Reforming Uzbekistan: challenges and opportunities

By EBRD  Press Office
@ebrd

Speech by EBRD First Vice President Jürgen Rigterink to German-Uzbek Business Forum

Delivered by: 

EBRD First Vice President Jürgen Rigterink

Venue: 

ESMT, Berlin, Germany

Event: 

German-Uzbek Business Forum

(Translation of speech delivered in German)

On behalf of the European Bank for Reconstruction and Development, I am delighted to be able to open the German-Uzbek Business Forum, being held here today in Berlin. Our meeting is taking place in the run-up to President Mirziyoyev’s forthcoming visit to Chancellor Merkel in a few days, which only emphasises further the importance of this event.

Uzbekistan may be far away geographically – the distance between Berlin and Tashkent is more than 5,000 kilometres. But this region, to which we now refer collectively as Central Asia, has always exerted a deep fascination. Places like Samarkand and Bukhara have a magical ring to them, conjuring up One Thousand and One Nights, the Orient, wealth and mystery.

As the great Alexander von Humboldt once said, and there could be nowhere more appropriate to quote him than in his native city of Berlin: “The most dangerous worldview is the worldview of those who have not viewed the world”.

So, let us now take a brief look together at Uzbekistan and we might even manage to solve one or two mysteries during our meeting. In fact, there has never been a better time to do this than now.

The reason for this is that, in recent years, Uzbekistan has taken decisive, bold steps towards openness and reform. Since President Mirziyoyev took office in September 2016, he has implemented a far‑reaching change process which has taken even long-term observers by surprise in light of its breadth and depth.

This implies that thorough, targeted preparation was involved, as well as an appropriate political procedure, as soon as the time had come for it. The general positive reception to the reform process also indicates society’s wide acceptance of the need for fundamental change.

The experiences of many countries during the transition process have shown that the switch from a state-controlled economy to a market economy entails painful changes and, at the very least, temporary losses. However, when President Mirziyoyev took office, the point had been reached where it was acknowledged that the opportunities offered by the old system were depleted.

No system based on coercion can achieve what free human productivity can. However, having the courage to set the system free is another matter. Having the ability to control this process is worthy of admiration.

All credit to the Uzbek leadership for having taken the first important, right steps to unleashing this potential. The strategic action plan for 2017­–2021 contains key reforms in the areas of politics, administration, case law, the economy and external relations. Reforms are always a process, but the wide-ranging approach adopted is encouraging. We also explicitly welcome, in this regard, progress made in the areas of human rights and freedom of the media.

These efforts have not gone either unnoticed or unrewarded. Uzbekistan, which has the largest population in Central Asia with 32 million inhabitants, and had still barely been on the radar for the outside world in the years before 2016, has now opened its borders to its neighbouring states, resulting in the rapid growth of both trade and movement of persons. In March this year, Tashkent will host a regional summit for the first time, highlighting the country’s new international prestige.

Relations with both Russia and the United States have been the best for a long time, while China remains a key partner, especially in terms of economic cooperation. There is another important consideration. In recognition of the changes made in Uzbekistan, negotiations were launched with the EU on an agreement offering a deeper partnership and cooperation.

Numerous steps have been taken, particularly around the economy. Liberalising the exchange rate of the country’s currency, the som, came as a real bolt from the blue in 2016. This measure now enables companies to receive via their banks payment for international transactions in Uzbek som without any restrictions. The obligatory tax paid to the state on foreign currency revenues from exports was abolished. Previously, 25 per cent of foreign currency had to be handed over to the state. Customs duties and taxes were adjusted for key trade partners as further liberalisation measures boosted trade.

This liberalisation was accompanied by other measures which significantly improved the investment climate. The institutional position of the Central Bank was strengthened and its mission was redefined. In future, it will pursue inflation control as its guiding principle, based on an international model. An extensive restructuring of the tax system, aimed at easing both the tax burden and administrative workload, came into force in early 2019.

