UZBEKISTAN: SMEs - ARE THEY ALL THEY'RE CRACKED UP TO BE?

UNCLAS SECTION 01 OF 03 TASHKENT 001960

SIPDIS

E.O. 12958: N/A
TAGS: ECON EINT UZ
SUBJECT: UZBEKISTAN: SMEs - ARE THEY ALL THEY'RE CRACKED UP TO BE?

REF: 08 TASHKENT 951


1. (SBU) SUMMARY. Small businesses play an important role in the
economy of Uzbekistan, a country with the largest labor resources
in Central Asia, but the degree to which small to medium
enterprises (SMEs) drive the Uzbek economy is not clear. GOU
officials repeatedly trumpet the growing role of SMEs as evidence
of the progress of their economic reform model. GOU statistics for
2008 claim a 48.2 percent GDP share for SMEs. However, internal
inconsistencies in GOU economic reports combined with a large,
poorly documented shadow economy make it difficult to determine the
extent to which the reported values are an accurate reflection of
small business growth. END SUMMRY.



SMEs IN THE WORLD AND IN UZBEKISTAN

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2. (SBU) There is no universal term for what constitutes an SME,
although all definitions consider thresholds in terms of a
business' employment, turnover, and balance sheet. The European
Union standardized SME categories in 2008: a business with a
headcount of fewer than 250 is classified as medium-sized; a
business with a headcount of fewer than 50 is classified as small,
and a business with a headcount of fewer than 10 is considered a
micro-business. The United States generally uses the term "SMB" --
small and medium business, but the concept is the same: a business
with 100 or fewer employees is generally considered small, while
one with 100-999 employees is considered to be medium-sized.
Globally, SMEs account for 99 percent of business numbers and 40-50
percent of GDP.




3. (SBU) In Uzbekistan, SMEs are further subdivided into the
following categories -- Individual entrepreneurship: a business
conducted by one individual; Micro-firms: businesses with from 5
to 20 employees; and Small enterprises: businesses with up to 100
employees.



SMEs GROWING - BUT HOW MUCH?

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4. (SBU) SMEs' contribution to Uzbekistan's GDP has increased
slowly but steadily over the last decade. In 2005, the GOU set a
goal of raising the share of the GDP contributed by SMEs to 45% by

2007. According to the State Statistics Committee of Uzbekistan,
the GOU met this goal: in 2000, SMEs accounted for 31 percent of
GDP with 3 million people employed in the sector. By 2003, SMEs
accounted for 35.5 percent of Uzbekistan's GDP and provided 57
percent of the total jobs in the economy. In 2008, the SME share
reached 48.2 percent of GDP, and its share of jobs totaled 72.7
percent. Agriculture accounts for the greatest number of active
small businesses. (NOTE: GOU statistics claim the private sector
as a whole about 79.4 percent of GDP and provides 78.4 percent of
the country's employment. End Note.)




5. (SBU) There are no independent estimates of the role of SMEs in
the Uzbek economy, and GOU statistics may actually underreport the
true contribution of SMEs to GDP. Small businesses in Uzbekistan
have traditionally straddled the line between the legal and grey
(shadow) sides of the economy. Open markets, kiosks, pavilions and
small shops operating unofficially have considerable retail
turnover, and unofficial consumer services (e.g., hair dressers,
caterers) also generate income that feed into GDP and which the
government statistics may not capture.




6. (SBU) Further complicating the issue, GOU reports are internally
inconsistent and indicate the methodology of accounting for SMEs,
is, at the very least, not well developed. According to one GOU
report, there are 267,658 business entities in the country divided
into two categories: state-owned (12.8 percent) and non-state
(87.2 percent). Of the non-state sector, 39.3 percent -- or
approximately 92,000 -- are considered to be privately owned.
Elsewhere, the same report states that there are 219,879 SMEs
currently operating in Uzbekistan. Official figures for the SMEs'
share of GDP as of September 2009 also differ: some GOU statistics

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show the share of SMEs at 40.9 percent while others claim a 6
percent growth in the sector.





