From March 18-27 of the current year, the Central Bank hosted a technical assistance mission from the International Monetary Fund (IMF) dedicated to the topic of “Transition to a Free-Floating Exchange Rate Regime.” The mission focused on assessing recent developments in Uzbekistan’s foreign exchange (FX) market and discussing policy measures aimed at strengthening the institutional and market framework needed for a more flexible exchange rate system.
During the mission, IMF experts held meetings with representatives of relevant structural divisions of the Central Bank to review the functioning of the foreign exchange market, ongoing reforms, and the policy framework that supports exchange rate flexibility.
In their assessment, IMF experts noted several positive developments in the evolution of Uzbekistan’s foreign exchange market and policy framework. In particular, the external sector has become increasingly diversified, while the domestic FX market has gradually deepened. Recent policy initiatives have contributed to strengthening market infrastructure and expanding available instruments for market participants.
These developments contribute to creating a more market-based FX ecosystem, where price formation increasingly reflects underlying economic fundamentals rather than administrative measures.
At the same time, IMF experts noted that certain structural challenges remain in further developing the foreign exchange market.
In particular, the participation of foreign investors in domestic financial markets remains limited, and the institutional investor base, such as pension funds, insurance companies, and investment funds is still at an early stage of development. They highlighted that strengthening these segments would increase market liquidity and improve risk-sharing mechanisms within the financial system.
Policy recommendations to deepen the FX market
To support the continued development of the foreign exchange market and facilitate the transition toward greater exchange rate flexibility, IMF experts presented a number of policy recommendations. These include:
¾ Review the requirements of the “market-making” program in the foreign exchange market. This measure will help strengthen price formation based on market mechanisms.
¾ Encouraging the use of derivative instruments, allowing banks to manage open foreign exchange positions more effectively and hedge currency risks.
¾ Introducing close-out netting practices, which would reduce counterparty risk and improve the efficiency of financial market transactions.
¾ Strengthen communication within the working group on the domestic foreign exchange market.
¾ Promoting the development of short-term FX instruments, including interbank one-day forwards and FX swaps, which can support liquidity management and deepen the interbank market.
The development of such instruments is considered an important step toward building a modern and resilient FX market infrastructure that can support a flexible exchange rate regime.
The continued development of the FX market and the gradual transition toward greater exchange rate flexibility are expected to bring several macroeconomic benefits. These include improved resilience to external shocks, stronger monetary policy transmission, increased attractiveness of domestic financial markets for investors, and a more efficient allocation of foreign currency resources across the economy.
Transition toward a more flexible exchange rate framework
Under a freely floating exchange rate regime, the primary objective of the central bank is to ensure price stability and maintain macroeconomic balance, while the exchange rate serves as an important adjustment mechanism for the economy, helping to absorb external shocks.
Under a more flexible regime, the exchange rate can adjust to external economic developments, such as changes in commodity prices, trade flows, or global financial conditions helping the economy adapt more smoothly to external shocks. Greater flexibility can also strengthen the transmission of monetary policy and support macroeconomic stability in economies integrated with global markets.
