Uzbekistan in economic transformation

Uzbekistan in economic transformation

Uzbekistan in Economic Transformation

According to the published report on the Bertelsmann Transformation Index (BTI) for 2020, Uzbekistan has significantly improved its performance compared to the last report in 2018. In particular, the composite index increased from 3.73 points in 2018 to 4.08 points in 2020, and the indicator of economic transformation increased by 0.25 points and amounted to 4.54 points.

The Bertelsmann Transformation Index is published every two years by the German edition Bertelsmann Stiftung and international importance for assessing a country's image and reputation. The purpose of the index is to analyze the processes of democracy formation and economic liberalization in the country. The final index is formed from three sub-indicators reflecting the transformation in the spheres of politics, economics, and public administration. More than 300 experts at the regional and national levels are involved in the index assessment process.

“The unprecedented reforms of President Mirziyoyev have created a new political, social and economic environment in both country and region,” – stated in the website of the BTI on changes of Uzbekistan over the past two years.

Improving the position of Uzbekistan in such international ratings is particular important, since it reflects qualitative transformations in all spheres of society and state over the past few years. In this regard, this article provides an analysis of the key recent transformations in the socio-economic sphere of Uzbekistan.

Economic performance

According to the International Monetary Fund (IMF), real GDP growth in 2018 was 5.4% and in 2019 - 5.6%. Despite the decline in this indicator to about 0.7% in 2020 during the pandemic, IMF predicts GDP growth between 5.5 - 6% until 2025. Uzbekistan is one of three CIS (Commonwealth and independent states) countries that maintained positive growth rates in 2020 (Table 1).

Table 1. Expected real GDP growth of the CIS countries in 2020, %

Countries

GDP growth, %

Turkmenistan

1,8

Tajikistan

1,0

Uzbekistan

0,7

Kazakhstan

-2,7

Belarus

-3,0

Azerbaijan

-4,0

Russia

-4,1

Armenia

-4,5

Moldova

-4,5

Ukraine

-7,2

Kyrgyzstan

-12,0

Source: World Economic Outlook, IMF, 2020

Uzbekistan's GDP per capita grew from $1,540 in 2018 to $1,740 in 2019. The annual percentage change in consumer prices (inflation) in 2018 was 17.5%, and in 2019 it fell to 14.5%. According to IMF estimates, it is expected to decline further to 5.1% by 2025.

According to the Asian Development Bank (ADB), the current account balance in 2018 and 2019 was -7.1% and -5.6% of GDP respectively. Total gold and foreign exchange reserves in 2019 increased by $2 billion compared to 2018, and amounted to $29.2 billion. At the end of 2019, Uzbekistan took 2nd place among the CIS countries and 48th in the world in terms of gold and foreign exchange reserves (Table 2).

Table 2. Gold and foreign exchange reserves of the CIS countries in 2019, USD

Rank

Countries

Reserves (US dollars)

1

Russia

555 179 461 639

2

Uzbekistan

29 291 325 502

3

Kazakhstan

28 957 509 931

4

Ukraine

25 317 002 927

5

Belarus

9 393 817 369

6

Azerbaijan

7 042 996 710

7

Moldova

3 059 660 617

8

Armenia

2 849 645 182

9

Kyrgyzstan

2 428 567 694

10

Tajikistan

1 466 304 531

Source: World Bank

According to the Central Bank of the Republic of Uzbekistan, the total external debt by the end of 2019 was $24.5 billion, of which $15.8 billion belonged to the state, and $8.7 billion was attributable to the private sector. It should be noted that in 2019 the ratio of public debt to GDP was 30.6%, which remains below the 60% threshold level recommended by the IMF for Uzbekistan. In addition, servicing the total external debt of Uzbekistan in relation to the export of goods and services constituted 15.2% in 2019, down from 19.5% in 2018. This coefficient is expected to remain stable in the future, as the export of goods continues to grow at a moderate pace: in 2018 - 11.4%, in 2019 - 28.6%, in 2020 due to the pandemic there was a decrease of -13.4%. However, it is forecasted to be around 25% in 2021. The above macroeconomic indicators reflect the sustainable nature of the economic development of Uzbekistan.

There are other factors on the stability of the Uzbek economy. Uzbekistan is the ninth largest gold producer with an annual production of 100 tons, and the seventh uranium producer in the world (2385 tons per year, which is 3.9% of world production). Year by year, Uzbekistan has been reducing direct export of cotton fiber, and today, Uzbek companies export textile products to more than 50 countries around the globe. In recent years, foreign investments have been actively attracted into various sectors of the domestic economy. According to the Ministry of Investment and Foreign Trade, the volume of foreign direct investments (FDI) in 2020 amounted to $6.6 billion, mainly due to the implementation of 197 large projects under the Investment Program, which created 38 thousand jobs. In 2021, FDI is expected to increase to $ 7.5 billion.

