Price stability in Uzbekistan

Price stability in Uzbekistan

Moderate inflation is considered 2-3% for developed countries and around 3-5% in developing countries, as recommended by international experts. However, higher inflation rates have serious consequences for the economy.

– The stability of pricing in the country is an important factor in a sustainable economy. The purpose of the article is descriptive nature of inflation, the use of inflation targeting in Uzbekistan and the further formation of state policy in this direction.

Here are four main interrelated problems arising from inflation.

The first problem is the decline in the purchasing power of the currency. Consequently, the further expectation of such an "inflationary tax" forces the population to reject the storage of assets in this monetary unit, which in the long term have negative consequences.

The second problem is the “inflationary surprises” of the population and business, which leads to an unexpected difference in the purchasing power of individual parties. The consequences of such "surprise" can be dual: beneficial for debtors, unprofitable for creditors.

Third, frequent fluctuations in inflation can create a kind of "uncertainty" among economic units (business, population, etc.), which obviously complicates their economic planning.

Consequently, such chaotic economic behavior will be to the disadvantage of each side.

Fourth, the final problem comes from the uneven origin of inflation. Inflation is the weighted average of price increases. In turn, this indicates that individual prices can rise at very different rates.

This leads to two problems:

1) such system for generating changes in prices may inadequately reflect the relative scarcity of goods and services and as a result, give buyers and sellers misleading signals;

2) such pricing system again complicates the forecast of inflation in the future, which again makes it difficult for the economic units.

An empirical relationship between inflation and growth

Businesses need money to buy capital goods and decreasing the “real balance sheet” of firms will increase the effective cost of buying new capital. In this direction, the empirical relationship between inflation and growth has been analyzed by many scientists. For example, a study by J. Gregorio, former governor of the Central Bank of Chile and minister of the economy, showed that in Latin America, between 1950 and 1980, GDP per capita growth would have been at least 25% higher if the level inflation rate would be half of its level over the same period.

According to a study by R. Barro, a professor at Harvard University, the results of inflation estimates for more than 100 countries in the period from 1960 to 1990 show that an increase in the average inflation rate by 10 percentage points per year reduces the growth rate of real GDP per capita by 0. 3 percentage points per year and the ratio of investment to GDP - by 0.6 percentage points. Here you need to clearly understand that inflation, investment and economic growth is closely interconnected. There is practically no option for the development of events where economic growth and investment growth would take place, while inflation would be at a high level.

The main task of any monetary regulator continues precisely because of the above problems, that’s why the task of any Central Bank (CB) is to curb inflation. This also applies to the Central Bank of the Republic of Uzbekistan (CB RUz). In fact, during the period of the devaluation of the soum and the conduct of free conversion in 2017-2019 inflation in the country was at a high level - around 15%. But already in 2020, the Central Bank of the Republic of Uzbekistan managed to reduce it to 11%.

For information, the consumer price index (compared to the previous month in%) in March 2021 was 100.8%. This indicator in March 2020 and in March 2019 was 101.3% and 101.2%, respectively. The average of monthly CPI for 2020 was 0.9%. After considering the dynamics for the period taken, we can say that the CPI remained at a moderate level, with the exception of some jumps as a result of soum devaluation and the opening of free conversion in 2017. The average of monthly CPI for 2020 was 0.9%.

Source: Database of the State Statistics Committee of the Republic of Uzbekistan

Using this data, it is possible to calculate the probability of remaining high inflation.

According to calculations by the Center for Economic Research and Reform, the probability of being in a high state inflation is 58%. If the CPI is in a high state inflation in a certain month, then the probability of its staying at the same level for the next month is 58%.

Keeping inflation at a consistently low level is a priority task for the Central Bank of Uzbekistan.

The task of a phased transition to the inflation targeting regime is enshrined in the Decree of the President of the Republic of Uzbekistan No.UP-5877 dated 11/18/2019. According to the Decree, the Central Bank of the Republic of Uzbekistan will ensure a decrease in inflation to 10% in 2021 and to 5% by 2023. Calculations of experts in the International Fund (IMF) confirm the full and timely feasibility of this task.

Experience shows that Central Banks successfully implement this function, being completely independent of the fiscal policy of the state, political and other commercial interests. Fixing inflation targeting as a required norm is a basis while achieving successful monetary policy.

In this regard, Monetary policy already launched in this direction to achieve the targeted goals in Uzbekistan.

First of all, as the Central Bank of Uzbekistan has started, it is always necessary to keep inflation at a certain level. Since the inflation target provides valuable information for the public and business about monetary policy and the expected trajectory of disinflation, consumers adjust their expectations (in the short and long term) based on this.

Secondly, monetary policy alone cannot solve price stabilization; it is also necessary to pursue an appropriate fiscal policy. During the period of large-scale reforms and cardinal transformations in the economy, international organizations and experts recommend keeping the budget deficit at a moderate level, since it has a direct impact on inflation. That is why the inflation of the fiscal deficit is perceived by economic agents as "inflationary surprises", which raises their inflationary expectations.

According to the CERR research, an increase in government expenditures of the consolidated budget by 1% of GDP can increase inflation by 0.6%.

Third, empirical evidence points to the inflationary expectations to selected consumer goods and services. For example, the results of the consumer expectations survey, which is conducted by the Federal Reserve Bank of New York indicate a close relationship between inflationary expectations of the population and changes in prices for food, fuel, medical care and the cost of higher education. The state regulation of pricing methods for the above goods and services are individual in nature.

Fourth, changes in exchange rate affect inflation expectations through wages. With the depreciation of the soum, population’s purchasing power to import prices decreases. Therefore, it is very important to ensure that the exchange rate is more resilient to various shocks. In this direction, the report of the Central Bank of Uzbekistan provides the main mechanisms for improving the foreign exchange market..


In conclusion, I would like to note the importance of stable pricing both from the point macroeconomic stability and from the point of social protection of the population. In this direction, the role of the regulator and its independence to “mandatory norms” is especially important.

Similarly, government's current policy of further economic liberalization, commitment to social justice and further international economic integration are also important.

Feruzbek Davletov, CERR

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