Uzbekistan: On the Reform Path

In September 2016, the man appointed as the new president of Uzbekistan, ShavkatMirziyoyev, unveiled a package of proposals aimed at liberalising the economy. Itincluded plans to free up foreign currency exchange, re-organise the tax system andloosen control over external trade activities. These economic reforms, coupled with thebenefits of having the largest population in Central Asia, and generous tax benefits innew Free Economic Zones (FEZs), improving connectivity and a rapidly developing start-up ecosystem, are helping Uzbekistan become an increasingly attractive business andtrading partner and a lucrative investment destination.

Becoming a Modern and Open Economy

Until reforms were introduced to open up the Uzbek economy, the public sector controlledmost of the country’s economic activity, dominating the small, moribund private sector.As a result, many Uzbeks sought work abroad, with about 20% of its workers taking jobsin countries like Russia and Kazakhstan. Uzbekistan has a population of nearly 33 millionpeople (45% of Central Asia’s entire total) and a labour force of 20 million. Now it islooking to unlock the full potential of this population dividend by boosting the growth ofmarket-driven commercial activity.

Marketisation of Currency and Banking System

To support business and facilitate trade, the new Uzbek government switched theUzbekistani Som (UZS) to a free-floating exchange rate in September 2017, uniting theofficial exchange rate with the informal market (or black market) rate. At the same time,the requirement that exporters sell a quarter of their foreign-currency earnings to thegovernment under the official rate was abolished. This has encouraged firms andindividuals to switch from using the informal money market back to the formal bankingservices. This improved confidence in the country’s banks has helped to double the totalamount of deposits in Uzbekistan’s commercial banking sector to more than UZS80trillion (US$9 billion) between mid-2017 and mid-2019.

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Along with creating a more flexible exchange rate regime, Uzbekistan is looking torestructure the state-led banking sector to ensure a more efficient channelling of bankcredits. In 2019, as a first step to reinvigorating market competition in the bankingsector, the central bank of Uzbekistan issued the first Uzbek foreign banking licence toTenge Bank (a subsidiary of Kazakh Halyk Bank). Backed by Halyk Bank’s establishmentsin Kazakhstan, Russia, Kyrgyzstan, Tajikistan and Georgia, Tenge Bank will not only actas a new source of private loans to promising Uzbek companies, but will also providecomprehensive trade finance instruments to support cross-border transactions.

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Alay Bazaar, a traditional cash-only market in Tashkent.

New Tax Rules

On 1 January 2019, the Uzbek government introduced new taxation rules aimed atsimplifying the tax regime and reducing the tax burden on the economy to around 2% ofGDP.

Under these rules, non-bank and non-telecom companies have had their corporateincome tax (CIT) cut from 14% to 12%, while firms with an annual turnover of less thanUZS1 billion (US$120,000) are recognised as small businesses and are only subject to areduced turnover (revenue) tax of 4%.

Because they are regarded as a strategic pillar for Uzbekistan’s economic growth,exporters no longer have to pay VAT of 20%. Companies which are still subject to VATcan offset their payments against the cost of purchased fixed assets, encouraging themto plough revenue into expanding their businesses.

Trade Facilitation

Uzbekistan is making determined efforts to boost trade by upgrading its customs regime.The government’s most significant move in this direction has been to abolish themonopoly position of the state-run company Uzagroexport in the area of fruit andvegetable exports. From 1 July 2017, provided that the importer provides fullprepayment for the shipment, Uzbek farmers have been allowed to deliver their productsto foreign markets via direct contracts.

Other trade liberalisation efforts include allowing the export of manufactured productsand services without registering an export contract, introducing zero import duty on

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electric vehicles, and adopting electronic forms and an electronic payment system forcustoms declarations. The combined effect of these economic reforms has been to shiftUzbekistan from its position as an extremely state-led economy towards a new status asa modern and open emerging market in Central Asia.

New Opportunities for Manufacturers

Free Economic Zones

Alongside this economic turnaround, Uzbekistan has also been laying out a red carpet forinternational manufacturers looking to invest in the country’s 14 new Free EconomicZones (FEZs). Companies investing more than US$10 million in the FEZs can enjoyexemptions or concessions for up to 10 years on land tax, income tax, property tax,social infrastructure tax, custom payments for imports, and contributions to variousgovernment development funds.

The primary objective of the FEZs is to support import substitution, economicdiversification and industrial upgrades to high-end manufacturing, in sectors with highervalue-add such as pharmaceuticals, chemicals, the automotive industry, construction andtourism. Taking advantage of Uzbekistan’s well-established agricultural industry, 7 of the14 FEZs are dedicated to developing high-value medical plantation and pharmaceuticals.The Uzbek government is looking to encourage the production of more than 70 of the 350medicine-related plant species currently used in international medical practice.

BRI and Global Connection

To support its export-oriented industrial upgrade initiatives, Uzbekistan is also trying toimprove its physical infrastructure and foreign trade relations. Thanks to the Central AsiaRegional Economic Cooperation (CAREC) program, the Uzbek national rail networkexpanded from some 4,200km of track in 2016 to 4,700km in 2019, and the amount ofelectrified rail track more than doubled to 2,300km. The Uzbek government and the Asian

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Development Bank (ADB) have also been co-financing the procurement of 24 electriclocomotives so as to make fuller use of the electrified tracks.

