Before movingexchange rate regime from managed floating to floating, Central bank ofUzbekistan has conducted it exchange rate policy under managed floatingexchange rate. Recently, the Central bank has started unification foreignexchange rate system in early September 2017 to liberalize economy of thecountry. Meanwhile, the Central Bank has taken series of measures to unify andeliminate the gap between official and parallel market rates which ensurednational currency convertibility against foreign currency via adopting IMF’sArticle VIII requirements. Before accepting the Article VIII, the governmentintroduced currency rationing policy which restricted import payments topromote domestic producers that gave rise to increase the gap between officialand parallel market rates.The Central bankannounces official exchange rate once a week for accounting and customs mandatorypayments and calculates based on weighted average weekly market rate.Transactions with trade partners in dollars, exchange rate depreciated innominal terms about 60.21percent subject to the beginning of the year due to the unification of exchangerate which is effects on the price of imported goods and exports. The price ofimported goods and services are priced in the market by two exchange rateswhich are translated to national currency using parallel rates and marketrates.
Even importers buy foreign currency at the official exchange rate in theforeign exchange market for import operations anyway they sell their importedgoods and services at the parallel market rate regarding national currency. Onthe other hand, depreciation of national currency makes export products cheaperand import products more expensive and creates higher demand for domestic goodsbecause of expensive imported goods. Therefore, increases in demand fordomestic goods led to rising aggregate demand; as a result, the nationaleconomy experiences higher inflation expectations. Those factors led to go upinflation expectations after moving more flexible exchange rate policy inUzbekistan.Uzbekistan’s maintrade partners are Russia, China, Kazakhstan and Turkey and remains ascommodity exporter country. Russia has some spillover effects on the countryeconomy with trade channel causes further the expectations of depreciation ofnational currency due to the depreciation of Russian ruble.
Depreciation ofRussian ruble decreases in demand for exports from this trade partner whichcauses that domestic prices will go up due to lower demand for exports. In addition, abovementioned factors, the perceived costs of exchange rate volatility related to(1) concerns about losing policy credibility; (2) adverse effects of apotential appreciation of the domestic currency on external balances; (3)higher inflation from exchange rate pass-through and (4) potential losses fromcurrency mismatches, in particular when markets and instruments to hedgeagainst risks are limited.2In Uzbekistan, theundeveloped financial market that less capacity to offset changes in demand forforeign currency prone more vulnerable to exchange rate fluctuation.
Duringunification process government took into account dollar-denominated loans termare extended to prevent balance sheet risks. Depreciation of national currencyand growing loans to real sector entails inflation pressures and to alleviatenegative consequences of the policy, to keep inflation lower level the centralbank changed refinance rate from 9 percent to 14.3The Central bank ofUzbekistan has price stability that conducts its monetary policy under monetaryaggregate target as its monetary objective. To achieve the goals, use exchangerate and the interest rate as the instrument. Exchange rate interventionremains a vital instrument for implementing monetary policy, and the Centralbank actively participates in foreign exchange market by selling. Lessons from countriesexperiences show that moving their exchange rate more flexible required tomodernize monetary policy framework as use inflation targeting.
From countriesexperiences that more flexible of exchange rate introduced as part of the movetoward inflating targeting.4 As we can see in Kazakhstan announced onintroducing Inflation targeting policy after changing exchange rate policy inAugust 2015. Uzbekistan needs to tighten monetary policy inthe short run in line with its objective and gradually adjust to inflationtargeting (IT). Before implementing the policies, dollarization needs to declinethis led to increase the Central bank’s credibility and earn public trust. InUzbekistan financial literacy plays the crucial role to implement the policiessuccessfully.1 Author’s calculation basedon the Central bank of Uzbekistan’s exchange rate data2 see Inci O.
R., Vavra D., and a team ofeconomists (2007), “Moving greater exchange rate Flexibility OperationalAspects Based on Lessons from Detailed Country Experiences, IMF, occasionallypaper3 Monetary policy report(2017), the Central bank of Uzbekistan4 see Inci O. R., Vavra D.,and a team of economists (2007), “Moving greater exchange rate FlexibilityOperational Aspects Based on Lessons from Detailed Country Experiences, IMF,occasionally paper pp.10