Steps to Liberalize Uzbekistan's Currency Regime
On 2 September 2017 Shavkat Mirziyoyev, the President of the Republic of Uzbekistan, issued a decree liberalizing certain aspects of Uzbekistan’s currency regime (the 2017 Currency Decree or Decree),1 effective 5 September 2017. A commentary clarifying certain issues in relation to the 2017 Currency Decree (the Commentary) was published by the Central Bank of Uzbekistan (the CBU) on 4 September.2 Also on 4 September, the CBU effectively devalued the country's currency, the soum.
This Legal Alert summarizes the principal provisions of the 2017 Currency Decree and related developments.
Foreign Exchange Transactions
The 2017 Currency Decree provides that Uzbek legal entities may purchase foreign currency in commercial banks for payments to fulfill their obligations under the following types of current international transactions: import of goods, works and services; repatriation of profits; repayment of loans; payment of travel expenses; and other non-commercial transfers. This legal right is not new, but in practice it has been almost impossible for companies to obtain sufficient hard currency from their banks due to a shortage of hard currency. The extent to which this situation will change in practice following the Decree remains to be seen.
The Decree further provides that individuals (natural persons) who are residents of Uzbekistan may freely sell foreign currency in exchange points. In addition, they may purchase foreign currency at commercial banks provided that the purchased foreign currency is deposited to an international payment card and used abroad.
Unification of Foreign Exchange Rates
But perhaps the most significant foreign exchange development was the CBU’s dramatic step to unify the country’s various exchange rates and, effectively, to devalue the soum by approximately 48% to reflect its market value.
Since independence in 1991, Uzbekistan has had a variety of exchange rates, the most notable being the official exchange rate set by the CBU (which is used for bookkeeping and statistical purposes and for calculating customs and other obligatory payments) and the interbank exchange rate at the Republican Currency Exchange (which banks use to set the exchange rate charged to their customers). Historically these two rates always have varied quite significantly from the bazaar (black market) rate which is readily available on the street in Uzbekistan and is viewed as more closely reflecting the soum’s market value. As of 1 September 2017, the official exchange rate was 4210.35 UZS / 1 USD, the most recent interbank exchange rate was 4247.98 UZS / 1 USD and the bazaar rate for the purchase of USD was 7800 UZS / 1 USD.
On the one business day (Monday, 4 September) between the date on which the 2017 Currency Decree was adopted (Saturday, 2 September) and the date on which the provisions of the Decree took effect (Tuesday, 5 September), the CBU set the official exchange rate at 8100 UZS / 1 USD effective 5 September. This was immediately followed by an adjustment to the interbank exchange rate to 8110 UZS / 1 USD. In its announcement setting the new official exchange rate,3 the CBU stated that, pursuant to the 2017 Currency Decree, one of the priority directions of the state economic policy is the exclusive use of market mechanisms in setting the exchange rate of the national currency in relation to foreign currency. Based on its analysis of relevant factors during 2003-2017 and taking into consideration the results of test transactions of banks on sale of foreign currency at an agreed rate, the CBU concluded that the current average exchange rate is in the range of 8000-8150 UZS / 1 USD.
Cancellation of Mandatory Conversion of Export Proceeds
The 2017 Currency Decree cancels the requirement for the mandatory sale of foreign currency export proceeds. Prior to February 2017, Uzbekistan required most exporters to convert 50% of their hard currency proceeds from exports into local currency at the official exchange rate. In February 2017 the percentage for mandatory conversion was reduced to 25% for exporters of certain goods and services.
Local Bank Operations
The 2017 Currency Decree calls for a procedure to be established in accordance with which:
- commercial banks shall establish the terms of issuing and receiving repayment of loans in foreign currency based on agreement of the parties;
- commercial banks’ risks associated with the purchase and sale of foreign currency are “entrepreneurial risk” and must be managed by the banks;
- the rate of commission relating to the purchase and sale of foreign currency must be established by a bank on its own.
Banks no longer need a license to conduct operations in a foreign currency.
Use of Foreign Currency within Uzbekistan
The 2017 Currency Decree limits the use of foreign currency in Uzbekistan as follows:
- it prohibits payments in foreign currency for goods (works and services), exclusive of payments by international payment cards “in accordance with international practice”;
- prices and tariffs for goods (works and services), and the minimum charter capital requirements for local companies, shall be set only in local currency;
- state duties and other mandatory payments shall be collected only in local currency.
Prior to the Decree, prices for goods and services were permitted to be stated in foreign currency, so long as they were settled in local currency. The ability to set prices in foreign currency has now been eliminated by the Decree, which makes it clear that Uzbekistan shall have a soum-based economy.
The Decree further instructs the General Prosecutors Office, the State Tax Committee and the Ministry of Internal Affairs to take “efficient measures” to prevent the unlawful circulation and conduct of operations with cash foreign currency in Uzbekistan.
The 2017 Currency Decree calls for the further developments in the currency legislation:
- Within one week from 2 September 2017, the Cabinet of Ministers shall develop and submit for approval draft Government resolutions to mitigate the consequences of the Decree's liberalization of the currency policy, including its effects on the banking system, the basic industries of the economy and socially vulnerable groups.
- Within one month from 2 September 2017, the CBU, together with the Ministry of Finance and the Ministry of Justice, shall submit a proposal to the Cabinet of Ministers on changes and additions to the legislation arising from the 2017 Currency Decree.
- The Ministry of Finance shall establish a temporary procedure (until 1 July 2018) pursuant to which the profit of commercial companies resulting from re-valuation of foreign currency funds held in their accounts is not included in the taxable base.
- Based on the results of the first six months of 2018 the CBU shall develop and submit to the Cabinet of Ministers a draft of a new version of the Law On Currency Regulation. This presumably will supersede and replace the Law On Currency Regulation No. 841-XII dated 7 May 1993.
1 Decree of the President of the Republic of Uzbekistan No. UP-5177 On Priority Measures for Liberalization of Currency Policy, dated 2 September 2017.
2 Commentary to Decree of the President On Priority Measures for Liberalization of Currency Policy, published by the CBU on 4 September 2017.
3 Announcement of the CBU, On Establishment of the Exchange Rate of the National Currency In Relation to Foreign Currency, published 4 September 2017.