Uzbekistan: World Bank Official Discusses Economic

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E.O. 12958: DECL: 2019-03-31
TAGS: ECON ELAB EFIN ENRG EPET EINV PGOV PREL SOCI UZ
SUBJECT: Uzbekistan: World Bank Official Discusses Economic
Conditions

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CLASSIFIED BY: Steven Prohaska, Second Secretary, P/E Office; REASON:
1.4(B),(D)


1. (C) Summary: In a March 24 meeting with us, a World Bank
economist discussed Uzbekistan's economy and the effects of the
global financial crisis on it. Despite the limited exposure of
Uzbekistan's financial sector to global markets, the slow-down in
construction abroad (particularly in Russia) may adversely affect
the remittances that a large number of Uzbek migrant workers send
back to their families in Uzbekistan. The Government of Uzbekistan
(GOU) enjoys a budget surplus from which it can finance further
anti-crisis measures. Thanks to rising prices for its gold
exports, lower but still-comfortable rates for cotton exports, and
high prices of 300 USD per thousand cubic meters of Uzbek natural
gas, some in the GOU appear to believe that these can enable it to
ride out the hard times. Potential GOU measures to stave off a
social crisis could include diverting a greater proportion of
natural gas toward domestic consumption and increasing wages. The
economist considered the GOU's support of business and plans to
privatize the two largest state-owned banks to be positive
developments, while Uzbekistan's closed trade policy gave him cause
for concern. End summary.


2. (C) On March 24, we met with World Bank economist Eskander
Trushin, who discussed economic conditions in Uzbekistan and the
effect of the world financial crisis on the country. Trushin said
that Uzbekistan had escaped being directly affected by the global
financial crisis. The financial sector has been largely unscathed
due to Uzbek banks having only 4-10 percent exposure to global
markets.

Return of Migrant Workers
--------------


3. (C) Trushin noted that estimates of the number of Uzbek migrant
workers abroad vary--he said these range from 500,000 to five
million--but his personal opinion was that the true figure is
somewhere around 1-1.5 million. (Note: An official from the
Russian Embassy in Tashkent told us in 2007 that the figure was
around one million. End note.) Some 85-90 percent of Uzbekistan's
remittances come from Russia, but Russia had imposed a dramatic
reduction on the number of migrant workers who can work in the
country. Some of Uzbekistan's migrant workers who were not
involved in construction remained in Russia, but a large number of
Uzbek workers (mainly from the Ferghana Valley and Samarkand)
returned in November. This has not put much pressure on Uzbekistan
yet because they brought a large amount of money back that is
tiding them over for now. About half of the workers in Russia were
involved in construction, but the credit crunch has adversely
affected this industry in particular. The impact may become
clearer by this summer. (Comment: Uzbek migrant workers involved
in construction may not have jobs waiting for them when they try to
return to Russia soon. End comment.) Trushin added that the
International Monetary Fund may have additional figures on
remittances in June or July.

Uzbekistan's Anti-Crisis Measures
-------------- -


4. (C) The GOU is aware of the potential for social problems. When
asked what the GOU or the international community could do to stave
off the outbreak of tensions, he replied that an important issue
for near-term stability would be good relations in the region on
water supply issues. He also noted that while much natural gas is
exported, the GOU could divert some of this toward domestic
consumption if necessary in order to prevent a social crisis.
Continued wage increases would be another method the GOU could use.



5. (C) He believed that the GOU's measures to address the effects
of the crisis in Uzbekistan have been generally effective so far.
These measures have focused primarily on supporting the export
market rather than establishing social security nets, but he didn't
expect this to be problematic. First, the GOU enjoys a budget
surplus of approximately five percent of GDP, from which it is able
to fund its anti-crisis measures. If the GOU determines in the
future that more or different measures are required, it should be

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able to continue financing these measures from the budget without
dipping into its reserves. (He noted that official reserves stand
at 9-10 billion USD). Second, the prospects for export markets are
bright. While commodity prices had dropped, the price of
gold--Uzbekistan's primary export--is still rising, and the GOU had
managed to lock in a price of 300 USD per 1,000 cubic meters for
natural gas for the first two quarters of the year. Cotton prices
had decreased by 15 percent, but considering that cotton prices had
jumped by 40 percent recently, a 15 percent decline still left
cotton prices at a comfortable level. The GOU appears to believe
that it could simply allow commodity prices to carry Uzbekistan
through the hard times, and Trushin did not disagree with this
view.


6. (C) Uzbekistan has a current account surplus of about 13 percent
(it had been reported initially as 18 percent, but the IMF "found
some errors and improper accounting," primarily in the
classification of remittances, and insisted that they revise the
number.) He expected that Uzbekistan would maintain a current
account surplus into the next year. The only aspect of the GOU's
plan that could be considered to have domestic effects was the
amount earmarked for infrastructure spending, but he was unsure to
what extent that would generate significant employment
opportunities.

