Uzbekistan - Economy
Uzbekistan is the world's sixth-largest producer of cotton, dedicating 65 percent of its irrigation water and 13 percent of all electricity to the crop. Almost one-fifth of Uzbekistan's adult population picks cotton each year, and more than half are women. Cotton exports have long been a major source of revenue for Uzbekistan stretching back decades into the Soviet era, when central planners ordered wide-scale cotton cultivation, despite the country's hot, arid climate. The crop accounted for 90 percent of Uzbekistan's total exports in 1992 but just 3.4 percent in 2016. As a share of GDP, revenue from cotton has dropped from 10 percent in 1992 to just 1.8 percent in 2016.
Mandatory production quotas led to labor abuses, with many Uzbeks being forced to help do the back-breaking labor of picking the crops. Children were also forced to pick cotton [a common practice in the rural South of the United States until the later decades of the 20th Century]. President Shavkat Mirziyoev ordered the abolition of a decades-old state quota system for cotton crops. The decree, signed by Mirziyoev on March 6, cancelled quotas beginning in 2020 for the cultivation and sale of cotton. The order also removed obligations on farmers to participate in cotton production, which should give them more flexibility to plant other cash crops.
In 2017, President Mirziyoyev ended the monopoly of government-controlled enterprise Uzpaxtasanoat to buy and sell raw cotton. In January 2018, the GOU launched pilot projects for a new integrated value chain system in the industry to allow private investors to independently manage cotton cultivation, harvesting, processing, and exports.
The International Labor Organization reported in April 2019 a dramatic 48 percent reduction last year in the use of forced and child labor in Uzbekistan, which for decades has been listed among the world's worst offenders. The ILO said wages "increased by up to 85 percent compared to the previous harvest," and that "cotton pickers were paid on time and in full." Given its bulging working-age population, creating more and better jobs is the country’s overarching priority. Uzbekistan has already implemented a first wave of important economic reforms, including foreign exchange liberalization, tax reform, and a major upgrade in statistics. Faced with a vast structural reform agenda, the authorities want to prioritize reforms that address the economy’s most damaging distortions first. The main short-term macroeconomic stability challenge is to prevent a credit boom that could generate excessive external deficits and aggravate inflation pressures.
In 2018, GDP growth picked up moderately to 5 percent as adverse weather impacted agriculture and bottlenecks in energy and water slowed economic growth, despite strong investment growth. Consumer inflation had fallen to 14½ percent by end-2018, but rapid credit growth, price liberalization, public wage adjustments, and high inflation expectations will maintain price pressures in 2019. A shift towards more liberal exchange rate and trade regimes in 2017 along with expansionary credit policies in 2018, pulled in additional imports causing a decline in Uzbekistan’s current account balance from a small surplus in 2017 to a 7 percent of GDP deficit in 2018. Nonetheless, Uzbekistan has substantial external buffers with reserves at 13 months of imports and external debt a moderate 35 percent of GDP at end-2018.
After the currency exchange liberalization reform in 2017, there were relatively high expectations for a continuation of significant reforms in 2018. The government raised these expectations by announcing a number of new reforms including in tax, customs, banking, privatization, and public administration areas. However, none of these reforms were fully completed by the end of 2018. Some elements of a sweeping tax reform went into effect and other elements are expected to go into effect in 2019. The government sought to achieve greater progress in 2019 by focusing on the development of a business friendly environment and on improvement of the quality and efficiency of public administration.
In general, the economy of Uzbekistan in 2018 continued its sustainable growth and the government maintained macroeconomic and financial stability. The government initiated and continued a number of critical reforms, which, in general, resulted in some improvement of the business environment. The government’s economic policy became more transparent, and Uzbekistan was appreciative of assistance from the international expert community. However, the reform strategy remains not entirely formulated.
The government has yet to address a number of fundamental problems plaguing businesses and investors. The cumulative inflow of FDI is still one of the lowest in the former Soviet Union due to factors such as the domination of state-owned monopolies in various key sectors of the Uzbek economy, an underdeveloped and overregulated banking sector, incomplete tax reform, remaining trade barriers, and a lack of transparency. Meanwhile, Uzbekistan fell two places from 74th to 76th in the comparative rankings of 190 countries in the World Bank’s 2019 Ease of Doing Business Index (DB), even as it improved its score in absolute terms.
Uzbekistan has its own stock market, which has been traded through Tashkent Stock Exchange, the main securities trading platform and the only corporate securities exchange. The stock exchange mainly hosts equity and secondary market transactions with shares of state-owned enterprises. In most cases, government agencies determine who can buy and sell shares and at what prices, and it is often impossible to locate accurate financial reports for traded companies.
