Uzbekistan names 2022 a watershed year of reforms
Uzbekistan names 2022 a watershed year of reforms
  • By Obid Khakimov.
  • 승인 2022.01.10 14:30
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To strengthen macroeconomic stability, maintain higher economic growth

By Obid Khakimov.

The following article by the above writer is has been contributed by the Embassy of the Republic of Uzbekistan in Seoul to The Korea Post media for publication, which publishes 3 English and 2 Korean-language news publications since 1985.—Ed.

In 2021, which is a turning point in the course of the ongoing transformations in Uzbekistan, a set of measures was completed to implement the Action Strategy in five priority areas of development of the Republic of Uzbekistan in 2017-2021. Reforms for the future are also determined, taking into account what has been done and what is to be implemented.

Obid Khakimov. Director of the Center for Economic Research and Reform under the Administration of the President of the Republic of Uzbekistan

The main tasks of the first stage of the economic reforms of the Strategy are to strengthen macroeconomic stability and maintain high rates of economic growth. How successfully it was solved is evidenced by the following data.
During the pandemic, economic growth last year amounted to 1.6 percent, the volume of production in the agricultural sector increased by 3, the service sector - by 2.3, and industry - 0.7. Following the results of 9 months of 2021, GDP increased by 6.9 percent. Inflation continues to slow down: prices rose by 5.9 percent, down 6.3 percent from the same period last year. The positive dynamics of production is noted in all sectors of the economy. There was also a significant increase in wages. All indicators clearly indicate a confident positive dynamics of recovery processes.

Development of the economy of Uzbekistan in January-September 2021
Development of the economy of Uzbekistan in January-September 2021

Growth in household income, as well as in investment volumes, has become an important factor in supporting aggregate demand in the economy, which makes it less susceptible to external shocks. According to the World Bank, public and private consumption has grown over the past year and a half, which has become the main driver of economic growth in the country for the first time in more than ten years.

The second package of economic reforms in the Strategy is related to the task of increasing the competitiveness of the national economy by deepening structural reforms, modernizing and diversifying its leading sectors. In 2019, the "Road Map" of the main directions of structural reforms of the Republic of Uzbekistan for the period 2019-2021, developed with the participation of international financial institutions, was approved. Among the most important tasks are increasing the share of industry, the service sector, small business and private entrepreneurship in the structure of the national economy, as well as the advanced development of high-tech production of finished products with high added value.
In 2016-2019, the sectoral structure of the economy improved significantly towards the production of products with higher added value. The average annual growth rates of industry amounted to 8.9 percent (in Kyrgyzstan - 7.2, Kazakhstan - 3.7). The share of industry in Uzbekistan increased from 18.7 percent to 27.3.
The main increase in industrial production comes from the more high-tech manufacturing industry, whose share in GDP grew from 11.5 percent in 2016 to 19.6 percent this year. The service sector also developed dynamically, which during this period increased annually by an average of 12 percent per year. At the same time, the agricultural sector, which accounted for 30.8 percent in 2016, decreased in 2019 to 25.5.
Numerous administrative barriers for business have been eliminated, interference in entrepreneurial activity is prohibited, and the business climate for entrepreneurs has improved.
During the pandemic, active support was also provided by the state - from the delay in paying taxes, the provision of preferential loans and ending with the allocation of subsidies to entrepreneurs. In 2016, the number of registered small businesses was 278 thousand, in 2021 - 503 thousand. If in 2016 258 thousand were active, then in 2021 - 475 thousand. In 2016, the number of newly created enterprises was about 28 thousand, in 2021 - 95 thousand.
Reforms aimed at improving the structural characteristics of the economy will continue. A special place in this process will be occupied by sectoral development strategies, which are being developed. The focus is on improving the competitiveness of industries through the introduction of innovations, the development of high-tech industries with high added value.

