This paper reviews economic developments in the Republic of Uzbekistan during 1992–97. It compares growth in Uzbekistan with that of other transition economies and seeks to shed light on why Uzbekistan has suffered a smaller transformational recession than other transition economies. The paper covers the existing arrangements for production and trade in agriculture, and estimates the costs for agriculture arising from state procurement and the multiple exchange rate system. The paper also traces the effects of multiple exchange rates and other quasi-fiscal operations on the economy as a whole.


This paper reviews economic developments in the Republic of Uzbekistan during 1992–97. It compares growth in Uzbekistan with that of other transition economies and seeks to shed light on why Uzbekistan has suffered a smaller transformational recession than other transition economies. The paper covers the existing arrangements for production and trade in agriculture, and estimates the costs for agriculture arising from state procurement and the multiple exchange rate system. The paper also traces the effects of multiple exchange rates and other quasi-fiscal operations on the economy as a whole.

III. Quasi-Fiscal Operations through the Foreign Exchange System

A. Introduction

67. Since late 1996, the Uzbek Government has relied on a multiple exchange rate regime (MER), together with foreign exchange and trade restrictions, to promote rapid industrialization as well as other economic goals.50 Exchange rates in official markets have been kept below market clearing levels, which in turn has required rationing and allocation of foreign exchange through administrative mechanisms. The implicit taxation of agricultural production through the exchange system and state orders (described in Chapter II) has been used to finance subsidies to industry, via preferential access to foreign exchange at favorable rates. Part of the implicit tax on agriculture has also financed a similar subsidization of imported consumer goods which were considered to be priority commodities, such as wheat and sugar.

68. Extending the analysis of Chapter II, this chapter analyzes the redistributive and quasi-fiscal effects of the present MER and marketing systems, by comparing the effects of the various official and unofficial exchange rates in place in 1997 with those of a hypothetical unified rate of 100 sums per U.S. dollar.51 This chapter does not attempt to estimate the efficiency losses inherent in the present system, or the perhaps substantial long-term costs resulting from the negative impact of current policies on domestic and foreign investors, as well as on the financial support available from bilateral and multilateral sources. This chapter demonstrates that the current MER regime involves sizable implicit intersectoral transfers. These transfers penalize agriculture and the government while benefitting other sectors, including industry, households, and commercial banks.

B. Background and Summary of the Current System

69. According to the authorities, the primary rationale for the existing exchange and trade system has been to support a development strategy based on import substitution.52 As described in Chapter I, the objective has been to build an industrial base in Uzbekistan over the next few years, in order to move away from the specialization imposed during the Soviet period when production was focused on cotton and gold. Under the MER system, foreign exchange resources have been allocated at preferential rates for the importation of capital goods, spare parts, and raw materials for the oil and gas, mining, manufacturing, and infrastructure sectors, in part to encourage foreign investment in these sectors. These activities are considered of strategic interest. A second reason for the MER system has been the government’s desire to contain the cost of servicing foreign debt and paying for government imports, which have been minimized by the provision of foreign exchange for these purposes at the official exchange rate.

70. With an overly appreciated exchange rate, and a loose credit policy,53 there has been strong pressure on the level of international reserves. To help maintain the level of international reserves, without a major tightening of credit policies or exchange rate correction, foreign exchange has been strictly rationed and trade controlled. Imports of consumer goods in particular have been compressed by an advance import contract registration requirement, restrictive licensing practices, controls on the allocation of foreign exchange, and import tariffs and quotas. At the same time, domestic manufacturing industries have been supported by the preferential allocation of foreign exchange as well as tax and customs exemptions.

71. The authorities have also been concerned that a substantial correction of the exchange rate would reignite inflation and contribute to social instability. By permitting only a gradual depreciation of the currency in official markets, the authorities have aimed to keep inflation down and preserve real wage levels. The application of the preferential exchange rate for imports of selected food items has been designed to help preserve social stability in the face of tight restrictions on imports of many consumer goods, and the heavy implicit taxation of the rural community.

