EBRD’s return to Uzbekistan underlines new president’s reformist goals

EBRD’s return to Uzbekistan underlines new president’s reformist goals
The EBRD closed its representative office in Uzbekistan in 2007.
By Kanat Shaku in Almaty April 18, 2017

If Shavkat Mirziyoyev’s reputation under the long rule of Uzbekistan’s late dictator Islam Karimov cast doubt on his initial calls for reform, the gradual improvements that the new president has made have gone some way to disprove the sceptics.

Mirziyoyev has showed willingness to follow up on his promises by issuing decrees protecting the interests of small businesses, getting rid of child labour at Uzbekistan’s cotton fields, and even recognising the existence of the country’s significant migrant population.

It is under these circumstances that Sir Suma Chakrabarti, president of the European Bank for Reconstruction and Development (EBRD), pledged to restart the multilateral lender’s activities in the country during a visit in mid-March. “The pause in that relationship is now over,” he said in a speech at Westminister International University in Tashkent on March 17.

The EBRD froze its links with Uzbekistan for 10 years because of Karimov’s poor human rights record, a split highlighted at a public stand-off between the dictator and human rights groups in 2003 at an event organised by then finance minister Rustam Azimov and the EBRD to attract foreign investment into Uzbekistan. The bank afterwards unsuccessfully attempted to pressure Karimov into addressing the country’s human rights issues and steadily wound down its investments until it closed its representative office in 2007.

The EBRD is sensitive to charges that it often turns a blind eye to dictators, so it is certain to proceed with caution. Nevertheless, the rise of Mirziyoyev has created the possibility of rekindling cooperation between the bank and the country.

The new leadership has made significant progress in mending the previous administration’s human rights record. For instance, a number of Uzbek political prisoners were freed within months of Mirziyoyev officially taking office in December.

“We met with civil society NGOs and there was no doubt that Uzbekistan is taking a slightly different approach,” Jonathan Charles, EBRD communications managing director, tells bne IntelliNews.

To finalise the process of kicking off investments into the country, the bank aims to re-open its office in Uzbekistan “as soon as possible”, he says, while noting that the procedure might take a number of months. “We certainly [ideally] want to do it this year.”

In order to start re-engaging with investments into the country, the EBRD signed a Memorandum of Understanding (MoU) with the Uzbek government during Chakrabarti’s visit.

Room to breathe

“There were projects we still had [in Uzbekistan], even though we did not do new ones, so it is not as if we are starting with a completely fresh page,” Charles says. The bank’s cumulative investments in Uzbekistan to date amount to €906mn, though it currently only has an €8mn portfolio in the country, according to the bank’s website.

“Our current interests in Uzbekistan lie in developing an enabling environment for SMEs, including credit lines for them to on-lend to small businesses as well as providing advisory services; other areas include goals to improve municipal services...we also detected an interest from the Uzbek authorities in solar power – there might be a possibility to bring investments into sustainable energy,” Charles says.

Charles also mentions “there may be also a possibility of cross-border projects”, since Mirziyoyev, again in contrast to Karimov, has been reaching out to Uzbekistan’s neighbours, including Kazakhstan, Kyrgyzstan, Turkmenistan and Tajikistan. Apart from initiating discussions on long-standing issues of border demarcation with at least two of its neighbours, Uzbekistan has also recently restarted flights to and from Tajikistan, for the first time in 25 years.

“We would like to see focus on – and we hear a lot from the authorities [about this] – the desire to end state control of the economy and the state ownership of the economy and give the private sector room to breathe,” Charles maintains. “The authorities recognise that economically Uzbekistan cannot be an island...a large number of youth are coming into the labour force right now and the authorities have indicated a desire to provide job opportunities for them.”

Among the already visible intentions to give the private sector elbow space is the Mirziyoyev government’s plan to liberalise the currency market. Both in official statements in November and anonymously Uzbek authorities have confirmed the government is working on the programme.

The difference between the official and black market rates for the Uzbek national currency – a direct result of currency restrictions imposed back 1996 – has distorted the country’s economy and provided lucrative pickings for well-connected insiders. The som’s unofficial rate fed double-digit inflation, unacknowledged in official figures, during the regional economic downturn in 2015-2016.

“Stringent currency controls in the country are having an adverse effect on the ability of businesses to carry out their export/import-related operations, and they need to be gradually removed. The exchange rate unification is also an important pre-condition for creating a more sustainable economy and improving the environment for doing business,” the EBRD said in its Transition Report for 2016-17.

While there are rumours of conflict over the plan within the ruling triumvirate  (which also includes security services head, Rustam Inoyatov, and Finance Minister Rustam Azimov), a representative of the foreign business community in Uzbekistan tells bne IntelliNews that the liberalisation is just a “question of time”.