A Country Report and Profile - Republic of Uzbekistan

Country Report and Profile

Presented By:

Alfiya G. Mirzagalamova amirz@indiana.edu

Jason C. Holman jholman@indinanaedu

Dmitri Maslitchenko dmitri@mailroom.com

 

The concept of transition of the Republic of Uzbekistan to the market economy consists of five principles formulated by its President Islam Karimov:

1. Economy should have priority over politics. Economic reforms should not follow the lead of political processes.

2. The State is the main reformer. The representatives of legally elected authorities have to determine priorities and pursue balanced policy of no social shocks.

3. Along with economic reforms it is necessary to create a system of social protection of the Republic population especially of most vulnerable groups.

4. Superiority of Law and Constitution.

5. Stage by stage movement to the market economy. The transition to next stage only after the current stage targets have been met..

 

 

 

^[1]I. Political and Economic Background

Politics

To understand the politics of Uzbekistan it is important to delve into it=s most recent history. The leader from 1959-1983 was Sharaf Rashidov, who ruled in a quasi-feudal fashion, much like the newly elected leader. Rashidov kept the USSR content through a combination of patronage, corruption, and repressive behavior. Once Mikhail Gorbachev was elected, Rashidov was the prime target for his drive to eliminate corruption. Although there was an upsurge of national identity among the Uzbeks and a feeling of victimization by the thousands of corrupt officials who where soon imprisoned, incredibly through more repression the elections for new leaders would go unopposed. The Republic of Uzbekistan declared its independence from the former Soviet Union on August 31, 1991. Although it was not recognized by the United States until December 25, 1992. Uzbekistan is a member of the United Nations and the Commonwealth of Independent States (CIS). Although Glasnost led to many open media discussions of the environment and ethnic issues, the elections held in 1990 were one-sided. The main opposition party was not allowed to stand, therefore leaving many communist candidates to be elected. Islam Karimov was first elected President in 1990 by the Supreme Soviet and later was reelected by a popular vote in 1991.

In 1995 Karimov held a national referendum which would extend his term into the year 2000. He had 99% of the electorate=s support. Karimov proclaims he is a supporter of AEastern Democracy.@ He stresses the importance of stability of eastern democracy over it=s western counterpart. The stability that Karimov suggests many believe is just a ploy for Karimov to use his dictatorship power to cling to the old world status. Karimov is one of the strongest supporters of continued cooperation among the Soviet Republics. Karimov supported the new Union Treaty in spring of 1991 and did not oppose the August 1991 coup in Moscow. Once the coup collapsed Uzbekistan declared independence. Karimov proclaims Uzbekistan is a multiparty system, yet the Erk (Freedom) Democratic Party, the Birlik (Unity) People=s Movement (BPM) and the Islamic rebirth Party (IRP) have been banned.

^[2]Policy makers still remain suspicious of unregulated market mechanisms, although Karimov officially commits to a market-oriented reform. Prices were slowly liberalized and the new trade policies are less harmful toward exports. The import tariffs proposed in 1993 are preferential toward CIS communities and extra low tariffs toward Central Asian countries. It is going to be very difficult for him to explain why many of the neighboring Central Asian countries are becoming richer through liberalization and privatization while Uzbekistan continues to stay stable, but poorer then the other nations. Karimov stresses stability as a reason why Uzbekistan has not seen the high inflation rates characteristic to other CIS communities in transition.

²Karimov gives little mention to human rights. He believes that economic stability is necessary for socio-political stability. In his new book, Along the Road of Deepening Economic Reform, Karimov states, Apreparation, discussion and adoption of fundamental laws regulating and providing guarantees of human rights and freedoms, rights and freedoms of public organizations and freedom of conscience and religion have been something principally new in practical law making in this country.@ He also briefly mentions the women=s rights and acknowledges their special role as Awomen-mothers@ and presses for better child care provisions.

Economy

³At independence, the economy was dominated by cotton production. Uzbekistan hoped to benefit from this by selling the cotton on the international market, but the early 1990s were a time of depressed prices on world cotton markets. This created a dispute with Russia, which responded by seeking to purchase cotton on the world market. Uzbekistan lost a considerable amount of revenue due to this conflict with Russia. Eventually the two countries reached an agreement to barter Uzbek cotton for Russian petroleum products.

