Previous Quarterly Editions
Expropriation Risk: 58 55 56 55 Political Violence Risk: 38 39 39 40 Terrorism Risk: 50 50 50 48 Exchange Transfer and Trade Sanction Risk: 56 58 60 60 Sovereign Default Risk: 54 54 56 54
TREND ▼ OUTLOOK ►
Despite the challenges associated with COVID-19, Uzbekistan continues on the path of extensive structural reform initiated by Shavqat Mirzioyev when he became president in 2016. His government has already taken steps towards capital markets reform and introducing a degree of privatisation of its largely state-run economy, and for 2020 it adopted a new commercial investment law and set out moves to liberalise the fuel and energy markets. While the rapid pace of reform has at times served to complicate the investment environment and overwhelmed the civil service, the government’s sense of urgency is justified. Uzbekistan is in the midst of a demographic boom, which is seeing huge numbers of young people enter the workforce each year with little hope of finding secure employment. The country often suffers from electricity and gas shortages, creating further tension among the population. The onset of the pandemic has exacerbated these challenges. The government initiated an early lockdown with a face mask requirement that was heavily enforced by the state’s extensive security capability. However, having begun to lift the lockdown in May 2020 and introduced a further loosening in June 2020, Tashkent again closed markets, parks, and entertainment venues and curtailed public transport and outdoor gatherings in July 2020 as the number of cases passed 13,000. Initially on course to achieve growth of at least 5.5% in 2020, the economy will now be fortunate to see growth reach 1% this year. In particular, the crisis has devastated the earning potential of Uzbekistan’s large migrant workforce, whose contributions make up some 15% of GDP and are a critical lifeline for many families. Uzbekistan has also witnessed a severe drop in imports, which largely consisted of critical capital goods needed to increase Uzbekistan’s productivity. In response, the government has turned its attention to social welfare issues, creating a new ministry for poverty reduction to coordinate its efforts in this area. However, despite the government’s evident attempts to spread the benefits of economic growth more widely, there is also a growing sense that a new oligarch class is developing with privileged access to the president as political reform trails economic progress. In the legislative elections at the end of 2019, the same five government-approved parties won approximately the same number of seats, and no new parties were permitted to field candidates. Popular opinion has also somewhat turned against Russia, with whom Uzbekistan was seen to be growing closer to under Mirzioyev. In response, the government has taken a step back from Moscow recently, resisting pressure to fully integrate Uzbekistan into the Russian-led Eurasian Economic Union. In May 2020, parliament voted to adopt observer status within the bloc, a position that does not impose any obligations on Tashkent. While the government will not reject the idea of membership outright, it is unlikely to pursue deeper integration in the near term. Despite the political and economic importance of the relationship with Russia, China has grown to be Uzbekistan’s largest trade partner and its primary source of credit. Developing this relationship will be critical to Uzbekistan’s economic recovery and future growth.
Under President Mirzioyev, the government identified key pillars of its 2017-21 national development strategy to be; public administration reform, the rule of law, and economic development and liberalisation. The most recent move has been new legislation that consolidates and clarifies the legal frameworks governing multiple forms of investment. The government also created a foreign investors council to be chaired by the president, a long-awaited development. Nevertheless, investors will still encounter difficulties with the implementation of these laws. The state bureaucracy is under resourced, over complicated, and opaque. Moreover, the judiciary cannot be considered independent and foreign investors will find themselves competing with a new and growing oligarch class that enjoys strong political connections.
TREND ▲ OUTLOOK ▲
Minor localised demonstrations over living standards, and instances of poor public service provision, are relatively common in Uzbekistan. President Mirzioyev has used this discontent to win the broad support of the population by positioning himself as a reformer, often in contrast to local officials. However, the COVID-19 pandemic is producing a significant and prolonged fall in living standards as remittances dry up and the economy struggles with a second lockdown. The ministry for poverty reduction is meant to improve the effective targeting of what government assistance there is, but it is possible that Tashkent may have to increase its reliance on the security services if demonstrations become more significant later in 2020.
Uzbekistan has not seen any incidents of domestic terror in recent years. However, it has been the source for recruits for Islamic State activity in the Middle East, and the government takes the prospect of their return very seriously. The government regularly reports on arrests of members of extremist groups, which includes the the detention made of many in a ‘jihadi group’ in June 2020, but is known to overplay the threat of terrorism in order to clamp down on other dissident activity. While President Mirzioyev initially sought to relax restrictions on public expressions of religion, particularly in schools and universities, the government has been reversing course over the last year, bringing in new restrictions on worship and public displays of religious affiliation.
TREND ► OUTLOOK ▲
The Uzbek som has fallen by more than 7% during the COVID-19 pandemic as exports fall and remittance income collapses but, with the government having recently completed a two-year process to float the som, a return to currency controls is unlikely. The central bank made a slight cut to its base rate from 16% to 15% in April 2020 as part of efforts to stimulate economic activity, but inflation remains a major policy concern.
Uzbekistan’s finances have remained relatively strong throughout the COVID-19 crisis, helped by a debt-to-GDP ratio below 25%, and the government has been able to gather one billion USD for extra crisis-related expenditure. It has also reached out to the major international financial institutions, securing pledges of support totalling nearly two billion USD. A major producer of gold, Uzbekistan has also benefited from the buoyant gold price, which has contributed to an increase in foreign currency reserves of almost 10% during the first half of 2020.
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