BACKGROUND: The Uzbek Government in December 2001 agreed to an IMF staff-monitored program (SMP) with a number of key economic reform policies to be carried out, including reforms of the agricultural sector, enhancing market competition, and narrowing the gap between the over-the-counter (OTC) exchange rate and the parallel market rate. Some analysts argue that the implementation of the SMP was not quite successful. The main goal of SMP – achieving foreign exchange convertibility by eliminating the gap between OTC rate and black market rate was de facto attained by mid-2003. However, the narrowing of the spread was not reached solely by improvements in access to official foreign exchange. In fact, it was partly a result of reduced demand for foreign exchange on the black market due to external trade restrictions. These ad-hoc restrictive measures include regulations requiring the mandatory use of cash registers; prohibition on sales of goods imported by others; and prohibitive licensing requirements for wholesalers. In addition to the recent border closures, external trade restrictions include a large list of goods for which conformance certificates are required and limited acceptance of internationally recognized certification; higher unified tariffs on goods imported by individuals than imports by legal entities; a surcharge on goods produced in third countries and re-exported to Uzbekistan from contiguous countries; and onerous labeling requirements. The measures have particularly affected “shuttle” traders who engage in small-scale cross-border trade. The Government argues that the measures undertaken by the Government in the area of trade policy are directed against smuggling, tax evasion, and low-quality and potentially dangerous products. While there is no doubt that these are valid reasons, benefits of such actions should be compared with the impact of these measures on the poor and the economy in general. The indirect cost of these actions was worsening the conditions of impoverished and aggravation of business environment in the country. Also, according to the Government, these measures are temporary. They were introduced because it was deemed impossible to liberalize foreign exchange policy simultaneously without restricting the relatively liberal trade environment for shuttle trade that existed before 2002. The Government feared that a liberal foreign exchange regime combined with a liberal trade environment could wash away foreign exchange reserves and have far-reaching consequences on the current accounts situation in the country.

IMPLICATIONS: The policy aimed at restricting trade, (first of all shuttle trade) launched last year had a negative impact on business environment and severely hit the poorest strata of population. As the clamp-down on shuttle traders intensified, the costs of importing goods through this trade channel inevitably increased. The traders had to pass on these additional costs onto consumers. Since the products imported by shuttle traders were cheaper than those imported by legal entities, and the majority of the poor bought these goods, the impoverished consumers took the hardest blow of these actions. The first reaction of many of the consumers was to go on shopping tours to neighboring countries (Kazakhstan, Kyrgyzstan and Tajikistan) themselves and buy goods that they needed there. However, in the end of the last year Uzbekistan effectively closed its borders with neighboring countries. For instance, although the visa free regime with Kazakhstan is still valid, crossing to Kazakhstan by car, bus, or on feet is possible only if an Uzbek traveler has an invitation to a wedding, funeral, any other family ceremony or with business trip authorization. Another way out is to bribe the corrupt customs officials and border guards on both sides of the border. This, however, increases the costs for shoppers and deters them from shopping trips. Restrictions imposed on shuttle trade and border closures were later aggravated by so-called “tight monetary and fiscal policies”, which, in practice, meant no more than withdrawal of cash from the monetary system accompanied with lowering the Central Bank’s refinancing rate. It seems that the main aim of this policy was to squeeze cash available for imports through shuttle trade in order to comply with the IMF requirement to decrease the difference between the official and black market rate. This resulted in bottlenecks in availability of cash and had a negative effect on the execution of the budget. In turn, this inflicted another damage on the poor. In addition to the increased prices and closed borders, they started having problems with getting their salaries in cash. Furthermore, the authorities send police from time to time to throw out small traders from bazaars who had small stalls or just space on the ground, and their goods are “confiscated”. Allegedly, these traders are thrown out because they sell smuggled goods without paying taxes. After such raids, the supply of some cheap and essential consumer goods disappears temporarily.

CONCLUSIONS: Overall, the drive to retain control over the trade and business environment is evident from Uzbekistan’s recent trade policy actions. This could stem from the endeavor to reach consensus with IMF, or it could be an ambivalent attempt to balance the pace of reforms vis-à-vis powerful interest groups. Whatever the reasons, the poor suffered most of these actions. To avoid further escalation of social tensions and alleviate the lot of the poor, the Government should consider gradual easing of the trade environment and reversing some of its trade policy actions.

AUTHOR’S BIO: Mr. Jahangir Kakharov earned his Masters Degree from School of International and Public Affairs of Columbia University. He has also carried out postgraduate research in economics at Oxford University (St. Antony’s College). Having been a lecturer at the Faculty of Economics of the National University of Uzbekistan, he is presently the Representative of the Business Information Service of the U.S. Department of Commerce in Tashkent. Views expressed in this article are his own, and not those of the U.S. Department of Commerce.