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bne October 2017 Eurasia I 45
introduce the strict currency conversion scheme. Dollars disappeared overnight, giving way to the dual exchange rate regime. Newly unable to repatriate prof- its in hard currency, the interest of for- eign investors in Uzbekistan evaporat- ed. Shops began closing and the elite, which did have access to dollars via the then newly established National Bank of Uzbekistan, began to take over the country’s most successful businesses.
Even among those investors who stayed, a foreign business exodus ensued in subsequent decades in no small part facilitated by Karimov’s crackdowns. Mirziyoyev, however, has already start- ed welcoming businesses back into the country, even prior to the announce- ment of plans to liberalise exchange rates. That can be seen in the return of Turkish businesses that is taking place.
FDI and trade
Currency convertibility had been one of the major bugbears for the handful of foreign investors operating in the coun- try, stifling Uzbekistan's overall foreign investment potential, compared to when the country was one of the leading Central Asian destinations for foreign investors in the early 1990s. It stands
to reason therefore that Uzbekistan might retake its leading regional role following the currency liberalisation.
“Net FDI grew from minus $24mn in 1995 to $167mn in 1997, a period of optimistic expectations about reforms in Uzbeki- stan,” according to an Asian Development Bank report from 2005. Yet the newly imposed restrictive foreign exchange and banking regimes set in 1996-1997 caused problems in access to foreign exchange repatriation of profits and purchase of imported inputs. That, combined with
a host of other side effects, brought about a sharp decline in net FDI from $140mn in 1998 to $74mn in 2000.
The succeeding years constrained foreign investment even more, after Karimov’s government installed controls designed to support Uzbekistan’s infant industries via an import substitution strategy and foreign exchange conservation.
These impediments to trade and foreign
investment were lightened in 2011 and, since then, “foreign investment to Uzbekistan has reached $1.2bn
in the first half of 2016 and $2.7bn
in total, according to preliminary findings,” Scandinavian banking group Nordea said in its country profile for Uzbekistan, citing Uzbek government statistics. “It is important to notice, however, that these figures highly contrast with the most recent UNCTAD data that suggest a paltry sum of $66mn in FDI inflow in 2016.”
The relatively low foreign investment levels can be contrasted with FDI in Uzbekistan’s neighbour, Kazakhstan, where it grew to $9bn in 2016, after a 126% surge from 2015. Kazakh FDI only amounted to below half a billion dollars
announced a plan to reduce Uzbeki- stan’s imports by $1.1bn in 2017.
Some of these policies will be carried out through import substitution mea- sures such as increasing local content in manufacturing facilities that assemble products from foreign imports. But it
is not unreasonable to expect Uzbeki- stan to implement or maintain quotas and tariffs in order to keep its own products competitive. The transition to a fully open capital account will be gradual, if it reaches that goal at all.
“[Uzbekistan’s] customs duties for imported goods range from zero to more than 100%, but the average rate is approximately 30%,” according to a 2017 update by the US export.gov website.
“We are not going to waste our precious hard currency reserves on importing chewing gum”
in 1994. Fresh investment opportuni- ties in Uzbekistan – with a population of 32mn people, and with the largest consumer market in the region – should now pose a challenge to the 18mn- strong Kazakhstan. At the same time, Uzbekistan has a high birth rate and its population size will overtake Poland
in the next decade to become the third most populous country in Eurasia after Germany and Russia.
Even if Uzbekistan does not triumph in overtaking Kazakhstan as the
top destination for foreign investment – it lacks the significant hydrocarbon resources of its neighbours – the country still has a lot of space for catching up after nearly 20 years worth of missed investment opportunities.
There could be a limit to the upsides
of currency reform. It will undoubt- edly improve the prospects for foreign investors and exporters, but importers, so far, seem unlikely to enjoy the full benefits of pre-Karimov regulation- era trade. In March, Mirziyoyev made it clear the country intends to keep some of its protectionist policies in place for the time being, when he
“Since January 2010, 5% customs duties are applied to imported live ani- mals, milk and cream, wheat, and com- puter hardware; 10%-30% duties are applied to clothing, furniture, metals, foodstuffs; and more than 50% duties are applied to luxury consumer goods such as cigarettes and cars,” it added.
Inflation worries
One of the key challenges standing in Uzbekistan’s way is the possible impact of inflation on existing Uzbek businesses following the adop-
tion of the floating exchange rate regime. To address this, the country announced it had $20bn in hard cur- rency reserves in July – the first time it has reported its gold and foreign currency reserves. The government pledged to support Uzbek businesses as they adjust to new conditions.
“Given Uzbekistan’s ample foreign exchange reserves, the reform can
be implemented from a position of strength,” the International Monetary Fund (IMF) said on July 24. The gold and foreign exchange reserves of $20bn is enough to cover two years
of imports – a very large reserve.
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