Uzbekistan strategy overview

Full strategy  (1.1Mb) Approved 26  Jul 2005

Ўзбекистон бўйича Дастур  (0.8Mb)

Summary of public comments  (0.1Mb)

Letter to President Karimov of Uzbekistan  (0.1Mb)

The previous country strategy for Uzbekistan, adopted in March 2003, qualified Uzbekistan’s progress towards implementation of the principles of Article 1 of the Agreement Establishing the Bank as being slow and characterised by setbacks. Although some progress has been achieved on the economic side since then, there was no improvement in Uzbekistan’s political environment and prospects for quick political liberalisation remain remote. The May 2005 events in Uzbekistan, resulting in the indiscriminate use of force against civilians, as documented in various reports including the 12 July 2005 report of the UN High Commissioner for Human Rights, is a cause of serious concern for the Bank. The international community has strongly urged the Government of Uzbekistan to allow an independent international investigation of the violence in and around Andijan.

Areas of concern

According to the OSCE/ODIHR, which deployed a limited observation mission, the parliamentary elections of 26 December 2004 fell significantly short of international standards for democratic elections, despite minor improvements in the election law. One new pro-presidential party was registered but genuine opposition parties were denied registration, which precluded their participation in the parliamentary polls. Lack of significant differences in the electoral platforms of the five registered political parties did not provide the electorate with a genuine choice. Lack of progress on democratic reform was reflected in non-registration of the opposition parties, closure of the Soros Open Society Institute and an independent media organisation, and cases of pressure on NGOs.

The authorities adopted a National Action Plan to implement the recommendations of the UN Special Rapporteur on Torture and convened meetings with relevant Government ministries. However, according to independent monitors, real progress in the practices of law enforcement agencies is yet to be achieved. The authorities continued to cooperate with the international community on the issue of prison reform. 

The media remained subject to state controls even in the absence of official censorship. In the context of assessing the pre-electoral situation, the OSCE/ODIHR noted that media outlets and civil society groups came under increasing pressure. 

Economic developments

Economic developments since the adoption of the last country strategy have been supported by strong world prices for a number of commodity exports, the highly favourable external economic environment, and some productivity gains in the agricultural sector. Recent independent estimates suggest a significant acceleration in economic growth to about 7.4 per cent in 2004, coupled with a sizeable current account surplus, and reserve accumulation to the equivalent of about 6.5 months of imports. Nevertheless, there remain serious shortcomings in the transparency, quality, and consistency of macroeconomic data. Moreover, both national accounts and household surveys find no improvement in the standards of living of the population. Current growth rates are unlikely to be sustainable, given the poor investment environment, and pervasive restrictions on external trade, and on domestic currency in circulation.

The performance of the state-owned sector has been supported by preferential tax and trade regulation, notably through the so-called localisation programme, in marked contrast to the private sector, which continues to languish. A notable exception is the textile and garments sector which also benefits from tax preferences, and continues to attract foreign investors.  While there have been commitments and expressions of interest from Russian investors in Uzbekistan’s telecoms and hydrocarbons sectors, at present the country continues to rank near the bottom of the CIS countries in terms of FDI inflows relative to the size of the economy.

As regards the areas of concern in the economic sphere set out in the 2003 strategy and reviewed in the 2004 strategy update, Uzbekistan has made progress only in certain areas. The authorities adopted current account convertibility under the IMF’s Articles in October 2003. However, widespread restrictions on domestic currency in circulation were further tightened in October 2004, and undermine the benefits that could be derived from current account convertibility. The quasi-fiscal deficit has been addressed through successive increases in utility rates, and a metering programme. Progress on banking reform has been limited over the two years. Tax authorities continue to debit bank accounts without prior authorisation from the client, though the authorities intend to abolish this right. Restrictions on cash in circulation were ostensibly introduced for the purposes of tax enforcement in the informal sector, but have impeded key functions of the payments system and eroded confidence in the financial system. Corporate governance and transparency of asset quality in the financial system have not improved, and no progress was made on the privatisation of the large state-owned banks. Confidence in the banking sector was further damaged by the sudden withdrawal of Business Bank’s licence in March 2005, the largest private bank in the country, at a time when the Bank was considering investing in it. 

