EurasiaNet Business & Economics - Tariff Policy Fueling Social Tension in Uzbekistan

BUSINESS & ECONOMICS

TARIFF POLICY FUELING SOCIAL TENSION IN UZBEKISTAN

9/26/02

Desperate to reestablish a good working relationship with international monetary institutions, Uzbekistan’s government is pushing ahead with fiscal policies that are causing hardship for possibly millions of citizens. Already, a punitive tax on imported goods is ravaging the country’s entrepreneurial sector, and foreign sources in Uzbekistan report that popular anger is building.

The government imposed a 90 percent tariff in July on most imported items, including those manufactured in other CIS countries. Packaged food and industrial equipment carries a 50 percent tariff. The measures have effectively caused activity at bazaars throughout the country to grind to a halt, eliminating the primary source of income for most traders, drivers, teamsters and others. Authorities require all vendors at bazaars to either provide a certificate of payment of the tariff, or produce proof that the goods being sold were made in Uzbekistan. Shoppers are hard-pressed to find anything other than fruits and vegetables grown in Uzbekistan at bazaars today.

In addition, the tariffs have imposed a prohibitive barrier on shuttle trading. The livelihoods of possibly hundreds of thousands of Uzbeks depend on shuttle-trading, in which an individual travels to a neighboring country � including Russia, Kazakhstan and Turkey � buys goods and returns to Uzbekistan to re-sell the wares. Overall, some political observers estimate that potentially 2 million Uzbeks, including traders and their families, have suffered economic dislocation due to the tariffs.

The Uzbek government says the measures are designed to stimulate local production of consumer goods, including clothing, household products and electronics. However, some observers say the main motive is to curtail black-market activity and to establish tighter control over the money supply. Officials have tended to view the country’s bazaars as black market bastions. Currently, imported goods can now only be found in state-run stores. Yet Uzbeks report that even in many state stores shelves are empty. At present, the Uzbek economic infrastructure lacks the ability to make up for the consumer goods shortages created by the import tariffs.

The tariffs were imposed weeks after an International Monetary Fund (IMF) mission visited Tashkent to evaluate implementation of a Staff Monitored Program (SMP). [For additional information see the Eurasia Insight archive]. The main goals contained in the SMP were the unification of the country’s exchange rates and the free convertibility of the Uzbek currency, the sum.

The Uzbek government had promised to implement free convertibility by July of this year. Compliance with the SMP was seen as the key to future cooperation between Uzbekistan and the IMF. The IMF closed its office in Tashkent in April 2001, citing the government’s reluctance to implement recommended programs. Since early 2002, Uzbek authorities have been seeking to entice the IMF to return to Tashkent. Uzbekistan’s support for the US-led campaign against terrorism prompted Washington to encourage the IMF to resume activity in Uzbekistan.

In the weeks before the June IMF mission, the government acted to cut the money supply by administratively causing a shortage of banknotes. The shortage succeeded in temporarily closing the gap between the black market currency exchange rate and the official rate, largely because black market traders lacked cash in Uzbek sum. Over time, however, the black market rate crept back up.

The import tariffs are seen by many local observers as an extension of the earlier efforts to narrow the exchange rate gap. Uzbek media reported in early September that the black market rate for one US dollar was starting to gradually decline again. Biznes-Vestnik Vostoka, for example, said the rate had fallen from 1,200 sums to 1,140 sums to the dollar.

Nevertheless, the tariff policy has so far failed to completely satisfy the IMF. A second IMF mission wrapped up a 10-day visit to Tashkent on September 20. An IMF statement issued at the conclusion of the visit noted that the government had failed to fulfill its currency liberalization commitments. At the same time, the statement expressed general satisfaction with "tax and budget policies," according to the UzReport web site.

Meanwhile, local political observers express concern that popular anger over the tariffs could prompt mass unrest. Already, relatively small-scale protests have hit many towns and cities, including Tashkent. According to a Tashkent-based foreign source, who has contact with Uzbek authorities, officials were aware before the imposition of the tariffs that they would cause economic havoc for many Uzbeks. The government’s strategy for dealing with discontent would be to step up repressive measures, the source added.

So far, government officials have publicly downplayed the economic disruption, declining to acknowledge that the tariffs are a source of hardship for many. "We are going to saturate our domestic market with quality goods as soon as possible," Deputy Prime Minister Mirabor Usmonov said in an interview broadcast by Uzbek television September 13.

"There will no longer be commodity hunger as before [during Soviet times]," Usmonov said. "Goods manufactured in our country will be enough for us."

Usmonov’s comments indicate that the Uzbek government is firmly committed to the current fiscal course. However, the Tashkent foreign source says that the government would abandoned the tariffs if popular anger approached the boiling over point.

The Central Eurasia Project aims, through its website, meetings, papers, and grants, to foster a more informed debate about the social, political and economic developments of the Caucasus and Central Asia. It is a program of the Open Society Institute-New York. The Open Society Institute-New York is a private operating and grantmaking foundation that promotes the development of open societies around the world by supporting educational, social, and legal reform, and by encouraging alternative approaches to complex and controversial issues.

The views expressed in this publication do not necessarily represent the position of the Open Society Institute and are the sole responsibility of the author or authors.