09 August 2020

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1 Feb  2019 2815

How 100 thousand soum banknote affects prices?

Behzod Hamrayev, Director of the Central Bank Monetary Policy Department, notes that the bill of 100,000 soum, approved by the Senate of Oliy Majlis, supposedly will be used mainly for savings.

There is an opinion that larger banknotes encourage inflation. According to experts, there is no connection between these processes. On the contrary, the 100 thousandths will become an alternative to foreign currency, contributing to the de-dollarization of payments.

 “When the 50,000 note came out, the cost of, say, a glass of sunflower seeds did not increase. There are many similar examples” - B. Khamrayev explains. – “The expansion of VAT payers does not show a strong impact on inflation as well. Its weak action will last for another couple of months. Then the market balances itself. According to our forecasts, VAT will not affect the annual inflation rate at all. Theory is theory, but after talking with people, you realize that it is not so easy to raise the price. The storeowner knows if he increases the cost of the goods by at least one hundred soum, customers will go to his competitor”.

He also noted that introduced 50, 100, 200 and 500 soum coins did not gain the expected popularity. The first reason is that citizens are not used to using metal money. The second is that notes of the same denomination have not yet been withdrawn.

Some Uzbekistanis also continue to keep their savings in dollars, although there are better options with the national currency. Here is a simple calculation based on the example of ten thousand dollars: in 2018, the rate changed from about 8,150 to 8,300 soum. The saver, simply holding the capital, as they say, under the mattress, multiplied it during this period by 1.5 million soum. If he had put the money in the bank (in soum), he would have received about extra ten million sums.

It was no coincidence that the Central Bank raised the discount rate from 14 to 16 percent last year. In 2018, there was a period when the national currency depreciated against the US dollar more intensively. That encouraged people to take off deposits in soum. To prevent capital outflows, the regulator changed his rate, and depositing became attractive again.

In early 2019, the Central Bank announced that the bank rate remained the same and was not reduced to the previous values. According to experts, this decision is based on the need to preserve anti-inflationary monetary policy.

Notable the annual inflation in 2018 was lower (14.3 percent) than the September forecast (16-17 percent). For the January of 2019, this number was 1.4 percent - much lower than a similar period last year. Conclusion - despite the introduction of a new VAT paying mechanism, prices are rising or decreasing depending on other factors.

The Central Bank kept the inflation forecast for 2019 at the level of 13.5-15.5 percent. According to specialists, after reaching a peak in February-March, annual inflation will slow down, but the increase in electricity and natural gas tariffs planned for June will make this process less pronounced.

Otabek Iskandarov.

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