenistan and also Uzbekistan has greater financing needs than Turkmenistan, in that it's a slightly more open economy, and in recent years it hasn't had the revenues, the foreign exchange revenues, that Turkmenistan has had because there have been a couple of bad crops," Ter-Sakarian says. "But I mean as long as Uzbekistan can maintain about $2 billion in export revenues, they can sustain their currency as well. But they are in dialogue with the IMF, which Turkmenistan is not, so in Uzbekistan they have to take occasional measures to meet IMF criteria."

(Naz Nazar, Merhat Sharipzhan, and Tynchtykbek Tchoroyev of RFE/RL's Turkmen, Kazakh, and Kyrgyz services contributed to this report.)