Uzbekistan: Inflation Worries Prompting Tashkent to Consult Soviet Playbook

Inflation fears are prompting Uzbek officials to resort to an old Soviet trick -- trying to drastically curtail the amount of cash in circulation. Such draconian government measures, however, risk creating a crisis atmosphere, some analysts caution.

Publicly, officials try to project an upbeat mood about the country's financial situation. According to recent government estimates, Uzbek GDP grew by 8 percent and inflation was less than 6 percent during the first half of 2009. A July broadcast on state television, meanwhile, boasted that Uzbekistan's economic development was moving forward despite the global financial crisis.

But Uzbek financial analysts suggest this rosy picture represents a gross distortion of the actual facts on the ground. "The real inflation rate is around 40-50 percent, and the government says it is at 4-6 percent. This [government figure], naturally, helps to inflate the value of GDP," Tashpulat Yuldashev, an Uzbek financial analyst, told Deutsche Welle in an August 2 interview.

Experts point to a sharp rise in prices for food and utilities as tangible evidence that inflation is ballooning. For example, in July the cost of sugar soared by 40 percent and bread prices rose by 20 percent, according to a report posted on the opposition website Uzmetronom.com.

Although publicly downplaying any inflation concerns, Uzbek authorities have nevertheless taken a series of administrative steps designed to stifle rising prices. For example, under an amnesty on individual assets, which lasted from April 1, 2008 to the start of April 2009, money deposited into banks by Uzbek citizens was not subject to taxes, fines or investigation by fiscal authorities. The measure, Uzbek officials hoped, would attract hidden cash and, by extension, reduce the amount in circulation. Analysts suggest the amnesty largely failed.

Banking experts say the core problem is a widespread lack of confidence in the banking system. Many Uzbeks, given their suspicion that their deposits are not safe in Uzbek banks, prefer to keep their savings in cash and safely stored at home. With banks lacking currency, the government is forced to print more money, creating one source of inflation.

In a further attempt to limit the amount of cash in circulation, the National Bank of Uzbekistan (NBU), a state-controlled institution that oversees the country's roughly 32 state and private banks, established informal quotas to limit the banks from dispensing paper currency. Another decree adopted in April 2009 obliged the country's employers to deposit wages and payments into employees' bank accounts, rather than provide payments in cash.

To further reduce a reliance on cash, the Uzbek government is expanding electronic payment systems. According to NBU statistics, by the end of 2008, Uzbek banks had issued close to 4.5 million electronic check cards and, nationwide, the number of ATMs was estimated at 27,000. This year authorities are planning to increase the number of check cards to 5 million and ATMs to 40,000. In 2008, the government also announced that it was giving tax breaks to companies that import servers and hardware used for electronic payments.

NBU restrictions on cash distribution have made it difficult for many people to obtain cash electronically. These difficulties have merely fueled distrust in the system. "It's frustrating when banks tell you to come another day when you want to retrieve your salary or petty cash from your account," Ikram, a former bank worker in the Uzbek city of Ferghana, told EurasiaNet. The use of electronic cards is also problematic because many stores and businesses lack electronic swipe machines, he added.

"The government says that plastic cards can be used everywhere. But you can't buy things at a store or bazaar because not many of them have terminals [card swiping machines]. It is very inconvenient for people," said Ikram.

Families of labor migrants abroad who rely on various money transfer systems such as Western Union have also had difficulties retrieving cash in local banks.

Some Uzbek banking experts contend that the imposition of informal cash disbursal quotas by the NBU is illegal. Observers point out that the measure clashes with previous government decrees that sought to boost public confidence in the banking sector, including the amnesty on individual assets legislation.

An Uzbek entrepreneur who spoke to EurasiaNet on condition of anonymity described one desperate situation. "Last year, my friend deposited a large sum of money in a savings account in a bank because he was offered a 30 percent interest rate. This year, he wanted to retrieve his money, but he can't do it. The bank clerks have told him that they don't have enough cash. He is now despairing."

Observers are skeptical that the government measures will help check inflation. "Such a measure of controlling inflation as a temporary restriction on cash retrieval is difficult to understand. People will get their money sooner or later, if not today then tomorrow . . . or next week, and as soon as they get their money, they will run to spend it," suggested a July editorial on the Uznews.net website.

Despite numerous inconveniences caused by the government-imposed measures, many Uzbek consumers and business owners are reluctant to protest, fearing that any attempt to seek redress will only provoke government retribution. Instead, people are relying on non-confrontational approaches. In an effort to retain customers, for example, some private banks are reportedly buying cash from other banks that have not exceeded cash quotas imposed by the NBU. Moreover, some enterprising businesses are making money off the cash crunch, charging up to 10 percent for electronic card withdrawals.

In other instances, employers and banks are getting creative. According to a July report by the Ferghana.ru news agency, a local bank in the city of Ferghana dispensed the salaries of local workers in coins. As the largest coin is only 25 sum, and the average salary in Ferghana is approximately 100,000 sum ($55), that is a heavy bag of change.