Focus on Capital-Intensive Industries
-------------- ---


7. (C) Trushin noted that both in terms of crisis measures and
general philosophy, the GOU's focus has been on developing
capital-intensive industries, not labor-intensive industries. This
was because the GOU "didn't study world markets." Trushin
considered this focus on capital-intensive industry to be
short-sighted, but because of the prospects for commodity prices,
this short-sightedness would not be crippling for the economy over
the near-term.

GDP Growth has had Little Effect on Poverty
-------------- --------------


8. (C) The World Bank has been unable to obtain raw data to assess
poverty trends in Uzbekistan. The Government of Uzbekistan had
provided raw data based on household budget surveys in 2000 up
until 2003, then stopped. Based on the numbers the World Bank does
have, the number of people considered to be below the poverty line
has gone from 27.5 percent in 2000 to 23.8 percent in 2007, even
though the cumulative GDP growth over the same period was some 40
percent. The reason for such poverty inelasticity, he said, was
that all the growth had been in exports and proceeds had flowed
into government coffers rather than to the population. He also
noted that GDP in 2008 had been about 33 billion USD.

Russian and Chinese Investment in Uzbekistan
-------------- --


9. (C) Trushin had seen no real change in Russian investment (90
percent or more of which goes into oil and gas) in Uzbekistan. The
2009 data is not yet available. China's economic presence has come
from offering credit instead of foreign direct investment. Trushin
noted that Uzbekistan borrows a lot from China, and has been
purchasing Chinese rail, construction, and excavating equipment.


Positive and Negative Economic Trends
-------------- --------------


10. (C) Trushin noted positive and negative developments that could
affect Uzbekistan's economic growth potential over the next 10-20
years. On the positive side, the GOU has been taking significant
steps to support business, particularly small and micro business,
and this may yield real results. The number of small businesses
has been growing, though slowly. The government has moved to a
single unified tax for small and micro businesses and reduced the
total amount of taxes on these from 15 percent to eight percent.

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It has also cut the profit taxes for other businesses. In the
financial sector, the GOU has increased the capital base for most
banks to 2.5 million Euro for small private banks and to five
million Euro for joint-stock government-owned banks. He also saw
the upcoming privatizations of the two largest Uzbek banks as a
positive sign. According to official pronouncements, one of the
two major state banks (Asaka) is to be privatized later this year,
while the other (National Bank of Uzbekistan) is slated to begin
privatization next year.


11. (C) On the negative side, he said that Uzbekistan's trade
policy remains "very closed" with "no signs of improvement." The
state is highly involved in trade policy and "inappropriate
targeting" of specific sectors. Taxes and tariffs are a major
barrier to trade. Uzbekistan has given most-favored-nation (MFN)
status to 38 countries, and import tariffs for these countries fall
into bands of 0, 5, 10, and 30 percent. Non-MFN rates are double
these. The overall average import tariff is 14 percent and the
weighted average is 16.6 percent. Despite these high numbers, the
average import duty collected is only 3.7 percent because of the
large number of exemptions granted, in particular for the import of
goods needed to support Uzbekistan's capital-intensive industries.
There is also an excise tax of about 39 percent, a value-added tax,
and a surcharge for goods without a certificate of origin of about
20 percent. He emphasized that all of these taxes are
cumulative--each new level of taxes is calculated based on the
value of the goods plus all of the previously-applied taxes. All
of this tax revenue goes to the central government. The only taxes
that local authorities collect are property and land taxes.

Comment:
--------------


12. (C) High commodity prices and limited exposure to global
financial markets are insulating Uzbekistan's economy to some
extent from the effects of the global financial crisis, and IMF
officials have recently projected continued strong growth for
Uzbekistan's GDP in 2009. Nevertheless, GOU officials are probably
monitoring economic conditions in Russia and Kazakhstan closely.
Exports of capital-intensive goods to these countries and
remittances from Uzbeks working there (the value of which nearly
doubled in 2005-2006 and nearly doubled again 2007-2008) are among
the pillars that Uzbekistan's recent export-driven economic growth
has rested upon. The potential disappearance of
construction-related jobs for Uzbek migrant workers in Russia this
year could be damaging to many citizens in the Ferghana Valley and
Samarkand, and the possibility of this translating into social
unrest in these provinces later this year remains an area to watch.


13. (SBU) Even President Karimov admits that some negative impact
is likely. In his latest policy pamphlet, he says that positive
economic trends last year "in no way mean that the ever-expanding
global financial crisis shall not have its impact on our country
and bypass us. This would be the most naive and I would say
unforgivable delusion."
NORLAND