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The economy is based primarily on agriculture and agricultural processing; Uzbekistan is a major producer and exporter of cotton. It also is a major producer of gold with the largest open-pit gold mine in the world and has substantial deposits of copper, strategic minerals, gas, and oil. Since independence, the government has stated that it is committed to a gradual transition to a free market economy but has been extremely cautious in moving to a market-based economy.
Although it is difficult to make an accurate estimate of economic growth in Uzbekistan--because of the unreliable nature of government statistics, which often serve political rather than economic ends--economic growth is far below potential due to:
the country's poor investment climate;
failure to attract foreign investment;
an extremely restrictive trade regime, implemented in order to meet a strategy of limiting imports of consumer goods;
failure to reform the agricultural sector of the economy, potentially the engine of economic growth for this largely rural economy; and
the price system in Uzbekistan, which is not functioning properly due to government intervention in markets.
The government accepted obligations under Article VIII of the International Monetary Fund (IMF) Articles of Agreement on October 15, 2003, establishing full current account convertibility. The government’s restrictive trade regime has crippled the economy and the government urgently needs to rescind its draconian trade measures. Substantial structural reform is needed, particularly in the area of improving the investment climate for foreign investors and in freeing the agricultural sector from smothering state control. Continuing restrictions on currency convertibility and other government measures to control economic activity, including the implementation of severe import restrictions and partial closure of Uzbekistan's borders with Kazakhstan and Kyrgyzstan, have constrained economic growth and led international lending organizations to suspend or scale back credits. The closure of the borders with neighboring Kazakhstan and Kyrgyzstan in 2002 almost paralyzed Uzbekistan’s consumer market, although some goods are still being smuggled into the country.
The government has made progress in reducing inflation and the budget deficit, but government statistics understate both, while overstating economic growth. There are no reliable statistics on unemployment, which is believed to be high and growing.
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The government claims that the GDP rose 4.1% in 2003; however, the U.S Government does not think it was greater than 0.3%. Unemployment and underemployment are very high, but reliable figures are difficult to obtain, as no recent credible surveying has been done. Underemployment in the agricultural sector is particularly high--which is important given the fact that 60% of the population is rural-based. Many observers believe that employment growth and real wage growth have been stagnant, given virtually no growth in output.
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Inflation was approximately 21.9% in 2003. In order to combat inflation, the government has exercised strict currency controls and severe shortages of cash exist in the country. From 1996 until the spring of 2003, the official and so-called "commercial" exchange rate were highly overvalued. Many businesses and individuals were unable to buy dollars legally at these rates, so a widespread black market developed to meet hard currency demand. However, by mid-2003, the gap between the black market, official, and commercial rates had been reduced to approximately 8%. In 2004, the gap between the two rates is negligible. Although the unification of the exchange rates is a positive development, recent government restrictions on the amount of local currency and hard currency that can be carried across the Uzbek border in either direction lessen the effect of currency convertibility on the Uzbek economy. Liberalization of the trade regime, however, is a prerequisite for Uzbekistan to proceed to an IMF-financed program.
Outstanding external debt reached $4.6 billion as of the end of 2003. Tax collection rates remained high, due to the use of the banking system by the government as a collection agency. Technical assistance from the World Bank, Office of Technical Assistance at the Treasury Department, and from the UN Development Program (UNDP) is being provided in reforming the Central Bank and Ministry of Finance into institutions that conduct market-oriented fiscal and monetary policy.
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Agriculture and the agro-industrial sector contribute more than 40% to Uzbekistan's GDP. Cotton is Uzbekistan's dominant crop, accounting for roughly 45% of the country's exports. Gold is second at 22%. Uzbekistan also produces significant amounts of silk, fruit, and vegetables. Virtually all agriculture involves heavy irrigation. Farmers and agricultural workers have very low incomes because the government uses the difference between the world prices of cotton and wheat and what it pays the farmers to subsidize highly inefficient capital-intensive industrial concerns, such as factories producing automobiles, airplanes, and tractors.
Consequently, agricultural productivity is low, with many farmers focusing on producing fruits and vegetables--for which supply and demand determine the price--on small plots of land, as well as smuggling cotton and wheat across the border with Kazakhstan and Kyrgyzstan in order to obtain higher prices.
Minerals and mining also are important to Uzbekistan's economy. Gold is Uzbekistan's second most important foreign exchange earner at 22%. Uzbekistan is the world's seventh-largest producer, mining about 80 tons per annum, and holds the fourth-largest reserves in the world. Uzbekistan has an abundance of natural gas, used both for domestic consumption and export; oil almost sufficient for domestic needs; and significant reserves of copper, lead, zinc, tungsten, and uranium. Inefficiency in energy use is extremely high, given the failure to use realistic price signals to cause consumers to conserve energy.
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Uzbekistan has adopted a policy of import substitution. The multiple exchange rate system and the highly over-regulated trade regime have led to both import and export declines since 1996, although imports have declined more than exports, as the government squeezed imports to maintain hard currency reserves. Draconian tariffs and border closures imposed in the summer and fall of 2002 led to massive decreases in imports of both consumer products and capital equipment. Uzbekistan's traditional "trade" partners are New Independent States (NIS) countries, notably Russia, Ukraine, Kazakhstan, and the other Central Asian countries. Non-NIS partners have been increasing in importance in recent years, with the U.S., Korea, Germany, Japan, and Turkey being the most active.
Uzbekistan is a member of the IMF, the World Bank, the Asian Development Bank, and the European Bank for Reconstruction and Development. It has observer status at the World Trade Organization (WTO) and has publicly stated its intention to accede to the WTO. It is a member of the World Intellectual Property Organization and is a signatory to the Convention on Settlement of Investment Disputes Between States and Nationals of Other States, the Paris Convention on Industrial Property, the Madrid Agreement on Trademarks Protection, and the Patent Cooperation Treaty. In 2003, Uzbekistan was again placed on the special "301" Watch List for lack of intellectual copyright protection.
Uzbekistan's previous lack of currency convertibility was one of the reasons that foreign direct investment (FDI) inflows dwindled to a trickle. In fact, Uzbekistan has the lowest level of FDI per capita in the Commonwealth of Independent States (CIS). Since Uzbekistan's independence, U.S. firms have invested roughly $500 million in Uzbekistan. Large U.S. investors include Newmont, reprocessing tailings from the Muruntau gold mine; Case Corporation, manufacturing and servicing cotton harvesters and tractors; Coca Cola, with bottling plants in Tashkent, Namangan and Samarkand; Texaco, producing lubricants for sale in the Uzbek market; and Baker Hughes, in oil and gas development. No large new investments have taken place from the U.S. in the last 5 years.
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