34 PROBLEMS OF ECONOMIC TRANSITION
loss from 1989 to 1996 was only about 18 percent of GDP. Output
growth has been small but persistent since 1996. From 1996 to 2004
real output growth averaged about 3 percent. Although the rate of
growth was moderate, it was sufficient for the 1989 GDP level to
be surpassed by 2001. In fact, Uzbekistan was the only country in
the CIS to achieve this result by 2001. The economic growth has
been particularly impressive recently; annual real GDP growth has
been maintained at more than 7 percent for the past four years.
20
Unfortunately, this admirable economic performance was not fol-
lowed (or supported) by good financial sector development.
To finance ambitious new investment projects in the industrial
sector while simultaneously maintaining
production in the ail-
ing enterprises, the government needed considerable financial
resources. To
meet this demand, instead of developing its own
banking sector, the government resorted to considerable external
borrowing. Government-guaranteed loans attracted from abroad
in this way have been estimated to account for about two-thirds of
banking sector assets (World Bank, 2003).
To date Uzbekistan has not abandoned many of the old-style
practices of monetary management. Under the current banking
regulations, banks are obliged to ensure timely payment of taxes
by the enterprises to the state budget. Banks must withhold any
outstanding amount of tax and similar
payments owed by the
enterprises to the budget. Interestingly, when doing so, banks do
not need to obtain prior permission from the account holders. The
function of collecting data on enterprise activities is also included in
the banking regulations. Banks collect information on their clients’
financial transactions and report them to the tax authorities and any
other relevant local and central government bodies.
More important, the continuation of the practice of cash discipline
and restrictions imposed on free convertibility of cash and noncash
money inhibit the general public’s trust in banks. The inability of
banks to perform the most basic but fundamental responsibility, that
of guaranteeing free convertibility of their liabilities into cash money
upon demand, is one of the paramount reasons why banks are strug-
gling badly to gain the confidence of the general public.
In short, like every other key sector of the economy in Uzbeki-
jUNE 2009 35
stan, the banking sector suffers from extreme centralization and
excessive government interventions, which inhibit the financial
sector’s development and thus undermine the public’s confidence in
it. Lack of fundamental reforms in terms of changing the old-style
resource allocation mechanism indicates that the banking sector
is still being used as a neutral conduit for channeling soft credits,
budget subsidies, and on-lending government-guaranteed foreign
loans to enterprises in the priority sectors of the economy.
All these problems indicate that reforms of the banking sector are
long overdue in Uzbekistan. In order to promote the general public’s
trust in banks and facilitate financial deepening and intermediation,
all forms of old-style monetary management should be brought to
an end. Excessive government interventions in everyday banking
activities as well as all inappropriate
functions imposed on the
banks should also come to an end. Limitation on the commercial
banks’ access to their correspondent accounts with the central bank,
and hence, restrictions on free convertibility of noncash money to
cash money should be abolished. Modernization of the payments
system should be extended to the retail banking sector too. In the
meantime, it is important not to forget the country’s experience
to date, which shows that comprehensive reform of the banking
system must be achieved against the backdrop of a stable market-
oriented macroeconomic environment. In other words, without
proper market-oriented macroeconomic
reforms any attempt to
reform the banking sector will be only partial.
Many positive developments achieved so far in the Uzbek bank-
ing sector, such as the reduction of inflation to moderate levels,
the creation of an up-to-date payments system, the adoption of
international accounting standards, the functioning of an interbank
market for loans, and the use of more experienced and knowledge-
able
personnel, indicate that comprehensive banking reforms at
present can only facilitate the development process. Moreover,
recent macroeconomic conditions are also better suited to support
such reforms. Favorable prices for the country’s main export items
have enabled the government to accumulate significant international
reserves and allowed it to set up a national fund for reconstruction
and development with a large budget; so there is less need for in-