In the field of agriculture, the Strategy set the task of modernization and intensive development of the sector.
As part of the systemic reforms in 2017-2021, the practice of producing raw cotton, cereals, and cereals on the basis of a state order and the establishment of purchase prices for them by the state was canceled. The agricultural management system has been improved.
The optimization of the sown areas envisaged by the Action Strategy, aimed at reducing the sowing of grain and cotton, has been carried out. In 2016-2020, a total of 330.5 thousand hectares of cotton and grain crops were reduced, due to which the production of potatoes, vegetables, fodder and oilseeds was increased. In the same period, intensive orchards were planted on 69.6 thousand hectares and 57 thousand hectares of vineyards. In the spring season of 2021, there were 11 times more fruit orchards than in 2016, and seven times more vineyards.

Agricultural reforms in dynamics
Agricultural reforms in dynamics

The task of creating multidisciplinary structures for the production and processing of agricultural products has been solved. Since 2017, in the agro-industrial complex, cluster production began to be introduced in cotton growing, and over time in other segments of the industry. By 2021, 463 agro-industrial clusters were already in operation. In 2018-2020, cotton and textile clusters attracted $ 1.4 billion in investments to create a value added chain. Due to additional investments in the 2019-2020s, the clusters put into reuse 14.6 thousand hectares, and water-saving technologies were introduced on 20.6 thousand hectares.
In order to improve the ameliorative state of irrigated lands, introduce water-saving agricultural technologies, 394.3 thousand hectares of agricultural land were re-commissioned in 2019-2021. In 2017-2020, water-saving technologies were introduced on 256.3 thousand hectares. An information system for monitoring the use of water resources at irrigation facilities has been introduced. According to the Concept on the effective use of land and water resources in agriculture in 2020-2030, 1.1 million hectares of land that have been removed from agricultural use will be gradually reused.
At the same time, in Uzbekistan, the situation with water consumption continues to remain tense against the background of a shortage of water resources due to an increase in water demand due to the growth of the economy and population. The scarcity is exacerbated by inefficient use of water, as well as its losses due to outdated and worn-out infrastructure. Water losses in irrigation networks are 35-40 percent.
In this regard, the Concept for the Development of the Water Economy of the Republic of Uzbekistan for 2020-2030 was approved. Obviously, the reform to improve water efficiency will become one of the most important in the coming years.
The agriculture development strategy of the Republic of Uzbekistan for 2020-2030 covers nine priority areas. Among them is the development of the activities of new agricultural clusters and cooperatives for the production of competitive, export-oriented quality products, the creation of value chains, and an increase in the income of agricultural producers. A strategy for the development of agricultural technologies was also approved, for the implementation of which the Center for Digitalization of the Agro-Industrial Complex was created under the Ministry of Agriculture.

One of the tasks of the first block of economic reforms in the Action Strategy is to improve monetary policy, introduce market mechanisms for foreign exchange regulation and ensure the stability of the national currency. The key decision in this direction was the liberalization of the domestic foreign exchange market carried out in September 2017 with the market formation of the exchange rate of the national currency, which allowed legal entities and individuals to freely convert it.
In 2018, the activities of the Central Bank were reformed, its independence was strengthened, and the priority goal of its activities was to ensure the stability of the price level. In 2019, the task was set to ensure, from January 1, 2020, a phased transfer of monetary policy to an inflation targeting regime.
The mechanism for determining the level of interest rates has been reformed. From January 1, 2020, interest rates on loans issued by commercial banks in national currency began to be set at a level not lower than the refinancing rate of the Central Bank, and from January 1, 2021, commercial banks were given the right to independently determine interest rates.
The positive impact of reforms in this area is also evidenced by the World Bank estimates, according to which the decrease in inflation allowed the Central Bank to lower the key rate from 16 percent to 14. At the same time, the financial system of Uzbekistan has sufficient capital to cope with possible credit shocks.
According to the main directions of monetary policy for 2021 and the period 2022-2023, the goal is to reduce inflation to 10 percent in 2021 and a constant inflation target of 5 percent in 2023. The current relatively tight monetary policy conditions will remain until the end of this year. The consolidated budget deficit is forecast to decrease to 2.5 percent of GDP in 2022. Structural reforms will continue, and liberalization of regulated prices is planned in 2022-2023.
Another key reform aimed at reducing the tax burden and simplifying the tax system is tax reform. Since 2018, a course has been taken towards the phased abolition of tax benefits and preferences. With the introduction of the new version of the Tax Code from 2020, most tax incentives have been canceled, but in the fight against the pandemic, their application has been expanded to support the population and the economy. For the period 2017-2020, revenues to the State budget as a whole increased by 2.7 times. At the same time, receipts from direct taxes increased 3.9 times, indirect - 1.8 times, resource taxes and property tax - 3.1 times. The growth in budget revenues was mainly due to the increase in the number of taxpayers.

