Uzbek President Islam Karimov's administration is repeating its pledge to create a single exchange rate for the country's currency, the som. At the same time, Karimov has backed down on the imposition of punitive tariffs on imports. The moves, the currency reform pledge in particular, aim to satisfy International Monetary Fund (IMF) conditions for the resumption of aid cooperation. However, in trying to forge ahead with reforms, the government must contend with a wary population.
Uzbek officials gave signals about their renewed commitment to currency reform in late November during a visit to Tashkent by US Assistant Secretary of Commerce William Lash, whose responsibilities include market access and compliance. Karimov himself provided a clearer pledge in early December that the Uzbek government would remove currency restrictions in the hopes of regaining access to IMF loans. [For additional information see the EurasiaNet Business and Economics archive].
Lash, as quoted by the UzReport web site, said he had received assurances that "the gap between the [official, commercial and black market] exchange rates would be reduced, and that the government would do its utmost to introduce a single currency exchange rate."
Lash emphasized that Karimov's administration was serious about implementation and was not making any pledges under duress. "Uzbekistan is our ally, and no ultimatums are issued to one's allies," Lash added.
Despite Lash's comments, Karimov's latest pronouncement on currency reform is one of a series that the Uzbek leader has made over the past six years. During that span, little actual progress has been achieved in harmonizing the various exchange rates. The government's past performance on reform is thus prompting many analysts to take a skeptical view of the latest currency harmonization initiative.
Currency reform is one of the primary points of a staff monitored program (SMP) agreed upon by the IMF and Uzbekistan. Implementation of the SMP reform package is widely viewed as a prerequisite for the renewal of discussions on an IMF loan program to Uzbekistan. Although Tashkent has been able to satisfy most of the SMP's conditions, the government has yet to wrestle with the currency dilemma.
At the moment, Uzbekistan's Central Bank artificially sets the country's rate of exchange. Three separate government rates currently coexist: an "official" rate, an "over the counter" rate for import-export operations, and a "cash point" rate for small sums of money.
Most important, however, is the black market rate, which indicates a more realistic value for the som and is currently trading 40 percent higher than the official rate of around 900 to the dollar. The IMF has demanded the government reduce the margin between the official and black market exchange rates to a more realistic 20 percent.
"The IMF really gave them a soft hurdle to get over and still they failed," said one Western diplomat.
Thanks to Uzbekistan's restrictive currency policy, analysts say, what should be the economic engine of former Soviet Central Asia with a population higher than the other four regional states combined has turned into a fiscal backwater.
Recent government reforms, introduced with the SMP in mind, have caused social and economic upheaval throughout the country. A presidential decree in July, for example, caused import duties to skyrocket, leading to shortages of imported consumer goods. The measure caused so much disruption that Karimov felt compelled to issue a new decree abolishing the tariffs imposed in July, the newspaper Pravda Vostoka reported December 5.
The government's drastic action during the last half of 2002 has prompted many Uzbeks to take a cautious stance on new reforms. Gulya, a trader with her own shop in downtown Tashkent, is one of many Uzbeks who harbors serious doubts about the government's economic policies.
When the import-duty decree was issued in July, the 44-year-old businesswoman struggled to keep her small clothing store, which she launched in mid 2002, operating. Under the July decree, legal entities initially had to pay a 40 percent surcharge on imports, while shuttle traders were subject to 90 percent surcharge. Gulya saw her costs skyrocket overnight while her business declined.
At the same time authorities cracked down all open air markets for clothing and household items across the country sometimes using water cannon to drive people away. Officials explained that tough measures were needed to crack down on shoddy quality imports and to force shuttle traders to pay taxes.
Eventually, according to Gulya, many Uzbeks sought to avoid local merchants and instead make individual purchases in neighboring countries Kazakshtan, Tajikistan and Kyrgyzstan. Goods in neighboring states were as much as one-third the price as comparable wares in Uzbekistan.
At Chirchik, just one of many crossings into Kazakhstan, border guards say that 3,000 Uzbeks now pass through every day, double that over the weekend. Each person carries perhaps $100 and another $200-$300 for friends or relatives, they say.
Kazakh traders in Chimkent just across the border publicly thank President Karimov for the boom in business that the tariffs brought. Uzbek merchants like Gulya on the other hand wonder how they can continue. Although the import tariffs have been repealed, it is uncertain whether Uzbek shopping habits will change quickly.
"I may have to close," she says. "I have four workers how will they support their families?"
One major obstacle to currency reform may be the Uzbek bureaucracy. Top officials, many of whom reportedly have business interests in up-scale stores and boutiques in major cities, are said to take advantage of discrepancies in exchange rates to enhance their profits.
Some analysts suggest that Karimov's imposition of punitive import tariffs was designed to drive many shuttle traders and entrepreneurs out of business. That would leave stores with ties to government officials with a greater market share, and, in theory, reduce bureaucrats' opposition to currency reform.
Other experts suggest the import tariffs were introduced in part to soften the blow of cheap foreign goods that were expected to inundate the market once currency restrictions were removed. Since the currency reforms haven't been implemented, Karimov apparently decided to abandon the tariffs. "What we are seeing is a reaction to the reforms without implementing the reforms themselves," said one Western observer.
David Stern is a freelance journalist in Tashkent.
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