Electronic Payments Encourage Uzbek Black Market

The widespread introduction of plastic cards to replace cash in Uzbekistan has stimulated the grown of a parallel currency market, NBCentralAsia observers say.

In late April, Uzbek president Islam Karimov signed a degree on “additional measures designed to stimulate the development of the bank card payment system”.

The decree sets out penalties for refusing to accept bank card payments, ranging from fines to two years of community work or six months’ detention.

As well as the retail sector, the service sector, public utilities, pharmacies, hospitals, and petrol stations are supposed to be transferring to non-cash transactions, as part of a process launched back in 2006.

Independent economists say the move away from cash was prompted by chronic monetary problems in this state-controlled formal economy, in which paper money is always in short supply and printing more simply exacerbates the weakness of the Uzbek som.

The shadow economy, meanwhile, is thriving. It takes the form of payments under the counter to avoid going through accounting and taxation procedures, and also the illicit trade in currency. Economists say it is the natural result of long-term economic policies designed to restrict imports, which cause an outflow of convertible foreign currencies, and to support the som at an unrealistically high exchange rates agaomst these currencies.

“It seemed to them [the authorities] that the less cash there was in circulation, the less demand there would be for the national currency on the black market, and this would help curb the inflation,” said Rovshan Nazarov, an expert in Tashkent.

In 2007, the authorities embarked on banking reforms intended to encourage people to open accounts in Uzbek banks and thus reduce the amount of cash in circulation. Additional benefits of this campaign were to curb the black market by increasing the use of bank transfers for commerce, and to build up the banks’ assets so that they could underwrite state projects.

Encouraging people to deposit money and modernising the way transactions are conducted looked like a positive step. However, its success was impeded by widespread mistrust of the banking system and by the tight constraints on the financial sector.

Uzbekistan’s monetary position took a further knock in 2009, when financial crisis in Russia and Kazakstan slashed the amount of money sent home by the large numbers of Uzbeks working there as labour migrants. Perhaps as a consequence, the authorities started deducting utility payments from public-sector wages and pensions at source.

It remains difficult to turn money held in bank accounts or paid onto cards, as is with the case with pensions, into hard cash. Automatic bank machines stand empty and people have had to devise elaborate schemes for getting money off their plastic cards. For example, there are traders at the country’s markets who perform this service in return for an illicit cut of 15 to 20 per cent. When companies trade with each other, they reach agreement on how much will be paid in cash.

“When I sign a service contract, I usually discuss how much the company will transfer to our bank account and how much will be paid in cash,” said Ilhom, who has a small business refilling printer cartridges in the western town of Navoi. “It’s usually a ratio of 20 per cent [transfer] to 80 per cent [cash].”

Economic commentators warn that forcing people into using non-cash payments for everything will simply encourage them to pay cash in the shadow economy.

“If the authorities implement their plan to completely transfer wages to the non-cash payment system, people will have no choice about where to buy goods, and supermarkets will win out over the markets,” said Dilmurod Kholmatov, an expert in Tashkent. “In the business sector, fly-by-night companies that turn money into cash services will proliferate.”

Greater demand will raise the fees such operators can charge, he added.

This article was produced as part of IWPR’s News Briefing Central Asia output, funded by theNational Endowment for Democracy.