Uzbek som close to equilibrium exchange rate
The equilibrium exchange rate is a long-term reference value that indicates whether the value of a currency largely corresponds to its economic fundamentals. It is, for example, essential for assessing competitiveness. For Uzbekistan, we estimate it using two methods: the external sustainability (ES) approach, which is based on the stabilisation of net foreign assets, and the balance of payments (BoP) approach, which examines whether the current account is sustainably financed. For 2024, the ES and BoP approaches suggest overvaluations of 20% and 9%, respectively. For more recent data, 2024Q3-2025Q2, the ES approach shows an overvaluation of around 10%, while the BoP approach shows that the som is in equilibrium.
We conclude that the som is largely in line with the fundamentals, which is good. However, our analysis also shows that the estimates are sensitive to the choice of time-spans and trade shifts. Thus, a continuous monitoring of the underlying indicators is advisable to help identify emerging distortions and respond in a timely manner if necessary.
Equilibrium exchange rate as a reference value
Unlike the daily exchange rate, an equilibrium exchange rate serves as a long-term reference value. The aim is to assess whether the value of a currency is in line with a country’s underlying economic fundamentals. It is a measure of external economic stability, i.e. a country’s ability to finance imports, debt servicing and investment needs. Importantly, it is not a policy target or a forecast. However, persistent or large deviations may indicate structural problems such as excessive dependence on foreign credit or loss of competitiveness.
The German Economic Team has estimated Uzbekistan’s equilibrium exchange rate using two common methods: 1) the external sustainability approach (ES), which considers the long-term stability of a country’s net foreign assets, and 2) the balance of payments (BoP) approach, which focuses on whether the current account is sustainably financed.
1% depreciation improves trade balance by 0.25%
Both approaches focus on trade elasticity. It measures the extent to which the trade balance improves in response to exchange rate changes. Estimating this elasticity for Uzbekistan is particularly difficult due to several reasons. Firstly, the exchange rate liberalisation in September 2017 represents a regime change that affects the stable long-term relationships in the data. Secondly, the period since liberalisation is therefore relatively short, which limits the reliability of the usual long-term econometric approaches. Thirdly, gold exports play an important role and are largely determined by world market prices. Fourthly, the analysed period was marked by external shocks (e.g. COVID-19) that disrupted global trade patterns. These factors may distort the usual relationships between the exchange rate and trade flows.
We have addressed these challenges using a vector autoregressive (VAR) model. Although this model is less complex than other approaches, as it does not make any assumptions about long-term relationships, it also places fewer demands on data quality. We estimate long-term trade elasticity at 0.25: a 1% real depreciation of the Som is expected to improve the trade balance by around 0.25% in the long-run. The results are stable when gold is excluded from the trade balance.
External sustainability approach: 10-20% overvalued
The ES approach examines whether the current account balance is compatible with a stable position in net foreign assets relative to GDP. It is therefore a stock-based estimate. It shows what trade balance (including transfers) is necessary in the long term to prevent excessive foreign debt from accumulating.
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To do this, a formula is first used to calculate the sustainable trade balance, which is derived from net foreign assets and assumptions about long-term growth and real interest rates. For Uzbekistan, this amounts to 0.3% of GDP. This figure is compared with the actual current account balance, which stood at -4.7% of GDP in 2024. This results in a gap of 5.0 pp. Calculating this into an exchange rate adjustment using the elasticity, the estimated overvaluation of the real effective exchange rate (REER) for 2024 is 20%.
However, the trade balance has improved significantly recently, mainly due to the sharp rise in the price of gold and thus the value of gold exports. In the most recent data (2024Q3-2025Q2), the current account deficit is therefore significantly lower (-2.2%). As the sustainable trade balance has not changed, the gap narrows to -2.5 pp, which corresponds to an overvaluation of the som of 10%.
Balance of payments approach: roughly in equilibrium
The balance of payments approach assumes that the exchange rate is determined by the equilibrium between the current account (CA) and capital/financial flows. The focus is on financing the current account, particularly whether it is supported by stable inflows, such as foreign direct investment (FDI) or remittances. This approach is therefore based on payment flows. It addresses the question of whether a CA deficit is consistent with sustainable external financing.
We estimate that the sustainable CA balance is around -2.5% of GDP. This is based on the average net FDI inflows over the last five years. With primary and secondary income averaging 9.5% of GDP over the same period, mainly in the form of remittances, this would render a trade deficit of 12.0% of GDP sustainable.
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Mainly due to a higher trade deficit, there was a CA gap of -2.3 pp from the norm in 2024. Using the elasticity, this results in an estimated overvaluation of the real exchange rate of around 9%.
When looking at more recent data (2024Q3-2025Q2), the trade deficit is close to the norm, while remittances and net FDI inflows exceed it. Overall, the CA gap is thus slightly positive (+0.4 pp). With an undervaluation of 1.6%, the exchange rate is virtually in equilibrium.
The latest IMF report from June 2025 supports these findings using a different methodology.
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Conclusion
In summary, the estimates suggest that the som is largely in balance, especially when looking at the most recent data. They send a clear message to observers and policymakers: there are currently no signs of a major misalignment in the exchange rate. However, the results also underscore the importance of the assumptions used, the choice of time period, and trade shifts.
The purpose of estimating an equilibrium exchange rate is to provide a practical benchmark for assessing whether the observed exchange rate is consistent with the external trade position. This, in turn, is important for long-term macroeconomic stability. Regular monitoring of net foreign assets, FDI, and remittances can identify emerging distortions at an early stage, enabling timely responses if necessary.
This newsletter is based on the Policy Paper “Calculating the equilibrium exchange rate for Uzbekistan: mission impossible?”.
