INVESTMENT CLIMATE IN THE REPUBLIC OF UZBEKISTAN:
CURRENT STATE, CHALLENGES AND SOLUTIONS
INVESTMENTS - DRIVER OF ECONOMIC GROWTH
As you know, a favorable investment climate is a prerequisite for ensuring a stable high development of the economy, attracting investments in regions and industries, and enhancing entrepreneurial activity. It contributes to the influx of foreign direct investment in important industrial and social projects, expands the possibilities for innovation, and improves the quality of socio-economic development.
Over the years of independence, Uzbekistan has gone through a difficult stage of restructuring the entire economy, accompanied by certain difficulties in terms of developing a suitable concept and mechanisms for its implementation.
In particular, it must be admitted that for a long time certain issues remained unresolved in the field of doing business (including currency conversion, free repatriation of profits, attracting international financial institutions, etc.), and this, in turn, seriously affected the investment attractiveness of the country .
However, in recent years the situation in this regard has begun to change drastically, and reforms aimed at improving the investment climate have gained a dynamic character.
Already now, in Uzbekistan, one of the drivers of economic growth is the attraction of foreign capital to the national economy.
In the first half of 2019, the volume of utilized foreign investments grew by 4.3 times compared to the same period in 2018 and amounted to $ 5.6 billion.
By the end of 2019, the development of foreign direct investment in the amount of at least $ 7 billion is expected. For comparison, this figure in 2018 amounted to $ 2.8 billion.
In addition, over two years, the number of enterprises with foreign investment doubled - the figure is more than 10 thousand. The share of investments in the GDP of Uzbekistan for the first time amounted to 38%.
According to the results of January-March 2019, Uzbekistan conducted trade relations with more than 150 countries of the world. Over the past year, total turnover increased by 37%. The main trading partners of the Republic are countries such as China, Russia, Kazakhstan, Korea and Turkey.
The achievement of positive results is facilitated by the implementation of structural reforms aimed at improving the business environment, including:
- reducing the time, number of documents and costs associated with registering a business (registration takes 30 minutes);
- liberalization of the foreign exchange market, which allowed to remove restrictions on the repatriation of profits;
- simplification of tax and customs administration - introduction of a risk analysis system, reduction of documents and time required for customs clearance;
- strengthening measures for the execution of contracts (introduction of the institution of mediation), protection of minority shareholders, as well as others.
As a result, Uzbekistan was ranked 69th among 190 countries in the Doing Business 2020 ranking and entered the top 20 reformer countries in terms of creating the most favorable conditions for doing business. For comparison, we note that in 2012, the country in this rating occupied only 166 place. Also, during the second half of 2018 and the past period of 2019, Uzbekistan managed to get the first ratings from agencies such as Fitch and Standard & Poor’s. At the same time, such factors as a strong sovereign balance, low level of state debt, as well as a decrease in state participation in the country's economy positively influenced the rating of Uzbekistan. The republic granted visa-free entry to citizens of 86 countries, which in turn contributed to obtaining the status of the second country in terms of openness for tourists among the CIS countries.
Uzbekistan has also resumed active negotiations on accession to the World Trade Organization (WTO). Joining the WTO will provide an opportunity, for Uzbek entrepreneurs, to raise the prospects for increasing scientific and technological progress in the sectors through the acquisition and purchase of efficient and reliable imported equipment. In addition, upon entry into the WTO, domestic exporters will gain easier access to foreign markets.
Uzbekistan’s potential is based on solid macroeconomic fundamentals - it is a country with a strong domestic market, relatively young and cheap labor, rich natural resources, a relatively diversified economy and a rapidly developing infrastructure.
In general, Uzbekistan has the advantage of macroeconomic stability, which, combined with ongoing reforms, opens up opportunities in various sectors of the economy, be it financial services, construction or tourism.
The work on furtherintegration into the international stock market was intensified. Thus, in February 2019, Uzbekistan placed the first 5-year and 10-year Eurobonds totaling $ 1 billion with a four-fold oversubscription, eventually orders were distributed among more than 150 investors from England, Europe, America and Asia.
It is also noteworthy that in November 2019, for the first time in the history of Uzbekistan, corporate Eurobonds were issued. In particular, JSCB «Uzpromstroybank»issued five-year international bonds worth $ 300 million on the London Stock Exchange. Orders reached $ 1.2 billion with 4x coverage.
Successful placement of bonds also evidences to the positive assessment of international investors of reforms carried out in Uzbekistan.
NECESSARY INSTITUTIONS CREATED FOR THE DEVELOPMENT AND PROTECTION OF ENTREPRENEURSHIP
To effectively ensure the rights and legitimate interests of business entities in the country, appropriate structures have been created, whose task, among other things, is to consolidate efforts in the field of entrepreneurship development.
- The Ministry of Investments and Foreign Trade is the state body of the Republic of Uzbekistan, dealing with export issues, attracting foreign investment and other aspects of the economy and international trade
- Receptions of the Prime Minister of the Republic of Uzbekistan for consideration of appeals of entrepreneurs - ensure the quality and efficiency of the organization of work with appeals of entrepreneurs;
- Foreign Investment Promotion Agency under the Ministry of Investments and Foreign Trade - participation in the implementation of the state investment policy to attract foreign investors and creating favorable conditions for the work of foreign businessmen who want to invest in Uzbekistan.
