Salvation through Investments

The economy of Uzbekistan has been subjected to a major overhaul due to the coronavirus pandemic. Under these new and challenging circumstances, what mattered was how the state has coped with difficulties and what support measures it has provided for both the public and business to survive in this extraordinary situation. But most importantly, what can the authorities offer for overcoming the current crisis?

Learning from mistakes

Now, after some passage of time, it’s obvious that a lot of mistakes could have been avoided, especially those made at the beginning of the coronavirus pandemic. For instance, among the anti-crisis measures, a lot of support was given to areas with a high level of corruption, and efficient control of planned budget became an intractable task.

The authorities received the most public backlash for their inaction in financially aiding the citizens during the first, the most challenging, lockdown. People deprived of sources of income were left alone with their problems. The compensations being paid now have come too late. And when various machinations around the payout of the compensation money were discovered, it only added fuel to the fire. From the total number of recipients needing direct financial aid (about 5 million people), only a million are receiving it at the moment, and even then with great difficulties.

Businesses were also presented with preferences which could not stimulate restarting activity in a short time. Measures for providing cheap working capital announced by the government and the central bank of Uzbekistan, unfortunately, remained ink on paper, since banks don’t have their own funds anymore to finance «cheap» loans or any other kinds of loans.

October is the deadline for payments on extended loans and taxes. I assume that the administrative forces, tax authorities and banks will make every effort to collect those payments. It’s clear as day that businesses have not recovered yet and the public does not have enough savings, so it’s going to be extremely hard for them to comply with their tax and loan obligations.

Things done right

Of course, some government measures could be seen as things done the right way. First of all, this includes creating the Anti-Crisis Fund, which has raised significant resources. Announcing a strict lockdown helped mitigate the spread of the disease and win time to ready the healthcare system. Tax preferences for particular business entities and individual industries, as well as concessions for small business such as extended loan payments and other payments, were of great importance and produced a small positive effect.

The pandemic will not pass without a trace and is going to have dire consequences. By my estimates, a decrease in the real GDP by the end of the year could amount to 3.2%, budget deficit without accounting for loans will amount to 6% of the GDP, the inflation level will amount to 13% annually, and the number of small and medium businesses will decrease by 23-25%. Moreover, the dollar exchange rate, unemployment and poverty levels in the country will all increase.

To invest and regain

Salvation in the current situation could be found through an active investment policy of the state. But to attract significant funds, reforms are required. 

At the moment, the liberalization degree of the economy of Uzbekistan amounts to around 40%, if it is measured as a share of the real private sector in the total GDP volume. And if we take into account administrative influence of the government bodies on operational activity, as well as difficulties related to acquiring various permits and licenses, the liberalization level would be even lower.

Unfortunately, the economic policy of the state does not sufficiently meet investors’ needs yet. Businesses which invest their own money have to pay huge interests to withdraw funds for their needs. Even when implementing smaller projects, investors cannot rely on help from banks and investment funds, whereas the price of access to the infrastructure – energy, water supply, motor roads – is not low in the slightest. The most astounding thing is that in a country with the official unemployment level of about 13%, the cost of labor is rather high, because life in Uzbek cities is not cheap.

Call for integration

In spite of everything, investors, especially foreign ones, are actively interested in the country’s economy. Even in current troubled circumstances, there is a number of industries which are attractive for capital investment. This concerns pharmaceutics, production of hygiene items and construction materials, the IT field, especially in the banking sector (e-commerce) and technologies around activities of state agencies (the e-government system), as well as jewelry and construction.

A lot of foreign countries are currently active in the Uzbekistan market. But investors from the neighboring countries, especially Kazakhstan, have a number of advantages for active economic interaction. First of all, those include closeness in mentality and good existing neighbor relations. We need to develop together at the regional level by integrating the economies of the two countries. The demand for this exists and is becoming more and more relevant, and in my opinion, we have no alternative.

Banking breakthrough 

However, when investing into the Uzbek economy, businesses should realize that the banking system of the country is highly conservative and isn’t yet ready to offer fully functional financial tools and guarantees to insure collectability of invested money. As for the banks themselves, currently they experience issues with liquidity and collection of issued loans, especially with preferential rates under the government programs for stimulating entrepreneurship.

At the same time, I approve of investments into the banking sector itself since I believe that this is the sector to have the first real economic revolution in the best sense of the word.