UZBEKISTAN TURNS TO DEBIT CARDS IN INFLATION BATTLE

UNCLAS SECTION 01 OF 02 TASHKENT 001604 SENSITIVE SIPDIS DEPARTMENT FOR SCA/CEN AND EB E.O. 12958: N/A TAGS: ECON EFIN EINV SOCI UZ SUBJECT: UZBEKISTAN TURNS TO DEBIT CARDS IN INFLATION BATTLE ¶1. (SBU) SUMMARY. In an effort to control inflation by limiting the amount of cash in circulation, the Government of Uzbekistan (GOU) has begun to mandate the use of debit cards. However, Uzbekistan remains a cash economy and although the debit cards can be used for payment in a limited number of stores, they are not accepted in the ubiquitous bazaars where most Uzbeks shop for basic staples. At the same time, banks are often unable or unwilling to pay out funds no matter how much money is in the account. This type of top-down measure is the norm here and ironically a consequence of import substitution policies that lead to a dual exchange rate and sustain a large, cash-driven gray economy. The demand for cash in the economy is a major driver of inflation and downward pressure on the exchange rate. By introducing debit cards, the GOU is trying to control and curtail the amount of cash in circulation, mandating the use of debit cards for payments of salaries, pensions, various social allowances and for use in financial transactions. At the same time, cash has become increasingly scarce. Plastic is the substitute, and Uzbek citizens must now contend with debit cards and hope that the infrastructure for their use eventually emerges. END SUMMARY PLASTIC COMES TO UZBEKISTAN -------------- ¶2. (SBU) Uzbeks are getting their first taste of plastic as the GOU seeks to impose the use of debit cards in an economy where cash is still king and most transactions are effected with stacks of 1000 soum notes (approximately USD 66 cents),the largest note in circulation. The measure is an attempt to mitigate the consequences of other GOU economic policies that create serious imbalances in the economy and lead to significant inflationary pressures. ¶3. (SBU) Most Uzbeks have little faith in the country's banks, so the demand for cash is high. This is exacerbated by import substitution policies that place high tariffs on imported goods and limit access to foreign exchange, driving a substantial shadow economy that runs entirely on cash. With the banking system thus unable to absorb cash and lend for investment, cash circulates rapidly, chasing goods imported with dollars at ever rising prices and thus creating inflationary pressure. The GOU understands this challenge and, rather than liberalize exchange, has attempted to limit the supply of cash in the economy with the introduction of debit cards. These heretofore unknown instruments of payment are now referred to simply as "plastic cards," reflecting popular belief that the aim of any government measure is simply to fleece the average citizen. MONEY SUPPLY THE UZBEK WAY -------------- ¶4. (SBU) The first debt cards in Uzbekistan were issued by local banks in the late 1990s, but never saw widespread use. Only late 2008 did the GOU begin its push to increase their use throughout the economy. In usual fashion, it has been policy rather than market forces driving this change. Businesses are now being forced to pay their employees not in cash, but by direct deposit. Government employees, pensioners and other beneficiaries of social allowances are also seeing their funds deposited. Whereas there were less than a million debit cards in early 2008, by the summer of 2009 there were over 4.7 million in circulation. The target of the Central Bank of Uzbekistan is to have 6 million plastics in circulation by the end of the year. ¶5. (SBU) Over the same period, cash has become increasingly scarce. Citizens and businesses attempting to withdraw cash from their accounts are told to come back in a week or a month. The banks do not have cash. Employees of many companies can go weeks or months without receiving their cash salaries, as their employers are simply unable to get access to sufficient quantities to meet their payrolls. Even employees at the General Motors-Uzavtosanoat assembly plant in Asaka have not received their full salaries for the past three months due to the lack of cash. ¶6. (SBU) Millions of people given debit cards that, in theory, allow them to access their funds whenever they wish, also find that they are unable to withdraw cash from banks or ATMs with the cards. This may not be a problem were the infrastructure to support electronic TASHKENT 00001604 002 OF 002 payments developed, but there are still few establishments even in Tashkent that accept debit cards as payment, much less in the provinces. Moreover, small businesses themselves need cash to pay their suppliers and are thus reluctant to accept debit cards, as they too will have difficulty withdrawing cash from a bank. In the bazaars, where the vast majority of Uzbeks shop, debit cards are unheard of. TURNING PLASTIC TO CASH -------------- ¶7. (SBU) Residents of Tashkent are finding resourceful ways to withdraw cash on their debit cards. One approach is to go to an office that accepts payment for municipal services. There the hopeful card holder waits for a fellow citizen to appear with cash in hand to pay for gas, electric, or other utilities (all utility bills in Uzbekistan must still be paid in person). When such a person appears, the card bearer steps forward and offers to pay that citizen's bill with plastic at a mutually beneficial exchange rate. (NOTE: Municipal services offices are required to accept debit cards.) The citizen's bill is paid, and the happy card-bearer departs with cash in hand. This method is also common at upscale Tashkent grocery stores that accept debit cards. ¶8. (SBU) Unfortunately, this method does not work outside the capital, where even municipal services offices are rarely equipped for debit card payments. There Uzbeks turn to a time-tested method in this part of the world: bribery. Although a bank may claim to have no cash on hand, individual cashiers will suddenly find cash if a card holder offers a 5-10 percent service fee. COMMENT -------------- ¶9. (SBU) Not content to control only the "commanding heights" of the economy, the GOU's top-down model affects nearly every aspect of economic life. For their part, citizens try to find creative ways resist at every turn. In attempting to control inflation and rein in the informal sector through the introduction of debit cards, the GOU is largely fighting the logical consequences of its own policies. The Uzbek economy continues to produce robust GDP growth (mainly due to stable external demand for its natural resources) but functions with scant attention to the financial needs of individual citizens. It is the average Uzbek who is left to find ways to survive in the space between policy and the real economy. NORLAND