Mirziyoyev’s dash for reform

Mirziyoyev’s dash for reform
Mirziyoyev just about owned the word "reform" in Central Asia last year.
By Filip Brokes in St Petersburg February 11, 2018

Uzbekistan has long been known as one of the most closed and economically rigid societies in the world. However, since late 2016, a lot has changed in this Central Asian country. Under new President Shavkat Mirziyoyev—who took over following the death of autocrat Islam Karimov—the country’s old economic model has been judged to be ill-equipped to produce sustainable growth, particularly given unfavourable external economic circumstances. Thus, Mirziyoyev and his officials have rolled out a series of reforms designed to modernise the country and make its economy more appealing to foreign investors. 

Most recently, 60-year-old Mirziyoyev signed a governmental decree to approve the “State Programme for the Implementation of the Action Strategy”. The document lays out a comprehensive plan for the development of the Uzbek economy and public administration for the period of 2017 to 2021, focusing on five main pillars.

Two main obstacles hindering the development of the Uzbek economy remain the largely inefficient system of public administration and over-regulation of the private sector. The new programme aims to tackle those inefficiencies through decentralisation, bettering the skills of the public servants and deregulating the economy.

In order to make the markets more efficient, the programme sets the ambitious goal of achieving a truly independent Uzbek judiciary. The courts will also be given the right to sanction home searches of suspects, as well as the power to permit or reject an application for the wiretapping of telephone conversations. Under Karimov, the intensely feared security services were not known for bothering with such niceties.

All of the reformist measures and policies – along with firm commitments in the human rights sphere such as a pledge to once and for all root out child and forced labour – have been drawn up to set Uzbekistan on the path to becoming an upper-middle income country by 2030. The highly ambitious goal is to be achieved by putting a premium on governmental support for small and medium-sized businesses. The reform package also aims to help the Uzbek economy gradually transfer to a more advanced type of production model based on the use of smart technologies. Moves to process much more cotton into value-added textiles rather than simply export it as a commodity are one telling example.

Set on modernisation, the government plans to create a number of venture funds and other financial mechanisms to stimulate the introduction to the Uzbek economy of innovative approaches and new technologies. Moreover, all entities involved in this process, such as start-ups, research institutions, venture funds or innovation centres, will be granted tax privileges.

The process, however, will likely be rather a lengthy one, as the Uzbek economy lacks the human capital and other vital resources for the creation of a more complex economy. This sentiment was recently voiced by the Uzbek Chamber of Commerce and Industry at a press conference in Tashkent. According to one government representative, only a very tiny portion of all Uzbek enterprises can be considered to be employing innovative approaches in their business activities. To this day, most Uzbek businesses do not even have a website.

Modernisation out of necessity

President Mirziyoyev took office on December 4, 2016, replacing Karimov, who ruled for a quarter of a century, after serving as his prime minister for 13 years. Despite his promises to continue on the trajectory set by his predecessor, he quickly began shaking up the old politico-economic system in Uzbekistan, largely founded on privileges and the monopolisation of key sectors of the economy.

Mirziyoyev inherited an economy strongly hit by the recession in Russia – Uzbekistan’s second-largest trading partner and its main source of remittances from Uzbeks working abroad – and impacted by the sluggish economic growth of Uzbekistan’s largest trading partner, China, as well as by falling prices of natural gas, copper, and cotton, Uzbekistan’s main export commodities.

According to the World Bank, all these factors contributed to a slight reduction in the country’s GDP growth in 2016, and the challenging external environment forced the new leader to look for alternative drivers for economic growth.

During his first year in office, Mirziyoyev (seen above with his wife First Lady Ziroatkhon Hoshimova visiting the Trumps at the White House in September last year) concentrated on tackling slowing economic growth by revitalising the private sector, deregulating the economy and betting on small and medium-sized businesses becoming the key driver in expanding GDP. He also liberalised Uzbekistan’s heavily regulated financial and monetary policies. For example, in September last year, Mirziyoyev signed a currency liberalisation decree allowing legal entities in Uzbekistan to buy foreign currency to pay for imported goods, repatriate profits, repay loans or pay travel expenses from banks without any restrictions.  

According to a government decree, “excessive administrative regulation in foreign currency circulation has created an inefficient system of privileges and preferences for some industries and business entities, has led to unequal conditions for doing business and violations of market principles and has become a limiting factor for attracting foreign investments and increasing exports of goods and services, and for the country's economic development in general”.

Prior to the change in legislation regulating the foreign exchange market, Uzbek small and medium-sized business owners engaged in importing goods into Uzbekistan were forced to rely on informal markets to obtain the foreign currency needed for their business activities. Similarly, Uzbek exporters were required to sell a quarter of their foreign currency revenue at the official rate. Moreover, since both private individuals and legal entities in Uzbekistan by and large acquired their foreign reserves on the black market, they couldn’t deposit this cash in Uzbek banks.