72. Foreign exchange transactions take place in a number of segmented markets as discussed in detail in Chapter IV. The auction and commercial bank markets are the largest legal markets. Box 4 summarizes the main foreign exchange flows through these markets. In addition to the auction and commercial bank markets, there are other ways for importers to access foreign exchange in Uzbekistan. Since early 1998, an enterprise is allowed to use its foreign exchange earnings (after the 30 percent surrender requirement) to pay for imports or other obligations abroad. In addition, an illegal curb exchange market operates in both cash and noncash. The latter is used to make payments abroad through the transfer of sum-denominated domestic bank balances, in exchange for a corresponding transfer of hard currency assets held abroad. Transactions in the curb market are typically those needed to satisfy imports not covered by licenses, as well as other unauthorized transactions and capital flight.

Sources and Uses of Foreign Exchange


Auction market:

  • mandatory 100 percent surrender on exports of cotton, gold, and other centralized exports (official rate);

  • net sales of official reserves of the CBU to commercial banks (official rate).

Commercial bank market:

  • mandatory 30 percent surrender of noncentralized exports (official rate);1

  • voluntary sales of up to 70 percent of noncentralized exports (up to 112 percent of the official rate);2

  • sales by commercial banks of reserves bought at the auction from the CBU for selected transactions (auction rate).

Access to foreign exchange

Auction market:

  • Eligible imports of capital goods, raw materials, and grains;

  • Government purchases and external debt service;

  • Imports of certain high priority consumer goods.

Commercial bank market:

  • Imports of high priority consumer goods (112 percent of the official/auction rate).3

1/ Commercial bank rate since July 1998.2/ There are no restrictions on the rate at which banks can buy foreign exchange. The selling rate, however, was limited to 112 percent of the official rate through June 1998. For simplicity, and given that during the relevant period the official and the auction exchange rates were very close to one another, this chapter refers to the official rate as the basic exchange rate, although for some transactions the auction rate was used.3/ As of July 1, 1998, this 12 percent limit has been formally removed.

Main Distortionary and Distributional Effects

73. Figure 5 and Table 16 provide detailed breakdowns of the gains and losses to various sectors of the economy resulting from the existing MER and marketing systems. In estimating these gains and losses, the volume of foreign exchange transactions estimated for 1997 were recomputed using the hypothetical unified exchange rate and the result compared with actual transactions. The calculations assume that, together with the unification of the exchange rate, state orders and the ex-ante registration of import contracts are eliminated. While the figures presented are only estimates, they reveal the complicated system of implicit and explicit taxes and transfers (Box 5), and show who the net gainers and losers are from the current system.

Figure 5.
Figure 5.

Uzbekistan: Gains and Losses from Multiple Exchange Rates

(In percent of GDP)

Citation: IMF Staff Country Reports 1998, 116; 10.5089/9781451839784.002.A003

Sources: Table 16.
Table 16.

Uzbekistan: Gains and Losses from Current Multiple Exchange Rate Practices and Marketing System 1/

(In billions of sums; gain +, loss −)

article image
Source: Fund staff estimates on the basis of data provided by the authorities and independent sources.

Based on 1997 data and comparison of average exchange rates with a hypothetical unified exchange rate of sum 100 per U.S. dollar.

Includes industry, mining, trade, and nonfinancial services.

Includes central and local governments and extrabudgetary funds, but not state-owned enterprises.

On existing VAT, excises, import tariffs, and profits tax.

Multiple Exchange Rates

A system of MERs is tantamount to an array of taxes and subsidies. Economists have examined the occurrence of multiple exchange rates both theoretically and empirically for a number of countries, and have determined that MERs bring about economic distortions leading to inefficient patterns of production and consumption. These are in turn reflected in losses for sectors of the economy, the government, and the central bank.1 Although MERs may help countries to achieve certain policy objectives over the short term, they invariably introduce new problems. In most cases, MERs are introduced as a response to external payments difficulties. Also, they are often introduced to counter the adverse impact on external current account transactions and the fiscal budget of an overvalued currency.

Once MERs are introduced, they need to be supported by a complex system of controls over international transactions, including requirements for the surrender of foreign exchange. The foreign exchange market becomes segmented and the economy loses flexibility, with the price system unable to signal relative scarcity and transmit incentives for efficient production. Because of the ad hoc nature of MERs, these systems require frequent adjustments, which in turn introduce further instability and complicate long-term planning by economic agents. A system of MERs makes exporters uncertain of the degree of protection they can count on; as a result, they become reluctant to invest.