Uzbekistan’s economy has been resilient in a difficult external environment, characterized by weak economic activity in the euro area and Russia and low energy prices. Following solid growth performance—8.1 percent in 2014, real GDP increased by 7.5 percent in the first quarter of 2015. Strong public investment has shielded the economy, so far, from the slowdown experienced by other countries in the region. The external position continues to be strong, and inflation has softened to around 9 percent through April 2015, owing to lower-than-anticipated administered price increases. However, the difficult external environment, in particular, the drop in oil and gas prices and spillovers from economic slowdown in major trading partners are taking a toll on the external sector. Notably, gas and machinery exports were negatively affected. Remittances fell by 14 percent in 2014 and 45 percent for the first quarter in 2015, compared to the corresponding periods of the previous year. The authorities have continued their policy of gradual nominal depreciation of the sum, which has been slower than that of most major trading partners.
The economy is based primarily on agriculture and natural resource extraction. Uzbekistan is a major producer and exporter of cotton, but natural gas has replaced it as the dominant source of foreign currency earnings. It also is a major exporter of gold, uranium, and strategic minerals. (Uranium is Uzbekistan’s largest export to the U.S.) Manufacturing has become increasingly important, particularly in the automotive sector, which is aimed primarily at export to the Russian market. Since independence, the government has followed a policy of gradual transition to a free market economy but most large enterprises are still state owned or controlled.
Uzbekistan is a source country for men, women, and children subjected to forced labor and sex trafficking. Internal trafficking is prevalent in the country. Government-compelled forced labor of men, women, and children remains endemic during the annual cotton harvest. There were reports that teachers, students (including children), employees in private businesses, and others were forced by the government to work in construction, agriculture, and cleaning parks.
In September and October 2013, for the first time, the Government of Uzbekistan cooperated with the ILO to monitor the cotton harvest for compliance with the Worst Forms of Child Labour Convention (No. 182). The ILO monitoring team—accompanied by government officials—verified 53 cases in violation of this Convention. The ILO concluded that it “appears to the Mission that forced child labour has not been used on a systematic basis in Uzbekistan to harvest cotton in 2013.
There were reports that some children aged 15 to 17 faced expulsion from school for refusing to pick cotton. There were additional reports that some government employees may have faced termination, and business owners faced financial pressure to require employees to pick cotton or pay for others to replace them in the fields.
It is difficult to accurately estimate economic growth in Uzbekistan due to unreliable government statistics. Economic growth has been strong in the past few years, but wealth is strictly held by the elite. According to the CIA World Factbook, approximately a quarter of Uzbeks live below the poverty line. The World Bank estimated the number living in poverty at about one-sixth.
The government implements a strict import substitution policy to control foreign trade and prevent capital outflow. Substantial structural reform is needed, particularly in the area of improving the investment climate for foreign investors and liberalizing the agricultural sector. Although the government has committed itself in theory to the provisions of the International Monetary Fund's (IMF) Article VIII regarding currency convertibility for current account operations, in practice firms can wait months or even years for currency conversion. Convertibility restrictions, difficulty withdrawing local currency from bank accounts, and other government measures to control economic activity, (e.g., import and export restrictions, and intermittent border closings) have constrained economic growth and led international lending organizations to suspend or scale back credits.
The World Bank estimated 2012 GDP growth at 8 %, but forecast a decline to 7% in coming years. The International Monetary Fund estimated 2011 GDP growth at 7.1%. Unemployment and underemployment are very high, but reliable figures are difficult to obtain, as no recent credible surveying has been done. Unofficially, unemployment is estimated around 8% and underemployment around 25%. Underemployment in the agricultural sector is particularly high--which is important given the fact that 62% of the population is rural-based. Many observers believe that employment growth and real wage growth have been stagnant, given virtually no growth in output.
Literacy in Uzbekistan is almost universal, and workers are generally well-educated and well-trained. Worsening corruption in the country's education system in the past few years eroded Uzbekistan's advantage in terms of its human capital, as grades and degrees are routinely purchased. Additionally, elementary and secondary students in the remote provinces have poor access to basic education. Most local technical and managerial training does not meet international business standards, but foreign companies engaged in production report that locally hired workers learn quickly and work effectively. Uzbekistan subsidizes studies for students at Westminster University--one of a few Western-style educational institutions in Uzbekistan.
