Since Uzbekistan’s new president came to power in September, Shavkat Mirziyoyev’s regime has put forth a multitude of promises in areas ranging from human rights to improvements for small businesses. The most significant of these was the announcement that Tashkent would initiate currency liberalisation reforms and abolish the black market exchange rate, further chipping away at the legacy left by the late Islam Karimov. 

The origins of the dual rate exchange system, which currently sees the Uzbek sum trading at around UZS4,000 to the dollar at the official rate and UZS8,000-9,000 at the bourse and black market rates, go back to the early 1990s, when the Central Asian nation saw a boom in private enterprise. As stores opened up across Central Asia’s most populated country to fill the insatiable demand for imports, Karimov was horrified when he discovered his country ran a $1bn trade deficit. 

“We are not going to waste our precious hard currency reserves on importing chewing gum,” Karimov announced in a famous speech, and went on to introduce the strict currency conversion scheme. Dollars disappeared overnight, giving way to the dual exchange rate regime. Unable to repatriate profits in hard currency, the interest of foreign investors in Uzbekistan evaporated. Shops began closing and the elite, which did have access to dollars via the then newly established National Bank of Uzbekistan, began to take over the country’s most successful businesses. 

To this day, the exchange rate regime still stifles foreign investment, so it was welcome news when Uzbek state-run media announced in July that commercial banks have been granted access to the market rate of the sum. A Reuters report from the same month did, however, suggest this rule only applied to a limited number of commercial banks and companies. 

In two consecutive visits to the country in the same month, International Monetary Fund (IMF) officials welcomed the upcoming changes and pledged to provide support. 

Addressing inflation

One of the key challenges standing in Uzbekistan’s way is the threatened impact of inflation on existing Uzbek businesses following the adoption of a floating exchange rate regime. To address this, the country announced in July its previously unreported gold and foreign currency reserves, and the government pledged to support Uzbek businesses as they adjust to new conditions. 

“Given Uzbekistan’s ample foreign exchange reserves, the reform can be implemented from a position of strength,” the IMF said on July 24. The gold and foreign exchange reserves were later revealed to stand at $20bn — enough to cover two years of imports. 

Before the country can proceed, however, it needs to solve the issue of existing double-digit inflation created by the black market currency. Despite official figures reporting annual consumer price hikes of 5-7%, independent press and economic reports from 2016 have suggested a rate running between 20% and 30% a year.

To curtail unreported double-digit inflation, the Central Bank of Uzbekistan has decided to increase its refinancing rate by as much as 5 percentage points to 14%. The move appears to be accompanied by cautious gradual adjustment of the sum — the currency has devalued slightly to UZS$4,070 at the official rate since the beginning of July.

“Unifying exchange rates and allowing a market-based allocation of foreign exchange resources would allow the Central Bank of Uzbekistan (CBU) to pivot to a stability-oriented monetary policy capable of effectively controlling inflation,” the IMF noted. 

Impact on trade 

While the currency reforms will undoubtedly improve prospects for exporters, especially after the authorities lift the requirement for exporters to convert a quarter of their earnings into local currency, importers are unlikely to see the full benefits of pre-Karimov regulation era trade. In March, Mirziyoyev made it clear the country intends to keep some of its protectionist policies in place, when he announced a plan to reduce Uzbekistan’s imports by $1.1bn in 2017.

Some of these policies will be carried out through import substitution measures such as increasing local content in manufacturing facilities that assemble products from foreign imports. But it is not unreasonable to expect Uzbekistan to implement or maintain quotas and tariffs in order to keep Uzbekistan’s own products competitive. In that regard, the post-Soviet country might not be truly opening up just yet. 

“[Uzbekistan’s] customs duties for imported goods range from zero to more than 100%, but the average rate is approximately 30%,” according to a 2017 update by the US export.gov website. “Since January 2010, 5% customs duties are applied to imported live animals, milk and cream, wheat, and computer hardware; 10%-30% duties are applied to clothing, furniture, metals, foodstuffs; and more than 50% duties are applied to luxury consumer goods such as cigarettes and cars.”

Impact on the population

All consumer goods within the country are priced in accordance with the black market rate. Since the ultimate goal of the reform process is to maintain consumer prices at more or less the same level as before currency liberalisation, Uzbek consumers are expected to stay largely unaffected by the liberalisation. 

Independent Uzbek economist Yuliy Yusupov confirmed this to Ozodlik in May, when he said that, once devalued, the official rate, the bourse market rate and the black market rate would most likely converge somewhere between UZS7,000-UZS8,000 against the greenback.

The other positive aspect of abolishing the strict currency regime might be a reduction of Uzbekistan’s reliance on remittances from Uzbek migrant workers, mostly situated in Russia, for foreign currency inflows. Remittances “make up 13-15% of the country's GDP and a large portion of the population’s foreign exchange earnings”, Alisher Taksanov, an exiled economist based in Switzerland told bne IntelliNews last year. The migrant workers themselves will certainly benefit from the increased employment opportunities within their home country. 

“The reform would also promote job creation and growth by increasing external competitiveness, attracting foreign direct investment (FDI), and improving the allocation of domestic resources,” the IMF mentioned in its statement.  

With the expected changes over the horizon, some foreign businesses are already returning to Uzbekistan — including Turkish companies such as Demir Holding. The European Investment Bank and the European Bank for Reconstruction and Development are also already re-entering the Uzbek market. It is now up to Mirziyoyev to follow up on the rest of his commitments.