Uzbekistan embarks on unexpected economic reforms

WHEN MINISTERS from faraway countries tour Western financial centres to tout their plans for economic reform, their presentations are often drearily predictable. There is typically lots of talk about “fiscal consolidation”, improvements to infrastructure and the soundness of the banking system. Not Djamshed Kuchkarov, finance minister of Uzbekistan: he is proudest of what his government is not doing. The most important economic reform since Shavkat Mirziyoyev succeeded Islam Karimov as president in 2016, he says, is a three-year moratorium on inspections of businesses by meddling government officials. Government could do the businessmen of Uzbekistan no greater favour, he implies, than getting out of their way and letting them get on with things, without fear of extortion.

In a region full of state-dominated, bureaucratic, corruption-riddled economies, it is a revolutionary thought. Mr Karimov was already running Uzbekistan when it became independent from the Soviet Union in 1991. He preserved all sorts of Soviet economic policies, including an inflated official exchange rate, currency controls and an enormous role for the state in industry and farming. To that he added such standard post-Soviet abuses as the abrupt expropriation of any private business that looked worth seizing.

Few had expected Mr Mirziyoyev to change much of this. He had, after all, served as Mr Karimov’s prime minister for 13 years. But since coming to power he has methodically set about renovating the economy, as well as initiating more limited political reforms. Uzbekistan, with 32m people, is the most populous country in Central Asia. Until recently, it was also one of the region’s most stagnant and repressive—in a competitive field. Overnight, it has become a showcase for reform.

Mr Mirziyoyev has sharply devalued the currency, the som, bringing the official and black-market rates into alignment. Exporters are no longer required to sell a quarter of their foreign-currency revenue to the government. This is important not just to cross-border businesses, Mr Kuchkarov argues, but also to ordinary Uzbeks, since the past shortage of hard currency had led to a shortage of cash, as businesses hoarded notes with which to buy dollars on the black market. That had left pensioners and salaried workers struggling to cash their monthly bank transfers.

Mr Kuchkarov also trumpets the government’s decision to allow petty traders to cross the country’s previously closed borders, which he says is spurring cottage industries in areas like the Fergana valley, where Uzbekistan, Kyrgyzstan and Tajikistan intertwine. The area’s arbitrary Soviet-era borders had separated many families, who are delighted by the new opening. Yuliy Yusupov, an economist based in Tashkent, Uzbekistan’s capital, likens the effect to the fall of the Berlin Wall. The authorities have approved the first flights in 25 years between Tashkent and Dushanbe in Tajikistan. “Connectivity” is a buzzword for the government, which recently hosted a conference on improving regional infrastructure and economic co-operation. The opening is already yielding benefits: trade with the rest of Central Asia has risen by half since 2017.

Uzbekistan has leapt up the World Bank’s ease of doing business rankings, from 166th in 2012 to 76th this year. The government has greatly simplified the tax code, to turn it into a mechanism for actually collecting tax, rather than bribes. It is also restructuring state-owned enterprises, with a view to their eventual privatisation. The management of airports and the state-owned airline is being separated, for example, as are the generation, transmission and distribution of electricity. In February Uzbekistan sold its first dollar-denominated bond, partly to set a benchmark for borrowing by local companies. It yields 5.4% over ten years, and was heavily oversubscribed.

In Tashkent there is a palpable sense of optimism. The investment climate has improved “big time”, says Igor Kolesnikov of British American Tobacco’s Uzbek unit: “In the past it was very difficult to understand the rules of the game, but these days the situation is much healthier.” The reforms are “super for business”, enthuses an entrepreneur who imports timber from Russia.

But as the bond prospectus noted, the immediate impact of all the upheaval is to hamper the economy. Inflation has jumped to 14%, thanks to the devaluation of the som. GDP growth has slowed from 7.9% in 2015 (suspiciously, it always grew by about 8% under Mr Karimov) to 5.1% last year. Unemployment has also risen.

Investors remain wary. They especially distrust the courts, which readily endorsed past expropriations. The government has stopped the most blatant forms of cronyism, such as handing out the right to import certain goods duty-free to those with friends in high places. But potential conflicts of interest endure: Tashkent’s mayor, for instance, owns a company that has invested in construction projects in the city.

The government has largely stopped forcing everyone able-bodied into the fields to help harvest cotton. But farmers are treated “like serfs”, says Mr Yusupov. Rules obliging them to grow cotton and sell it to the state at fixed prices endure.

The true accountability that business requires to flourish is still absent. Mr Mirziyoyev has created limited space for public debate, releasing some political prisoners and tolerating a degree of criticism. Forced evictions and demolitions of homes to make way for big construction projects currently under way in Tashkent, for instance, have led to widespread condemnation—something Mr Karimov would have stamped out. But Uzbekistan still lacks opposition parties and free media.

Just how far Mr Mirziyoyev’s reforms will go is a burning question. There is no indication that genuine democracy is on offer. Even economic reforms are bound to prompt resistance from entrenched elites. But the fact that any reforms are being undertaken at all is a big step forward.

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