Tax reform in Uzbekistan in 2016-2020
Tax reform in Uzbekistan in 2016-2020

Nevertheless, the improvement of tax policy will continue in the coming years. In particular, the role of environmental taxes remains insignificant, which requires an increase in the environmental focus of taxation. Reducing tax pressure on enterprise spending, strengthening the redistributive function of property taxes, and stimulating investment and innovation will also be important areas of the reform. In order to attract large investments for the modernization of the mining industry, it is planned to reduce tax rates for copper and gold from 10 percent to 7 percent, for natural gas and oil - up to 10, for uranium - up to 8, for tungsten - from 10 to 2.7 percent.

The improvement in the business environment contributed to a more active investment policy, which led to a dynamic growth in financial investments. So, according to the CIS Statistical Committee, in 2019, compared to 2000, investments in Kyrgyzstan increased 4.1 times, Kazakhstan - 7.6 times, and in Uzbekistan - 10.4 times. If in 2016 Uzbekistan attracted $ 1.6 billion in foreign direct investment, then in 2019 - already $ 4.2 billion.
Although due to the pandemic last year and the first quarter of this year, the inflow of investments has slowed down. Nevertheless, according to the results of nine months of 2021, investments show a moderate growth rate at the level of five percent. Investments continue to decline due to centralized sources: from 22 percent in January-September 2020 to 18.7 percent in the same period this year. The decrease is mainly due to the reduction of attracted foreign loans guaranteed by the government. In contrast, the share of investments from decentralized sources increased from 78 percent to 81.
The Strategy of the Investment Policy of the Republic of Uzbekistan until 2025 is being implemented. The document provides for the development of the securities market, the expansion of the investment potential of commercial banks, the formation of a diversified capital market, an increase in the investment opportunities of enterprises, the active involvement of public funds in investment activities, as well as an increase in the efficiency of allocation of public funds.
Over the next five years, the share of investment in GDP will remain at about 30 percent, or $ 120 billion, of which at least 70 billion will be foreign investment. Within the framework of public-private partnership projects, it is planned to attract $ 14 billion in the development of transport, road construction, water management and other areas. In addition, it is planned to create a Development Bank to stimulate industry and improve infrastructure in the regions. When concluding investment agreements with a domestic business making large investments, the state guarantees the preservation of investment conditions for 10 years. Also, a methodology for evaluating the effectiveness of projects implemented with the participation of international financial institutions, based on clear criteria, and a modern management system for these projects will be introduced.

In the area of reforming the banking system, tasks were set to ensure the stability of the level of capitalization and the deposit base of banks, and to expand lending. We managed to achieve almost all the set goals.
In 2018-2020, the number of credit institutions in Uzbekistan increased by 55 units. As of January 1, 2021, the assets of commercial banks reached 366.1 trillion soums, an increase of 120 percent compared to 2017. The total volume of loans issued to sectors of the economy amounted to 277 trillion soums, an increase of 150 percent compared to 2017. The real growth of loans during this period averaged 38.6 percent per year, and the growth of deposits - 18.5.
At the same time, the level of dollarization in the banking sector has dropped significantly. If the share of foreign currency assets in the total assets of banks in 2017 was 64 percent, then in 2020 it decreased to 50.2 (the share of loans in foreign currency decreased from 62.3 percent to 49.9, and the share of deposits in foreign currency - from 48.4 to 43.1). It is planned to reduce the level of dollarization of the economy from 50.2 percent last year to 45 this year.

