On the eve of the 29^th anniversary of independence of Uzbekistan, Shavkat Mirziyoyev, the President of Uzbekistan, laid out his vision for the country. New policies will increase investments into education, healthcare and social spheres and have become priorities for his government. The coronavirus (COVID-19) epidemic has been a litmus test and has thrown into stark relief how underinvested the country was in its people and infrastructure, as well as the lack of trust in society. The new policies are supposed to address these issues and kick off the country’s third renaissance.

As the long-serving prime minister under the country’s first (and until now, only) President Islam Karimov, Mirziyoyev is intimately familiar with Uzbekistan’s problems and has launched a comprehensive programme that touches on all aspects of life.

At the same time, he has not only opened the country's doors to the outside world, but he has reached out to Uzbekistan’s neighbours in Central Asia and launched a diplomatic charm offensive to rebuild ties with the countries that surround Uzbekistan.

From the earliest days of his presidency, Mirziyoyev has worked to improve regional co-operation with other Central Asian neighbours. Travelling restrictions have been abolished and economic co-operation encouraged.

Uzbekistan has been a platform to discuss the resolution of the Afghan peace process and during his speech to the United Nations General Assembly (UNGA) he proposed a new body under the UN’s auspices specifically to help Afghanistan recover from its many years in isolation and war. Tashkent has already signed a 10-year contract to supply power to Afghanistan and Uzbek Railways are helping to re-build the Afghan rail link from Termez to Hairaton, which is one of the few transport connections Afghanistan has to the outside world. Since the reforms took place regional tourism and trade have expanded greatly, but while Uzbekistan's population of 34mn people is an interesting market for manufacturers and investors, a regional market of almost 100mn people is even more interesting for investors.

How can these changes be brought about?

Political openness

The government’s attitude to the people has radically changed. From the start, the government launched President’s Receptions, where people could voice their concerns, raise issues and describe their problems directly to the government. These receptions later were turned into a Ministry of Civil Services, which led to the opening of “Single Window” that did away with bureaucracy and the glacial government services. Chores like opening a bank that used to take weeks to accumulate sheaves of documents can now be done with one trip to the single window. Property registration has been added to the single window system and more services will be included.

The humiliating 2-year exit visa regime was abolished and the government started issuing 10-year international passports, simplifying travel for Uzbek citizens. The visa regime with 100 countries softened and the country introduced 5-day visa free transit rules as well as a 30-day no visa regime to encourage tourism.

Over 1mn new students used to sit for entrance exams for 60,000 available places at universities, which led to corruption and a low quality of education. But over the last three years 43 universities or branches of foreign universities have opened in the country as the government prepares to educate a new generation. The South Korean Inha University has been focusing on the IT sector and other universities are moving in. The kindergartens and primary schools have also received government aid to improve the quality of education from the ground up.

Bank sector reform

The reform of the banking sector is probably the most advanced of all the reforms and will materially improve the functioning of the economy. Banks used to be little more than the financial arms of the various ministries, distributing state funds and collecting physical cash. Hard currency was rationed by the central bank and commercial banks played no significant role in the economy, except as the agent for the government to collect documents for converting currency and forex control.

Since the reforms have begun, the banking sector has been blown open as the suffocating restrictions were stripped away. A comprehensive Banking Sector Reform Road Map was adopted with a concrete road map, containing definite steps that are the distinct responsibility of named individuals.

Uzbekistan has 31 banks, 13 of which have state participation. According to the Road Map, the state will only retain four policy banks and all the others will be fully privatised. To get these banks ready for sale the state has embarked on a massive transformation process with the assistance of International Financial Corporation (IFC), European Bank for Reconstruction and Development (EBRD), Asian Development Bank (ADB), the Big Four international consultancies and others.

The IFC has already provided one of the top banks with a $35mn convertible loan and currently three other banks are being prepared for partial privatisation by the development banks. The Ministry of Finance has created a roster of international independent directors and state-owned banks' supervisory board operations are also changing.

Banking system assets to GDP currently stand at 52.1% and domestic loans to GDP at 40.4%, which is quite modest.

But a great deal of work still needs to be done. Functioning credit bureaus need to be set up. A domestic debt market should be establishment. A corporate governance institute should be created to certify independent directors.

