Cash ‘n tarry

How will Uzbekistan’s debit policy affect its economy?


Uzbekistan is moving toward a cash-free economy, by asphyxiating it with red tape. Now a typical worker in the country’s bulimic government can spend his paycheck only by using a debit card at approved stores, reports EurasiaNet.org, a Soros offshoot. This policy is supposed to discourage tax evasion by eliminating cash income. But it may have a few other effects as well.

Consumer spending may fall, because it is more troublesome than before. This may slow the economy. Not by much, perhaps: To keep its economy afloat, Uzbekistan relies heavily on sales to foreigners; exports are almost a third of the economy (as measured by gross domestic product), estimated the World Bank. But at a time when residents of most countries still seem to spend too little, yet another constraint on consumption is hardly welcome.

The debit policy may affect financial markets in curious ways. Initially, the amount of money supplied need not change, since this is the sum of cash and checking accounts. The government is just substituting the latter for the former. But the banks may lend out the money that is added to checking accounts, and this will increase money supply. Moreover, if the banks lend to producers rather than consumers, then a rise in real investment – such as expansions of factories and farms -- may offset the fall in consumption. The economy’s capacity to produce will grow; but as long as world demand for Uzbek products remains anemic, the new capacity will go unused.

Because spending has become inconvenient, the demand for Uzbek money will fall. This will pull down the price of holding a som – the amount of interest that the som could have earned had it been lent out rather than held. Interest rates will fall; borrowing will become cheaper. Producers may borrow more to finance new capacity, even if they can’t use it right away.

In short, the debit policy may tilt the Uzbek economy toward investment and away from private consumption. Since the government still controls much production, its new policy may increase the state’s presence in the economy over time. Tashkent, which has never welcomed markets with as much verve as Astana has, thus delays its transition to a Western-style economy, just as it has for 20 years. Foreign investors won’t rejoice. –Leon Taylor, tayloralmaty@gmail.com


References

Joanna Lillis. Malls muscling out markets in Tashkent. February 28, 2013. EurasiaNet.org

World Bank. World Development Indicators. www.worldbank.org