1See, for example, Nita Ghei et al., “Parallel exchange rates in developing countries: Lessons from eight case studies” in Miguel A. Kiguel et al., Parallel Exchange Rates in Developing Countries (London and New York: MacMillan and St. Martin’s, 1997).

74. The biggest loser is agriculture (almost 6 percent of GDP), where the combined effect of low producer prices and an unfavorable exchange rate for cotton and wheat have swamped the tax breaks and subsidies the sector receives. Other big losers have been the central bank (4 percent of GDP, due to subsidized credit and net sales of official reserves at an overvalued exchange rate), the budget (2½ percent of GDP, primarily due to agricultural subsidies and tax exemptions), and exporters (3 percent of GDP). The big gainers have been non-exporting—particularly import-competing—industries (9 percent of GDP, primarily from imports of capital and intermediate goods, and sales of foreign exchange earnings) and households (5½ percent of GDP, primarily through inexpensive wheat and other priority goods).

Effect on Agriculture and Other Exporting Sectors

75. The government’s ability to transfer resources from agriculture to the industrial sector has depended on two factors: first, control of the crop production and marketing processes, especially for cotton and wheat; and second, control of the foreign exchange and trade systems. The taxation of the agricultural sector has created disincentives for producers that have been reflected in declining yields and poor crop quality. In addition, the distortions of relative prices as a result of the web of implicit taxes and subsidies have led to substantial inefficiencies in agricultural production.

76. Exports of traditional raw materials are basically undertaken by the state directly, or by state-owned trading enterprises.54 All export receipts on these items have been subject to a surrender requirement of 100 percent at the official exchange rate. Primary producers have ultimately incurred the losses due to the unfavorable exchange rate and the state procurement system.

77. Exporters of nontraditional goods have suffered losses due to the 30 percent surrender requirement for export earnings at the official exchange rate.55 The surrender requirement has not only made exports less profitable and competitive, but it has also encouraged capital flight through under-invoicing of exports and illegal cross-border trade. In addition, exporters have incurred losses on voluntary legal sales of foreign exchange at the commercial banks’ exchange rate. To avoid these losses, exporters have been inclined to use their export proceeds to import virtually anything.

Effect on Investors and Other Importers

78. The overvaluation of the currency in the auction and commercial bank markets has created excess demand for foreign exchange, necessitating rationing. Industrial enterprises that import capital goods, raw materials, and assembly parts, together with external debt service associated with investment projects and government programs, have had access to foreign exchange directly from the auction at the official exchange rate, and have thereby received a large implicit subsidy, at the expense of administrative hurdles and delays.

79. Other eligible importers have obtained foreign exchange at the more depreciated commercial bank exchange rate. They have also enjoyed a subsidy, albeit a smaller one. Access to foreign currency from these official sources has been constrained by limits administratively determined by the Republican Monetary Commission.

80. Importers have had a strong incentive to resort to over invoicing in order to secure as much foreign exchange as possible at the auction or commercial bank exchange rates. Importers of goods not eligible for foreign exchange from official sources have been forced to resort to the curb markets. In these markets, they have paid a substantial premium, compared not only with the auction and commercial bank rates but also relative to the market clearing rate that would emerge in the absence of restrictions. Operating in illegal markets results in risks and costs and these have been passed on in terms of higher prices.

81. Additional costs that cannot be easily quantified arise from bureaucratic hurdles that importers have faced. One of the most important hurdles is the ex-ante registration of import contracts with the Ministry of Foreign Economic Relations (MFER). The MFER approves each contract individually, after determining whether the import is viewed as necessary by the government and whether price matches quality. Although the process should take no more than ten days, longer delays have often been reported, and the outcome of the review has been unpredictable. The registration has also created scope for rent seeking, which in turn may have increased import costs. Importers could avoid ex-ante registration by resorting to preshipment inspection, for a fee. In addition, substantial delays in customs processing have been reported, which resulted in additional storage costs, theft, and deterioration of perishable goods which have not been given priority for clearance. Importers have also incurred considerable costs in terms of time and resources in securing foreign exchange and import licenses.

