The Uzbek economy has three key things going for it: it has growth; it has a young and growing population, and it has money.

Over the last four years Uzbekistan has been a frenzy of reform activity after Uzbek President Shavkat Mirziyoyev opened up the country and began the long overdue process of modernising the economy. And all that effort is starting to bear fruit: Uzbekistan was one of only three economies in the Europe and Central Asia (ECA) region that turned in positive economic growth during the annus horribilis of 2020.

Despite the severe impact of the coronavirus (COVID-19) pandemic that sent nearly every other country in the region into recession, thanks to market reforms implemented since a deep and comprehensive programme was launched in 2017 economic growth already had enough momentum to carry it through 2020.

“The COVID-19 pandemic had a short-term negative impact on the Uzbek economy, [but] the government had taken timely and decisive action. As a result, Uzbekistan has become one of the few countries to show economic growth in 2020,” the World Bank said in an assessment.

But only just. Uzbekistan’s economy had been growing at over 5% since 2018 and was slowly starting to accelerate in 2019 and into the first half of 2020, but the global lockdown hurt the country along with everyone else, and growth dropped off to almost zero in the third quarter of that year.

Now a rebound has started with 1.6% growth in the first quarter of this year, which the government hopes will continue to accelerate as the world bounces back. The World Bank forecasts that economic growth will return to 5% by the end of this year.

The main macroeconomic indicators are already starting to improve visibly. Industrial production was up 3.8% in the first quarter of 2021 over the same quarter in the previous year.

Growth is also being helped along by a positive current account that is expected to widen to 6% of GDP this year, as exports should recover faster than imports, according to the World Bank,

Looking further out growth will also be supported over the long term by the youthful population. Uzbekistan has one of the youngest populations in the whole Former Soviet Union (FSU). Already the fourth-largest population after Russia, Poland and Ukraine, it is expected to overtake both Ukraine and Poland in the coming decades.

But the basis for the country's growth is Mirziyoyev’s reform programme launched in February 2017 that is designed to unleash the country’s potential. The goal is to create a more open, integrated market economic model, improving international relations, strengthening the rule of law and judicial independence as well as achieving the liberalisation of the foreign exchange rate, according to the EBRD.

GIR

And thanks to its gold mines it has money. Last year Uzbekistan produced 100 tonnes of the yellow metal for the first time ever. The country has built up over $30bn in reserves, two thirds of which is in gold and that cash pile ensures the stability of the economy and the currency.

The gross international reserves are enough to cover most of its external debt, which is a relatively modest, but still all-time high, 57.8% of the country's nominal GDP in 2020 (the last data available), or $36.2bn. The debt has climbed in the last year from 42% of GDP in the previous year and has risen in the last years from the all-time low of 17.9% set in December 2016.

Still, with enough reserves to cover the external debt nearly dollar for dollar, Uzbekistan is in an enviable position. It makes the country very attractive as a potential bond issuer and the government said this week that it is contemplating more bond issues after its debut $750mn bond last year.

After a sharp increase at the end of 2020, the reserves began to decline again at the start of this year, when they were $34.9bn. But as the economy recovers they have grown by $600mn in the first half of this year to reach $35.5bn as of June 1. Of that, $13.7bn is in foreign exchange with another $21.5bn in gold, according to the central bank.

Inflows due to foreign direct investment (FDI) were only $369mn as of September 2020 and while foreign investors are very interested in the opening up of the country, that has yet to translate into big inflows of FDI as a source of capital. A lot more reform ground work still needs to be done to improve the investment climate.

Incomes too low

On the negative side of the ledger one of the biggest challenges is that average incomes are still too low and the poverty levels grew during the 2020 crisis year.

The number of people living in poverty ($3.20 a day, 2011 purchasing power parity adjusted) has increased during the pandemic to 9% of the population – well above the pre-crisis projection of 7.4% in 2020. As the pandemic led to job losses, income reductions and declining remittances, the population is still under pressure; nearly 1mn people dropped below the poverty line last year.

In the annual address to the Oliy Majlis delivered in December 2020, President Mirziyoyev reconfirmed the political commitment to continue on the path of social and economic reforms in 2021: to transform and privatise large state-owned enterprises (SOEs) in various sectors, invest in poverty and unemployment reduction, improve the social protection system, and develop human capital, including through better and more accessible health and education services.

In the short term the government is supporting the population with wage hikes in the public sector to give the economy a shot in the arm, but the wage gap even with its peers in Central Asia remains too wide.

Per capita income in Uzbekistan in 2019 was $7,420 in ppp terms, which puts it third from bottom in a table of its peers, ahead of only Kyrgyzstan ($5,080) and Tajikistan ($4,110), but very far behind Kazakhstan ($24,080). (There are no reliable figures for Turkmenistan.)

Kazakhstan is actually very advanced on this basis thanks to its oil production and second only to the regional leader Russia ($28,270). But Uzbekistan’s income is about half that of even the poorest members of Eastern Europe and the Caucasus: Belarus ($19,400), Ukraine ($13,750), Moldova ($14,330), Armenia ($14,500), Georgia ($15,260) and Azerbaijan ($14,400).

The low income levels in Uzbekistan remain a major challenge for the government and key focus of the economic reforms to create an investment environment where business can flourish.

“As the global pandemic abates, Uzbekistan still need to secure strong, sustainable and inclusive growth to narrow the income gap relative to other emerging economies and achieve the Sustainable Development Goals,” the World Bank says. “The authorities will need to continue with wide-ranging structural reforms to help achieve this, including by reducing the role of the state in the economy and creating an environment conducive to strong private sector growth, while expanding the social safety net to protect vulnerable households.”

And that is exactly what the government is planning to do. At the end of March 2021, the government approved a strategy to manage and reform SOEs, targeted for implementation in 2021-25 with the aim of reducing the overall number of SOEs by 75%.

As bne IntelliNews has reported, the privatisation drive in Uzbekistan is already moving off the drawing board and into the boardrooms. The newly appointed State Asset Management Agency (SAMA) head has started to implement the Presidential decree #6096 that covers privatisation with a new zeal. SAMA has announced tenders to select sell-side advisors and valuation services for real estate assets and select SOEs, with the first auctions slated to happen this year.

Inflation

Another serious problem the country is facing is inflation that has been made worse by the pandemic and rapidly rising global food prices. All the countries of the region are suffering from high inflation as bne IntelliNews reported recently in a DATACRUNCH on inflation, but inflation has been especially tenacious in Uzbekistan and was running at 16% in 2019 – the highest level in the region.

Still, the central bank has made good progress in bringing the rate down. The prudent policies of the central bank mean that while inflation has been rising in many other countries in the region, in Uzbekistan it has been falling steadily over the last two years and dropped to under 11% this year to post 10.90% in May.

The inflation rate in Uzbekistan is expected to be 9% by the end of the second quarter, according to Trading Economics, and in the long term it is projected to trend around that level for rest of this year and into the next.

Uzbekistan earns top marks for effort and the student that has showed the most progress with reforms in the last two years, but it still has much work ahead. However, having managed to continue to grow while the rest of the region fell into recession in 2020 highlights that the economy already has some growth momentum. If the government sticks to its current reform agenda it hopeful it can add some more.