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September 8, 2017 www.intellinews.com I Page 2
Uzbekistan lifts currency controls driving hopes of investment renaissance
UZS8,100 on September 5. One day prior, the strict currency controls saw the Uzbek sum trad- ing at around UZS4,210 to the dollar at the official rate and UZS7,700-8,000 at the black market rate.
Uzbekistan is the natural destination of choice for a would-be investor in Central Asia. It has by far the largest population (which is growing fast) and is the only one of the 'Stans that has a border with all the others. It is the obvious production and distribution centre for the whole region. Foreign investors flocked to the country in the early 1990s only to leave again when Karimov killed the ability to convert the currency.
The origins of the now defunct dual exchange rate go back to the early 1990s when Uzbekistan saw
a boom in private enterprise. As stores opened up across Central Asia’s most populous country to fill the insatiable demand for imports, Karimov was horrified when he discovered his country was run- ning a $1bn trade deficit.
“We are not going to waste our precious hard currency reserves on importing chewing gum,” Karimov announced in a famous speech, and went on to introduce the strict currency conversion scheme. Dollars disappeared overnight, giv-
ing way to the dual exchange rate regime. Newly unable to repatriate profits in hard currency, the interest of foreign investors in Uzbekistan evapo- rated. Shops began closing and the elite, who did have access to dollars via the then newly estab- lished 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 started welcom-
ing businesses back into the country, even prior to the announcement 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 op- erating in the country, 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 Uzbeki- stan might retake its leading regional role follow- ing the currency liberalisation.
“Net FDI grew from minus $24mn in 1995 to $167mn in 1997, a period of optimistic expecta- tions about reforms in Uzbekistan,” according to an Asian Development Bank report from 2005. Yet the restrictive foreign exchange and banking re- gimes imposed 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 invest- ment even more, after Karimov’s government in- stalled controls designed to support Uzbekistan’s infant industries via an import substitution strat- egy 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, accord- ing to preliminary findings,” Scandinavian bank- ing 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 profile added.
The relatively low foreign investment levels can be contrasted with FDI in Uzbekistan’s neighbour,