One of the problems in this process is that onerous tendering requirements for state-owned banks, which are there to eradicate corruption and improve transparency, are slowing the pave of reforms. Tenders can take up to a year to complete, while private banks are exempt from the need to hold tenders.

Two foreign banks – TBC bank of Georgia and Halyk Bank of Kazakhstan (under brand name Tenge Bank) – have already entered the Uzbek market and have been granted a banking licence. A local fully digital bank Anor has also received a licence. Other players, such as OTP Bank of Hungary, are also reportedly looking into setting up shop in Uzbekistan.

Financial markets reform

Another big branch of the economy that has already been transformed is the financial sector. In 2017 Uzbekistan finally allowed full convertibility for its national currency, the som, and in 2019 all profit repatriation restrictions were lifted. Alarmed by the amount of hard currency that was being eaten up by booming imports in the first half of the '90s, Karimov clamped down on convertibility in 1996 and getting hold of hard currency was extremely difficult until the recent reform.

Tashkent Stock Exchange (TSE) is currently 25% owned by Korean Stock Exchange (KSE) and there are talks currently about the exchange purchasing a controlling stake in TSE. Thanks to foreign involvement, currently it is possible to download TSE mobile application and trade from anywhere in the world (although you still need to open an account with an Uzbek brokerage firm first, though).

Currently, bank shares make up over 80% of the TSE market capitalisation. The government wants to use the exchange as a platform to carry out its ambitious privatisation programme and plans to hold 20 IPOs and SPOs in the next two years to increase the representation of industrial firms on the exchange. A plastic products producer and a glass manufacturer have listed recently, and increasing the free float of the largest cement producer is also envisaged.

However, some restrictions remain, such as infrastructural requirement for custodial services, restrictions on the purchase of bank shares, and funds or companies from some offshore jurisdictions, such as Cayman Islands, are banned. Any would-be buyer of an Uzbek bank must have a banking licence themselves or be exempt, such as a development financial institution. These rules are to stop speculators and prevent international portfolio investors from making more than small investments into banks.

Uzbekistan has obtained an international credit rating of BB- and successfully issued $1bn Eurobonds with tenors of 5 and 10 years, which was followed up by a $300mn bond issue by a leading Uzbek bank – SQB – last year. Most of the proceeds of this fiat money were invested into the production of physical gold at Navoi and Almalyk Mining companies, which increased the levels of production and the amount of gold in the state reserves.

A few more banks are preparing to tap the fixed income market. Navoi Mining (the largest gold and uranium producer) and Uzbek Hydro Power have also announced their intentions to offer international bonds.

The Uzbek som has been quite stable since the beginning of 2020, primarily due to lower than expected inflation, because the price of the country’s main import commodity – oil – has decreased while the price of its major export commodity – gold – has increased. Although remittances from Russia and Kazakhstan initially decreased due to the falling value of both the Russian ruble and the Kazakh tenge, at the end of the summer the volumes of remittances have begun to recover again.

Overall, the government’s debt has been increasing and is anticipated to reach about 35% of GDP and 137% of budget revenues; however, most of these loan obligations are soft loans provided by international financial institutions (IFIs) to counter the effects of the pandemic or export credit agencies supporting major infrastructure projects, some extending to 20 years with 10-year grace period at low interest rates. For example, JICA provided $1.2bn for 30 years with a 10-year grace period at low interest rates. Eurobond debt is about 5.5% of the total government debt of Uzbekistan.

Most of the imports into the country have been machinery and equipment, which should generate value-added products in the future.

Privatisation

Uzbekistan never carried out mass privatisations like Russia or Kazakhstan did in the '90s. There are approximately 3,000 state-owned companies and they comprise more than 55% of the economy. The government wants to decrease its stakes massively in companies by 81% and either sell or liquidate these firms.

Nothing is off the list: banks, telecoms companies, transport, insurance companies, alcoholic beverage companies will all be put up for sale. Even the national crown jewels, such as Navoi Mining and Almalyk Mining, will be listed on international stock exchanges and national oil and gas corporation Uzbekneftgaz has been ordered to spin off all its non-core businesses.

The state agency UzAssets Company has been set up to manage the process and prepare the companies for sale.

Tax Reform

Uzbekistan has introduced progressive tax reforms, which has brought the number of taxes from 13 to 9, as well as introducing deferment and tax payments in instalments. A VAT excess return process is being put in place. The corporate tax rate has been set at 15% (banks pay 20%), with personal income tax lowered to a 12% flat tax, down from 23%. Many off-budget funds payments have been abolished. The government is working on improving the tax collection processes and is laying off large numbers of tax inspectors at the district level.