Other important agricultural products include grain, fruit, vegetables and natural silk from cocoons. The main problem of Uzbekistan is that about three-fifths of the country is desert or semi-arid desert: almost all cultivated land must be irrigated. This has resulted in the gradual drying up of the Aral Sea. By the 90's the available water supply had been exhausted to the point that there was no possibility of increasing the amount of land used for agricultural purposes. Grain production only covers a quarter of Uzbekistan=s total consumption. Therefore Uzbekistan relies heavily on imports from countries such as the United States to support their supply of grain. Uzbekistan complains that the USSR destroyed it=s grain-growing capacity in order to create the cotton monoculture. This has remained a very difficult obstacle for Uzbekistan and grain continues to be a major import.

⁴Uzbekistan=s other primary product exports include gas and minerals. Uzbekistan has few energy sources besides gas and untapped hydro power. Although a major oil field was recently discovered in the Fergana Valley in 1992. Uzbekistan is the largest importer of oil by all the CARs. The most accessible mineral export is gold, of which Uzbekistan was the USSR=s second-largest producer. Joint ventures are bringing foreign technology to exploit Uzbekistan gold mines. Other mineral deposits include silver, lead, copper, zinc, and tungsten. Uzbekistan=s minerals have a low ore content, which suggests that it would not be as valuable on the world market.

⁵After World War II, Soviet resources were concentrated on rebuilding industrial enterprises in European areas. With less investment the growth rate of Uzbekistans industry declined. There was a long trend of falling industrial growth rates. Manufacturing industry in Uzbekistan was originally developed in close relation to its primary product base which of course was cotton and fruits and vegetables. Machinery for the cotton sector was a major output and food processing industries were also important. These are the only two substantial forms of manufacturing in Uzbekistan. This is somewhat disturbing considering the large amounts of resources that are available.

⁶The general problem was of lack technical ability and low standards of quality. The main approach to correct this problem was to encourage joint ventures. Many joint venture agreements were signed in 1992 and 1993, but there was little actual foreign investment. There was also a problem with Uzbekistan=s communication capabilities. In 1993 a joint venture was formed with the Turkish company, Teletas, to install seventy thousand lines.

Uzbekistan also would like to become the hub of Central Asia. When the Aeroflot fleet was shared out after the dismemberment of the USSR, Uzbekistan utilized its share of the planes productively to earn vast amounts of hard currency. It created an international network in the spring of 1993 with the goal of making Tashkent a hub for budget and travel between Europe and Asia. Flights would be established to Karachi, Delhi, Kuala, Lumpur, Bangkok, Beijing, Frankfort, and London. Israel provided training assistance to Uzbekistan Airways, and the airline raised its credibility by purchasing several Airbuses.

Economic reform in Uzbekistan has been very slow. Until 1994 Mr. Karimov opposed reform. Since then he has had to start some reforms to obtain IMF backing for his stabilization program and to get World Bank financing. Uzbekistan has been officially committed to economic reform since independence. The government has favored gradual change, and the pace has become increasingly slower as the years have went on. Labor market and enterprise reform have been limited, and indeed the ultimate reason behind Uzbekistans slow price liberalization has been to maintain the value of real wages and subsidies. The government has promised to keep wage and benefit increases ahead of future price rises.

⁷Privatization in Uzbekistan has progressed extremely slow. Karimov dominates economic policy; he has issued a raft of decrees that are on occasion contradictory, but aim to convince the multilateral institutions that reform is taking place. The first form of privatization took place in 1994. The process lacked transparency, was corrupt and resulted in Mr Karimov=s allies owning the viable firms. Other obstacles are that land liberalization ahead of establishing a guaranteed water supply would be meaningless for the irrigation-based agricultural sector. In industry, not only has privatization of state enterprises been slow but there was also very little privatization created from many small-scale entrepreneurs.

⁸II. Budgetary and Monetary Conditions

Uzbekistan=s statistics are notoriously inaccurate and in small quantities. The government views economic data as a state secret, and circulation of the more informative data is restricted. All figures from Uzbekistan must be treated with a degree of caution as the government is trying show that the country is handling the post Soviet government better then its neighbors. The country is attempting to switch from the old communist national accounting method using National material product (NMP), which excludes most services and depreciation, to the standard System of National Accounts (SNA).

What is clear is that Uzbekistan=s economy has been in decline since the collapse of the Soviet Union. After a 3.7 % fall in 1991 National material product declined by 14.4% in 1992. GDP in those two years has dropped by 0.5% and 11.1%. In 1993 the fall in GDP was 2.4 % according to IMF estimates, with national material product down by 3.5% mainly due to continued government subsidies. The IMP initially estimated that, due to tighter policies, GDP contracted by 10.1% in 1994. However, the Uzbek authorities claim that despite a severe credit crunch and a confiscatory change of currency, GDP shrank by only 2.6%, the figure that the IMF now accepts.