- The Commissioner under the President of the Republic of Uzbekistan for the protection of the rights and legitimate interests of business entities - provides guarantees for the protection of the rights and legitimate interests of business entities;
- Agency for the Development of Small Business and Entrepreneurship - implements a unified state policy aimed at the development of entrepreneurship.
- The Council of Foreign Investors under the President of the Republic of Uzbekistan - the main task of the Council of Foreign Investors is to directly participate in creating a favorable investment climate and effective mechanisms to stimulate domestic and foreign entrepreneurs to invest in priority sectors of the economy, as well as to the regions of the country, with the aim of organizing high-tech industries to produce competitive export oriented products.
In turn, the Ministry of Justice is also carrying out consistent work in this direction.
In particular, according to the results of the analysis of law enforcement practice, relevant proposals are developed to eliminate systemic problems that hamper the development of entrepreneurship, as well as aimed at improving the business environment as a whole.
For example, it is expected to introduce a system for assessing the level of entrepreneurship development in the regions of the Republic, which will allow timely identification and elimination of problems that impede the development of entrepreneurship and attracting local investments.
Work is underway to radically improve the licensing system and licensing procedures (proposals will be made to eliminate bureaucratic barriers in obtaining licenses and permits, reduce the number of licenses and permits, and also reduce the time for issuing them).
CHALLENGES IN THE WAY OF EFFECTIVELY ATTRACTING INVESTMENTS AND THEIR SOLUTION
Along with the achieved results, there are also areas requiring appropriate adjustments.
As you know, in advanced foreign countries (USA, England, etc.), the bulk of the financing of the economy comes from equity funds, bonds, and only the smaller one consists of a form of bank financing.
In Uzbekistan, banking sector assets are 130 times higher than the shares of free float.
In particular, today the volume of securities in free circulation is only 0.5% of the country's GDP, the market capitalization of securities at the end of 2017 amounted to 5.9% of GDP.
These are very modest figures, which, on the other hand, show huge potential for growth.
Based on this, in order to develop this direction, in early 2019, the Agency for the Development of the Capital Market was created.
No less important is the course taken to reduce state participation in the economy and the privatization of state assets. In 2020, the Management and Privatization Strategy of state-owned enterprises will be adopted, which provides for the criteria for maintaining state ownership of enterprises and their transformation into efficient enterprises that can compete in the domestic and foreign markets. By 2023, Uzbekistan plans to privatize at least 20 large state-owned companies.
At the same time, one of the main conditions for attracting investments is the provision of guarantees of property rights.
However, recently there have been some problematic issues related to ensuring guarantees of property rights.
In particular, cases of violation of the rights of owners during the seizure and demolition of real estate.
In recent years, the country has been actively working to improve the architectural appearance of cities, improve the living conditions of the population and implement investment projects. These works in some cases were accompanied by the seizure and demolition of real estate, often dilapidated, in disrepair, and also not meeting the requirements of urban planning.
Unfortunately, this process was not always carried out by local authorities in accordance with the requirements of the law, which required the adoption of urgent measures to unconditionally ensure the rights of owners.
Along with this, until recently, there were still bureaucratic barriers and red tape in the allocation of land.
In addition, there were cases of initiation of issues of revision and cancellation of the results of privatization, which negatively affected the confidence of entrepreneurs in ensuring ownership.
The course taken on the policy of openness, direct dialogue with the public, including with entrepreneurs and investors, made it possible to timely identify problematic issues, as well as take effective measures to address them.
In particular, in order to address the above issues, appropriate decisions were taken by the President and the Government of the Republic of Uzbekistan.
Thus, in recent years, intensive reforms have been carried out under the leadership of the President of the Republic of Uzbekistan Sh. Mirziyoyev, including those aimed at ensuring a favorable investment climate.
At the same time, meetings held with entrepreneurs and investors showed a lack of awareness of the local civil servants on the nature and content of the reforms.
It should be noted that the effectiveness of reforms is determined not by the number of legislative acts adopted, but by the full provision for their implementation.
Based on this, in early November 2019, the legal monitoring system was introduced, aimed at ensuring 100 percent and uniform implementation of legislative acts.
Thus, despite the positive results achieved, it seems necessary to continue focused work to improve the investment climate in the country.
First of all, such issues as ensuring reliable protection of the rights and legitimate interests of entrepreneurs, including foreign investors, further strengthening the protection of private property, stimulating the development of competition in the investment market, developing the capital market, improving law enforcement practice, etc. need to be further developed.
The solution of these issues will undoubtedly open up new opportunities for the wide promotion of the investment potential and the republic’s opportunities abroad, as well as positively affect the positions of the Republic of Uzbekistan in such international ratings as the Index of Economic Freedom, the Rule of Law Index, the Corruption Perception Index, where our results so far remain modest.
Ministry of Justice of the Republic of Uzbekistan
BCGReport «Uzbekistan: window for opportunity», http://media-publications.bcg.com/RUS-UZ-Tier_MAY-2019-FIN.pdf