82. The authorities’ declared intention is to promote investments. However, investors have been affected by the obstacles described above in the process of obtaining foreign exchange and licenses for their imports and the resulting uncertainties. As a result, at times they have experienced difficulties in acquiring necessary inputs for production and in the repatriation of profits. There have also been restrictions on using funds deposited in local banks, both in domestic and hard currencies.

83. However, those investors that have been able to secure foreign exchange through official channels have benefitted from the favorable official exchange rate at which they repatriated profits and paid for capital goods and raw materials. Certain categories of investors have enjoyed tax benefits and trade-related exemptions (Chapter IV, Box 12). The current system, therefore, distorts the relative input, output, and transfer prices and consequently affects investment decisions. Some ongoing investment projects may not be viable and may not have been undertaken in the absence of these subsidies. Other investments may have been discouraged by the rent seeking, administrative complexities, and uncertainties under the current system. Also, large firms appear to have received preferential treatment at the expense of small businesses.

Effect on Households

84. Consumer goods imported at either the official or commercial bank rates have received substantial implicit subsidies, which may or may not have been passed onto consumers. To the extent that the savings were passed onto consumers, the overvalued sum has reduced the level of prices of selected goods, while the relatively slow adjustment of the two legal rates has reduced the rate of increase of those prices. The implicit subsidization has resulted in excess demand for officially imported consumer goods and their subsequent administrative rationing. Consumers have therefore been limited in their choice and have incurred costs such as queuing or searching for stores where goods are available. This situation has been exacerbated by the fact the present system makes it highly profitable to reexport these subsidized goods to neighboring countries. The authorities have imposed restrictions on reexports, tightened border controls, and sought to prohibit the resale of the basic goods imported by the state in the free market. For example, since mid-1997, wheat and sugar cannot be sold outside state shops.

85. Many consumer goods have been imported with foreign exchange secured through the curb market. The black market has been used for imports for which foreign exchange cannot be purchased on the official markets, as well as to satisfy foreign exchange needs for travel—beyond the small amounts converted through the banking system—and other invisible transactions.56 Since the curb market rate commanded a premium of more than 100 percent during the period, this has entailed a significant implicit taxation of the corresponding transactions.

86. Whether individual consumers have gained or lost on a net basis depends on the weight of implicitly subsidized imported goods in their individual consumption baskets. However, abstracting from consumer choice and rationing issues, households, as a group, have been net beneficiaries of the present system.

Effect on Commercial Banks

87. Commercial banks have been among the beneficiaries of the system of multiple currency practices, as they have received high margins on foreign exchange transactions. These margins arise because, through June 1998, commercial banks could purchase foreign exchange at the official exchange rate and resell it at the commercial bank rate, a markup of 12 percent. More than two-thirds of the foreign exchange transactions of commercial banks are carried out by the National Bank of Uzbekistan, which is a state-owned bank.

Effect on the Government Sector: Quasi-Fiscal Operations of the Central Bank and the Fiscal Budget

88. In principle, the central bank should not have suffered losses or derived gains from the MERs, as (until July 1, 1998) it transacted only at the official/auction rate. However, during the period under analysis, central bank sales far exceeded purchases of foreign exchange from cotton and other centralized exports.57 Central bank “losses” have resulted from the net sales of international reserves below a market-clearing exchange rate. The central bank has also lost through the provision of credit to agriculture and industry at subsidized interest rates.

89. In addition to the quasi-fiscal effects discussed earlier, the system of MERs has had a direct effect on both fiscal revenue and expenditure. The present system entails sizable revenue losses for the budget. As the cotton sector is already heavily taxed through an unfavorable exchange rate and the state-order system, this has precluded the levying of general taxes on its activity. An additional revenue of 11 billion sums (equivalent to 1.1 percent of GDP) could have been raised in 1997 if the VAT and profits tax had applied to agriculture. This would have more than compensated for the elimination of the present excise tax on cotton delivered under state orders, from which a revenue of about half that amount was collected in 1997. An important source of revenue loss for the budget under the present system has derived from the application of an overvalued exchange rate on nonbudgetary imports entering the tax bases. Revenues foregone on this account have stemmed mainly from the VAT, excises, and customs duties on imported tobacco and alcoholic beverages. Under the present system, VAT revenue has also been pressed by the valuation of “priority imports” by nonagricultural sectors at the official exchange rate.58