The government has implemented salary caps in an attempt to prevent firms from circumventing restrictions on the withdrawal of cash from banks. Some firms had tried in the past to evade these limits on withdrawals by inflating salaries of employees, allowing firms to withdraw more money. These salary caps prevent many foreign firms from paying their workers as much as they would like. Labor market regulations in Uzbekistan are similar to those once used in the Soviet Union, with all rights guaranteed but some rights unobserved. Unemployment and underemployment are persistent problems, and a significant number of people continue to look for jobs in Russia, Kazakhstan, the Middle East, and Southeast Asia. Business analysts estimate that a high number of Uzbek citizens are working abroad. Estimates range from lows of 3 million to highs of 5 million Uzbek citizens of working age living outside Uzbekistan. Uzbekistan signed a labor agreement with Russia in 2007 to facilitate the temporary migration of Uzbek workers and the taxation of their income.
Domestic forced labor remains prevalent during the annual cotton harvest, when many school-age children, college students, and adults are mobilized to pick cotton. There have been some recent improvements in the use of child labor, as the government has restricted the use of young children in the fields. The government has made significant progress in recent years addressing trafficking in persons, including those trafficked for sexual exploitation and labor migrants.
Inflation was estimated at 13.1% in 2011. In order to combat inflation, the government has exercised strict currency controls, causing periodic shortages of cash. Reacting to the weakening of the dollar to the Euro, the government in recent years switched to the Euro for its accounting and financial management, with the hospitality sector following suit.
Gross official reserves in 2010 were estimated at $13.5 billion. In 2007, the World Bank and the UN Development Program (UNDP) provided technical assistance to reform the Central Bank and Ministry of Finance into institutions that conduct market-oriented fiscal and monetary policy. But official economic data on Uzbekistan is still often unreliable and not always available. Bank reform is very slow and inhibits the ability of citizens or private companies to obtain credit and other banking services.
Agriculture and the agro-industrial sector contribute about 17% to Uzbekistan's GDP. Cotton was Uzbekistan's dominant crop, accounting for roughly 11% of the country's GDP in 2009. Uzbekistan also produces significant amounts of silk, wheat, fruit, and vegetables. Nearly all agriculture involves heavy irrigation. In 2008, the President signed a decree on enlargement of private farms, which has led to the redistribution of small farmers’ land in favor of large farms. Farmers and agricultural workers earn low wages, which the state seldom pays on a regular basis. In general, the government controls the agriculture sector, dictates what farms grow, and sets prices for commodities like cotton and wheat. Most farms grow wheat and cotton to meet the state order, and farmers can face losing their leased land if they do not meet state quotas.
Natural resources, minerals, and mining are integral to Uzbekistan's economy. Natural gas is Uzbekistan's most important foreign exchange earner, estimated at around 24% (2010). Gold is another important source of foreign earnings (about 7%-10% of total exports). Uzbekistan is the world's seventh-largest producer of gold, mining about 80 tons per year, and holds the fourth-largest reserves in the world. It produces oil for domestic consumption and has significant reserves of copper, lead, zinc, tungsten, and uranium.
Uzbekistan's export/import policy is based on import substitution. The highly regulated trade regime has led to both import and export declines since 1996, although imports have declined more than exports, as the government squeezed imports to maintain hard currency reserves. Draconian tariffs and sporadic border closures and crossing "fees" decrease legal imports of both consumer products and capital equipment. Uzbekistan's traditional trade partners are from the Commonwealth of Independent States (CIS), notably Russia, Ukraine, and Kazakhstan. Non-CIS partners have been increasing in importance in recent years, with the European Union, China, South Korea, Germany, Japan, and Turkey being the most active.
Uzbekistan is a member of the IMF, the World Bank, the Asian Development Bank, the Islamic Development Bank, and the European Bank for Reconstruction and Development. It has observer status at the World Trade Organization (WTO) and has publicly stated its intention to accede to the WTO. It is a member of the World Intellectual Property Organization and is a signatory to the Convention on Settlement of Investment Disputes between States and Nationals of Other States, the Paris Convention on Industrial Property, the Madrid Agreement on Trademarks Protection, and the Patent Cooperation Treaty. In 2008, Uzbekistan was again placed on the special "301" Watch List for lack of intellectual copyright protection.
Since Uzbekistan's independence, U.S. firms have invested roughly U.S. $500 million in Uzbekistan. In 2007 GM-DAT, a Korean subsidiary of GM, entered Uzbekistan when it signed a joint venture agreement with UzDaewoo to assemble Korean-manufactured cars for export and domestic sale, including Chevrolets. This plant in Asaka now produces many lines of cars under the Chevrolet nameplate for export to Russia as well as the domestic market. In 2011, General Motors opened a plant just outside Tashkent to begin producing powertrain engines. Boeing also has a longstanding relationship with the national airline of Uzbekistan, Uzbekistan Airways. Coca Cola, Baker Hughes, Nukem, Hewlett Packard, and other U.S. companies conduct small-scale operations in Uzbekistan as well. Nonetheless, some foreign investors are departing Uzbekistan because of declining investor confidence, harassment, and currency convertibility problems.
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