Agricultural reforms

Agriculture has been the cornerstone of the Uzbek economy since ancient times. The most important part of agriculture, cotton production, has been the focus of international criticism for using forced labour and has ended up on a blacklist, which severely hampers efforts to develop the textile industry, as international companies can neither invest nor buy the products because of the embargo.

Cotton has been the major export earner since independence and has been funded by the government. Cotton was bought cheaply from the farmers and exported for hard currency. One of the first reforms the government enacted was to create clusters, where the cotton is now grown by the processors. The government is leaving the sector.

Uzbekistan is one of only two double-landlocked countries in the world, which makes transportation a concern. The government has taken the approach that the export of finished goods is more profitable than simply selling commodities, and so has taken the radical step of banning the export of raw cotton and increased the taxes on the export of yarn, to stimulate local production of finished goods.

The improving business climate (Uzbekistan moved up to 69^th position on the World Bank Ease of Doing business from 166^th place in 2012), lowering taxes and the abundance of youthful labour should allow the country to become a powerhouse in textiles. Hence the government is doing its best to eliminate any taint of forced labour so that it can finally be removed from the Cotton Campaign boycott.

Energy sector reform

In the energy sector the government’s reforms have also made a lot of progress. The government has intensified investments into processing capacity, with a GTL project coming online at the end of 2020, a new petrochemical project starting in the Jizzakh Oil complex, and the Surhan Gas complex project also well underway. The goal is to end natural gas exports in 2025 and process all this gas domestically, using it as feedstock for things such as petrochemicals where the finished products can be exported.

Value chain production is not possible without a stable and cheap supply of power. Unlike the policies of the past, where the government was focused on controlling power generation, the government has signed off on a large number of power generation projects.

The newly established PPP Agency has 32 projects in the pipeline worth $3.85bn, of which four have already been signed off on. The IFC’s Scaling Solar project was given permission to sign off on a 100-MW solar plant in Samarkand region with Masdar (UAE) and another 100-MW solar plant will be constructed with France’s Total Eren in Samarkand. In the Syrdarya region a 1,500-MW thermal power plant (TPP) is being built by ACWA of the Kingdom of Saudi Arabia. The government is working with EBRD to increase wind power generation in Karakalpakistan. Peak consumption in the winter of 2030 is expected to be 20.9 GW compared with 10.4 GW in 2019, which means power generating capacity needs to double by 2030, and Uzbekistan has set ambitious goals of increasing the share of renewable energy production as part of the development of the sector.

Team

All the plans are great, but one of Uzbekistan’s biggest problems is finding qualified people to implement them, and more importantly, to take responsibility for them.

The legacy of the faceless Soviet bureaucracy is a huge hurdle for many of the countries in the Former Soviet Union (FSU), where bureaucrats had every incentive to avoid taking responsibility for projects; however, today’s reforms have been assigned to identified names.

Most of the financial and banking block of the government is led by young, Western educated technocrats whose average age is about 40-45 years.

The progressive chairman of the Central Bank, Mamarizo Nurmuradov, is in his 40s, as is the Minister of Economy and Poverty Reduction, Jamshid Kuchkarov, as is the young Minister of Finance and his team, Timur Ishmetov, Omonulla Nasretdinhojaev and Ruslanbek Davletov. The Minister of Justice was a mere 38 when he was appointed to one of the toughest jobs in the country.

The investments' focal point is the Deputy Prime Minister in charge of investments, the energetic and charismatic Sardor Umurzakov, who can be seen one day negotiating multi-billion coronavirus (COVID-19) response concessional loans with the World Bank, the next day rubbing shoulders in Islamabad negotiating a regional trade deal, and the day after that sitting down with the state development bank VEB of Russia to sign a multi-billion non-ferrous plant renovation contract.

Another rising star is Atabek Nazirov, formerly of Goldman Sachs and the EBRD, who is tackling the tough capital markets issues at Capital Markets Development Agency.

Together with these Western-minded, technocratic, focused young Turks, the can-do President Mirziyoyev has a strong hand to play the game. If the comprehensive economic reforms achieve their goals, perhaps Uzbekistan can have its third Renaissance.