Reducing the poverty

A new important factor in the ongoing socio-economic policy is the beginning of a large-scale program on poverty reduction, which reflects the political will of the country's leadership. According to World Bank experts, the poverty level in Uzbekistan in 2018 was 9.6% at the international criterion of $ 3.2. Relatively high levels of poverty according to the same criterion were observed in the Samarkand, Surkhandarya, Syrdarya, Andijan regions and the Republic of Karakalpakstan (Figure 1).

Figure 1. Proportion of population living below the poverty line of US $ 3.2 per day per person, based on PPP, 2018.

Source: Seitz,William, “Where They Live : District-Level Measures of Poverty, Average Consumption, and the Middle Class in Central Asia”. World Bank, 2019.

On January 24, 2020, the President of the Republic of Uzbekistan in his Message to the Parliament (Oliy Majlis), for the first time in the history of the country, raised the issue of poverty.“According to various estimates, this figure is 12-15%,” said Shavkat Mirziyoyev. "We are talking about 4-5 million residents of our country." In the Message it was also noted that poverty reduction requires the implementation of a comprehensive economic and social policy - from stimulating entrepreneurial activity to mobilizing the abilities and potential of the population.In this regard, it was proposed to develop a Poverty Reduction Program jointly with international organizations, including the World Bank and the United Nations Development Program.

In March 2020, the President signed a Decree "On measures to cardinally update state policy in the field of economic development and poverty reduction", which provided for an improvement in the standard and quality of life of the population, the creation of stable jobs, the creation of the necessary conditions for increasing the competitiveness of all branches and spheres of the economy. In particular, the Ministry of Economy and Industry of the Republic of Uzbekistan was transformed into the Ministry of Economic Development and Poverty Reduction of the Republic of Uzbekistan, it is envisaged to develop a Poverty Reduction Program with the participation of all stakeholders. A draft Concept for Poverty Reduction in Uzbekistan has already been developed, which includes criteria and methods for calculating poverty levels, effective tools for its reduction based on international experience.

At the same time, the Center for Economic Research and Reforms (CERR) implemented a pilot project to reduce poverty, support the low-income and vulnerable segments of the population in the Buka and Chinaz districts of the Tashkent region. The study was based on the methodology of the Nobel Prize winners in economics on poverty - A. Banerji and E. Duflo, a distinctive feature of which is the comprehensiveness of the fight against poverty. The transition to recognized international methods of fighting against poverty will definitely contribute to its successful eradication in the country.

Competition development

Much development has also taken place in the area of antitrust policy and the promotion of competition. At the beginning of 2019, three independent institutions were created on the basis of the State Committee of the Republic of Uzbekistan for the Promotion of Privatized Enterprises and the Development of Competition. Among them is the Antimonopoly Committee of the Republic of Uzbekistan, which has been delegated all powers for antimonopoly regulation, and which is independent of other state structures in line with international practice.

The new committee has already done plenty of work. For example, in 2020 alone, 32 draft normative legal acts were developed. The procedures of 3639 positions of public procurement were investigated. The impact of 528 draft legislative acts on competition was assessed and 958.8 billion sums were reimbursed from abuse of a dominant positions.

In addition, the structure of new committee, a system has been established for identifying cases of unfair competition in various areas, for identifying violations of the law during public procurement and tenders and for studying commodity and financial markets.Also, starting from 2021, the committee plans to introduce antimonopoly compliance in a pilot mode at nine large state-owned enterprises such as Uzbekistan Airways JSC, UzAuto motors JSC.Antimonopoly compliance is a set of legal and organizational measures provided by an internal act of an enterprise and aimed at complying with the requirements of antimonopoly legislation.In other words, compliance can be understood as a risk management system within the company, which helps to reduce various offenses. A similar system is widely practiced in other countries. For example, in China - where the state-owned enterprises account for 30% of the country's GDP.

External Trade

The liberalization of foreign trade, including the elimination of non-tariff barriers, excise duties and the inconvertibility of the national currency, should be especially noted. There have also been significant changes in trade facilitation. For example, exporters gained a right to operate without export contracts. Other measures include the introduction of government subsidies on export transportation costs of up to 50%, the abolition of customs duties on all types of exported goods and services, the simplification of the export licensing system, a reduction in customs duties to 6.45%, the creation of a one-stop-shop website for export and import operations and others.

The results of such changes are evident. According to the World Bank, if in 2016 the export of goods and services was 15% of GDP, in 2019 this figure reached to 31%. Among the CIS countries, the highest growth in the share of exports in GDP for 2016-2019 was observed in Uzbekistan (Table 3).

Table 3. Exports of goods and services of the CIS countries for 2016, 2019, % of GDP.

