Uzbekistan: International Institutions Skeptical on Uzbek Economy

Uzbekistan has weathered the global financial crisis and is projecting a robust 2010 -- or so says Uzbek President Islam Karimov in his new book, The World Economic Crisis. But a December 17 report published by the credit ratings agency Standard & Poor's paints a much darker picture of the Uzbek economy.

Karimov's 53-page book, published recently by the American Uzbekistan Chamber of Commerce, lauds his government for keeping banks and inflation rates stable in 2008 and 2009 and sets out a five-point-plan to keep the lingering effects of the global financial crisis at bay, and to stimulate growth.

The report states that despite some adverse effects, like a decrease in commodity exports, Uzbekistan's economy held up well because of government efforts to ensure bank liquidity, spur foreign investment, promote small and medium-sized businesses and make capitol improvements in energy and technology. Future success, according to Karimov, hinges upon continuing advances in these sectors.

"We do have all the necessary prerequisites in our country to neutralize the impact of the global financial crisis and overcome its consequences," Karimov stated in the book.

The government's strong grip on the economy is actually one of the reasons that Standard & Poor's placed Uzbekistan in Group 9 -- with Group 10 being the weakest - on its country risk assessment list released December 17. Kazakhstan, whose banking sector nearly imploded this fall, is also in Group 9. [For background see the Eurasia Insight archive].

"The placement of Uzbekistan in Group 9 reflects our view of the significant risks facing the Uzbek banking system, which we understand is characterized by state ownership, a short track record, a low level of credit penetration, a weak bank franchise, high single-name concentrations, undeveloped risk-management practices, and the economy's dependence on commodity exports," said a S&P statement.

International financial experts tend to view Uzbekistan's self-reported economic data with skepticism. In his book, Karimov contended that the country's inflation rate has held steady at 7.8 percent. But the US State Department, in its October 2009 report on Uzbekistan, put the country's inflation rate at between 20 to 22 percent. The report added that though economic growth is strong, it is poorly distributed, with 25 percent of Uzbeks living at or below the poverty line.

According to news accounts distributed by the opposition website UzMetronom.com, Uzbekistan appears to be experiencing skyrocketing inflation. The black market exchange rate for the Uzbek sum, for example, has jumped from 1,350 to one US dollar in August to 2,050 sum to the dollar in early December. And in November, the site said its readers calculated that over a 10 month-span the price of staples like food, cleaning supplies and other essentials had risen anywhere from 105 to 215 percent.

One of the sectors that Karimov's book credits with helping keep the Uzbek economy stable is small- and medium-sized enterprises, or SME's. The book claims that in the past six years, small business activity has increased by 1.9 times, adding that the sector employ 76 percent of the workers in the nation. The "priority task remains the further acceleration of the development of services and small businesses as the most important factor of ensuring jobs and raising living standards," Karimov stated.

The vibrant SME-sector that Karimov depicts is contradicted by a May 2009 evaluation prepared by the Asian Development Bank. The ADB invested $47.9 million in Uzbekistan's national banks so they could offer small businesses start-up loans from 2001 to 2006. The evaluation, however, found that the ADB loans had not stoked the desired level of economic activity. It asserted that despite the country's seeming potential for developing SME's - having plentiful natural resources, a moderate climate and an educated workforce -- less than half of the intended projects were successful, and only half of the successful businesses paid their loans on time.

The evaluation blamed the project's struggles on government interference, onerous administrative procedures, high taxation, a cash shortage, government restrictions on imports and exports and unfair competition from state-controlled businesses. The ADB also singled out corruption as a major impediment to SME growth. In Transparency International's 2009 Corruption Perceptions Index, Uzbekistan ranked as one of the most corrupt nations on earth, coming in 174th out of the 180 countries surveyed.

The ADB's conclusions about starting companies in Uzbekistan are echoed by the World Bank in its "Doing Business" report, which ranks the ease of doing business in 183 countries. After scoring poorly in the areas of starting a new business and taxes, Uzbekistan fell 5 spots from its already low ranking last year to 150.