Uzbekistan’s central bank carried out foreign exchange interventions worth $2.4 billion in the first quarter of this year reacting to currency market fluctuations following the Russia-Ukraine conflict.
The interventions, which were 19 percent more than in the last quarter of 2021, helped to mitigate excessive fluctuations in the exchange rate of the Uzbek national currency, soum, due to external risks and increased demand for foreign currency, the bank said.
According to the bank’s review, activity in the money market in March has increased with a total volume of deposit operations of 12.5 trillion soums. This was the result of the increased demand for foreign currency, for the purchase of which banks needed soum liquidity.
Last month, the money market was influenced by the reduction of liquidity in soums, caused by the increase in devaluation expectations of the business and the subsequent increased demand for foreign currency. This situation coincided with the seasonal reduction in overall liquidity in the banking system in January-February.
The Uzbek soum fell against the dollar by around 6 percent within two months under the influence of the economic situation in Russia. Russia, which came under western sanctions over its invasion of Ukraine, is Uzbekistan’s key trading partner. Over 3 million Uzbek labour migrants work there. Russia’s financial markets have been thrown into turmoil. Fitch, Moody’s, S&P downgraded Russia’s sovereign rating to junk, FTSE Russell and MSCI decided to remove Russian equities from all their indexes and many western companies left the Russian market or suspended operations there.
After the central bank rose the key interest rate from 14 to 17 percent last month, the Uzbek soum began to strengthen against the dollar slowly.
The central bank’s decision was in response to “high uncertainties and tensions in the external economic environment … (to) ensure macroeconomic and financial stability by preventing the growth of devaluation and inflation expectations, as well as to maintain savings in the national currency and mitigating the impact of external risks on Uzbek economy.”
According to the bank, the economic situation in Uzbekistan’s major trading partners, sharp fluctuations in their exchange rates, rising commodity and energy prices are increasing macroeconomic uncertainties and risks. Surveys conducted among the population and business entities show that there is a significant increase in their devaluation expectations, the bank said.
The bank said that it would take all necessary measures to prevent a sharp rise in domestic prices, ensure the continuity of the payment system and financial stability in the country.
The interventions are carried out at the expense of additional reserves accumulated last year as a result of favourable conditions in the foreign exchange market.
The review said that foreign exchange interventions are based on the principle of “neutrality” of gold and foreign exchange reserves. When carrying out operations in the domestic foreign exchange market, “the central bank does not pursue the goal of accumulating or using existing gold and foreign exchange reserves (GFR), but proceeds from the principle of preventing excessive growth in the money supply,” it said.
The central bank said last month that it would continue appropriate interventions in the future in order to ensure stability on the market and measures will be taken to prevent sharp fluctuations in the national currency.
The bank said that measures to minimise external risks included providing short-term liquidity to commercial banks without any restrictions (through REPO and SWAP operations), and increasing limits on the average monthly balance of short-term bonds issued by the central bank to 20 trillion sums.
In addition, commercial banks are permitted to use the exchange rate formed as a result of a call auction on the currency exchange when setting exchange rates for retail transactions until July 1. Interest rates on the central bank notes purchased by commercial banks at auctions have been raised to the upper bound of the interest rate corridor, while limits on two-week deposit auctions have been eliminated.