Countries

2016

2019

Change

Uzbekistan

15%

31%

16%

Armenia

34%

41%

8%

Kazakhstan

32%

36%

4%

Belarus

63%

66%

4%

Tajikistan

13%

16%

3%

Azerbaijan

46%

49%

3%

Russia

26%

28%

2%

Kyrgyzstan

36%

37%

2%

Moldova

32%

31%

-1%

Ukraine

49%

41%

-8%

Source: Author's calculations based on World Bank data

If in 2017 the foreign trade turnover of Uzbekistan amounted to $26.9 billion, then in 2019 it reached $42.2 billion, having increased by $15 billion. These are the highest indicators of the country in its entire history. During the period 2017-2019, there were also significant changes in the structure of exports (Figure 2).

In particular, the share of food products increased by 1.5%, energy carriers and oil products by 1.3%, ferrous metals and products from them by 0.8%. At the same time, there was a decrease in the share of cotton fiber by 2.2%, chemical products - by 2.1% and non-ferrous metals - by 0.8%. This diversification of the export structure is explained by the increase of export products manufactured domestically.

Figure 2. Structure of Uzbekistan's exports for 2017, 2019, % of total exports.

Source: Author's calculations based on the data of the State Committee of the Republic of Uzbekistan

Large-scale reforms have also taken place in the sphere of the country's monetary policy. In recent years, measures have been taken to stabilize the inflation rate. After the devaluation of the national currency in 2017 and the introduction of free conversion, inflation in 2018 and 2019 remained in the region of 14-15%, before dropping 11% in 2020.

In 2019, the President of Uzbekistan signed a decree "On improving monetary policy with a phased transition to an inflation targeting regime." The transition to inflation targeting is expected to reduce the inflation rate to 10% in 2021 and to 5% in 2023. Today, the inflation targeting regime is used by a number of developed countries such as the UK, Canada, New Zealand, Australia, etc.

It should be noted that inflation targeting indirectly affects other economic indicators. Thus, according to the estimates of the chief economist of the Central Bank of Iceland G. Petursson, after the introduction of inflation targeting by countries, fluctuations in economic growth rates decrease, with the greatest effect observed in emerging market economies (Table 4).

Table 4. Fluctuations in economic growth rates before and after the introduction of inflation targeting.

Countries

Average fluctuations in 5 years before the adoption of the regime

Average fluctuations after the adoption of the regime

Average fluctuations for 1981-1990

Average fluctuations for 1991-2002

Australia

2,1

1,6

2,7

2,1

Brazil

1,6

1,8

3,3

1,9

Canada

2,2

2,0

3,0

2,0

Chile

1,8

3,3

5,9

3,3

Colombia

2,8

1,0

1,4

2,4

Czech Republic

2,4

1,5

-

3,4

Hungary

0,7

0,4

3,2

3,9

Iceland

2,6

2,8

5,4

3,6

Israel

3,0

3,8

2,9

3,7

Korea

3,1

6,5

2,8

4,7

Mexico

3,9

2,7

2,8

2,9

New Zealand

3,9

2,9

4,6

2,8

Norway

2,7

1,9

2,5

2,5

Peru

3,5

1,7

10,8

5,6

Philippines

1,4

2,0

4,4

1,9

Poland

11,8

4,9

5,7

14,5

South Africa

1,5

0,4

3,0

2,1

Sweden

1,9

1,8

2,0

2,3

Switzerland

1,1

1,5

1,9

1,3

Thailand

5,6

1,6

3,0

5,0

Great Britain

2,5

1,5

2,1

1,9

All countries

3,0

2,3

3,3

3,5

Source: Thorarin G. Pétursson "Inflation targeting and its impact on macroeconomic indicators", 2005.

Consequently, the success of monetary policy in Uzbekistan requires the full implementation of inflation targeting, not only in terms of price stabilization, but also in terms of improving the overall macroeconomic stability of the country.

Strengthening private property rights

In recent years, the Uzbek government has begun to pay particular attention to strengthening private property rights and developing private entrepreneurship. The number of operating small enterprises and micro firms has grown from 229 thousand in 2017 to 334 thousand in 2019. The share of small business in GDP has remained at 60% over the past three years. The share in investment over the same years increased from 34.8% to 47%, in construction - from 66.2% to 75.4%, in exports - from 22% to 27.2%.

The development of the private sector is also confirmed by the creation of 23 free economic zones (FEZ), which provide a wide range of benefits for private investors, including exemption from the payment of a number of taxes (on property, land tax, etc.), exemption from customs payments, deferred payment of VAT and others.

The most important step in the ongoing reforms is the introduction of private ownership of land. Thus, the Presidential Decree of 10.01.2019 "On measures to radically improve urbanization processes" allowed the privatization of land plots, which, on the one hand, contributes to the comprehensive improvement of land legislation, and on the other hand, is an important factor in stimulating external and internal investments.

In conclusion, it should be noted that the large-scale reforms carried out by the government of Uzbekistan are constantly assessed and supported by the international community. A main example is the Bertelsmann Transformation Index, which reflects many aspects of the socio-economic transformations taking place in Uzbekistan.

Feruzbek Davletov, Leading reasearcher, CERR

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