A further manifestation of the policy of curbing informal transactions has been the persistent restrictions on external, as well as domestic, trade.  Despite Uzbekistan’s continued engagement in various regional and multilateral fora, only limited progress has been made in bilateral trade relations, and several additional restrictions were imposed in 2004, in particular on the trade by individual entrepreneurs. The programme of utility tariff adjustments that was initiated in 2002 has continued, and was supported through an ambitious metering programme. However, in the context of re-emerging wage and pension arrears, and of an increase in consumer price inflation, affordability has deteriorated. In early November 2004 there were signs of increased social unrest in Ferghana Valley and other parts of the country related to the implementation of the legislation further restricting shuttle trade.

Regarding the benchmarks of the last country strategy, progress can be seen only on the issues of current account convertibility and adjustment of tariffs in public utilities, while the Government’s reaction to the Andijan events in May 2005 reflects the worsening of the situation in the area of human rights, rule of law and openness of the political system. Overall, the progress towards the benchmarks is inadequate. Therefore, in its current Strategy, the Bank will limit its activities to private sector operations and will not undertake any new public sector projects. Only reforms can unlock Uzbekistan’s significant economic potential and allow the Bank to operate on a full-fledged basis. 

Areas of focus

Considering the above, the Bank will focus on the following areas during this strategy period:

Supporting private sector development

The Bank will continue to support private sector investment and entrepreneurship provided that there is no direct or indirect link to the Government or Government officials. For the development of SMEs and micro-business, the Bank will channel its resources to the sector through its credit lines to local financial institutions. In addition, the Bank will continue operating its Trade Facilitation Programme. The programme will continue to be facilitated by the provision of the risk sharing guarantee under the Central Asia Risk Sharing Special Fund (CARSSF). The Bank, with donor support, will complement its SME financing with TurnAround Management (TAM) and Business Advisory Services (BAS) programmes.

Recognising that private banks will not be able to satisfy needs for microfinancing, the Bank will also investigate the possibility of establishing a microfinance bank, together with other IFIs. This is of particular significance in light of the recent closure of the country’s largest private bank. The Bank will also consider the possibility of expanding its leasing operation, as there is considerable demand for such financing.

The Bank will further develop its use of facilities available under the ETC initiative, increasing direct exposure to SMEs in the private sector in close cooperation with donors. Both the Direct Lending Facility and the Direct Investment Facility will continue to be utilised during the strategy period.  In addition, extending the Co-financing Facility to selected Uzbek banks will enable the Bank to increase direct exposure to SMEs.

An important means for developing the private sector will be the promotion of foreign investment. The Bank will remain ready to work with foreign investors for joint venture projects. However, the current investment climate is of limited interest to foreign investors and further improvement is necessary in order to attract foreign investment, as well as closer dialogue between the Government and the investor community, to accommodate private sector initiatives. Based on its experience so far, the Bank will put more emphasis on the monitoring of the existing portfolio, both private and public sector projects, including integrity issues.

Policy dialogue

During the strategy period, the Bank will seek to engage in policy dialogue with the authorities, working for improvement in the investment climate and supporting their reform efforts. The Bank will continue to monitor political and economic reforms in Uzbekistan. This monitoring will be based on the assessment of progress on the following benchmarks: 

In the political sphere:

• Ensure greater political openness of the system and freedom of the media. A multi-party democracy and a pluralistic society require greater pluralism of opinions.
• Open up the political processes to a variety of interests. Ensure free functioning of civil society organisations, including independent local NGOs in the areas of rule of law and protection of human rights.
• Improve the country’s human rights record, including measures directed at implementation of the recommendations made by the UN Special Rapporteur on the elimination of systematic torture.

In the economic sphere:

• Continued and full current account convertibility, as supported through the elimination of restrictions on the availability of domestic currency, of daily cash deposit requirements for retailers, and of regulatory distinctions between cash-and non-cash payments.
• Opening of the economy to effective competition. Among other elements this could include the elimination of discriminatory barriers against foreign trade, a liberalisation of state procurement prices in agriculture, an improvement in the conditions for the entry of domestic businesses and protection of property rights, and the acceleration of large-scale privatisation in a transparent manner.
• Implementation of a banking sector reform programme, moving towards fully market-based allocation of credit and providing the basis for privatisation of the main state banks.
• Reform in public utilities, including through the further adjustment of tariffs towards cost-recovery levels in all sectors.

The Bank will seek co-financing opportunities with other IFIs and bilateral institutions to mobilise resources into the country. The Bank will continue to ensure that all Bank operations in Uzbekistan are subject to the Bank’s Environmental Procedures and incorporate, where appropriate, Environmental Action Plans (EAPs) into the legal documentation, in order to address issues raised during due diligence.