Thanks to the ongoing reforms, domestic commercial banks for the first time in history began to enter the international capital market. Uzpromstroybank, National Bank for Foreign Economic Affairs, Ipoteka Bank issued Eurobonds to attract long-term capital, attracting funds from the London Stock Exchange. The German Development Financial Institute and Triodos Investment Management have invested in the authorized capital of Ipak Yuli Bank through the purchase of shares.
Reducing the role of the state in the economy.

One of the key tasks set in the Action Strategy is the implementation of institutional and structural reforms aimed at reducing the presence of the state in the economy. Much has been done in this direction, but until now the share of the state's presence in the economy remains high. About 50 percent of the country's GDP and one-fifth of the volume of foreign trade are created by state-owned enterprises, which provide more than half of the state budget revenues when hiring less than 10 percent of the employed population.
Therefore, one of the most difficult reforms (state-owned enterprises) is currently being carried out, which provides for large-scale privatization, reducing the state's participation in the authorized capital of economic entities, introducing market-based management principles at state-owned enterprises and creating additional opportunities for attracting private capital.
In previous years, preparations were made for the reform of state enterprises, including the creation of the necessary institutions.

The active privatization of state property began this year. In February, the Presidential Decree approved a list of 11 state assets that are fully put up for auction, as well as 18 enterprises, state shares of which are to be sold in 2021. Among them are the Fergana Oil Refinery (100 percent of shares), Quartz (89.5 percent), Trest-12 (51), Kokand Mechanical Plant (64.1), Uzbekkhimmash (44.7), “Zizzakh plastics" (85.8), Samarkand winery named after Khovrenko (71.2) and other facilities.
From July 1, 2021, supervisory boards and an internal audit service are created at enterprises with the participation of the state, and from January 1, 2022, the right of the state to participate in the management of individual joint-stock companies in strategic sectors of the economy is canceled.
According to the approved Strategy for Management and Reform of Enterprises with State Participation for 2021-2025, the number of enterprises with state participation will be reduced by 75 percent, and shares of at least 20 enterprises will be offered for primary and secondary placements. So, in the coming years, a large-scale privatization of state property will take place, including with the involvement of foreign strategic investors. All the necessary institutional and regulatory conditions have been created.
At the same time, the banking system of Uzbekistan continues to be characterized by a high concentration of state participation: 84 percent of all banks' assets still belong to banks with state shares, and 64 percent - to five state-owned banks (National Bank, Asakabank, Uzpromstroybank, Ipoteka Bank and Agrobank).

The share of deposits of banks with a state share in relation to loans is 32.9 percent. For comparison: in private banks this figure is about 96 percent. Individual deposits account for only 24 percent of the total volume of deposits in the banking system, which is about 5 percent of GDP. Therefore, one of the most important tasks is to attract the savings of the population to the banking and financial system.
In this regard, widespread privatization in the banking sector is envisaged, preparation for which began with the release of the President's Decree "On the Strategy for Reforming the Banking System of the Republic of Uzbekistan for 2020-2025" dated May 12, 2020. According to the document, Ipoteka Bank, Uzpromstroybank, Asakabank, Aloqabank, Qishloq Qurilish Bank and Turonbank will be privatized. Uzpromstroybank, in preparation for privatization with the support of the EBRD, began commercializing its business model and reforming corporate governance. In order to support the privatization of JSCIB Ipoteka-Bank, the International Finance Corporation (IFC) provided him with a loan. The first step has been taken: an agreement was reached on the sale of the state share of Ipoteka Bank to the Hungarian bank OTP.

