Uzbekistan has announced a long-awaited move to ease some restrictions on converting its currency, the som, for international trade. But experts say without a true commitment from the government to encourage trade, the move may not have much practical effect. RFE/RL correspondent Mark Baker takes a look at the issue of currency convertibility and why countries are often reluctant to let their currencies float freely.
Prague, 20 October 2003 (RFE/RL) -- Uzbekistan this month announced a long-awaited move to ease restrictions on converting the som into foreign currency for trading in goods and services.
Officials in Tashkent say they will ease what are called "current account" restrictions on the currency -- in other words, they will make it easier for importers and exporters to get dollars and euros to conduct trade. Other restrictions, on activities like converting currency to invest or to loan money, remain in place.
Willem Buiter, the chief economist for the London-based European Bank for Reconstruction and Development, explains the changes by saying, "They've made it possible in principle for there to be a single price, a single market for hard currency -- for foreign currency, say dollars -- in which importers of foreign goods can obtain dollars freely to pay for the imports and for exporters to repatriate their foreign currency -- bring it back home. [The exporters could] either keep it in dollars or euros or convert it back [into soms]."
International financial institutions -- led by the International Monetary Fund -- have for years been trying to convince officials in Tashkent to make the som at least partly convertible. They argued that such a move would not only fuel economic growth in Uzbekistan but would also catalyze regional trade given the country's location at the center of Central Asia.
Buiter agrees. He tells RFE/RL that for Uzbekistan, current-account convertibility is a necessary first step toward integrating the country into the global economy.
"Without current-account convertibility, there can be no effective participation in the global economy. [Uzbekistan] is small -- despite the fact it has 25 million inhabitants. From a global economic perspective, it's a small economy. [Economies like] Uzbekistan do not have the size of markets [or] the depth of experience to flourish under autarky [economic isolation]," Buiter said.
But countries are often very reluctant to liberalize their currency regimes. By keeping a currency fixed at artificially high levels -- such as Uzbekistan has with the som -- imports appear much cheaper, and inflation can be controlled. Officials can also keep firmer control over the economy -- granting preferential exchange rates to favored individuals and businesses to promote certain political or economic objectives.
Maintaining fixed exchange rates, however, can have strong disadvantages. Domestic producers find it more difficult to sell their products abroad. And foreigners are discouraged from investing in the country. Ultimately, a fixed exchange rate impedes communication between local producers and the world economy.
Uzbek officials have justified the fixed rates in the past by saying they fear any move toward full convertibility could lead to a sharp devaluation in the som. This in turn would make imports more expensive and fuel inflation.
Ibrokhim Toymamatov, a representative of the Uzbek Central Bank, says that's the reason the government did not fully ease currency restrictions. He said the Central Bank could lower the som's exchange rate -- making it easier to buy foreign currency -- provided the country has a good harvest to ensure its foreign currency reserves.
"For the time being, we have to keep the exchange rate under control. If you let the currency float freely, the som may sharply fall in value. Everything, speaking frankly, depends on the productivity of the agricultural season this year," Toymamatov said. "The more we get good quality cotton fiber, the lower the currency rate will be. As for our currency resources, I can't tell you how much we have, but it's limited."
Buiter, like many outside observers, says only time will tell if the Uzbek authorities are serious about making the currency truly convertible for trade. He says one possible trick if they are not sincere would be to announce that the som is convertible for trade transactions, but at the same time impose artificially high fees for exchanging the currency or high tariffs to discourage trade by other means.
"We have to wait and see whether this is for real," says Buiter. "It could be real, in which case it would be good news for Uzbekistan. It could be more 'smoke and mirrors' [an illusion created by the Uzbek government], which they have a long tradition of. In this case, it would be bad news for Uzbekistan."
Traders interviewed last week in Tashkent's largest street market were skeptical that the announced currency liberalization will make any difference. They point out that many borders are still closed and tariffs on imported goods remain prohibitively high.
"If you buy goods for 100,000 soms abroad, you will end up paying 170,000 soms because of the high customs duties. Who is suffering? Of course, it is the ordinary people," one trader said. "What is the use of having convertibility or being allowed to trade freely in dollars when the borders are closed and we can't bring anything in? Instead [we should ask the government] to reduce customs tariffs from 70 percent to 20 percent."
The move in Uzbekistan has highlighted the situation in Russia, where the ruble -- while freer than the som -- is still not fully convertible.
Moves to introduce capital convertibility -- the freedom to exchange rubles to buy and sell financial assets like stocks and bonds or to make loans abroad -- have gained pace in recent months as the Russian economy has strengthened and the central bank's reserves have grown.
Buiter says Russia may not yet be ready for full convertibility. He says the banking sector, for one thing, is still very weak.
"In my view, opening up to full capital account convertibility at this stage in Russia would be premature. Because in order to have the full benefits of capital account convertibility, you have to have a strong, well-supervised and regulated banking sector," Buiter said. "The Russians don't have that. The banking sector is woefully underdeveloped. The supervisor, the regulator -- the central bank -- has improved greatly in recent years, but it is still in charge of a huge ... banking ... mess."
A fully convertible ruble fits well with the country's long-term political ambitions through groups like the G-8, which brings together the seven biggest industrialized democracies plus Russia. But while Russia currently can sit in on G-8 meetings dealing with political problems, without a fully convertible currency it is still barred from participating in global financial decisions. These are handled through the G-7 -- without Russia.
(RFE/RL's Uzbek Service contributed to this story.)
