The existence of multiple exchange rates for foreign currency in Uzbekistan is stifling economic activity. The case of Sanobar, a former merchant, helps illustrate how government currency policies are putting the squeeze on budding entrepreneurs.
Sanobar, a woman in her mid-30s, was for a brief time a trader in clothing and textiles at Uzbekistan’s largest consumer goods market in Tashkent. Three years ago she left her poorly paid government job and partnered with a group of Turkish traders. But after their first deal, her entrepreneurial career came to an abrupt halt, thanks to Uzbekistan’s artificially controlled currency regime.
Hefty import duties make Turkish goods prohibitively expensive for ordinary Uzbeks, Sanobar discovered. In addition, the inability to purchase foreign currency at official exchange rates made it nearly impossible to convert Uzbek soum profits into the hard currency needed to purchase and import more goods.
“For three years now there’s been no way of converting soums officially because exchange offices haven’t been working properly. We’ve only been able to buy dollars from [black market] currency dealers [at high rates],” said Sanobar. (She asked that her name be changed, citing fear of government persecution). “There are exchange offices in all banks, but they stopped selling dollars a long time ago. They only buy them off you at the official rate.”
The need to exchange cash on the black market created a disincentive to keep importing. The spread between the official and black market exchange rates is now as high as 35 percent.
The dual exchange rate has hurt not just individual entrepreneurs like Sanobar, but the economy as a whole, experts say. “The existence of a black market exchange rate is an indication that there is a shortage of foreign currency in the country, at least through official channels, and that the official value of the soum is artificially set too high. It also indicates that inflation is far higher than official figures suggest, and that people fear their savings will erode in value if they deposit them in banks in local currency,” John Andrew, an Uzbekistan analyst at the Economist Intelligence Unit (EIU), told EurasiaNet.org. “All of these trends – restricted access to foreign exchange, high inflation, low trust in banks – are damaging for the economy.”
At the same time, a dual exchange rate allows people or entities with access to the preferential rate to reap enormous profits. That’s because they can obtain foreign exchange on favorable terms, says Anna Walker, a Central Asia analyst at London-based Control Risks consultancy. “This is why the government and financial authorities tolerate the system. It means that state-owned entities, which earn revenue in the local currency, are able to get access to foreign currency comparatively cheaply, while private citizens or privately owned companies who rely on the black market rate have to pay much more,” she told EurasiaNet.org.
Neither Uzbekistan’s Central Bank nor the Finance Ministry responded to queries about the government’s tolerance of a currency black market. The country’s largest lenders – the Asian Development Bank, which agreed in May to loan $1.15 billion to Uzbekistan; and the European Bank for Reconstruction and Development, which has so far provided Tashkent with 560 million euros since 1992 – also failed to respond to queries.
According to Uzbekistan’s Hamkorbank, current currency regulations limit the amount of hard currency each citizen can legally buy to $2,000 per quarter; each purchase is recorded in one’s passport. Black market dealers have devised an ingenious system to gain access to lucrative hard currency, however. Sources in Uzbekistan say currency dealers recruit people (usually pensioners or the jobless) and provide them with cash to buy their quarterly hard currency quota, paying a token remuneration of $2 to $5 per person in exchange for their currency rights. Taxi drivers are sometimes contracted to find “buyers” and paid up to $30 for finding four people to sell their currency quotas.
This seemingly laborious scheme pays well: by buying currency at 1,626 soums to the dollar (Hamkorbank’s exchange rate in mid-August) and selling it on the black market at 2,200 soums to the dollar (the black market rate quoted by Uzmetronom.com), dealers can earn about $700 per pensioner. Black marketeers, in turn, share their profits with officials in law-enforcement and government agencies who protect their businesses.
Other beneficiaries are foreign tourists (when they sell their dollars on the black market) and Uzbek citizens whose wages are paid in foreign currency or who receive remittances from abroad. They profit from the difference in exchange rates when making dollar-denominated payments in soums at the official rate (for example, when purchasing air tickets or hotel rooms).
The EIU’s Andrew thinks Uzbek authorities can do little to prevent the existence of a black market exchange rate, so long as they continue to keep the official value of the soum artificially high. He suggested the central bank allow the soum to depreciate to close the gap between the two rates and liberalize access to foreign exchange. But such action would amount to an acknowledgement that the economy is not doing as well as authorities claim. “To wipe out the exchange-rate spread by allowing the official rate of the soum to fall more rapidly would be tantamount to admitting that their policies are flawed,” Andrew said.
Foreign trade -- already heavily restricted, and subject to high duties -- suffers from limited access to currency through official channels. Thus, exports are expensive but government-approved imports cheaper in soum terms. “The existence of two exchange rates deters foreign investors too, as it makes them less competitive when compared with state-owned companies,” said Walker of Control Risks. “Furthermore, because access to foreign exchange is tightly controlled, it makes it difficult for foreign companies to operate.”