Uzbekistan Returns to Currency Convertibility, Delivers Blow to Black Market
The big bang has arrived for Uzbekistan’s financial system, with the government lifting decades-old currency restrictions that had choked entrepreneurship and enabled the black market to thrive.
At the opening of business hours on September 5, the Central Bank publicized the new official exchange rate for the national currency — the sum. From 4,200 sums to the dollar a day earlier, the rate on September 5 dropped suddenly to 8,100, even more than the going black market rate of 7,700 sums to the dollar.
On the same day, rule changes allowing Uzbek citizens to buy and sell foreign currencies in banks and exchange points went into effect. Many in the banking sector seemed to have been surprised by the developments, which have long been awaited by regular people and the business community alike.
Workers at Ipak Yuli (Silk Road), a bank in the Universam commercial area of Tashkent, told a EurasiaNet.org correspondent that they were not prepared to sell foreign currency to the public. One employee, who gave her name only as Raziya, said the rule changes had been introduced without adequate time to prepare.
Undeterred by the odd failure, many Uzbeks nonetheless could be seen from early morning getting in long lines outside banks in the capital. Some had dollars, but others were also hoping to turn in their euros and Kazakhstani tenges. When a bank declined to exchange a certain currency, customers tended to go off in search of another bank.
The best prepared was Asaka bank, the country’s largest lender. At one branch, a EurasiaNet.org correspondent counted 12 customers. Cashiers worked fast and exchanged the foreign currency for 50,000 sum notes — another novelty for Uzbekistan.
Authorities only revealed in August that they were going to start producing 50,000 sum notes (worth around $6) in order to reduce the sheer volume of paper money in circulation. Economists have said that the denomination is still far too small, and there are reportedly imminent plans for a 100,000 sum note. The 50,000 notes first appeared on August 22, but they did not start to widely circulate until September 5, the same day as the currency devaluation.
The mood in banks bordered on the jubilant, with many flooding bank tellers with questions and speaking out loud in glowing terms about the government’s decision to set the exchange rate in line with the market. Only people with more than $2,000 to change needed to present their passports.
Those who came to buy dollars were told that they could not get hard cash, but that they could have $5,000 deposited onto their Mastercard or Visa cards once every quarter.
Meanwhile, just 500 meters from the cluster of banks in the Universam area, in a spot normally occupied by black market currency traders, it was a forlorn sight. Where people once stood selling and buying money, shouting “Dollar, ruble, tenge olamiz!” (“We buy dollars, rubles and tenge!), there were only police officers. By instantaneously leapfrogging the unofficial rate, the government in a single stroke put the black market in Tashkent out of business – at least for now.
Currency traders are lying low at present.
Mavzuna, a long-time currency trader in her 50s, told EurasiaNet.org that there were rumors going around that police were planning to start rounding up black marketeers en masse on the day of the devaluation. The instructions purportedly were said to have come down from the presidential administration.
“We have all stopped working for now, and we are going to wait and see. We’ll come back out onto the streets, if the banks run out of cash, and for people who want hard foreign cash. And there are going to be lines at the exchange desks. People don’t trust the government, so it will take them some time to get used to the currency exchange rules,” Mavzuna told EurasiaNet.org.
Banks in the provinces have also started to change money.
Hamro Rasulov, an employee at a filling station in the city of Karshi, 450 kilometers from Tashkent, told EurasiaNet.org that although local banks are exchanging currencies, many people from the villages are still turning to black marketeers out of habit and distrust of authorities.
The return to convertibility brings a close to a 21-year interlude. From independence through to 1996, the sum could be exchanged freely, but that all changed following a series of chronic balance of payments crises. While instilling a surface-deep level of stability, this policy crippled the potential for foreign trade and enriched criminal black marketeers.
Although the sudden changes have been broadly welcomed by the population, economists like Rafael Sattarov are concerned that they could lead to a sudden spike in prices for some goods.
“This is inevitable. What we should have gone through in the 1990s, we are about to experience soon. What we need from the government now are guarantees for business, open borders and the end to monopolies,” Sattarov told EurasiaNet.org.
The government has introduced specific measures along with currency convertibility to try and mitigate inflationary effects. One is to provide sufficient financing to core sectors of the economy, such as those providing basic utilities. There are also plans to adjust customs tariffs to avoid massive rises in prices for imported goods and services.
A statement issued by the International Monetary Fund after a July visit to Uzbekistan by its staff said that an overhaul of the currency exchange mechanism would require wide-ranging reforms elsewhere.
“The reform of the foreign exchange system would need to be backed up by restructuring state-owned enterprises and state-controlled banks, removing other bottlenecks to international trade and [foreign direct investment], and streamlining laws, regulations, and practices that unnecessarily raise transaction costs for businesses, especially for small and medium-sized enterprises crucial for promoting job creation,” the IMF said in its statement.
In another move designed to soften the financial blow, President Shavkat Mirziyoyev has vowed to substantially increase welfare payments for families with children under the age of 14. Especially low-income families will be due double the amount of welfare payments, Mirziyoyev has said. The reintroduction of currency convertibility is occurring about a year after Mirziyoyev assumed the top spot in Uzbek politics following the death of Islam Karimov, the hardline leader who had maintained tight state control over the financial sector for two-plus decades.
Even normally level-headed experts like Yuliy Yusupov were exuberant.
“I don’t think it would be a bad idea to make September 5 a holiday — Convertibility Day. Outsiders wouldn’t understand. … For 21 years we’ve been waiting,” Yusupov wrote on Facebook.