Microsoft Word econ 2004 16. doc

1. Introduction 
Transition economies may be defined as economic systems in the process of 
changing from an administrative-command economy to a market economy. This 
definition encompasses all Eastern and Central European countries and the former 
Soviet Union. However, each nation has had its own unique historical evolution, 
culture, initial conditions and capacity for transformation. Western academics as 
well as policy makers have tended to focus most of their attention to transition 
economics of Central and Eastern Europe, with less effort directed to the 
economies of Central Asia in general, and Uzbekistan in particular. 
This paper examines the historical development and sequence of reforms of the 
financial system in Uzbekistan. It attempts to place the reform process in 
analytical perspective, with particular emphasis on financial development in 
Uzbekistan. 
The paper itself is divided into three main parts. Section 2 provides a synoptic 
description of Uzbekistan’s financial system prior to independence. Section 3 
focuses on developments since independence, examining the banking sector, non-
bank financial institutions, and the securities market. The paper ends with some 
brief comments in section 4. 

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2. Uzbekistan’s Financial System before Independence 
In order to have a clear picture of the financial structure of Uzbekistan before 
1991, we must first consider the financial system of the Soviet Union, since the 
financial system of pre-independent Uzbekistan was an integral part of the 
communist financial system of the USSR. To analyse the Soviet financial system it 
is necessary to briefly consider how the financial system functioned. 
The allocation of investments is an important function for any financial system to 
fulfil. In market economies, investment allocation is largely governed by a cost-
benefit framework in which expected investment benefits are compared to 
estimated costs. Investment costs and benefits must be converted into present 
values using interest rates from financial markets. In the planned Soviet economy 
there were no financial markets, and these decisions were made by planners and 
enterprise managers. 
All the other functions of the financial system were executed by the banking 
system. The reason for this is the extremely low level of development of non-bank 
financial institutions (NBFIs). Furthermore, the vast majority of banking services 
was provided by Gosbank (the State Bank), which combined the services of a 
central bank and those of commercial banks. However, owing to the absence of 

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money and capital markets, the Gosbank did not perform some traditional banking 
functions (i.e. open market operations, commercial paper transactions, and the 
like). It also undertook major functions such as granting short-term loans for 
working capital, overseeing enterprise plan fulfilment, and monitoring wage 
payments (as the centre for all accounts). Thus, enterprises held their accounts 
with the local branch of Gosbank, upon which they were dependent for short-term 
credit to finance inventories and working capital. Receipts were normally 
deposited with the Bank, and cash for wage-payments were drawn at the discretion 
of the Bank. In addition, profit remained in special accounts at the Bank.
Gosbank was the only provider of short-term credit, with interfirm lending strictly 
prohibited. Indeed, with the exception of small payments, all interfirm transactions 
were handled and supervised by Gosbank. Hence, Gosbank was in a unique 
position to monitor enterprise activities, as the single clearing agent and the sole 
source of short-term credit. In drawing up short-term credit plans and in 
controlling enterprise accounts, the Gosbank played a largely passive role, 
providing the credit necessary to implement the physical plans. As for short-term 
loans, Gosbank granted credit for specific targeted purposes.
Besides Gosbank, there were also a number of specialized banks, which fulfilled a 
complementary role to Gosbank. In the former Soviet Union these banks included 

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Promstroybank (supporting industry and construction), Agroprombank (supporting 
agriculture), Sberbank (the national savings bank), and Vneshtorgbank (for 
business involving foreign exchange transactions). 
NBFIs in the former Soviet Union were very undeveloped. The only insurance 
company was Gosstrakh (State Insurance), entirely owned by the government. The 
variety and quality of its services was rather limited. There was also only one 
pension fund owned exclusively by the government. Other notable features of the 
financial system of the Soviet Union were the absence of a capital market for 
government debt, enterprise debt and equities, the absence of money markets and 
foreign exchange markets, restrictions on monetary circulation which, effectively, 
meant the absence of a universal payment system.