Uzbekistan: Capital Amnesty Initiative Stalls in the Face of Public Skepticism

Authorities in Uzbekistan are trying to curb the underground economy and bolster confidence in the country's financial sector by offering an amnesty on individual assets. But the people aren't buying into the government's offer.

Under the amnesty's provisions, money deposited by Uzbek citizens in banks will not be subject to taxes, fines or investigations by fiscal authorities. The amnesty began April 1 and is scheduled to expire at the start of April 2009.

To help boost confidence that the government will keep its word, authorities have been conducting a wide-scale publicity campaign about the capital amnesty, involving state TV, radio and print media. A recent broadcast on Andijan TV, for example, emphasized that it is "illegal for bank representatives and state officials to ask depositors to submit any documents or any other information related to the money's origin and source. The violators of the law will be severely punished in accordance with the Uzbek criminal code." Uzbek media outlets are providing hotline numbers for customers who want to report violations of the amnesty decree, which Karimov signed last February.

Uzbekistan's banking system is composed of 32 banks and is dominated by the National Bank of Uzbekistan (NBU), a state-controlled institution that holds roughly 40 percent of all deposits in the country. Citing measures to prevent money laundering and the financing of alleged terrorist and criminal groups, authorities have until very recently maintained tight control over the banking sector. In particular, officials have scrutinized transfers from outside the country.

Frequent government interference and rigid regulation have severely hampered the development of Uzbekistan's financial sector. In 2007, Uzbekistan ranked at the bottom of the Economist's Emerging Market Access Index, which measures a particular country's openness to trade and investment. The country's banks have also suffered from low public confidence. Total retail deposits in Uzbek banks amounted to approximately $760 million in 2007. Although this represented a 50 percent increase compared with 2006, the total was still relatively paltry. In neighboring Kazakhstan, by contrast, retail deposits reached $12 billion at the end of 2007.

The capital amnesty efforts are targeting two groups of residents: wealthy urban residents and Uzbek labor migrants. According to data by Russlavbank, annual remittances by Uzbek labor migrants constitute close to 18 percent of Uzbekistan's GDP. However, the bulk of this amount flies under the state's radar, as labor migrants have used means other than normal wire transfer procedures to repatriate their earnings.

Despite the PR blitz, conversations with a variety of Uzbeks indicated that the amnesty initiative remains cloaked in public skepticism. Most continue to lack faith in the government. "People are wary of this [capital amnesty law]," said a Tashkent entrepreneur, who spoke on condition of anonymity due to concern about possible government retribution for his comments.

"The government adopts many good laws and offers promises," the entrepreneur continued. "But the implementation of laws is not good. There were many situations [in the past] when the government did not keep its promises. Why should people trust this time?"

Uzbek entrepreneurs complain that despite the existence of legislation intended to promote small business activity, as well as shield citizens from undue intrusions by the government, banks continue to routinely violate the privacy of depositors. According to some Uzbek business owners, banks still report to the Uzbek security services any deposit or transfer exceeding $1,000.

Many Uzbek residents are questioning the government's motives for offering the capital amnesty. Given the government's opaque decision-making process, conspiracy theories have circulated in Tashkent. One such theory holds that Uzbek officials have grown increasingly concerned that thriving black and gray markets are creating a new subset of wealthy citizens who do not owe allegiance to the Karimov administration. This independence, combined with widespread popular discontent, poses a serious security challenge, from the official viewpoint. By encouraging the wealthy to keep their money in government banks, authorities are thus seeking to enhance their control over the country's political life, the theory goes.

Ambiguous wording in the amnesty legislation is another source of concern for many Uzbeks. In particular, the law does not stipulate what will happen to deposits and depositors after the amnesty period expires in April 2009.

As an alternative to state-controlled banks, many urban Uzbeks are deploying their assets in real estate. For example, the prices of apartments in Tashkent and elsewhere are estimated to have increased 400 percent since 2006. The boom, some observers say, shows no signs of abating.

Uzbek bank representatives seem to be aware that it will take more than a legislation that offers security guarantees. As additional incentives to customers, Uzbek banks are offering very high interest rates. For example, the NBU is offering up to a 30-percent interest rate on savings deposits in the local currency.

Even high interest rates are not proving to be enough to get a critical mass of citizens to trust the banking system. "It will take a lot of time before [Uzbek] people regain trust in the [state-controlled] banks." said the Tashkent-based Uzbek entrepreneur.