90. A number of budgetary expenditure items have been subsidized through MERs. Although interest payments abroad have represented a small proportion of total expenditure, the present system has resulted in some net savings for the budget. More important, the budget has saved on imports of investment goods for budget-financed projects, as well as on budgetary imports of foodstuffs and other consumer goods and services.59 These savings, however, have been more than offset by public spending for the provision of equipment and inputs for free or at subsidized prices to agriculture. These subsidies have been made necessary by the squeeze on agriculture caused by the exchange and marketing regimes. Budgetary savings would have resulted from the application of cost-recovery prices on inputs in conjunction with producer prices based on a market-clearing unified exchange rate.

91. To the extent that the households have benefitted from savings on the import of wheat and other basic foodstuffs at preferential exchange rates, exchange rate unification would have implied an increase in the relative price of the subsistence basket. This in turn would have required an extension of the social safety net to shield, through targeted budgetary transfers, the most needy from the adverse effect of higher food prices. Taking account of this additional expenditure, estimated at 8 billion sums in 1997, the combined net effect on the fiscal deficit from eliminating the MERs and trade restrictions still suggests the possibility of a very substantial “fiscal dividend” from a move to a unified, market-determined exchange rate in Uzbekistan.60

C. Concluding Remarks

92. Under the present MER system, agriculture and the budget have provided significant net transfers to industry, households, and commercial banks. As the central bank sold, in 1997, a substantial part of its exchange reserves at an exchange rate that underpriced foreign exchange, the central bank has also provided significant transfers to other sectors.

93. Although the present exchange and marketing systems have adverse effects on efficiency and economic growth, and thus the economy as a whole, some groups—those who have access to foreign exchange at favorable rates—have benefitted from the current regime. It is possible that, over time, some of the beneficiaries of the current system would gain by supporting reforms—including exchange rate unification—that would promote faster growth; they may benefit from accepting a smaller “slice” of a more rapidly expanding “pie.” However, these groups may not support reforms if they do not perceive the advantages that reforms may bring for them. In addition, it is likely that those individuals who have benefitted most from the current system would lose from a movement to a more liberal system.


This was in addition to the traditional use of directed and subsidized credit, and direct budgetary support, for priority sectors.


The official (auction market) exchange rate was 67 sums per U.S. dollar on average in 1997, while the commercial bank rate averaged 74 sums and the curb market rate 140 sums per U.S. dollar. This chapter uses a hypothetical unified rate of 100 sums per U.S. dollar. This is for illustrative purposes only, to provide an idea of the magnitudes involved in the income redistribution which currently takes place through the exchange system. It should not be interpreted as a judgement by Fund staff about what would have constituted an equilibrium exchange rate for Uzbekistan.


On the characterization of the strategy as import substitution, see footnote 15 of Chapter I.


Credit to industry was also designed to support rapid industrialization, while credit to agriculture was necessitated by the heavy implicit taxes imposed on that sector, which led to payments difficulties.


Traditional raw materials are cotton, gold and other precious metals, ferrous metals, petroleum, and gas.


Surrender is made at the commercial bank rate since July 1998.


Due to lack of information, it is difficult to estimate the size of the curb market.


The central bank also acquires all locally produced gold against payment at gold’s world price, converted at the official exchange rate.


In addition, there would have been a second-order, lagged effect on goods which are partly produced domestically using imported materials and equipment.


These imports include the cost of running embassies, payments of fees to international organizations, the import component of military expenditures, and imports of medicines and materials for the public health care system.


This finding for Uzbekistan is consistent with research results for several countries (e.g., Ghana, Mexico) where existing multiple exchange practices have been shown to generate fiscal losses. See Miguel Kiguel and Stephen O’Connell, “Parallel Exchange Rates in Developing Countries,” The World Bank Research Observer, 10:1, February 1995.