Ishmetov: Uzbekistan aims to reduce inflation to 5%

Timur Ishmetov, Chairman of the Central Bank of Uzbekistan, announced that the regulator plans to reduce inflation to 5% as early as next year, compared to the current 6.5%. He made this announcement in an interview.

**A Decade of Liberalization**

Ishmetov noted that ten years ago, Uzbekistan embarked on large-scale economic liberalization. The Central Bank lifted restrictions on current account transactions and ensured free currency convertibility, while maintaining a more prudent approach to the capital account. The transition to market pricing, including the liberalization of energy prices, temporarily accelerated inflation, which exceeded 20% in 2017. Since then, this figure has gradually declined to the current 6.5%.

This year, the International Monetary Fund officially recognized Uzbekistan's exchange rate as a free float. Ishmetov described this as the result of consistent foreign exchange policy reforms over the past decade.

**Commitment to a Floating Exchange Rate**

Responding to a question about protecting against external pressure amid an influx of foreign investment, Ishmetov emphasized that the Central Bank does not intend to return to the practice of exchange rate management. He noted that the country has had negative experiences with exchange rate intervention in the past, and the regulator does not intend to repeat these mistakes. According to the head of the Central Bank, to minimize risks, it is necessary to focus on attracting long-term foreign direct investment, increasing the share of financing in the national currency, and stimulating domestic economic growth, rather than relying solely on foreign borrowing.

**Capital Account Liberalization**

The next stage of reforms will be preparation for broader capital account liberalization. The head of the Central Bank announced that the agency, together with the IMF, has developed a roadmap for the sequencing of reforms and intends to coordinate it with other ministries. After this work is completed, the document is planned to be published so that investors and the public can familiarize themselves with the regulator's next steps. Ishmetov called strengthening institutions, protective mechanisms, and the risk management system a top priority, as opening a capital account could create additional volatility and pressure on the foreign exchange market.

Regarding inflation risks, the head of the Central Bank noted that domestic problems have been largely resolved thanks to the gradual liberalization of prices, including energy tariffs. The main source of risk remains external shocks, particularly fluctuations in oil and food prices amid global conflicts. Ishmetov clarified that no direct impact from the conflict in the Persian Gulf has yet been observed, but increased logistics costs could impact the economy if the conflict drags on.

**Response to External Shocks through Supply**

Ishmetov emphasized that rising oil and food prices on global markets cannot be offset solely by monetary policy instruments. He stated that the Central Bank, together with the government, is exploring options for influencing supply, specifically by exploring alternative logistics routes and the possibility of domestic production of certain goods instead of importing them.

**Transition to National Currency Financing**

Ishmetov spoke about the gradual reduction of dependence on foreign currency debt. He noted that the first step was the issuance of Uzbek soum bonds by the International Finance Corporation (IFC) in 2019, dubbed "Samarkand Bonds." Subsequently, the Ministry of Finance of Uzbekistan began issuing Eurobonds in the national currency, which, according to Ishmetov, generated strong demand from investors. This year, all of the Finance Ministry's borrowings were denominated in soums. Banks are gradually following suit, increasing their issuance of bonds in the national currency.

According to the head of the Central Bank, investor interest in soum investments is due to the stability of the exchange rate and confidence in maintaining low inflation in the long term.

**Banking Sector Regulation**

Ishmetov reported that the Central Bank has already brought bank capital and liquidity requirements into line with international standards. By the end of this year and into next year, the regulator plans to convert all banks' financial statements to IFRS standards.

Against the backdrop of the capital account opening, the Central Bank is introducing new requirements for currency risk management, especially for banks with unhedged positions. According to Ishmetov, the regulator adheres to the principle that, along with the liberalization of a particular area, the regulation of associated risks is tightened.

**Diversification of Foreign Investment**

Responding to a question about the geography of foreign direct investment, Ishmetov confirmed that China remains a major trade and investment partner for Uzbekistan due to its geographic proximity and historical ties. At the same time, the country is consistently expanding its relations with Europe and the United States, without prioritizing specific regions or countries.

**Uzbekistan's Role in Central Asia**

Speaking about Uzbekistan's potential role as a regional investment hub, Ishmetov noted that, from the first days of his presidency, the country's president has prioritized improving relations with all of his neighbors, in contrast to his previous policy. According to him, this has become a significant impetus for economic growth both in Uzbekistan itself and in the region as a whole.

Ishmetov emphasized that, instead of competition between individual countries, it is more beneficial for the region to act as a single bloc: what matters to investors is the aggregate size of the economy, not the performance of any individual country. He stated that the region's population will continue to grow in the coming years, and the combined economy of Central Asia could reach a trillion dollars.

**Central Bank Independence and Global Uncertainty**

Ishmetov also noted that in recent years, the Central Bank of Uzbekistan has become completely independent in its decision-making on the key interest rate and exchange rate, free from the government pressure faced by some other central banks.

Commenting on the situation in global markets, including rising US government bond yields and the challenges facing central banks worldwide, Ishmetov stated that the world has entered a period where uncertainty has become the new normal.

According to him, since the COVID-19 pandemic, Uzbekistan's economy has been facing a consistent series of external shocks, forcing the Central Bank to shift its focus from forecasting specific risks to enhancing the overall resilience of the economy.

Ishmetov emphasized that the regulator intends to maintain a moderately tight monetary policy and respond in a measured manner, based on confirmed data, rather than reacting immediately to any global fluctuations.