Uzbek currency is experiment in controlled chaos


By Neil Unmack

LONDON, Sept 6 (Reuters Breakingviews) – Uzbekistan is conducting an experiment in controlled currency chaos. The central Asian country slashed the value of its currency, the sum, by half, and relaxed many controls over buying and selling foreign currency on Sept. 5. Such moves can hurt consumers and banks and trigger runaway inflation, but this is likely to be an example of virtuous devaluation.

President Shavkat Mirziyoyev has gone where his strongman predecessor, Islam Karimov, didn’t dare. By allowing citizens and businesses to buy and sell foreign currency, and letting the sum fall to market levels, he is dismantling a system of currency controls in place since the collapse of the Soviet Union. The move may have been inevitable: the falling oil price and devaluations by trading partners have strained currency pegs across the former Soviet countries.

Uzbekistan’s adjustment may be benign, despite an eye-catching initial realignment causing the currency fall to 8100 for a single dollar, from 4210 a day earlier. It already operated a so-called crawling peg and successive official devaluations in recent years. Freer markets, and a move to limit cash exchanges, should reduce black market trading.

It helps that the country’s finances are in relatively good health. Government debt is low, at 13 percent of GDP, foreign currency reserves outweigh bank foreign liabilities, and the budget is almost balanced, creating room to stimulate the economy. Fitch Ratings reckons Uzbek banks should be able to survive a devaluation thanks to robust capital, few unhedged foreign currency positions, and if necessary, state funds.

The missing link is reform. The new government is taking steps to improve its inflation-fighting credentials, by improving public data. But it needs to encourage businesses to invest in Uzbekistan and keep their money there. It recently announced a four-year plan to boost the rule of law, fight corruption and reduce the state’s role in the economy. That’s tough talk. At least it has shown itself willing to try new things.

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– Uzbekistan made it easier for its citizens to buy and sell foreign currency on Sept. 5, and devalued its domestic currency to the market rate.

– The central bank set the currency rate at 8100 sums per dollar, down from 4210 sums previously. The official rate compares with a black market rate in of around 7700 sums per dollar.

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