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IMF SAYS UZBEK REFORMS "ON TRACK", SOME OBSERVERS EXPRESS DOUBTE

6/27/02

An International Monetary Fund team, having recently completed a nearly two-week assessment mission, has announced that Uzbekistan has made "significant progress" on economic reforms, emphasizing that fiscal policies are "on track." But several economic observers in Tashkent express doubts privately that the government’s fiscal policies can be sustained.

The IMF assessment mission was designed to review implementation of a Staff Monitored Program (SMP) detailed in a Memorandum of Economic and Financial Policies covering the first six months of 2002. In the memorandum, the Uzbek government was called on to de-centralize the economy. Specifically, the SMP called on Uzbek officials to liberalize access to foreign exchange and unify the country’s currency exchange rates.

The memorandum, signed last February, promised the convertibility of the Uzbek currency, the sum, by July. In order to accomplish this goal, the government agreed to take measures that would effectively eliminate the black market for currency in the country.

"We hope that the implementation of the measures described in the SMP will demonstrate our commitment to reform," Deputy Prime Minister Rustam Azimov and other officials wrote in a February letter to IMF Managing Director Horst Koehler. "We fully understand the importance of adhering to the spirit of the reform program and will decisively implement formal decrees, resolutions and instructions."

Since the Soviet collapse, Uzbekistan’s government has maintained tight control over the country’s political and economic life. There are several state-controlled exchange rates for hard currency. Currently, under the official rate it takes 749 sums to buy one US dollar. The official commercial (over-the-counter) rate is 990 sums per dollar and the black market rate is about 1,000-1,050 per dollar. In addition, the government controls how much foreign exchange citizens can purchase. The multi-tiered exchange rate, and the limited access to currency exchange, has helped the black market to flourish, while discouraging foreign investment.

The assessment mission was in Uzbekistan from June 12-25. In the weeks leading up to the visit, Uzbek officials made tangible progress in meeting some SMP goals. For example, the US dollar conversion rate on the black market dropped throughout June from 1,450 sums per dollar to less than 1,000 sums per dollar. The rate was far lower at official exchange outlets.

Local analysts say the drop can been attributed to the government’s liberalization of the over-the-counter rate in May � a move designed to remove excess sums from the money supply and thus bring down the black market rate.

Also, in May, the government simplified currency exchange procedures. It abolished a number of documents citizens need to submit in order to purchase foreign exchange. Officials additionally increased the amount of foreign exchange that an individual can purchase to up to $1000 per three months. Previously, citizens could only purchase up to $400 and had to produce evidence of scheduled travel, a visa and an official reason relating to family or business in order to purchase foreign exchange.

These measures were sufficient for the IMF team to acknowledge in a joint statement along with the Uzbek government and Central Bank that Tashkent was meeting its reform requirements as outlined under the SMP.

Currently, the Uzbek Government is not receiving any assistance from the IMF, nor does it have any existing program for cooperation with the fund as the IMF closed its offices last April citing a lack of progress in Uzbekistan’s economic reform program. Nonetheless, the Uzbek government continues to receive technical assistance and consultations through the SMP.

In striving to implement the SMP, the government intends to "establish an economic program beyond mid-2002 that could be supported by financial resources from the IMF � [and] the granting of financial assistance from other international financial organizations," Azimov said in his letter to Koehler.

However, some Uzbek economic observers take a cynical view of how "on track" the SMP is. One Uzbek economist, speaking on condition of anonymity, pointed out that the IMF mission had originally been scheduled to undertake the mission in April. At the time, the economist added, the Uzbek government had made no progress on implementing reforms and asked the IMF to delay its mission. The economist also noted that the date for the program’s term has also been extended.

The final IMF mission under the SMP had been scheduled for July, but now the assessment has been pushed back until September. The delay was needed "to enable the IMF staff to assess the sustainability and irreversibility of the reforms," according to the joint statement issued in late June. During this period, the IMF and Uzbek officials are expected to engage in negotiations on an economic program that would be supported by an arrangement with the IMF, the statement added.

The economist expressed doubt that current fiscal policies aimed at narrowing the difference between official and black market exchange rates are sustainable. The specialist also said the government has so far not addressed broader structural reforms envisioned in the SMP, including the liberalization of access to foreign exchange for enterprises � not just for individuals. In addition, the government has not yet started to dismantle the state-order system for grain and cotton, which affects procurement and pricing.

Given that many areas have not been addressed, the economist suggested that "the Staff Monitored Program effectively has failed, but politically, the IMF in its statement could never say it." Uzbekistan has developed into a key strategic ally of the United States in the ongoing campaign to curb terrorism. As such, international financial institutions face pressure not to do anything that might hamper the ability of Uzbekistan to actively participate in the anti-terrorism coalition, observers say.

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