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Eurasia
July 28, 2017 www.intellinews.com I Page 20
IMF mission welcomes Uzbek plan to frontload currency reform
bne IntelliNews
An International Monetary Fund (IMF) mission welcomed the Uzbek authorities' plan to frontload reforms of the foreign exchange system, the fund said in a statement published following a visit to Uzbekistan between July 17-24.
Earlier in July, Uzbekistan granted permission to commercial banks in the country to trade the Uz- bek national currency at the market rate as part of a pilot project that is to lead to the introduc- tion of a floating exchange rate. Uzbek President Shavkat Mirziyoyev previously announced plans to abolish the black market rate of the Uzbek som, which has stood in the way of foreign investment.
“Unifying exchange rates and allowing a market- based allocation of foreign exchange resources would allow the Central Bank of Uzbekistan (CBU) to pivot to a stability-oriented monetary policy capable of effectively controlling inflation,” the IMF noted. “The reform would also promote job creation and growth by increasing external competitiveness, attracting foreign direct investment (FDI), and improving the allocation of domestic resources. Given Uzbekistan’s ample foreign exchange reserves, the reform can be implemented from a position of strength.
“The reform of the foreign exchange system would need to be backed up by restructuring state- owned enterprises and state-controlled banks,” the IMF added.
While the official rate of the sum is currently
set at UZS4,000 to the dollar, the bourse market rate and the black market rate are at UZS8000- UZS9,000 to the dollar. So far, exporters have been required to sell a quarter of their foreign currency
at the official rate, while importers can only buy currency at the unofficial rate.
The black market rate fuels rapid inflation in the country. According to official statistics, the infla- tion rate in 2016 was 5.7% compared to 5.6% in 2015, with a targeted inflation rate projected at 5.7-6.7%. However, independent analysts estimate inflation to be in the double digits.
A sharp increase in official alcohol prices by 16%-19% at the beginning of 2017 indicated the ongoing double-digit inflation problem. In a simi- lar example, the country saw a 35% hike in gov- ernment-set fuel prices in October. The move was supposedly aimed at combatting “smugglers” who bought cheap Tashkent fuel to re-sell at higher prices in other regions of Uzbekistan.
Such a suggestion is questionable, however, as the government itself mentioned that smuggled fuel prices reached UZS5,000, when official prices stood between UZS2,000-UZS2,500. The newly set prices of UZS3,000-UZS3,300 hardly seems to reflect the country’s real rate of inflation fuelled by the country’s double exchange rate regime.
The Central Bank of Uzbekistan increased its refi- nancing rate in June by as much as 5 percentage points to 14%, changing the rate for the first time since January 2015. The central bank’s decision was influenced by “growing inflationary risks”
and the need to ensure stable consumer prices, according to the statement. The move shows the regulator's willingness to acknowledge the coun- try’s inflationary troubles, which Uzbekistan has been facing for the last couple of years.