Economy of Uzbekistan - Prices and Monetary Policy

Prices and Monetary Policy

Uzbekistan experienced galloping inflation of around 1000% per year immediately after independence (1992–1994). Stabilization efforts implemented with active guidance from the International Monetary Fund rapidly paid off, as inflation rates were brought down to 50% in 1997 and then to 22% in 2002. Since 2003 annual inflation rates averaged less than 10%.

The severe inflationary pressures that characterized the early years of independence inevitably led to a dramatic depreciation of the national currency. The exchange rate of Uzbekistan’s first currency, the “notional” ruble inherited from the Soviet period and its successor, the transient "coupon som" introduced in November 1993 in a ratio of 1:1 to the ruble, went up from 100 rubles/US$ in the early 1992 to 3627 rubles (or coupon soms) in mid-April 1994. On July 1, 1994 the "coupon som" was replaced with the permanent new Uzbekistani som (UZS) in a ratio of 1000:1, and the starting exchange rate for the new national currency was set at 7 som/US$, implying an almost two-fold depreciation since mid-April. Within the first six months, between July and December 1994, the national currency depreciated further to 25 som/US$ and continued depreciating at a fast clip until December 2002, when the exchange rate had reached 969 som/US$, i.e., 138 times the starting exchange rate eight and a half years earlier or nearly 10,000 times the exchange rate in early 1992, soon after the declaration of independence. Then the depreciation of the som virtually stopped in response to the government's stabilization program, which at the same time dramatically reduced the inflation rates. During the four years that followed (2003–2007) the exchange rate of the som to the US dollar increased only by a factor of 1.33, from 969 som to around 1865 som in May 2012.

From 1996 until the spring of 2003, the official and so-called "commercial" exchange rate – both set administratively by the Central Bank – were highly overvalued. Many businesses and individuals were unable to buy dollars legally at these "low" rates, so a widespread black market developed to meet hard currency demand. The spread between the official exchange rate and the curb rate widened especially after the Russian financial crisis of August 1998: at the end of 1999 the curb rate stood at 550 som/US$ compared with the official rate of 140 som/US$, a gap by nearly a factor of 4 (up from a factor of "only" 2 in 1997 and the first half of 1998). By mid-2003, the government's stabilization and liberalization efforts had reduced the gap between the black market, official, and commercial rates to approximately 8% and it quickly disappeared as the som was made convertible after October 2003. Today, four foreign currencies—the U.S. dollar, the euro, the pound sterling, and the yen—are freely exchanged in commercial booths all around the cities, while other currencies, including the Russian ruble and the Kazakh tenge, are bought and sold by individual ("black market") money changers, who are allowed to operate openly without harassment. The foreign exchange regime since October 2003 is characterized as "controlled floating rate". Liberalization of the trade regime remains a prerequisite for Uzbekistan to proceed to an IMF-financed program. In 2012, "black market" rate is again significantly higher than official rate, 2850 som/US$ vs. 1865 som/US$ (as of mid-June 2011). This curb rate is often referred to as 'bazar rate', because money changers operate at or near 'bazars' - large farmer markets.

Tax collection rates remained high, due to the use of the banking system by the government as a collection agency. Technical assistance from the World Bank, Office of Technical Assistance at the U.S. Treasury Department, and UNDP is being provided in reforming the Central Bank and Ministry of Finance into institutions capable of conducting market-oriented fiscal and monetary policy.