10.04.2020 | As Uzbekistan comes in from the cold, foreign investors eye opportunity

Once closed and restrictive, the Uzbek economy is opening up though political change seems a distant prospect.

Click here to read the Alaco article in Asia Sentinel.

Uzbekistan has come a long way since the demise of its former authoritarian leader Islam Karimov just over three and a half years ago. For much of his repressive, isolationist rule most foreign investors gave the country a wide berth. But in a surprising turnaround, a wave of reforms, driven by Karimov’s successor Shavkat Mirziyoyev, has seen foreign direct investment surge as the formerly closed economy opens up – with planned privatisations likely to lead to more investor engagement.

Yet with little sign of comparable political progress – real opposition is still not tolerated – there are concerns that the country might evolve along the same lines as neighbouring Central Asian republic Kazakhstan, where a ruling elite ushered in a relatively open, market-orientated economy, but one with clear limitations underlined by its continuing over-reliance on energy resources.

Having served as prime minister under Karimov for 13 years, Mirziyoyev’s reformist potential was not obvious at the outset. Yet he would have had an acute understanding of the need for change in a country that had laboured under years of stagnation and urgently needed to create new jobs for its increasingly youthful workforce – particularly since many Uzbeks who sought work in Russia have returned or sent back fewer remittances in recent years. For Mirziyoyev, the watchword has been stability, through a thawing of the repressive political climate and economic regeneration.

After a year in office, in a major move to consolidate power and expedite reforms, Mirziyoyev sacked the feared head of the National Security Service (NSS), Rustam Inoyatov, one of the most influential figures in the country. He had been a central figure in a brutal, long campaign against political opponents, human rights activists and Islamists.  The NSS was renamed and its powers curtailed, though according to Human Rights Watch the security services still wield enormous power. Other efforts to rein back state coercion and intimidation included the closure of a prison notorious for its harsh conditions, the release of a number of political prisoners, the toleration of small protests, plans to liberalise restrictions over internal migration, and moves to end forced labour in agriculture. While tough measures to stem coronavirus worry some activists, others told Al Jazeera the former are indispensable. 

At the same time, there has been a determined attempt to remove a range of obstacles to economic progress, such as the lifting of capital and currency controls, import tariff exemptions, the opening of border crossings, the abolition of exit visas for Uzbek citizens and the easing of entry barriers for foreigners. To help effect the liberalisation programme, Mirziyoyev has drawn on the expertise of capable technocrats and international development banks, with Uzbekistan at a distinct advantage over some of its neighbours in already possessing a diversified economy.

There have been notable achievements: in the last year or so the country has witnessed a steep rise in new businesses registered, exports in 2019 jumped 28% to $17.9 billion year-on-year while 2,700 new enterprises were involved in export activities, with sales of 206 new types of products. Agriculture, which employs about a third of the workforce, has benefited from both the US decision to lift its ban on Uzbek cotton and the promotion of textile production, aimed at deriving greater value from one of the country’s most important commodities. Moreover, a recent decision to cancel cotton quotas will assist efforts to terminate forced labour and enable farmers to cultivate more lucrative crops.

For foreign investors looking to establish themselves in the country there have been other positive developments. Uzbekistan now boasts 20 free economic zones entitling investors to tax and customs exemptions, with recent legislation protecting their rights in these jurisdictions. The World Bank concluded last year that Uzbekistan was one of the top twenty most improved economies for ease of doing business; progress underlined by FDI last year more than tripling to $4.2 billion, about 37 per cent of the country’s GDP.

On the horizon is possible membership of the WTO and the Russia-led Eurasian Economic Union (EEU). Joining the latter has obvious advantages for Uzbekistan because the majority of its trading partners are members and investors would value the connections with regional markets. But membership of the EEU is risky as the US is unhappy about the prospect, and may try to hold up the country’s WTO accession. There are other tricky decisions on the agenda. Many of the economic changes undertaken so far have been relatively straightforward with the next phase, including capital market reforms and privatisations, expected to be more challenging. There are ambitious plans to fully privatise over a thousand companies and sell significant stakes in other state assets.

While the process of reforming the economy has been sustained and promising, it has, however, not been without shortcomings. In a commentary last December, Kate Mallinson, a respected Central Asia-watcher at Chatham House, said opposition within the administration and competing government interests have led to backtracking on some reforms – such as free and unrestricted currency convertibility – and creeping protectionism in certain sectors. Some reforms, she added, have simply got lost in the long chain from presidential decree to implementation.

And though Mirziyoyev has spoken out and acted against corruption, there has been unease about the appointment of family members to influential roles within his administration and the rehabilitation of  Karimov-era officials. Indeed, Uzbekistan still languishes way down Transparency International’s corruption perceptions league table, level with Tajikistan and only just above Zimbabwe. And this year’s Heritage Foundation economic freedom index, while acknowledging that improvements in tax, trade, and investment policies have had a positive impact on the business environment, concludes that the economy remains mostly unfree.

Political freedoms are barely in evidence. According to Freedom House, the country remains an authoritarian regime, the legislature and judiciary effectively serving as instruments of the executive, with little movement towards democratisation. The December parliamentary ballot, said the NGO, offered voters no meaningful choice as all the participating parties supported the government.  It noted that domestic supporters or family members of exiled opposition figures have been persecuted and barred from participating in elections.

Uzbekistan is at a crossroads. Mirziyoyev clearly sees stability as sufficing for now, buttressed by an improving economy and a relaxation of Karimov’s repressive policies. Yet without moves towards genuine pluralism and accountability, the efficacy and impact of economic reforms could be limited.

Writing in BNE Intellinews in October, Eric Hontz, of the Center for International Private Enterprise in Tashkent, said the government did well to consult independent representatives of the business community in the reform process.

But there were now signs that it might want to “control this dialogue more directly” through the creation of a state chamber of commerce, similar to the Atameken in Kazakhstan. In effect, he said, this would serve as an echo chamber that only tells the government how well it is doing, “One only needs to look at the Kazakh economy to see the results. Decades of trying to diversify its economy away from natural resources has been largely fruitless.”

The upcoming privatisations will provide an important test of Mirziyoyev’s economic competence. Much is at stake.  Assets earmarked for partial sell-offs include prized entities, such as the state oil and gas company Uzbekneftegaz and Uzbekistan Airways. The government, though, will have to tread carefully to avoid the mistakes made by Eurasian neighbours in the mass auctions of the 90s. In particular, it must guard against well-connected local investors acquiring or heavily influencing key assets. With oligarchs holding significant sway over so much of the CIS region, the consequences of such missteps are plain to see.