Author: Madina Kurbonova
Uzbekistan, a country in Central Asia without any coastline, has been dealing with the problem of having a consistently low-valued currency called the Uzbekistani Som. This currency's losing value is complicated and involves economic policies, outside pressures, and internal factors. The global financial community, as well as economists and politicians, need to understand why Uzbekistan's currency is not worth anything. Understanding the economic factors that lead to the low value of Uzbekistani Som enhances our understanding of the barriers and possibilities to face the nation's economy. Given that the Uzbekistani Som is among the top 10 currencies with the lowest value regularly, it is crucial to determine the economic causes behind its relatively low exchange rate. To provide knowledge on the challenges facing Uzbekistan's economy, this case seeks to examine and understand the factors that led to this currency's devaluation, promoting a better understanding of the factors affecting Uzbekistani Som's position in the world currency market. For a nation, having a low-value currency such as the Uzbekistani Som has various drawbacks. Firstly, it raises the price of imported products, which increases individuals' cost of living. A decreased level of life may result from this decline in purchasing power. Second, a weak home currency makes it more difficult for a nation to repay debts it has taken out in foreign currencies. Converting loans from other currencies to the local currency has a higher cost associated with repayment. A constantly weak currency may also cause a loss of trust among local and foreign investors, resulting in capital flight and restricting foreign direct investment. Furthermore, a country's capacity to purchase products and services abroad is restricted by a weak currency, which lowers its competitiveness worldwide. Currency depreciation can occur due to economic fundamentals, interest rate differentials, political instability, or risk aversion among investors.
The value of the currency plays an important role in trade between two or more countries. As trade occurs between different countries, there is a fixed value of the exchange rate and the exchange rate is the value of one currency compared to another currency. The main causes of Uzbekistan's trade deficits are the country's low export variety and its need for goods that are imported. Natural resources, which represent an important portion of Uzbekistan's exports, such as cotton, gold, and natural gas, are important to the country's economy. However, the nation struggles to add value to its exports and diversify its export base, which makes it dependent on imports for industrial and consumer products. Structural problems that restrict export growth, such as insufficient infrastructure and restricted firm access to financing, worsen this imbalance even further. Because of this, Uzbekistan continuously imports more than it sells, creating a trade imbalance and depressing the value of the som. As trade.gov represents “ Uzbekistan’s economy continued to grow at a healthy rate with GDP rising to 888.3 trillion Soum ($80.4 billion) in 2022, or 5.7% in real terms. The service industry (3.2%) was the main contributor to GDP growth, while the manufacturing (1.3%), agriculture (0.9%), and construction (0.4%) industries added the rest, and net taxes on products decreased (-0.1%). Uzbekistan’s national currency Soum depreciated by 3.5% against the U.S. dollar. The country’s international reserves increased by $0.7 billion to $35.8 billion, and the public external debt rose by $2.9 billion to $29.2 billion. The government did not publish private external debt data.”
The table illustrates the key economic indicators, as the exchange rate of the Uzbekistani som is relatively low compared to the USD, and so the total price of imports is greater than the exports. Exports brought less amount of money while imports are the reason for a lot of money going out of the country. This situation affects inflation as the living costs are increasing. Businesses that rely on imported resources may find it difficult to survive because of higher production costs,
which can affect their international and domestic competitiveness. This can lead to reduced profitability and an increase in the unemployment rate.
In fact, a weak exchange rate can make it difficult to repay debts that have been borrowed from foreign countries. The currency of Uzbekistan is relatively low and when the country tries to get 1 million dollars from another country when the value of the som is almost equal to the other country’s currency, however after some time the value of the Uzbekistani sum may start depreciating and the total amount of repayment starts increasing, if it depreciates by 50% the Uzbekistan will need to pay 2 million dollars back and with the interest. Moreover, a weak currency may also affect a country's ability to borrow, the lenders may be less willing to give money to a country that has a weak exchange rate or they may apply higher interest rates as the value of the currency may depreciate again. This will cause a cut in the finances of the country and make it harder to manage the country.
Some countries devalue their currency intentionally, this strategy is used by governments to boost their economy or to be competitive in the global market. By lowering the currency the country may increase its exports because every country wants to buy more goods and services for less money. Exports are encouraged while imports are discouraged. There should be some caution, however, for two reasons. First, as the demand for a country's exported goods increases worldwide, the price will begin to rise, normalizing the initial effect of the devaluation. So the country that lowered its currency may put a monopoly in the global market. For instance, China was trying to get into the market of US by lowering its currency. However, protectionism was planned well and China could not make a monopoly in the market of the US. But China become one of the biggest exporters of other countries. However, there is a big impact of low-valued currency, the devaluation done on purpose may not be sustainable over time. Exports and economic growth may benefit temporarily from it, but inflationary pressures and the reliability of the nation's monetary policy may also result. In the worst situations, it may lead to a decline in investor confidence and capital flight, which would further devalue the currency and cause economic instability.
Source evaluation
The websites that I used to take information are official websites that use sources that have been checked already and are reliable. These websites have been confirmed by the governments which is why the given information is true. The organization's employees are professional. I got most of the information from Kun.uz as it is an official website of Uzbekistan that gives information with its timeline and dates. There is an update every second on that website as it represents new and reliable information.
Personal Perspective
My personal perspective on this topic is that when a weak currency cuts the opportunities for a country the country may find it difficult to grow. If the value of the country is too low the government should set laws or use policies to protect the people from suffering relatively high living costs. It is not easy to appreciate a country’s currency, however by using good plans and calculations, the country can achieve the right value of its currency in the long term.
In conclusion, both internal and external variables can have an impact on a nation's value of currency. The exchange rates are heavily influenced by domestic variables including trade imbalances, stability in politics, and financial performance. Furthermore, the state of the world economy which includes shifts in interest rates, commodities prices, and investment. Governments frequently apply planned currency depreciation to increase exports and promote economic growth, although this strategy may not be sustainable in the future and can result in trade conflict. Furthermore, even if the state of the world economy might present nations with chances to reinforce their currencies through wise economic decisions, it also carries hazards that must be properly managed, such as capital flight and currency volatility. In order to deal with the complexities of currency markets and guarantee economic stability and growth, authorities, companies, and investors must have a thorough awareness of the intricate interactions between local and global elements.
Works Cited
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Khamidov, Khalilulloh, and Doniyor Tukhsinov. “What is the main reason for devaluation of the soum?” Kun.uz, 16 April 2020, https://kun.uz/en/news/2020/04/16/what-is-the-main-reason-for-devalu ation-of-the-soum. Accessed 25 February 2024.
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