HISTORICAL DEVELOPMENT OF SMEs IN UZBEKISTAN

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7. (SBU) After independence in 1991, the GOU focused on specific
industries -- for example, automotive -- that would underpin its
import-substitution, export-oriented industrialization policy.
This led to the collapse of much of the Soviet-era industrial
economy, thereby leaving large segments of the population
unemployed or underemployed (reftel). This was particularly true
in rural areas. For many, creating a small business became a means
of survival.




8. (SBU) Initially, small businessmen were hampered by an
inadequate and complicated tax system; excessive, burdensome
inspections; corrupt officials; problems with settlement operations
in banks; and severe foreign trade restrictions. Beginning in
2005, however, the GOU undertook a number of measures to improve
the business climate for small entrepreneurs. New business
registration procedures were simplified; complicated tax
legislation and procedures were consolidated into one Tax Code; and
some administrative barriers were removed.




9. (SBU) Foreign organizations also contributed to improving the
business environment for SMEs. The Asian Development Bank (ADB)
provided USD 100 million in credit to finance the foreign exchange
component of several investment projects in the SME sector. Other
major donors, such as the European Bank for Reconstruction (EBRD),
UNDP, and USAID, funded various programs focused on developing
micro-credit sources and providing SME training for entrepreneurs.
Uzbek NGOs, such as the Business Women's Association and the
Tashkent Business Club, are also active in SME development
activities.



ITS NOT ALL FUN AND GAMES

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10. (SBU) Many of Uzbekistan's reforms to benefit SMEs have fallen
short of expectations. Introduction of the new Tax Code did not
alleviate the heavy burden on SMEs, which continue to pay a large
amount of taxes: in 2007, the total tax payments (the sum of all
taxes and obligatory payments) for small businesses amounted to 15
percent of annual turnover. (Note: This figure was 18 percent of
turnover in 2005.) In other cases, the rules and regulations on
protection of small businesses are not implemented in practice.
Post hears anecdotal accounts from businessmen who say they must
periodically make "unofficial payments" when dealing with taxes,
licensing, or gaining access to the public sector.




11. (SBU) Other businesses report problems related to restrictions
on withdrawal of cash from bank accounts, a problem that is
heightened by the periodic unavailability of cash at banks.
Although the Uzbek Soum became convertible in October 2003, in
practice, unofficial regulations continue to limit access to
foreign exchange. International Finance Corporation's (IFC) 2007
survey on the procedures for small business registration also
documented a number of continuing registration obstacles, including
inspectors requiring the submission of documents not required by
law, charging registration fees higher than the legal public
registration fees, and forcing entrepreneurs to pay fines for
delayed data submission even if the delay was the fault of the
registration authorities.




12. (SBU) Today in Uzbekistan, export-oriented businesses engaged
in manufacturing have the greatest chance of succeeding. Government
policies specifically do not encourage private businesses engaged

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primarily in import. The World Bank's "Doing Business 2009" survey
ranks Uzbekistan 138 among 181 countries, with unfavorable scores
for trans-border trade and receiving credit/loans. (Note:
Uzbekistan advanced two places from 2008, driven by the development
of credit information sharing.) Import contract implementation in
Uzbekistan also takes longer than in other Central Asian countries.
The GOU, however, continues to make strong statements regarding its
commitment to develop entrepreneurship and remove barriers
hampering development of business. The GOU has set the ambitious
new goal of raising the share of SMEs to 52.5 percent of GDP by
2010, with export-oriented businesses comprising 18.2 percent of
the total.





COMMENT




13. (SBU) The GOU frequently claims that its policies have
encouraged private sector development in general and small
businesses in particular; however, the business environment for
private entrepreneurs is still far from comfortable. Moreover,
although there clearly are infinitely more SMEs in Uzbekistan today
than there were in the Soviet era, continued SME growth will
require, at a minimum, that Uzbekistan enforce in practice those
SME protections already enacted into law.
NORLAND