Banking System Liberalization as the Way of Economy Liberalization

On March 21, 2000 there was published the President’s Decree on "Measures on Further Liberalization and Reforming of the Banking System." The Decree assumes establishment of a special bank fund to grant loans on beneficiary terms to production micro-firms, small, and medium-size enterprises, dekhkan farms, and private farms as well as to the high-technology and innovative projects. With that, it is planned to form this fund by allocating banks’ contributions in the amount of 25% of their income. The heads of ministries, agencies, local authority bodies, and departments are prohibited to interfere with the activities of commercial banks and their branches. At the same time, the Decree prohibits the controlling and justice bodies to interfere with the banks’ activities on management of entrepreneurs’ risks related to formation of credit portfolio and their own assets.

The published Decree logically resulted from the course on liberalization and deepening of reforms in all the sectors of Uzbekistan economy. This course was announced by President Islam Karimov during the January Session of Oliy Majlis. By liberalization, primarily, was meant the reduction of the state controlling and regulating functions as well as the limitation of its interference with economic activities of enterprises. Mass media reacted on the announced liberalization by publishing a number of articles dedicated to the problems arising in the way of the reforms.

With that, some articles criticized the behavior stereotypes that were inherited from the past. According to "Hurriyat" newspaper, for instance, many people got used to getting everything from the state; they are idle. Even if they have a land lot, they do not try to get any income from it, despite of their difficult financial status. People have bright recollections about their past, and they believe that they found themselves in difficult situation after Uzbekistan became independent. At the same time, the newspaper states that there are people who consider the independence to be the blessing.

Other newspapers paid more attention to the problems and their solution. A journalist of «Fidokor» newspaper writes, for instance, that when talking to him farmers complained that they have not been paid yet for the raw cotton of the crops of 1997, 1998, and 1999. «Bayaut district cotton gin owns us 2 million 754 thousand Soums only for the cotton sold to the state in 1999. Advance payment for the year 2000 crop has been already transferred to the bank, however, we still have not received this money. However, to buy seedlings we had to take a loan in «Tadbirkorbank» in the amount of 500 thousand Soums. We have our own money, but we have to take a loan.»

Entrepreneurs are under big pressure of numerous controlling structures, each of which is trying to use the situation to its own benefit rather than observe laws. Hurshid Raupov, a farmer from Samarkand region, says that he has an impression that "somebody creates problems on purpose to view how we are overcoming them." Thus, to become a member of the regional union of dehkan farms he was requested to pay 200 thousand Soums. "I begged for lowering the fee to 85 thousand, - the farmer Raupov says, - and I found out only later on that the union did not have the right to impose any membership fees. According to the agreement, a farm, on starting its activities has to transfer 1% of its income to the union fund. The farm that just starts its activities has to bear big expenses. Since the farm does not has its own bank account, it has to pay in cash. The farmer has to make payments for the Business Plan preparation as well as for the state cadastre, insurance policy, and notary office services. There is also another problem: that is the withdrawal of cash from banks. For instance, a farmer has sold cattle and put the money on its bank account. However, to purchase cattle again for fattening he cannot withdraw cash and cannot make transfer payment through bank. Another problem results from the fact that the farmer has to purchase seeds only from dekhkan-farms, and these farms have their own price increments. Wherever one comes, they expect bribes from him.»

Those who are trying to start running their own businesses are strangled by the big number of report documents that entrepreneurs and farmers have to present to various controlling bodies. Tashkent region farmers, for instance, complain that each quarter they have to present 10-15 reports to various departments. State Tax Committee reports indicate that in 1999 they have conducted 30 thousand illegal inspections.

The authorities also understand that Uzbekistan has a severe problem with small and medium-size businesses development. Thus, President Islam Karimov, in his speech on the Session of Surkhan-daria Regional Soviet of Peoples' Deputies, underlined that actually half of established in the region farms are not independent. They do not have an opportunity to conclude agreements with any organizations or enterprises, they cannot initiate banking operations. Such a situation resulted from the fact that actually all these right were seized by big associations and farms.

The Government, most likely, is ready to take serious actions with this regard. Under the Decree of the Cabinet of Ministers of Uzbekistan they have established the Head Department on the Regime and Personnel Work Conduction. Under this Department it is supposed to establish a Special Department on Fight with Corruption in State Tax Bodies. First results followed soon after this. Thus, procurator’s office of Uzbekistan has brought a suit against a number of officials of the State Tax Committee. On March 26, B.M. Ibragimov, the head of Samarkand Regional Department of the State Tax Committee, was put under arrest on suspicion of abusing his official position and taking bribes in especially big amounts.

During the above-mentioned Session of Olyi Majlis, President Islam Karimov also highlighted that "liberalization of the economy is closely related to the liberalization of the foreign economic activities, and, first of all, stock markets. According to the President, nowadays, the priority will be the development and strengthening of non-stock-exchange market, increase of the commercial banks’ own currency resources.» Most likely, with this regard the Cabinet of Ministers of Uzbekistan has issued a Decree on "Further Measures on Development of Non-Stock-Exchange Market." Under this Decree, starting from April 1, 2000 all individuals who are non-residents of the Republic of Uzbekistan will make payments only in convertible currency for all the services rendered to them. Following is the list of these services: medical services, studies in educational institutions of all the levels (except for the secondary education), services provided by hotels, tourist firms, air and rail-way transportation services, telephone and paging communication services, sport-sanitation services, services on renting dwelling that belongs to legal entities, transportation-expeditionary and insurance services. With this, the payment may be made in cash (in convertible currency) as well as by bank transfers and by credit cards.

The following three banks are entitled to collect convertible currency from the non-residents through these banks’ branches: the National Bank of Foreign Economic Activity, "Asaka" bank, and Uzpromstroybank. With this, received by these banks convertible currency will be distributed in the following way: 50% should be obligatorily sold to the Central Bank of Uzbekistan, and the rest 50% will be put on special convertible currency accounts of enterprises, agencies, and organizations that are providing paid services to non-residents.

The economy liberalization that was announced by the President of Uzbekistan, thus, so far became apparent only in two actions: desire to limit controlling-auditing functions of numerous organizations and restricting the regime of convertible currency payments made by non-residents on the territory of Uzbekistan. Development of small and medium-size businesses that could to a great extent ease the situation in Uzbekistan regions with excessive labor resources is facing serious obstacles caused by the structures that emerged within the last few years. While pretending that they fulfill their controlling functions, these structures are involved in extortion, and actually they are suppressing these businesses.

Introduction of restrictions on payments made by non-residents of Uzbekistan, in our opinion, is not the measure that contributes to the liberalization of the economy. This action was undertaken to achieve rather simple objective: to limit the flow of convertible currency resources in the "black" market of cash circulation. Within the last eight months on this market there was a sharp increase of the Dollar/Soum exchange rate: from 500 Soums for 1 US dollar in August 1999 up to 700 Soums per 1 US dollar at present. This is the attempt to bereave the "black" market of one of the sources of convertible cash flow, by directing this flow to the channel that is controlled by the state.