The new legislation brought far-reaching changes to the Uzbek banking sector. According to the Azerbaijani state-owned newspaper Azernews, as early as during the first week after the removal of the foreign exchange market restrictions, the population handed over $200mn to Uzbek banks, while legal entities delivered another $100mn. It also levelled the playing field for the Uzbek importers. They now have equal access to foreign currencies.

Apart from liberalising the private sector, the Uzbek president has committed himself to ridding the public administration of the forces opposed to his ambitious reform plans.

In December 2017, Uzbek state news agency UzA reported that Uzbekistan’s finance ministry had sacked 562 employees after Mirziyoyev ordered it to root out inefficiency and get rid of what he called “rats” demolishing its reputation. The president’s decision came after he criticised the ministry over what he perceived to be a poorly drafted state budget and the manipulation of economic data. According to the news agency, the sacked officials were holdovers from “a previous minister”.

The coordinator of the Joint Eurasian Expert Network, Natalia Kharitonova, says the purges in Uzbekistan have been taking place on a rather large scale. “The Uzbek Ministry of Internal Affairs has recently seen two changes in leadership in swift succession. There is talk in Tashkent about the possibility of sacking a number of generals from the National Security Service and the Presidential Security Service,” Kharitonova said in an interview for the Russian service of Deutsche Welle published on January 17.

Two weeks later, on January 31, Mirziyoyev fired National Security Service (SNB) chief Rustam Inoyatov, a powerful, publicity-shy veteran who held his post for 23 years. Inoyatov, 73 and known both as Uzbekistan's “last Stalinist politician", and also as the “kingmaker” for playing a decisive role in ensuring Mirziyoyev succeeded Karimov, seemed to have fallen victim to the president's determination to surround himself with his allies.

Power, old and new

The purges and far-reaching reforms in the foreign exchange markets have been formulated to do away with the vestiges of the political and economic power structures that held the insular country together until the death of Karimov.

One member of Karimov’s inner circle was Timur Tillyaev, husband of the late Uzbek president’s youngest daughter, Lola Karimova-Tillyaeva. Taking advantage of his family connections, Tillyaev in 2006 established the Abu Sahiy wholesale market in Tashkent and quickly turned it into the largest commercial centre in Uzbekistan. Abu Sahiy functioned as a clearing house for importing goods from Turkey and China. Given that the heavily regulated foreign currency market under the former regime made it almost impossible for the majority of Uzbek businessmen to obtain foreign currencies at real market prices, those individuals with close ties to the ruling elite, and thus access to cheap foreign currencies, were able to monopolise the market with imported goods.

It was precisely this kind of market monopolisation, in Mirziyoyev’s eyes, that became a key factor in holding back the country’s economic development. The new incumbent has thus sanctioned the implementation of a set of policies designed to break up such monopolies, and the move appears to be working.

“On January 5, Shavkat Mirziyoyev made a reference to the sudden bonanza of revenue coming into the state coffers from the Abu Sahiy wholesale market in Tashkent. Where in the first half of December alone, the market generated around $4.4mn in taxes, the monthly amount before was a relatively meagre $625,000,” Eurasianet reported.

Warm reception

Mirziyoyev’s attempts at reforms in Uzbekistan have been welcomed by most of the major international financial institutions.  

On January 18, a delegation of the World Bank headed by its CEO, Kristalina Georgieva,  paid a visit to the Uzbek capital. In Tashkent, Georgieva met with Mirziyoyev and members of the government and parliament, as well as with representatives of the private sector. Georgieva expressed her support for the recent reforms aimed at improving the state of Uzbek economy and private services.

“The leadership of Uzbekistan continues to implement ambitious reforms. The country is on the right track with projected economic growth at the level of 5.6% in 2018. The continuation of bold economic and social reforms, the improvement of the business environment and the strengthening of the corresponding institutional mechanisms will stimulate the inflow of additional investments into the private sector, economic growth and job creation,” Azernews quoted her as saying during the visit.

Earlier this month, Mirziyoyev approved a framework agreement between Uzbekistan and the European Investment Bank (EIB) under which the development bank will enter the Uzbek market. The Uzbek central bank said earlier that Uzbekistan is interested in EIB funding for the purposes of financing fuel and energy projects, including alternative and renewable energy development and general energy efficiency.

On January 16, the first deputy chairman of the Senate, Sodiq Safayev, said that Uzbekistan will begin negotiations on accession into the World Trade Organization (WTO) this year. He reiterated that Uzbekistan is prepared to work hard to create favourable conditions for foreign investors.

The willingness of international financial institutions to work with the refreshed Uzbek government shows that the president has negotiated all the important steps necessary to begin the process of rebranding the image of his nation, a country so often cited under Karimov’s rule for having one of the most repressive state apparatuses in the world. That said, Uzbekistan is still nowhere close to resembling a democracy. And how far Mirziyoyev will get with his reforms before he ruffles more feathers and encounters some serious challenges to his power remains to be seen.