That’s som devaluation

By bne IntelliNews April 16, 2015

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Counting out money has become a time-consuming business in Uzbekistan.

People flipping through thick wads of Uzbek som banknotes can be spotted at any corner of the street all over the Central Asian country. No matter how small, any trade involves the counting out of dozens of banknotes on both sides. For larger transactions, like buying an airplane ticket, clients pull out of their bags neatly prepared wads of notes and pile them up on the counter. But what looks like a money-laundering paradise for drug barons is, in fact, a country almost exclusively relying on fast-depreciating UZS1,000 banknotes.

Introduced in 1994, the Uzbek som has emerged as one of the weakest currencies in the post-Soviet space and its continuous depreciation has become a hallmark of the 24-year tenure of President Islam Karimov. The depreciation of the som, like those currencies elsewhere in the region, has picked up of late because of the steep fall in the currency of the country’s largest trading partner, Russia. “The som is depreciating quickly, it has always been like that,” Aziz, an informal money exchanger in Tashkent who prefers to omit his surname for safety reasons, tells bne IntelliNews.

The som’s “street course” fell to about UZS4,000 to the US dollar in mid-April from around UZS3,000 six months earlier, Aziz confirms. The Uzbek currency then took an even deeper dive after the March 29 presidential election, when Karimov secured a fresh five-year mandate thanks to a rigged election, falling to about UZS4,200-4,300 to the dollar in a matter of days.

This rate contrasts sharply with the official exchange rate provided by the Central Bank of Uzbekistan, which quotes a price of UZS2,502 to the dollar, 68% lower than the street course. In more notorious cases of monetary mismanagement like Argentina, the same difference never exceeded 40%.

In denial

One visible manifestation of this official denial has been the reluctance of the government to introduce much needed higher denominations; UZS5,000 notes were finally introduced in 2013, but are still rare outside the capital of Tashkent. On the other hand, people avoid smaller UZS500 or UZS200 banknotes, as their value is just too marginal. Most of the monetary base thus relies on UZS1,000 banknotes, whose value is decreasing day by day as Russia’s troubles spill over into the rest of the region.

The denial to acknowledge the real pace of the som's depreciation also mirrors the government’s overly bullish attitude toward the economy. The authorities expect real economic growth to remain stable at around 8% in 2015, thus creating millions of new jobs for the impoverished nation. Inflation is also expected to remain under control below 10%. However, the quick depreciation the som on the black market tells a different story.

The Uzbek currency is suffering from decreasing inflows of hard currency that trace back to a combination of factors, such as falling remittances from Russia, which made up 12% of GDP in 2013 and fell by 16% y/y in 2014, the World Bank confirmed in a report on April 15; decreasing exports to Russia, with big exporters like carmaker GM Uzbekistan experiencing a 58% y/y plunge in sales to Russia in the first quarter of the year; and weakening commodity prices, which are reducing the value of major exports such as hydrocarbons, cotton and mining output.

The som weakness is building up pressure on consumer prices, with real inflation running between 20% and 30%, according to rare independent analysis; back in 2012, the CIA World Factbook put consumer price inflation (CPI) at 22%.

International observers like the International Monetary Fund (IMF) and the Asian Development Bank (ADB), which still largely rely on government figures for their forecasts on the Uzbek economy, have been adjusting down slightly their forecasts given the country’s deteriorating economic position. The IMF now expects economic growth to slow to 6.2% in 2015, and inflation to reach 9.5%, according to the latest figures published in its "2015 World Economic Outlook". The ADB forecasts economic growth at 7.0% and inflation at 9.5% in 2015, according to estimates published in the "2015 Asian Development Outlook" report.

The Uzbek som is no exception among Central Asian currencies. The partially free-floating Kyrgyz som and the Tajik somoni have also fallen to historic lows as remittances from Russia, which make up an even larger share of GDP in those countries, plunge. In Turkmenistan, the central bank devalued the manat by 19% in January for the first time since 2009. The National Bank of Kazakhstan also devalued the tenge by 19% in February 2014 and its population has been waiting for another devaluation for months; there is a widespread belief that the authorities will finally carry out a new devaluation after President Nursultan Nazarbayev secures a new mandate in the presidential elections to be held on April 26. Just across the Caspian Sea, Azerbaijan devalued the manat by as much as 33.5% in February.

All of this is leading to an increasing dollarization of local monetary bases, with bank deposits denominated in dollars making up 54.5% and 59.3% in Kazakhstan and Kyrgyzstan, respectively, and 67.7% in Tajikistan at the end of February, according to central bank figures. People in Uzbekistan have little official access to dollars and, at least officially, there is no ongoing dollarization of the economy. Yet money changers in the bazaars across the country seem busier than ever.

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