Page 21 - Uzbekistan rising bne IntelliNews special report

bne December 2021 Special Report: Uzbekistan Rising I 21
Inflation and interest rates
Plov index
In order to get a better handle of how prices rises hurt the most vulnerable sections of society the Uzbek State Committee has set up the “plov index”, an equivalent of the Economist magazine’s famous Big Mac index to track prices, that also has a Russian equivalent, the borscht index.
All these indices do is track the prices of the most basic food – a burger, or in Russia’s and Uzbekistan’s cases,
the cost of the ingredients needed to make the most popular staples. Plov is the national dish and made of lamb, rice, yellow carrots, onion, garlic and vegetable oil. Changes in the cost of
a portion of plov have the most direct impact on a household’s income.
The statistics committee publishes the monthly cost of a kilo of plov in all the regions as an alternative to measuring inflation and the cost of one portion of plov in Tashkent in September has gone up by 30.4% y/y compared to an increase of 10.7% for headline inflation in the same period.
The plov index shows that those at
the lower end of the income bracket are disproportionately hurt by
rising food prices, which is another reason why inflation expectations have become unanchored and are significantly higher than the CBU forecast for the headline inflation rate.
External trade
The final piece in the macroeconomic puzzle is Uzbekistan’s improving foreign trade balance. Since the foreign exchange currency liberation in 2017, dismantling the harsh systems of controls imposed by
Inflation by product type (yoy % change)
falling more noticeably, from 9.1% in February to 7.7% in September.
Rates mismatch
High inflation causes another problem that will fade as price rises are brought under control. High inflation means the CBU has to keep its monetary policy rate relatively high; however, banks with access to dollar funding can afford to offer significantly low rates on dollar loans. The spread between the cost of borrowing in soum and dollars is so wide that most borrowing is done in foreign exchange that exposes Uzbek companies to significant FX risks.
“The dollar share of loans is currently 48%, but there is a gradual decline,” says Nosirov. “There is still a big interest rate differential.”
With retail deposits paying 17.5%
and loans costing 21% in soum there
is a 3-4% spread that remains a disincentive for business to borrow for investment capital in the local currency. However, Nosirov points out that the soum has been very stable and only devalued against the dollar by 2% in the first nine months of this year.
“But it will take time for this differential to fade,” says Nosirov. “We have only just started the inflation targeting policies. It's a new mentality but we already see that it’s having an effect.”
The central bank has to be worried by the dollarisation of credits as other countries, like Ukraine and Poland, have come a cropper in the past by exposing themselves too big FX risks. The share of dollar loans has already started to
fall from 70% previously to 50%:50% local vs foreign exchange now.
“It's changing now thanks to the stable currency and the falling inflation,” says Nosirov. “But it will take several years to normalise.”
Plov Index (Cost of 1 portion of plov in Tashkent city)
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