jUNE 2009 31
first place. One example of these transactions is the black market
foreign exchange to generate cash money.
16
Under the persistent shortage of cash money, and all the difficul-
ties associated with operating corporate accounts with the com-
mercial banks, it could be expected that enterprises and companies
would choose an easier option and start paying wages in kind or in
hard currencies. Indeed, wage arrears and nonmonetary transac-
tions, which included payments in kind, transactions in promissory
notes, mutual debt write-offs, and pure barter transactions, were
observed in almost all of the twenty-plus transition economies in
the 1990s (Carlin, Schaffer, and Seabright, 2000). The situation was
most severe in Russia and Ukraine where, at their peak in 1998,
nonmonetary transactions accounted for more than 50 percent of
all industrial transactions.
However, although payment of wages in kind can be observed
in some sectors of the Uzbek economy, it has not become a popular
practice in the country. There are several reasons for this. First, pay-
ment of wages in kind is prohibited by law.
17
Regulations, however,
allow agricultural entities to pay wages in kind, provided that these
goods are either from their own produce (wheat, fruits, vegetables,
etc.) or originate from the processing of their own produce (flour,
cooking oil, juice, etc.). Therefore, only in agriculture are wages
paid predominantly in kind. Second, enterprises have to pay wages
only in national currency. Moreover, although foreign exchange
restrictions
have been lifted, neither commercial banks nor the
monetary authorities are in a position to satisfy foreign exchange
demand on a large scale. In addition, besides the indirect costs of
negotiations with banks and other agents, enterprises actually do
not share the cost of the loss of purchasing power of employee de-
posits. The cost is borne solely by the wage earners. In fact, when
employers are too sluggish to pay wages, employees often have
to approach third parties, for example, an arbitrageur, to convert
their noncash earnings into cash money. In large enterprises, for
example, employees open bank accounts and ask their employers
to transfer their wages to these accounts. Next, they issue power
of attorney to their respective arbitrageurs
and authorize them
free access to these deposits. The arbitrageurs convert noncash
32 PROBLEMS OF ECONOMIC TRANSITION
money into cash money using one of the many possible methods
of conversion discussed above and pay the wages to the employees
in cash money. Naturally, the cash value of wages gets reduced in
accordance with the incurred costs and the profit premium of the
arbitrageurs.
As for the nonmonetary transactions in general, unlike Russia
and Ukraine or any other transition country that has experienced a
rise in nonmonetary transactions, Uzbekistan has kept centralized
control over production in key sectors of the economy, and its
banking sector generously supplies credit to the enterprise sector,
including subsidized credits to the agricultural sector. The use of
nonmonetary transactions, including bills of exchange (
veksels
), has
also been officially banned since the mid-1990s.
18
Moreover, in ad-
dition to the generous credit policy, the government has successfully
initiated specialized programs, the so-called credit schemes, to deal
with interenterprise payment arrears, which is thought to be one of
the most important factors driving nonmonetary transactions.
Indeed, along with
the above-mentioned measures, credit
schemes play a very important role in reducing the degree of de-
pendence on nonmonetary transactions in the economy. Figure 4
draws the picture of how such “credit scheme” programs (simply
skhema
in the local jargon) operate in Uzbekistan.
Primarily, schemes like these are used to prevent interenterprise
payment arrears from becoming a payment
crisis for the entire
economy. When the problem of interenterprise payment arrears
among several enterprises is discovered, the authorities take the
initiative and try to solve it as quickly as possible. As a rule, the
authorities extend centralized credit to the banking sector, which
then on-lends it to troubled enterprises at concessionary interest
rates. The flow of the credit facility is then monitored continuously
until its ultimate repayment back to the banking sector. Because of
their centralized and purposeful nature such loans are referred to as
“dead money” in the practitioners’ jargon. The term “dead money”
signifies that noncash money created by the authorities circulates
only along the predetermined channels of the scheme and flows
back to its place of origination.
In a nutshell, it is unfortunate that after more than fifteen years
jUNE 2009 33
of transition, the most basic precondition for financial develop-
ment, that is, the free convertibility
between cash money and
noncash money, has not been achieved in Uzbekistan. The core of
the problem of less-than-perfect-substitutability of noncash money
to cash money is explained by the excessive supply of soft credits
and the concomitant restrictions imposed on the free convertibility
of noncash money into cash money to suppress inflation. Because
these restrictions make enterprises and households unable to convert
their noncash money holdings into cash money on demand, and
thus hold back their purchasing power, a condition for forced sav-
ing is created.
19
The cost of suppressing inflation under the current
Uzbek regime then is weak public confidence in banks and hence
an underdeveloped banking sector.
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