Introduction

International reserves are a key indicator of a country’s macroeconomic stability. They serve several important functions:

• Ensuring liquidity – Reserves allow the state to fulfill its obligations to foreign partners and investors.
• Maintaining currency stability – The central bank uses reserves for foreign exchange interventions to smooth fluctuations in the national currency.
• Financial safety buffer – Reserves help mitigate the impact of economic crises or sharp external shocks.
• Guaranteeing import operations – A sufficient level of reserves allows the country to cover import costs even under unfavorable external economic conditions.
• Improving the country’s credit rating – A high level of reserves indicates financial stability and reduces risks for foreign investors and creditors.

Uzbekistan’s reserves are traditionally dominated by gold and foreign currency. Their changes reflect global economic trends, the policies of the Central Bank, and the country’s liquidity needs.

According to the Central Bank of the Republic of Uzbekistan, as of February 1, 2025, the total volume of international reserves stood at $42.9 billion, increasing by $1.72 billion (+4.17%) over the month. The main factor behind this growth was the increase in gold prices on global markets.

International Reserves Dynamics

As seen in the table, after three months of declining reserves, an increase was observed in January 2025.

Structure of International Reserves

Key Reserve Components:

1. Gold:

• As of February 1, 2025, Uzbekistan’s gold reserves were valued at $35.06 billion, increasing by $3.02 billion over the previous month.
• The physical volume of gold increased from 3 million to 12.6 million troy ounces (approximately 391.9 tons).
• The rise in gold prices, reaching nearly $2,900 per troy ounce, significantly contributed to this growth.

2. Foreign Currency Reserves:

• The volume of foreign currency reserves decreased by $1.29 billion, falling below $7.3 billion.
• Breakdown:

– $442.3 million is held in central banks and the International Monetary Fund (IMF).

– $6.75 billion is placed in foreign commercial banks.

• Possible reasons:

– Central Bank interventions to support the exchange rate of the Uzbek soum.

– Repayment of external obligations.

3. Securities:

– The value of securities purchased by the Central Bank increased to $102.1 million.

– In October 2024, the regulator announced foreign bond purchases worth $65 million, nearly doubling their volume.

Factors Behind Reserve Changes

1. Increase in Gold Prices

• Gold prices on global markets exceeded $2,900 per troy ounce, marking a new all-time high.
• The physical volume of gold reserves increased from 3 million to 12.6 million ounces (≈391.9 tons).
• Gold’s share in reserves reached 7%, making Uzbekistan’s economy more dependent on fluctuations in gold prices.

2. Decline in Foreign Currency Reserves

• Foreign currency reserves fell by $1.29 billion, dropping to $7.3 billion.
• Breakdown:

– $442.3 million held in foreign central banks and the IMF.

– $6.75 billion held in foreign commercial banks.

• Possible reasons:

– Foreign exchange interventions by the Central Bank to stabilize the Uzbek soum.

– Payments on external debt obligations.

3. Slight Increase in Bond Holdings

• The Central Bank increased its holdings in foreign bonds by $1.6 million, reaching a total of $102.1 million.
• This minor increase reflects gradual diversification of reserve assets.

Analysis and Forecasts

1. Imbalance in Reserve Structure

• The 81.7% share of gold in reserves is a record high, strengthening the protective function of reserves but also making them more dependent on gold price fluctuations.
• Despite the increase in gold value, a high concentration in one asset reduces the flexibility of reserve management, as gold cannot be used for direct foreign exchange interventions.

2. Foreign Currency Reserves at Their Lowest Level in Five Years

• The continued decline in foreign currency reserves may limit the Central Bank’s ability to support the Uzbek soum.
• If this trend persists, potential risks include:

– Increased volatility in the exchange rate.

– Higher inflationary pressure due to a weaker soum.

3. Forecast for 2025

• If gold prices continue to rise, the total reserve value will increase, even without additional gold purchases.
• However, if foreign currency reserves continue to decline, Uzbekistan may face liquidity shortages for external transactions, requiring adjustments in economic policy.

Conclusions and Recommendations

Conclusions:

• The January increase in reserves was mainly driven by rising gold prices, highlighting Uzbekistan’s reliance on global precious metal markets.
• A high share of gold in reserves provides protection against external shocks and currency risks but reduces economic flexibility.
• The reduction in foreign currency reserves could limit the Central Bank’s ability to respond to external challenges.
• The optimal strategy is a balance between gold and foreign currency assets, with possible diversification into other financial instruments.

Recommendations:

1. Maintain a balance between gold and foreign currency reserves
   • Despite benefits from rising gold prices, increasing foreign currency assets is essential to enhance the Central Bank’s flexibility.
2. Attract more foreign currency inflows
   • Developing non-resource exports and improving conditions for foreign investors will help boost foreign currency inflows.
3. Use gold as a financial instrument
   • If necessary, gold reserves can be used as collateral for obtaining foreign currency liquidity, without direct sales.
4. Continue reserve diversification
   • Beyond gold and currency, Uzbekistan should consider investments in foreign government bonds and other low-risk financial instruments that provide stable returns.

Conclusion

Gold remains a strategic asset, protecting the economy from currency and geopolitical risks. However, its high share in reserves limits the country’s operational flexibility in monetary policy.

The best approach is to ensure a balanced management strategy where gold continues to play a key role, while at the same time, foreign currency and other liquid instruments are strengthened. This approach will help Uzbekistan maintain macroeconomic stability and effectively respond to external challenges.

Source: The Central Bank of the Republic of Uzbekistan