Uzbek Government Makes New Pledge on Currency Convertiblity

Uzbek authorities are promising yet again to implement economic reforms long demanded by international financial institutions, and long resisted by Tashkent. Specifically, Uzbek authorities have developed a detailed plan to make the country's currency, the som, fully convertible by November. While officials appear more committed than ever to implementation, entrepreneurs in Uzbekistan remain skeptical that the government will relinquish control over economic activity.

Uzbekistan has already committed several times to establish a single exchange rate, but on each occasion the government failed to follow through. [For background see the Eurasia Insight archive]. Tashkent's reluctance to implement reforms proved to be a source of embarrassment when the government was subjected to broad criticism during an international economic meeting in Tashkent in May. [For background see the Eurasia Insight archive].

Uzbekistan's deputy prime minister and economy minister, Rustam Azimov, took many by surprise during late June news conference when he announced a new Uzbek currency reform effort, which is designed to introduce free convertibility by the end of November. "You can be confident that by November [2003] the currency will be freely convertible," Azimov insisted. The comments came at the conclusion of a visit by an International Monetary Fund (IMF) delegation.

To demonstrate the seriousness of their intent, Azimov and Uzbek Central Bank Chairman Fayzulla Mullajonov sent IMF Managing Director Horst Keller a memorandum detailing the measures that Tashkent was prepared to take to promote convertibility. In the memo, the Uzbek officials endorsed a "policy of a gradual transformation into a market economy, the aims of which are to stabilize the economy, achieve maximum growth rates, while ensuring social and political stability at the same time."

Implementation of the steps outlined in the memo would allow Uzbekistan to conform to Article 8 of the IMF charter. Sections of Article 8 prohibit members from taking steps to restrict international payments, or maintain a multi-tiered currency exchange framework.

The Azimov-Mullajonov memo committed Uzbekistan to taking "all necessary measures to give unrestricted access to currency markets and ensure the long-term unification of exchange rates." It also stated that restrictions concerning "current international operations" would be removed by the end of September, according to the text of the memo published July 3 by the Biznes-Vestnik Vostoka, a Tashkent paper.

To reinforce the government's convertibility message, the Central Bank's deputy chairman, Ravshan Gulyamov, appeared on Uzbek television July 13 to explain government reform intentions. Gulyamov said that the state exchange rate and the black market rate were already "within permissible parameters." He added: "The norms on making foreign trade calculations and the purchase and sale of foreign currency will be brought into line with international practice."

While acknowledging that Uzbek officials have failed to act on currency convertibility in the past, local political analysts believe that Uzbekistan's economic stagnation has reached such a point that the government now sees reform as the lesser of all evils. Continuing ignore the country's economic plight heightens the risk of economic discontent undermining the government's hold on power. As recently as March, government officials were reportedly resisting IMF reform recommendations. [For background see the Eurasia Insight archives].

Uzbek officials now admit that foreign investment will be the key to any economic turnaround, and apparently realize that the removal of currency restrictions is necessary to attract large scale investment. "Uzbekistan needs foreign investments – investments rather than IMF loans," Azimov said.

IMF representatives have welcomed the government's announcement on convertibility. However, Erik De Vrijer, the IMF's chief representative in Tashkent, has said that it will take more than currency liberalization to make Uzbekistan's business climate more attractive for foreign investors. He indicated that the Uzbek government should also consider banking-sector reforms, and additional steps to stimulate domestic and international trade.

Private foreign and domestic investors add that the Uzbek government must also curb corruption. "They [Uzbek officials] build a huge bureaucratic maze, make us go through it, and solicit bribes at every corner of the maze," said one entrepreneur in Tashkent. "In addition to already high official fees and other burdens, government bureaucrats solicit bribes for a license