Uzbekistan's trade with Central Asian countries more than doubled from 2016 to 2019, from $ 2.5 billion to $ 5.2 billion. The share of the republic's trade with the countries of the region also increased from the total volume of trade from 10.2 percent to 12.4. Despite a 5.4 percent decrease in trade with them due to the pandemic, the share of Central Asian countries in the total trade turnover of Uzbekistan increased from 12.4 to 13.6 percent in 2020. But since the beginning of this year, trade with the states of the region has grown by 24 percent, and the share of Central Asian countries in the total trade turnover of Uzbekistan has increased to 17.2.
Investment cooperation of Uzbekistan with the countries of the region is also growing. In the last year alone, the number of enterprises registered in the republic with the capital of Kazakhstan increased from 856 to 999, Kyrgyzstan - from 169 to 217, Tajikistan - from 171 to 205 and Turkmenistan - from 155 to 159 units.
Although investment cooperation and cooperation ties between the states of the region are actively developing, their level is lower than in relations with the leading trade partners of Uzbekistan outside Central Asia. Therefore, measures will be taken to expand and deepen investment and cooperative cooperation with the countries of the region.
The decision to resume the process of Uzbekistan's accession to the World Trade Organization (WTO) was initiated by the President and officially announced in the Address to the Parliament of Uzbekistan in December 2017.
The analysis carried out by CERD shows that for certain types of products the country already has a significant untapped export potential. In particular: fruits and vegetables - $ 986.7 million; textile - by 686.6 million; electrical engineering - for 56.6 million, which will help to implement the entry into the WTO. According to preliminary calculations, the volume of imports to Uzbekistan may grow by 5 percent as a whole, and for the products of certain industries - from 2 to 13 percent. The impact on exports from our country's accession to the WTO will generally be positive.
Uzbekistan received observer status in the Eurasian Economic Union on December 11 last year. The question of full-fledged entry into the EAEU is not yet raised.
According to the preliminary assessment of CEIR, there are sectors that a full-fledged accession to the EAEU as a member can have a very beneficial effect, in particular, for the textile and agro-industrial sectors that have competitive advantages in the markets of the EAEU countries. But there are also sectors, which will be negatively affected by joining this organization, up to stopping the industry at first with the need for its subsequent reorganization. Therefore, in the coming years, Uzbekistan will deepen its interaction with the EAEU countries in observer status, while, to a certain extent, adapting the regulatory requirements for trade with the states of the Eurasian Economic Union and carefully studying the balance of pros and cons of a possible entry into it.
EAEU members are members of the WTO. When Uzbekistan joins this organization, certain changes are expected in the regulation of foreign economic activity, as well as when joining the EAEU. It can be expected that the processes of accession to the WTO and the EAEU (if it is profitable for Uzbekistan to join this organization as the reforms deepen) will be synchronized, and reforms to adapt the economy to membership in these organizations will be carried out in parallel.
Economic reforms were carried out dynamically in all areas and showed high results. The new five-year period is ending successfully. The country managed to maintain positive growth rates in the harsh conditions of the pandemic and ensure a dynamic economic recovery this year, which growth forecasts are very favorable.
So, according to the Central Bank, it is expected that in 2021 real GDP growth will be in the range of 6-7 percent. The World Bank predicts that economic growth in Uzbekistan in 2021 and 2022 will reach 4.8 and 5.5 percent, respectively. According to the latest EBRD forecasts, Uzbekistan's GDP will grow by 6.8 percent in 2021 and by six in 2022. And this positions our country as the fastest growing economy in Central Asia. Considering that these forecasts are significantly higher than in many countries of the world this year, it can be stated: in the process of ongoing reforms, Uzbekistan has managed to strengthen the competitive position of its economy relative to the economies of other countries.
Over the past period, a serious basis has been prepared for further deepening reforms in a wide range of areas requiring more serious preparation for the next five years. The World Bank described the new stage of reforms as follows: "Uzbekistan is moving to reforming the market for rights to use and own land, creating a capital market, and transforming state-owned enterprises." And reforms in these areas have already begun. Specification of goals and objectives for their deepening is in the process of formation.

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