Lifting controls on trade and exchange rates: how far will Tashkent go?
Introduction
Are the current liberalizations of trade and exchange rates in Uzbekistan sufficient to begin a new era in the country’s history? Do not hold your breath...
The reforms
Shavkat Mirziyoyev, President of Uzbekistan and successor of the passed-away repressive Islam Karimov, launched several reforms, including liberalizing trade and exchange rates and easing overall business activity.
On September 2, the President signed a law, according to which, beginning September 5, Uzbek citizens can buy and sell foreign currency without restrictions at the market price. In comparison, under Karimov, the central bank fixed the official exchange rate, creating a large gap between this rate and the black market rate. There was also a third exchange rate, used in commodity exchanges. Exporters then had to exchange foreign-denominated revenues for national currency.
Nevertheless, this liberalization is far from complete. Unlike citizens of Kazakhstan, citizens of Uzbekistan are still not allowed to purchase foreign currency in exchange rate bureaus. One must create a conversion bank card to purchase dollars or euros and report about trips abroad. Cash may still be purchased only on the black market. This puts banks at a disadvantage, reports Center-1, an information service devoted to Central Asian news.
Uzbekistan is also liberalizing trade. Importers and exporters still have to obtain licenses, but since November 3, import contracts, amounting to less than 100 thousand dollars, are no longer subject to examination. Accounts receivable for export operations now become overdue within 120 days from the date of shipment of the product for export, unlike 60-90 days previously, reports the Uzbekistan Today newspaper.
Furthermore, Uzbekistan is working to enter the World Trade Organization (WTO). The 2018 State Program “A Year of Active Entrepreneurship, Innovational Ideas and Technologies” states that Uzbekistan will accelerate WTO accession, reports Khamid Berdiyev, of Podrobno.uz, a news information agency. As of 2018, the average applied tariff rate in Uzbekistan is 8.7%, with significant non-tariff barriers. Interestingly, in 2016, the average applied tariff rate was 7.2%, implying that the economy actually became more closed tariff-wise. In comparison, Kazakhstan, a WTO member since December 2015, has an a average applied tariffs rate of 4.7%, reports Heritage Foundation. The economy of Uzbekistan must become more open to join the WTO.
Tashkent is also easing restraints on overall business activity. Starting January 1, 2017, all unplanned inspections of enterprises are abolished. Withdrawing the right to conduct entrepreneurial activity is no longer among the penalties. New enterprises with foreign participation are entitled to pay the tax rates that existed on their registration date within 5 years, reports Dosym Satpayev, of the Ratel information agency.
The effects
The effects
Exchange rate and trade liberalizations increased both exports and imports, with imports growing slower than exports in 2017. Exchange rate trends may explain why import growth lagged.
The elimination of the gap between the official and the market exchange rate and new market conditions triggered depreciation of the official exchange rate. The official monthly average exchange rate of the soum depreciated from 4,109.11 soum per dollar in August to 7,288.93 soum per dollar in September for the bid price and from 4,167.09 soum per dollar in August to 7,343.77 soum per dollar in September for the ask price, reports OANDA Exchange Rates, the Internet branch of the econometric research firm Olsen & Associates. Since exporters no longer converted their earnings into national currency and since foreign currency was easier to purchase, more people bought and held foreign currency. The depreciation explains why inflation in Uzbekistan accelerated in 2017. A weaker soum made imports more expensive. Also, as more goods were exported abroad, their domestic supply decreased. The International Monetary Fund expects inflation to slow down in 2018.
Exchange rate and trade liberalization improved the current account balance. Exporters benefited, since their goods became cheaper for foreigners, and working and providing services abroad became more beneficial. The table below illustrates the above-mentioned economic parameters of Uzbekistan. Unemployment in Uzbekistan, as a percent of the labor force, decreased very slightly, from 8.8% in 2015 and 2016 to 8.7% in 2017, according to the World Bank. Growing willingness of exporters to hire more laborers may explain this decrease.
2015
|
2016
|
2017P
|
2018F
| |
Real GDP Growth, %
|
8.00
|
7.80
|
5.97
|
6.03
|
End-of-period Inflation, %
|
8.43
|
7.89
|
15.67
|
10.65
|
Imports of goods and services, % change
|
-6.00
|
4.25
|
3.64
|
6.09
|
Exports of goods and services, % change
|
1.78
|
-14.81
|
9.18
|
3.17
|
Current account balance, U.S. dollars
|
0.47
|
0.50
|
0.63
|
0.18
|
(P=projected, F=forecasted)
Sources: October 2017 IMF World Economic Outlook Database
Sources: October 2017 IMF World Economic Outlook Database
Table: Key Macroeconomic Indicators of Uzbekistan
Over time, Uzbekistan will benefit from increased trade. Trade helps countries specialize in goods that they are most productive in or which require factors (such as land or labor), that the country is most abundant in. In an open economy, consumers benefit from competition of domestic producers with importers. Intra-industry trade eliminates monopoly power of domestic producers and lowers prices. Though eliminating export restrictions, such as licensing procedures, increases prices of exported goods domestically, the gain to exporters (who can supply more and cheaper abroad) is higher than the loss to domestic consumers from higher prices.