Two particularly tough issues have also been tackled: energy reform and – the most difficult, but also most urgent area – the restructuring of state companies. Both areas have a direct impact on the population. Any sensible reform of the energy sector must guarantee supply and increase efficiency, but also place energy suppliers on a solid commercial foundation. This also involves tariff reform. It is an awkward matter in social and political terms; but not only is it inevitable, it is also possible, as has been proven no less than by Ukraine.

Restructuring “companies in social ownership”, which describes businesses held by the ruling class, whether it be a party or government department or a particular service, also deeply encroaches on the lives of other sections of the population if jobs and income are dependent on them. The first key steps towards reforming these areas were two decrees intended to push back the influence of the state and increase the transparency of the decision-making process in these companies.

We must be honest in our assessment and realistic in terms of our expectations. The state companies are a long way from being competitive and able to compete on the market. But this marks an important start. After all, as Louis Brandeis, the legendary justice of the US Supreme Court, wrote in 1914: “Sunlight is the best disinfectant” – transparency, reliability and rule of law are firm principles, without which a successful economy cannot be developed on a sustainable basis.

Uzbekistan’s efforts have been recognised. Only a few days ago, the ratings agency Fitch raised the country’s Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs) to BB – with a stable outlook. This assessment reflects the robust budgetary balance, the low level of state debt and the high growth rate forecast in relation to the rest of the region of 5.0 per cent in 2018 and 4.5 per cent in 2019. Conversely, on the debit side, there is high inflation, strong dependence on raw materials and structural weaknesses with a comparatively low GDP per capita.

This is why Uzbekistan was recently pleased that it had leapt from 87th to 76th place out of 190 countries which were assessed in the latest “Doing Business” report from the World Bank. But in the same evaluation, Kazakhstan – traditionally Uzbekistan’s main rival as the leading power in the region – is in 28th place! Not to mention that Kyrgyzstan is also ahead of it in 70th place. This shows us what a long way there is still to go.

Uzbekistan’s efforts have been recognised. But have they attracted sufficient attention? We are confident at the EBRD that the process of reform and opening up the country will offer an historic opportunity. We all have a responsibility to ensure that we utilise this opportunity. Germany, as one of Uzbekistan’s foremost trade partners, is already leading the way on this. But we firmly believe that this is only the beginning. We can see great potential for industry, agriculture and tourism. Just remember Samarkand and Bukhara...

Ladies and gentlemen

You are familiar with the EBRD. Our Bank, in which Germany is a major shareholder, was founded in 1991 after the fall of the Berlin Wall to promote and support the transition process from planned to private economies. We currently operate in 38 states in Europe, Asia and Africa and support sustainable economic structures based on a healthy private sector. We are the largest institutional investor in Central Asia; so far we have made investments amounting to €14.5 billion of our own resources. It is a region with which – no doubt you have already noticed – I feel a close personal connection. This is because, from 2005 to 2008, I had the privilege of managing ABN AMRO’s business activities in Kazakhstan and of living there.

The EBRD operates alongside the German economy in its activities and also perhaps acts as a facilitator on occasions. As a result of the fundamental changes going on in Uzbekistan, we have taken the opportunity not only to reaffirm our commitment in this country, but also to substantially extend it. Up to late 2016, our activities were virtually frozen. Following our initial advances, we were able to launch our activities so successfully that in the last 18 months alone, we have signed deals for 16 projects worth more than €500 million in total.

We are proud and fortunate that we will have another opportunity today to sign another agreement. Together with our partners from the Asian Development Bank and the Uzbekistan Fund for Reconstruction and Development, we will finance the construction and operation of a gas power plant in Talimarjan with a capacity of 900 MW. The energy sector is one of the priority areas in our work in Uzbekistan, whereby we link investments with specific support for reforms.

