HIGH POVERTY DESPITE STRONG ECONOMIC GROWTH

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 001386

SIPDIS

SIPDIS

E.O. 12958: DECL: 07/27/2017
TAGS: ECON PGOV SOCI UZ
SUBJECT: HIGH POVERTY DESPITE STRONG ECONOMIC GROWTH

REF: TASHKENT 1284

Classified By: CDA Brad Hanson for reasons 1.4 (b) and (d).


1. (C) Summary: While Government of Uzbekistan (GOU)
officials tout the country's strong economic growth, they
fail to recognize problems associated with high inflation and
poverty rates. Inflation in 2006 most likely was around 20
percent and the cost of living continues to rise, fueled
recently by a decree raising minimum monthly salaries. This
contributes to high poverty rates; government officials have
acknowledged that at least 26 percent of the population lives
below the poverty line, but the true figure likely is around
75 percent. Uzbekistan's economic growth certainly has been
good for the country's "haves," but has done little to
improve the lives of its "have nots." End summary.


2. (C) GOU officials continue to tout the country's strong
economic growth as evidence that reforms ordered by President
Islam Karimov are working. Official statistics peg real
Gross Domestic Product (GDP) growth in 2006 at 7.2 percent,
and recently released figures indicate that GDP grew by over
nine percent during the first half of 2007. Official GDP
growth statistics are difficult to independently verify;
however, World Bank officials recently told Charge that they
believe the government figures could be accurate (reftel).


3. (C) Even if accurate, strong GDP growth serves to hide
other, deeper problems in the Uzbek economy. For example,
official statistics put inflation in 2006 at 7.2 percent.
The GOU's approach to estimating inflation rates, however,
differs substantially from international standards. The
International Monetary Fund (IMF) estimates inflation in 2006
was closer to 19 percent, while Post's own semi-annual market
surveys suggest it was 25 percent. Post's most recent market
survey indicates that the cost of living for an average Uzbek
family has risen another 14 percent in the first half of 2007.


4. (C) A July 10 presidential decree raising minimum monthly
salaries from $10 to $13 likely will only exacerbate the
situation as wage indexation traditionally has led to an
increase in inflation while resulting only in insignificant
increases in real income. Several of Post's local staff
report they are already seeing price increases for milk,
meat, and other staples despite the wage increase not taking
effect until early August. Recent internet press reports
also comment on "huge" price increases in Andijon and
elsewhere following the announcement of the decree, which one
website suggested was designed to increase President
Karimov's popularity in the run-up to the December
presidential election. The decree will not necessarily
result in a wage increase for most ordinary Uzbeks, as the
minimum monthly salary figure primarily is used as a means of
calculating fees and penalties.


5. (C) Continued increases in the cost of living add
substantially to the burden of the large number of Uzbeks
living in poverty. The Ministry of Economy estimates that
approximately 26 percent of the population lives in poverty.
This probably significantly underestimates the true poverty
level in Uzbekistan, as the World Bank agreed with the
Ministry of Economy to set the poverty line for Uzbekistan at
$1.10 per person per day. Elsewhere, the World Bank's
poverty line is $2.15 per person per day. Applying the more
widely used figure raises the estimates of Uzbeks living in
poverty to around 75 percent of the population.


6. (C) Low wages and unemployment, officially estimated by
the International Labor Organization (ILOs) at eight percent,
has fueled an explosion in the number of Uzbeks working
abroad. (Note: This probably significantly underestimates
Uzbekistan's true unemployment rates as ILO's estimate does
not capture large segments of the population officially
employed at now defunct factories or other state enterprises,
but in reality neither working nor receiving a paycheck.
These estimates also do not capture the large number of
people who leave Uzbekistan to seek work elsewhere. End
note.) The World Bank estimates the number of Uzbeks working
outside the country could be as high as 3-4 million, with
remittances through official banking channels in 2006
reaching $1.6 billion, or ten percent of Uzbekistan's GDP.
(Note: The World Bank believes that another $1.5 billion may
have been sent back to Uzbekistan through unofficial
channels. End note.) Uzbekistan's labor force currently is
growing at more than three percent a year, while the growth
of new jobs is under two percent. The government claims that
the volume of investments for the creation of new jobs is
growing; however, most of this investment is directed to
industrial sectors, which collectively employ less than 13
percent of the labor force. Meanwhile, small and medium

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sized enterprises, which employ about half the labor force,
suffer disproportionately from trade restrictions, high
taxes, and overregulation.


7. (C) Comment: Uzbekistan's economic growth has no doubt
been very good for the country's "haves," but it has done
little to improve the lives of the "have nots." The GOU
instituted a tighter monetary policy in 2006, which has
started to bring inflation down slowly. Still, inflation
remains high, and combined with the GOU's irrational economic
policy, increases the cost of living and slows efforts to
reduce poverty. Despite the vast majority of its population
trying to scratch out an existence below the poverty line,
the GOU prefers to hide behind its economic growth figures
and does not recognize, officially or unofficially, the
magnitude of the problem, and is taking virtually no action
to implement poverty reduction reforms.
HANSON