Forced labor in some Uzbekistani industries prevents some employees from benefiting from trade. In June 2017, Human Rights Watch issued a report on forced labor in Uzbekistan, based on 257 detailed interviews and about 700 conversations with victims of forced and child labor. According to that report, in 2015 and 2016, the government forced teachers, students, medical personnel, and other employees of the public and private sectors to harvest cotton, upon the threats of expulsion from academic institutions, of firing, and of stopping welfare payments. Employees in almost every state-owned organization, except in large cities, took part in agricultural work, reports the Uzbek-German Forum for Human Rights. If this practice continues, growing cotton and other agricultural exports will imply more unpaid work.
Tashkent will have to work to end this practice to establish good relations with international organizations and foreign investors. A total of 274 companies pledged not to purchase cotton from Uzbekistan knowingly, due to the use of forced and child labor. The World Bank is financing half a billion dollars in agricultural projects, and can suspend the loans under credible evidence of violations of bans on forced and child labor, reports Human Rights Watch.
Prospects and incentives for further reform
Foreign investors will find Uzbekistan more attractive than before, but it is unlikely that many will substitute Uzbekistan for Kazakhstan. Investors coming to Uzbekistan benefit from lower labor costs and an already complete transition of presidential power, which reduces political risks. Yet incentives for the President for reforming further are mixed. High presidential power gives an incentive to keep both political and economic reforms superficial. A large class of entrepreneurs would be more likely to make political demands and erode it. In neighboring Turkmenistan, President Berdymukhamedov scrapped the welfare benefits in the area of utilities and allowed opera and circuses, unlike his predecessor, but the economy remains largely state-controlled and the government repressive. On the other hand, many more citizens of Uzbekistan legally work abroad. As of 2016, personal remittances accounted for 3.7% of the country’s GDP, according to the World Bank, while the official figure for Turkmenistan is 0%. These people may return at any time and demand higher standards of living from their government.
Conclusion
The exchange rate and trade liberalization measures that Uzbekistan undertook in 2017 are largely give-and-takes. Uzbekistan still has a long way to go, and its economy remains much more closed than that of neighboring Kazakhstan.
Forced labor in some Uzbekistani industries prevents some employees from benefiting from trade. In June 2017, Human Rights Watch issued a report on forced labor in Uzbekistan, based on 257 detailed interviews and about 700 conversations with victims of forced and child labor. According to that report, in 2015 and 2016, the government forced teachers, students, medical personnel, and other employees of the public and private sectors to harvest cotton, upon the threats of expulsion from academic institutions, of firing, and of stopping welfare payments. Employees in almost every state-owned organization, except in large cities, took part in agricultural work, reports the Uzbek-German Forum for Human Rights. If this practice continues, growing cotton and other agricultural exports will imply more unpaid work.
Tashkent will have to work to end this practice to establish good relations with international organizations and foreign investors. A total of 274 companies pledged not to purchase cotton from Uzbekistan knowingly, due to the use of forced and child labor. The World Bank is financing half a billion dollars in agricultural projects, and can suspend the loans under credible evidence of violations of bans on forced and child labor, reports Human Rights Watch.
Prospects and incentives for further reform
Foreign investors will find Uzbekistan more attractive than before, but it is unlikely that many will substitute Uzbekistan for Kazakhstan. Investors coming to Uzbekistan benefit from lower labor costs and an already complete transition of presidential power, which reduces political risks. Yet incentives for the President for reforming further are mixed. High presidential power gives an incentive to keep both political and economic reforms superficial. A large class of entrepreneurs would be more likely to make political demands and erode it. In neighboring Turkmenistan, President Berdymukhamedov scrapped the welfare benefits in the area of utilities and allowed opera and circuses, unlike his predecessor, but the economy remains largely state-controlled and the government repressive. On the other hand, many more citizens of Uzbekistan legally work abroad. As of 2016, personal remittances accounted for 3.7% of the country’s GDP, according to the World Bank, while the official figure for Turkmenistan is 0%. These people may return at any time and demand higher standards of living from their government.
Conclusion
The exchange rate and trade liberalization measures that Uzbekistan undertook in 2017 are largely give-and-takes. Uzbekistan still has a long way to go, and its economy remains much more closed than that of neighboring Kazakhstan.
References
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