With the official launch of Uzbekistan-Kyrgyzstan-China highway corridor in February2018, Uzbekistan is increasingly becoming an important transport node along the China-Central Asia-West Asia Economic Corridor – a key component of the Belt and RoadInitiative in Eurasia. The 900km highway, which connects Tashkent with Kashgar inXinjiang via southern Kyrgyzstan, has shortened the journey between Uzbekistan andnorthwest China from 8 days to 2 days.

The Uzbek government is looking to liberalise the movement of goods and people. Whileit prepares to join the World Trade Organization (WTO), Uzbekistan has been taking thelead in the development of a regional customs information system intended to harmonisearrangements among CAREC member countries, including Afghanistan, Azerbaijan, China,Georgia, Kazakhstan, the Kyrgyz Republic, Mongolia, Pakistan, Tajikistan, andTurkmenistan.

To facilitate cross-border business collaboration, the Uzbek Ministry of Foreign Affairs isalso working on freeing up its visa policy. For example, it is introducing a 30-day e-visafor 77 countries and visa-free transit for 53 countries. From 15 March 2019, Hong Kongand Chinese mainland passport holders can apply for Uzbek visas online. These are smallbut important steps in the attempt to transforming the double-landlocked Uzbekistan intoa more open and connected economy that works hand-in-hand with the new FEZs inattracting manufacturing investment from abroad.

Links with China

Uzbekistan has worked together with Chinese investors to build production bases in andfor Central Asia and Eastern Europe. A good example is Chinese Wenzhou JinshengTrading’s US$90 million investment in Peng Sheng Industrial Park. Kick-started in 2009,the Peng Sheng Industrial Park has become a vibrant manufacturing zone,accommodating 9 major producers and employing some 1,300 Uzbek workers.

More recently, a Chinese logistics and warehousing firm – Hebei Haowanjiao WuliuFazhan – is reportedly building the Uzbekistan Tashkent Hebei Industrial Park. Set toopen in 2020, the park is expected to produce US$130 million worth of consumer goodsand construction materials for the Central Asian and Eastern European markets once it iscompleted.

Hong Kong companies that are new to Uzbekistan can get a jump start by partnering witha Chinese mainland business or opening in one of the FEZs. Hong Kong ZRSC Technologyand Hubei Provincial Road & Bridge, for instance, both became residents of FEZ Angren(Tashkent region) to invest in the production of different building materials.

Amid rising production costs in traditional bases and mounting global protectionismagainst products of Chinese origin, Uzbekistan presents an increasingly handy option forHong Kong and mainland entrepreneurs looking for alternative manufacturing locations.The country’s advantages also include its abundant source of young labour, its closeconnections with Europe and Asia, and its free-market access to the often overlooked270+ million-strong Eurasian Economic Union (EAEU) market.

Early Fruits of Economic Reform and Development

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The opening up of the Uzbekistan economy has been well received around the world. InFebruary 2019, Uzbekistan was awarded its first-ever Moody’s rating of B1. The countryhas shot up the World Bank’s rankings of the best countries in which to conduct business,from 141st four years ago to 76th, thanks to the encouraging improvements in areassuch as starting a business, getting electricity, registering property, getting credit andpaying taxes.

Uzbekistan: Ease of Doing Business Ranking

2015 (1-189) 2019 (1-190)

Ease of doing business 141 76

Starting a business 65 12

Dealing with construction permits 149 134

Getting electricity 145 35

Registering property 143 71

Getting credit 104 60

Protecting minority investors 100 64

Paying taxes 118 64

Trading across borders 189 165

Enforcing contracts 28 41

Resolving insolvency 77 91

Source: World Bank.

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Blooming Entrepreneurship in Tashkent

Uzbekistan has opened the door to entrepreneurs, especially in the high value-added technology sector. Following the year of ‘dialogue with the people’ in2017, the Uzbek government named 2018 the year of ‘support for activeentrepreneurship, innovative ideas and technologies’, and set up the Ministry ofInnovation Development. Government institutions have been set up to providefunding to SMEs and to protect the legal rights of businesses, breeding a slew ofstart-ups, especially in its capital and business centre – Tashkent.

Humo Partners, a group of 10 companies, is an Uzbek private sector leaderactively working with start-ups and promoting entrepreneurship in Tashkent.Started by the Uzbek-Chinese Trading House (one of the largest Chineseequipment suppliers in Uzbekistan) and the International Business Travel (abusiness travel and Chinese networking consultant), Humo Partners has beenhelping start-ups with foreign technology solutions, business consultancy andbusiness networking services.

To cultivate an enterprising business ecosystem, Humo Partners has in recentyears set up different platforms such as GroundZero (co-working space),Ground Zero Business Accelerator, an Uzbekistan branch of the GlobalEntrepreneurship Network, and Batiskaf Consulting. To facilitate the exchange oftechnology, business ideas and knowledge with China, Humo Partners has beenorganising and receiving business delegations to and from China.

Humo Partners has been operating the Uzbek-Chinese Trading House since 2006.

The office of Uzbek-Chinese Trading House and the co-working space GroundZero.

Economic resurgence in the wake of reforms has seen migrant Uzbek workers graduallybegin returning to the country. To cope with increasing demand for residential andcommercial spaces, Uzbekistan is orchestrating the construction of Tashkent City – alarge development area in the capital’s centre. Early movers to Tashkent include someworld-leading hotel brands, such as Wyndham Hotels & Resorts and Hyatt Regency fromthe US, and South Korea’s Lotte Hotels & Resorts.

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Construction site of Tashkent City. The Tashkent Metro, which began operating in 1977,is a well-maintained rapid transit system in the capitalcity.

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