Uzbekistan has now granted permission to commercial banks in the country to trade the Uzbek national currency at the market rate, Uzbek state-run UzDaily news agency reported on July 10.

The announcement follows a Reuters report from July 7, which revealed that a pilot project to lead to the introduction of the floating exchange rate had been initiated in the country. The project allowed a limited number of companies and banks to trade foreign currency at the market rate, but the UzDaily report now appears to suggest that all commercial banks were given permission.

Uzbek President Shavkat Mirziyoyev previously announced plans to abolish the black market rate of the Uzbek som, which has stood in the way of foreign investment. While the official rate of the sum currently trades at UZS4,000 per dollar, the bourse market rate and the black market rate trade at UZS8000-UZS9,000 to a dollar. Exporters are required to sell a quarter of their foreign currency at the official rate, while importers can only buy currency at the unofficial rate.

The black market rate also fuels rapid inflation in the country. According to official statistics, the inflation rate in 2016 was 5.7% compared to 5.6% in 2015, with a targeted inflation rate projected at 5.7-6.7%. However, independent analysts estimate inflation to be in the double digits.

A sharp increase in official alcohol prices by 16%-19% at the beginning of 2017 indicated the ongoing double-digit inflation problem. In a similar example, the country saw a 35% hike in government-set fuel prices in October. The move was supposedly aimed at combating “smugglers” who bought cheap Tashkent fuel to re-sell at higher prices in other regions of Uzbekistan.

Such a theory is questionable, however, as the government itself mentioned that smuggled fuel prices reached UZS5,000, when official prices stood between UZS2,000-UZS2,500. The newly set prices of UZS3,000-UZS3,300 hardly seem to reflect the country’s real rate of inflation, which is fueled by the country’s double exchange rate regime.

The Central Bank of Uzbekistan increased its refinancing rate in June by as much as 5 percentage points to 14%, changing the rate for the first time since January 2015. The central bank’s decision was influenced by “growing inflationary risks” and the need to ensure stable consumer prices, according to the statement. The move shows the regulator's willingness to acknowledge the country’s inflationary troubles, which Uzbekistan has been facing for the last couple of years.