Microsoft Word econ 2004 16. doc

3. Uzbekistan’s Financial System since Independence 
3.1 The Banking Sector. 
After Independence in 1991, departments of the Soviet banks located in 
Uzbekistan became the independent banks of the Republic of Uzbekistan. A law of 
the Republic “On Banks and Banking Activity” was adopted in February 1991, 
establishing the new structure of the banking system. This structure envisaged the 
creation a two-tier banking system, with the Central Bank of Uzbekistan formed 
from the Uzbekistan’s department of Gosbank, as well as commercial banks based 

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on various non-state forms of property (i.e. private, corporate, cooperative, etc.). 
According to the Law, the Central Bank became subordinate to the Oliy Majlis 
(the Parliament of Uzbekistan), and main task and responsibilities were set to 
conduct monetary policy and bank supervision, and also to provide the country 
with its own payments system. 
The Uzbekistan’s department of Vneshtorgbank became the National Bank for 
Foreign Economic Activity of Uzbekistan (NBU). Other new banks emerged from 
former Uzbekistan branches of Soviet banks. The branch of Sberbank became 
Narodnybank (the national savings bank); and the branch of the Soviet 
Promstroybank (industrial and construction bank) became Promstroybank of 
Uzbekistan. 
The legislation formed to regulate the banking system emphasised administrative 
measures of regulation. This was due to both of the background from which policy 
makers and legislators had emerged, and the unsophisticated state of the financial 
system at the time. 
As economy and financial system developed, new two Laws were drafted to 
replace the outdated law. The law “On the Central Bank of the Republic of 
Uzbekistan” has been adopted as of 21st of December, 1995 and the new Law “On 
Banks and Banking Activity” was adopted on 25th of April, 1996. 

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3.1.1 The Central Bank and its policies 
The main aim of the Central Bank, according to the new Law, has been set “…to 
ensure the stability of the national currency” (The Republic of Uzbekistan, 1995). 
The Central Bank has been forbidden to engage in commercial investing, and 
subsidizing particular banks or other organizations independently from their 
ownership. The Law “On the Central Bank” has also defined its status of 
independent from the state budget institution.
In 1997, foreign assets earlier held by the Ministry of Finance at the National Bank 
of Uzbekistan were transferred to the Central Bank. However, the NBU continues 
to be the depository of a large (though decreasing) proportion of official gold 
reserves on behalf of the Central Bank. Money and credit policies, as well as 
foreign exchange allocation, are determined by the Chairman of the Central Bank, 
with the involvement of representatives of various government agencies and the 
banking sector. 
Monetary policy of the Central Bank
. 
The monetary policy of the Central Bank in early independence years was largely 
influenced by the fact that Uzbekistan remained in Russian ruble zone until the 

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end of 1993. Consequently, it had limited arsenal of tools and methods of 
monetary regulation. Nevertheless, since independence, monetary policy has 
become increasingly important as an instrument of economic regulation.
As mentioned earlier, in Soviet times, cash and credit plans were important 
‘ingredients’ of overall plan and were aligned according to production plans. Since 
independence, there have been regular attempts to get rid of such planning. 
However, progress has been rather slow, and authorities have continued to 
intervene with the Central Bank’s responsibilities, rationing credit and 
manipulating money demand (Centre of Economic Research, 1997). The 
achievement of annual macroeconomic objectives on inflation and real GDP 
growth has been attempted through direct credit restriction by the Central Bank. 
Refinancing by the Central Bank has remained a more important instrument than 
reserve requirements and interest rate policy. The interest rate policy of the Central 
Bank differed significantly before introduction of the permanent national currency 
(in July, 1994) and after its introduction. Initially it behaved in very much the 
same manner as Gosbank of the ex-USSR. Since introduction of the national 
currency, refinancing policy has changed. It became more oriented towards the 
achievement and maintenance of macroeconomic stability and the support of 
banking sector liquidity. 

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In mid-1994, the refinancing rate has increased to 150% per year, and in March 
1995, it increased further to 300%. It thus became positive in real terms. Since 
1995, all refinancing credits have been granted via the interbank auctions. The 
refinancing rate has been revised on regular basis to reflect inflation rate 
expectations. In 2001 the rate was cut to 24% but the inflation rate has remained at 
the level higher than 25%. In 2002, the interest rate has been increased to 30%, a 
level above inflation rate (see Table 1).