New Economic Initiatives in Uzbekistan Offer Opportunities but Face Challenges

Publication: Eurasia Daily Monitor Volume: 9 Issue: 178

An Uzbek market (Source: Travelourplanet)

Uzbekistan potentially has one of the strongest economies in Eurasia, but certain weaknesses constrain its development. The country has been experiencing strong growth rates of 6-8 percent annually for the past few years, while the government has kept its annual budget deficit and overall public debt relatively low. The International Labor Organization calculates national unemployment presently at a very low 1.3 percent.  

The Uzbekistani government has also been striving to diversify the economy and attract more foreign direct investment. The diversification campaign has had some success, with cotton now accounting for a much smaller share of national exports than the 70-80 percent share it held two decades ago. At present, cotton, metals, energy and petroleum products amount to slightly more than half of the country’s total exports, while machinery and equipment account for almost half of all national imports (Dun and Bradstreet, September 2012). 

According to experts, the economy could perform significantly better, if the country strengthened its infrastructure, improved overall levels of education, and allowed for the free flow of information. Uzbekistan needs to relax its rules on currency conversion and further reduce tax rates to allow for economic growth. Foreign employees still experience difficulties in obtaining long-term work visas, which dissuades foreign investment. The government also needs to clarify its opaque procurement process, permit more repatriation of profits, and reduce formal and informal trade barriers with neighboring countries (author’s interviews in Uzbekistan, September 9-15). 

Other challenges to Uzbekistan include maintaining security in the country despite the turmoil in neighboring Afghanistan, and transitioning to a new generation of political and economic leaders to replace the Soviet-era elite that has governed the country and determined economic policy since Uzbeskistan gained independence two decades ago. In addition, the country is vulnerable to a decline in the world prices for its cotton and energy exports. 

The recently adopted Asian Development Bank (ADB) partnership strategy (CPS) with Uzbekistan for 2012-2016 affirms Uzbekistan’s goal to become an upper middle-income country by 2020. The CPS aims to promote balanced growth, economic diversification, private sector development, and more jobs. Priority development sectors include transportation, energy, municipal services, water, and access to finance. The CPS also seeks to improve governance, regional cooperation and integration, private sector development, knowledge management, and gender equity. At present, the ADB approved 35 joint projects at an aggregate cost of more than $3.8 billion (Uzbekistan Daily, September 10). 

A new priority of the government and foreign partners is promoting small business development. The country now has some 460,000 enterprises, which employed more than 8.6 million people (Uzbekistan Daily, September 15). 

According to the ADB, small and private businesses had increased their share of Uzbekistan’s GDP during the past decade from 30 percent to 50 percent by the end of 2011. They have been creating half a million jobs each year and now account for three-fourths of all employees. These firms have established a particular prominent place in the country’s agriculture, construction, manufacturing, and trade services sectors. 

Xiaoyu Zhao, Vice President of the ADB, expects that Uzbekistan’s rich natural resources, strategic location, and a pool of talented young people should ensure continued growth of the country’s small and private businesses. Zhao argued, however, that the country still needed more financial products. This is why the ADB and Uzbekistan’s government have recently launched a new initiative to increase small and micro financing (Uzbekistan Daily, September 15).  

Addressing the first conference on the role of small business and entrepreneurship organized by Uzbekistan’s government in Tashkent on September 14, President Islam Karimov said that supporting small businesses has been a priority of his administration since the first days of independence. He pointed out the role of small businesses in providing domestic goods and services, promoting national economic growth and diversification, and generating jobs and income for millions of Uzbek citizens. Small businesses do not require much capital to modernize their means of production and their agility allows them to rapidly adapt to changing economic conditions, stressed Karimov (Uzbekistan National News Agency, September 15). 

Between 2005 and 2012, the government reduced the turnover tax on small business from 13 percent to 5 percent, with even lower rates for family businesses and folk artisans. Karimov said that in 2011 alone, the value of all tax benefits granted to small businesses and private enterprises amounted to more than $500 million (Uzbekistan National News Agency, September 15). 

The government is seeking to promote an import substitution strategy that includes encouraging foreign companies to establish production facilities in the country. General Motors has been the most successful example. According to Karimov, the government has spent some $100 million to construct the high-tech Navoi Free Industrial and Economic Zone and the Angren Special Industrial Zone, which aim to support small entrepreneurship as well as attract more foreign direct investment (Uzbekistan National News Agency, September 15). 

Furthermore, the government declared 2011 the Year of Small Business and Private Entrepreneurship in Uzbekistan, with an ensuing state program. A presidential decree signed on August 24, 2011 provided additional measures to create a more favorable business environment to encourage development of small business and private entrepreneurship. Small and medium-sized enterprises (SME) were recently exempted from the requirement to sell to the central bank 50 percent of the foreign currency they earn from exports. Some components and spare parts for technological equipment have been exempted from import custom duties until 2016 (Dunn and Bradstreet, September 2012). 

Recent legislative and judicial reforms have sought to provide legal protection for small businesses. For example, legislation adopted in 2011 and 2012 provides more guarantees of freedom of entrepreneurship, reduction of business inspections, and specifies the rights and responsibilities for a new legally recognized form of entrepreneurship, family business (Uzbekistan National News Agency, September 15).