 

⁹Net Material Product

1989 1990 1991 1992 1993

Total(Rb m)

At current prices 21,588 23,402 49,636 386,071 3,686,800

Real Change ( %) 3.1 11.3 -3.7 -14.4 -3.5

 

Per Head (Rb)

At current prices 1,091 1,157 2,407 18,287 170,622

Real change (%) 0.8 8.9 -5.5 -16.4 -5.7

*Derived from the World Bank mid-year population estimates.

Budget Deficit

Uzbekistan=s government budget has suffered from large deficits since the collapse of the Soviet Union. The IMF has put the 1993 fiscal deficit at 12% of GDP, while the governments figure released through the World Bank was 2.5%. The main reason for the deficits is lost revenue subsidies from the Soviet Union. Uzbekistan had one of the largest subsidy share of revenue compared to many of the other (CIS) countries. During the 1980s the proportion of revenue actually increased form 20.8% in 1987 to 43.2% in 1990. Soviet grants which has once accounted for 7% of GDP in 1987 rose to 19.5% of GDP by 1991.

¹⁰III. Expenditure Policies and Assignments

Although Uzbekistan is now engaged in the necessary fiscal and revenue-raising reforms demanded by multilateral institutions, very little revenue is received from taxes. Corruption, weak institutions, economic recession and poor tax compliance have hindered revenue collection severely. The government claims that actual revenue to GDP has risen in recent years from 26.4% to 41%in 1993. Given continued state control of the economy, tax compliance among state enterprises would tend to be greater than in countries with a growing private sector, although figures may be overstated. On the expenditure side, increased outlays on defense and security, welfare payments, and subsidies to industry have been the most important developments since 1991. Increased expenditure was financed through huge expansion of domestic credit, montised by courtesy of the Russian Central Bank until 1993 when this tactical trend was eliminated once it was found to be unsustainable. The government then went to the IMF. The figures on the preceding page show this information

¹¹State Budget (Rb bn)

1988 1989 1990 1991 1992 1993

Revenue 9.7 11.8 15.1 30.2 139.8 1,814.5

of which:

Turnover Tax 3.3 3.8 4.0 6.1 3.3 n/a

VAT 0.0 0.0 0.0 0.0 38.4 477.1

Excises 0.0 0.0 0.0 0.0 9.5 44.9

Company income Tax 1.7 1.3 1.5 3.8 23.9 382.9

Personal Income tax 1.1 1.5 1.3 1.8 11.4 145.3

Grants from Union Budget 2.3 3.6 6.4 11.4 0.0 0.0

Expenditure 10.1 11.0 14.9 32.4 193.9 1,923.4

of which:

Economy 4.6 5.0 8.1 5.9 20.9 392.7

Defense and Public Order n/a n/a n/a 0.2 11.7 n/a

Social and Cultural 5.2 5.5 6.2 9.2 70.8 n/a

Balance -0.4 -0.8 -0.2 -2.4 -54.1 -108.9

% of GDP -1.4 -1.0 -1.2 -3.6 -12.1 -2.5

* 1993 data are from the World Bank. They exclude non-budgetary accounts.

Sources: IMF, Economic Review: Uzbekistan; World Bank, Statistical Handbook: States of the Former USSR, 1994

IV. Tax Structure and Administration¹²

Corporate Taxation

Profit Tax

Uzbek entities ‑ taxed on their profits from all sources worldwide.

Foreign Entities ‑ taxed on profits from the entrepreneurial activities of their establishments in Uzbekistan.

Foreign entities receiving income from Uzbek sources other than through Permanent Establishments are subject to withholding tax on the gross amounts of the income without reduction for any expenses.

The general profit tax rate is 37%. This rate is reduced to 25% for entities with foreign investment of 30% or greater.

A tax return and activity report should be filed with the tax authorities by February 15. An audit opinion or an agreement for audit services should also be submitted by the appropriate deadline.

Social charges

Employers must make social insurance and employment fund contributions, as well as contributions to a trade union if applicable. The total amount payable, which is deductible for profits tax purposes, is 38% to 40% of each employee's gross salary, made up as follows:

Fund Rate

Social insurance 36%

employment 2%

Trade union (if applicable) 2%

Individual Taxation

A resident is defined as an individual who is physically present in Uzbekistan for 183 days or more in a calendar year. Residents are taxed on their worldwide income, while non‑residents are taxed only on their Uzbek sources income.

Taxable income for 1995 and 1996 is taxed at the following rates:

Taxable income (less annual non‑taxable minimum)

Up to 2 annual minimum wage 15%