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World > Middle East > Uzbekistan > Economy (Notes)

Uzbekistan - Economy (Notes)


ECONOMY
The economy is based primarily on agriculture and agricultural processing. Uzbekistan is a major producer and exporter of cotton. It also is a major producer of gold, with the largest open-pit gold mine in the world, and has substantial deposits of copper, uranium, strategic minerals, gas, and oil. Since independence, the government has stated that it is committed to a gradual transition to a free market economy but has been extremely cautious in moving to a market-based economy.

Although it is difficult to make an accurate estimate of economic growth in Uzbekistan--because of the unreliable nature of government statistics, which often serve political rather than economic ends--economic growth is far below potential due to:
The country's poor investment climate; Failure to attract foreign investment; An extremely restrictive trade regime, implemented in order to meet a strategy of limiting imports of consumer goods; Failure to reform the agricultural sector of the economy, potentially the engine of economic growth for this largely rural economy; and The price system in Uzbekistan, which is not functioning properly due to government intervention in markets. The government runs a strict import subsidies regime 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 in freeing the agricultural sector from smothering state control. 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 up to three months for conversion. Convertibility restrictions and other government measures to control economic activity, (e.g., harassment of foreign-owned companies, import and export restrictions, and intermittent border closings) have constrained economic growth and led international lending organizations to suspend or scale back credits. The government has made progress in reducing the budget deficit, due in part to import substitution policies and high excise taxes. However, government statistics understate the budget deficit, while overstating economic growth.

GDP and Employment
The Uzbek Government claims that the GDP rose 7.2% in 2006; however, the U.S Government assesses GDP growth in 2006 as close to zero. 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 10% and underemployment around 20%. Underemployment in the agricultural sector is particularly high--which is important given the fact that 60% 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.

Labor
Literacy in Uzbekistan is almost universal, and workers are generally well-educated and well-trained. However, worsening corruption in the country's education system in the past few years has begun to erode Uzbekistan's advantage in terms of its human capital, as grades and degrees are routinely purchased. 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. Foreign firms generally find that younger workers, untainted by the Soviet system, work well at all levels. The government has significantly curbed a long-time program emphasizing foreign education, which in past years annually sent about 50 students to the United States, Europe, and Japan for university degrees, after which they have a commitment to work for the government for 5 years. Reportedly, about 60% of the students who studied abroad found employment with foreign companies upon their return, despite their 5-year commitment to work in the government. In addition, Uzbekistan subsidizes studies for students at Westminster University--the only Western-style institution in Uzbekistan. In 2003, Westminster admitted about 360 students, and the government funded about half of the students' education. Education at Westminster costs $4,800 per academic year.

With the closure or downsizing of many foreign firms, it is relatively easy to find qualified, well-trained employees, and salaries are very low by Western standards. 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 is a growing problem, and the number of people looking for jobs in Russia, Kazakhstan, and Southeast Asia is increasing each year. 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, most in neighboring countries or Russia. However, the government does not acknowledge these unofficial reports.

Prices and Monetary and Fiscal Policy
Inflation was approximately 25% in 2005. In order to combat inflation, the government has exercised strict currency controls, and severe shortages of cash exist in the country. Despite currency convertibility, a freely determined black market rate continues to exist for the soum. As of March 2007, the difference between the official and black market exchange rates was approximately 200 soum in exchange for U.S. dollars. Liberalization of its trade regime is a prerequisite for Uzbekistan to proceed to an IMF-financed program.

Outstanding external debt reached $4.7 billion in 2006. Tax collection rates remained high, due to the use of the banking system by the government as a collection agency. Technical assistance from the World Bank and from the UN Development Program (UNDP) is being provided to reform the Central Bank and Ministry of Finance into institutions that conduct market-oriented fiscal and monetary policy. Lack of reform in the banking system constrains banks' profits and limits their role as financial intermediaries, thus inhibiting the ability of citizens or private companies to obtain credit and other banking services.

Agriculture and Natural Resources
Agriculture and the agro-industrial sector contribute more than 40% to Uzbekistan's GDP. Cotton is Uzbekistan's dominant crop, accounting for roughly 20% of the country's exports in 2005. Uzbekistan also produces significant amounts of silk, fruit, and vegetables. Virtually all agriculture involves heavy irrigation. Farmers and agricultural workers have very low incomes because the government uses the difference between the world prices of cotton and wheat and what it pays the farmers to subsidize highly inefficient capital-intensive industrial concerns, such as factories producing automobiles, airplanes, and tractors.

Consequently, agricultural productivity is low, with many farmers focusing on producing fruits and vegetables--for which supply and demand determine the price--on small plots of land, as well as smuggling cotton and wheat across the border with Kazakhstan and Kyrgyzstan in order to obtain higher prices.

Minerals and mining also are important to Uzbekistan's economy. Gold is Uzbekistan's second most important foreign exchange earner, unofficially estimated at around 20%. Uzbekistan is the world's seventh-largest producer, mining about 80 tons per year, and holds the fourth-largest reserves in the world. Uzbekistan has an abundance of natural gas, used both for domestic consumption and export; oil almost sufficient for domestic needs; and significant reserves of copper, lead, zinc, tungsten, and uranium. Inefficiency in energy use is extremely high, given the failure to use realistic price signals to cause consumers to conserve energy.

Trade and Investment
Uzbekistan's export/import policy is based on import substitution. The highly over-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 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, 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 2006, 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. 2006 was one of the worst years for foreign investment, especially U.S. Due to declining investor confidence, currency convertibility problems, and changes to Uzbek legislation, numerous international investors have left the country or are considering leaving. The Government of Uzbekistan declared bankrupt the Newmont Mining joint venture, the largest U.S. investor. Caterpillar Tractors pulled out in late 2006. Chevron-Texaco set up operations in 1992 and is focusing on producing lubricants for the Uzbek market. Coca Cola, one of the largest U.S. franchises, weathered problems in previous years. No large, new investments have been made by U.S. firms in the last 5 years.


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