Situation with Uzbek currency to normalize by 2020 (Exclusive)

Baku, Azerbaijan, Aug 22

By Fakhri Vakilov -Trend:

Analysts of the information and analytical Uzbek portal World of Finance told Trend about the causes and consequences of the devaluation of the Uzbek soum.

Recently it was reported that an increase in exchange rate volatility was observed at auctions of the interbank currency market of Uzbekistan. Since the beginning of the year, the dollar against the soum increased by 12.5 percent from 8336.25 soums on January 1 to 9384 soums on August 21. Most of the growth occurred in August, when the dollar rose by 679 soums.

Experts told Trend that there are several reasons for this situation and cited the most basic ones.

The Central Bank decided to cancel the maximum 0.5 percent deviation in the formation of the soum rate. The cancellation by the Central Bank of Uzbekistan of the requirement for the established permissible limits of volatility (0.5 percent per day) of the exchange rate on the exchange led to the possibility of a decrease of more than 0.5 percent, for example, on August 20 there was a depreciation of the soum by 2.76 percent, they said.

A change in the policy to support the exchange rate of the soum by the Central Bank, henceforth the Central Bank is letting the course go free float. It will not create an artificial proposal for the sale of foreign currency, they added.

The abolition of customs privileges for imports for early reservation of import stock until October 1 also affected the increase in demand for the purchase of the dollar, they noted.

In their words, although this is denied by the Central Bank, the excessive expansion of the money supply in the form of cash, loans and an increase in state budget expenditures also caused a sharp jump.

“Although you should not expect anything good in the beginning, but over time, if the fiscal policy which can improve the business climate also contributes to monetary policy, then by 2020 the situation with the exchange rate will normalize,” the experts noted.

They added that the Uzbek currency will devalue until there is a comprehensive approach to economic reform.

Earlier, Head of the Central Bank Mamarizo Nurmuratov said that denomination in Uzbekistan is not expected and the devaluation of the soum will not interfere with the servicing of external debt.

Analysts agreed with the head of the Central Bank on this issue and said: “There really is no place for denominations, but devaluation at such a pace will, of course, adversely affect the country's external debts."

However, according to them, sooner or later it was necessary to go to this step. "We think that the recent decision of the Central Bank authorities and the Ministry of Finance should have been taken back in 2017, so we could now analyze the effects of the scale of the liberalization of the foreign exchange market”, they added.

In their words, given that the external debts of Uzbekistan mainly consist of corporate debts, that is, debts of business entities, a devaluation of 12 percent affects their activities the most.

It should be noted that the authorities of the Central Bank and the Ministry of Finance have already begun processes to mitigate the consequences of the devaluation.

“Given that on August 21-22, we did not see the growth of the dollar exchange rate in the currency exchange, we hope that the situation in the financial market will normalize in the medium term,” analysts at Finance World emphasized.

They expressed hope that the Central Bank did not affect the depreciation these days, and further also will not significantly affect the formation of the currency rate.

---

Follow author on Twitter:@vakilovfaxri

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