The changes made in the country have also enabled us to devise a new strategy that supports the EBRD’s commitment in Uzbekistan. In cooperation with the authorities in Tashkent, we will focus on the following main objectives in the next five years:

1. Strengthening the role of the private sector by enhancing its competitiveness;

2. Promoting green energy solutions;

3. Supporting the country’s regional and international integration.

As I have already mentioned, we can see great potential for investors in Uzbekistan. This country is the most populous in Central Asia with 32 million inhabitants. It also has a rapidly growing young population. This creates demographic pressure but, if managed in the right way, it can provide dynamic impetus for the economy.

Uzbekistan is not only renowned for its massive cotton production and associated textile industry. The country is also an established subcontractor to the global economy in the car industry, for instance. Uzbekistan has considerable reserves of gas, oil and numerous minerals, such as gold, zinc, copper, uranium and others. As perhaps the most important of all raw materials, Uzbekistan controls parts of the Fergana Valley with its water reserves which are essential for the region.

The country also occupies a strategic position in numerous respects. Firstly, it is located at the intersection between Russia and China, a position which even intrigued Humboldt long ago. He did not give up with his quest for an expedition to this region until he was finally able to go on it in 1829 at the ripe old age of 60. Looking ahead to the future, we should also not underestimate the Uzbeks’ awakening sense of national identity as a Turkic people, which will establish a close, long-term relationship with Turkey.

If you have ever had the opportunity to stand on the huge Registan Square in Samarkand and look at the three adjacent madrassas, you will get some impression of the rich historical heritage of this people, which survived Genghis Khan and subsequently went on the offensive with Timur. As Tamerlane, he pursued a course of expansion similar to that of the Mongol Empire and established a reign which was as notorious for its acts of violence as it was famous for its cultural achievements. This gives a rough indication just for the future potential of tourism.

The fact that Uzbekistan is only tackling the restructuring of its economic system many years after its neighbouring states in Central Asia means that the country has a huge amount of catching up to do. Its competitors have a 20-year head start in terms of reforming state‑controlled companies and turning them into companies capable of competing on the market. This is theoretically the case. In practice, embarking on this process late also means there is a chance of avoiding mistakes and undesirable developments.

The EBRD is supporting Uzbekistan and the group of investors in converting the current momentum into sustainable progress. Having been actively involved in the transition process for almost 30 years, we have acquired experience, which may also be relevant to Uzbekistan. This includes the following points:

1. A healthy, dynamic and mobile private sector is the driving force of a successful economy.

2. Micro, small and medium-sized enterprises form the backbone of the economy. They need access to financing to be able to prosper and grow. Where banks are – still – not prepared or able to take an appropriate risk, institutions such as the EBRD can provide support. A healthy economy is not possible without a healthy financial sector.

3. How a company is run is a more important consideration than who owns it. But anyone who is isolated from the market loses touch. Ultimately, consumers end up footing the bill by having to pay a higher price for poorer-quality products.

4. In order to achieve sustainable success, an economy requires effective, supportive and reliable institutions and basic conditions. It is not about more or less state involvement, but about a better state.

5. The use of energy, from its generation to consumption, is a fundamental issue for the modern economy, extending from climate protection to matters of external dependence. Currently, we have reached a stage where “green solutions”, such as solar energy, are marketable and competitive. A country which enjoys a climate such as Uzbekistan’s offers huge untapped potential in this respect.

6. A healthy economy is also one which does not leave anyone behind as far as possible. On this point, employment for women, young people and disadvantaged groups, opening up the education system and providing access to financing are all issues which must not be ignored.

And finally, the market is not the solution to every challenge faced. The market requires constant support, adjustment and intervention. A mature market can achieve many tasks which may go unnoticed in the early days. Support is still needed on other issues. Shifting everything to the market does not work. Working against the market is even less effective.

Uzbekistan has today come on a visit to Berlin. Ladies and gentlemen, please allow me to make the following appeal. Take advantage of this offer. It is not for nothing that Germany is a top exporter, or better still, probably the second-top exporter at the moment. A new opportunity is being presented here in a growing region of strategic importance. The EBRD is here to provide support to you who, as German taxpayers, are owners of this institution.

I hope you have a successful meeting. Thank you for your attention.