RaboResearch - Economic Research

Country Report Uzbekistan

Country Report


Flag Uzbekistan
Growth in Uzbekistan is likely to weaken somewhat in the coming years, but remain sound on the back of high (public) investment growth. Would president Karimov decide to run for another term, political uncertainty will be eased temporarily.

Strengths (+) and weaknesses (-)

(+) Sound economic growth prospects

Growth prospects for Uzbekistan are sound due to sustained, strong inflows of foreign capital, a major push of public-infrastructure construction, and still-strong commodity exports.  

(+) Strong external position

FX-reserves are substantial and exceed total external debt. However, the convertibility of the currency is a problem due to government controls. Furthermore, data suggest that there are large unofficial capital outflows.

(-) Weak institutions and dictatorial government

Institutional quality is weak and corruption is widespread. The government rules in an authoritarian fashion and tries to further increase its control over business decisions.

(-) Succession risks heighten political tensions

Considerable uncertainty will remain over who might succeed the 76-year-old Islam Karimov as president, which increases political tensions. 

Key developments

1. Growth is set to weaken, but remain strong on the back of government support

In the coming years, economic growth in Uzbekistan is expected to weaken from above 8% in the past years to between 6% and 7% in the years ahead. We note that official growth estimates continue to put growth at 8% a year or higher. However, inflation is estimated by the EIU at roughly 12% this year and 11% next year - between 2 and 3 percentage points higher than the official figures - on the back of strong monetary growth and public expenditure increases. As a result, the official growth figures likely overstate the country’s actual growth performance. GDP growth will be supported by government (-induced) investment and expenditures. Current expenditures are raised by means of increasing public sector wages and social payments, which will support private consumption. Investments in infrastructure and industry are partly made off-balance – financed by the Fund for Reconstruction and Development. Also, the government plans to finance a part of the capital investment program externally by means of concessional loans and foreign direct investments. Foreign investors – attracted by the country’s natural endowments - continue to invest in Uzbekistan despite the country’s weak business climate. In this regard, we note that the government has improved the protection of foreign investors’ rights in the past years.

2. Current account surplus narrows as import growth accelerates

The current account surplus narrowed from about 6% of GDP in 2010/11 to around 2.5% of GDP in 2013. Increased investment activity in Uzbekistan is the main reason for this deterioration. Aside from the increasing deficit on the income account, the country’s trade surplus has narrowed significantly in the past years. Although the government has strict import controls, imports needed for investments are allowed. The overall current account surplus continues to be supported by a large and stable inflow of remittances (roughly USD 2.8bn a year) sent home by Uzbek immigrant workers abroad. In all, the current account balance is expected to hover around 2.5% of GDP in the coming years. However, we note that data suggest that there are large unofficial capital outflows.

Figure 1: Growth is expected to slow
Figure 1: Growth is expected to slowSource: EIU
Figure 2: Current account surplus narrows
Figure 2: Current account surplus narrowsSource: EIU

3. 'Elections” are scheduled in 2014 and 2015

Elections are held regularly in Uzbekistan. However, as the government – led by president Karimov – tightly controls the political environment, elections in Uzbekistan are not free nor fair. Any meaningful opposition is not present in Uzbekistan, following years of political repression. In December this year, Uzbeks can once again vote for their country’s rubber stamp parliament. The next presidential elections are scheduled for 2015 and the question who will succeed Karimov is already resulting in some political instability. His daughter Gulnara Karimova appears to have been involved in a power struggle with the aim to position herself for the top position. She has started a feud with other contenders that may succeed her father, such as Azimov, the first deputy prime minister, and accused other members of the Karimov family – including her younger sister Lola and Mother Tatyana - of conspiring to grab power with the aid of Inoyatov, Uzbekistan’s head of intelligence. However, Karimov, who is 76 years old and has been in power since 1989 – before the country’s independence - has hinted that he “wants to keep working”. This could imply that Karimov is considering running for another term in office. Islam Karimov’s succession will be a delicate and politically difficult process. If president Karimov decides to run for another term, he will certainly win the elections. However, political uncertainty regarding the succession will only be eased temporarily. Given Karimov’s age, domestic political tensions are set to surface in the medium-term if not short-term.

Factsheet of Uzbekistan
Factsheet of UzbekistanSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Due to limited data availability, the figures presented in this report should be treated as indicative.

Background information

Uzbekistan is a land-locked country located in Central Asia with a very low level of development. With a per capita income of USD 1,879 a year, Uzbekistan is among the poorest countries in the CIS region. Following independence from Russia in September 1991, the government continued its Soviet-style command economy with subsidies and tight controls on production and prices. While aware of the need to improve the investment climate, the government still takes measures that often further increase, not decrease, its tight control over business decisions. The economy predominantly relies on the export of labor (remittances), gold, gas and cotton. Most ordinary Uzbek’s make a living from agriculture or live on remittances. With 40% of the population below the age of 16, creating enough employment will be a long-term challenge for the government. Uzbekistan’s president, Islam Karimov, is ruling the country in an authoritarian fashion. Power is highly centralized within the executive, and more specifically in the person of Mr. Karimov himself. Elections are held regularly, but are a farce, as they are manipulated by the government, while any real opposition is absent. Economic, religious and press freedom are strictly limited, the legal system is not independent, forced labor is a problem and corruption continues to be endemic.

Economic indicators of Uzbekistan
Economic indicators of UzbekistanSource: EIU

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