Clare Nuttall in Astana -

The Uzbek government has continued to introduce new currency and import restrictions in the months since its shock announcement that it was banning the sale of foreign currency to Uzbekistani citizens. Importers have struggled to adapt to the new rules, while the government has stepped up its import substitution drive, offering more incentives to foreign manufacturers to start production within the country.

Most recently, the government announced additional support for local software developers, who will be exempt from all taxes and other mandatory payments until January 2017. Designers who manage to export at least 50% of their products will have the exemption extended for another two years, according to the September 20 government resolution.

Tashkent is also keen to attract more international companies to its free economic zones, which offer tax breaks and other incentives to foreign investors. The largest, the Navoi Free Industrial Economic Zone, was set up back in 2008, but more zones have recently been set up in the Angren and Jizzak regions.

Several international high-tech companies have set up production in the zones this year under joint venture agreements with local companies. The first "Uzbek iPads" - tablet computers produced by Indian-Uzbek joint venture OliveTelecom - are due to be launched on the domestic market by the end of this year. The company, a joint venture between state-owned Uzbektelecom and India's Olive Telecommunications, already produces modems and other electronic equipment at the Navoi FIZ.

Meanwhile, Pengzhong Xingsheng, a Chinese-Uzbek joint venture, has started producing ZTE smartphones for the Uzbek market. Its factory in the Syrdarya region has the capacity to produce 100,000 handsets a year. And the local company Artel, launched in 2011, is now producing domestic appliances under partnership agreements with Samsung and electronics companies from China, Italy and Turkey.

Buy local

Combined with the import restrictions introduced earlier this year, the increased support for domestic production, especially of electronic consumer goods, appears to be part of a two-pronged approach to encourage import substitution and keep the trade deficit in check.

While the arrival of foreign manufacturers indicates some success, Lilit Gevorgyan, analyst at IHS Global Insight, points out it could lead to higher prices, a less competitive environment for local producers and an expansion of the black market. "Considering that Uzbek producers have yet to develop reliable alternatives for these imports, it is Uzbek consumers who will carry the brunt of these changes. At the same time, the overwhelming red tape is likely to give yet another incentive to importers to avoid the customs services altogether by resorting to bribery," Gevorgyan tells bne.

The new currency and import restrictions began when the government announced that from February 1 selling foreign currency to Uzbek citizens would become a criminal offence. The move was apparently intended to stop fluctuations in global markets from affecting the Uzbek economy and to halt the drain on forex reserves.

Uzbekistan has a long history of currency restrictions. The European Bank for Reconstruction and Development said in its 2012 "Transition Report" that there had been "no progress" in eliminating distortions in the forex market - one of the main obstacles cited by foreign investors to investing in the country. The initial ban was followed up by further measures including a requirement for banks to report currency transactions to the tax authorities.

"Clearly banning currency trading is geared towards weeding out foreign currency from domestic retail sales and services, including car dealerships," says Gevorgyan. "But it is also designed to tap into the foreign exchange in the country considering that the country's international reserves have been eroded recently due to a slump in foreign exchange revenues as a result of low external demand and the decline in world energy, metals and cotton prices, the main Uzbek exports."

New rules on imports of consumer goods have also been introduced. In April, Tashkent increased the amount of documentation required from importers. From July 1, all imports of food and other consumer products approved for import have to carry labels in the Uzbek language and stamped by the manufacturer. While these were presented as anti-smuggling measures, there is a clear link to the drive to halt the decline in forex reserves.

It is not yet clear whether these measures will result in a better level of local production or simply push up prices and feed the black market. Independent news site Uznews pointed out that many importers were slow to switch to Uzbek-language labels, knowing that consumers assume an Uzbek label denotes a locally produced item while a stuck-on label that has not been professionally printed signals an import. The general preference for foreign goods meant that importers were "in no hurry to make arrangements for the new labels", leading to a scramble before the July deadline, Uznews says.

With a population of 30m, despite lower incomes than in neighbouring Kazakhstan, Uzbekistan is potentially Central Asia's largest consumer market. The appetite for electronics and other consumer goods is high, but Tashkent has not been able to shake the perception that imports are higher quality than locally produced goods.