Uzbekistan - Overview of economy

Although rich in natural resources, particularly natural gas and gold, Uzbekistan was among the poorest republics of the Soviet Union before its independence in 1991. The Soviet regime stressed the development of heavy industry, particularly mining, machines, and chemicals, while neglecting consumer goods production and the country's infrastructure . Although it developed as a major producer and exporter of natural gas

and gold and a sizable regional manufacturer of automobiles, aircraft, machinery, textiles, and chemicals, Uzbekistan remained predominantly rural. Nearly two-thirds of its population was concentrated in the heavily farmed river valleys where cotton production was the top priority of the central government. Uzbekistan was the principal cotton supplier to the Soviet Union and became the third largest cotton exporter worldwide in 2000. Monocultural (production of a single crop) agriculture and extensive irrigation in the arid Uzbek plains, however, caused severe environmental problems during the 1970s and 1980s. Poor land management resulted in the depletion of water supplies, the partial drying of the Amu Darya and Sir Darya rivers and the Aral Sea, heavy water and soil contamination, and newly formed patches of desert.

Following the collapse of the Soviet Union, Uzbek manufacturing experienced some decline in demand from its former Soviet markets, but the industrial sector protected the economy from the massive contraction seen in other former Soviet republics. The government of communist leader Islam Karimov, who stayed in office as president throughout the 1990s, subsidized state-owned, loss-making companies to keep them open. Karimov adopted protectionist policies in order to boost domestic industry, leading to expensive and inefficient industrial import substitutions . Industrialization was achieved but with the accumulation of a large external debt (US$3.3 billion in 1999) that was to be repaid with cotton and gold exports. In the late 1990s, however, the world prices of these key exports dropped, and the lack of competitiveness of the new Uzbeki industrial sector produced a hard currency shortage. The situation was aggravated by the government's reluctance to introduce current-account convertibility of the sum. The sum is not freely convertible to foreign currencies, and exchange rates for different purposes are set by the administration. The financial crises in Asia and Russia in the late 1990s and the lack of sufficient foreign investment caused economic stagnation and additionally-tightened import controls, fueling inflation and a deficit of goods in the domestic consumer market. Poor cotton harvests in the 1990s added to the growing budget deficit , and by 1995, Uzbekistan had received US$276.6 million in foreign aid to help meet its financial obligations.

To counter the negative trend towards debt, by the mid-1990s, the government introduced tighter monetary controls, launched a privatization program, and tried to lure foreign investors. However, its legal regimes still lacked transparency and many foreign partners complained about slow decision-making and persistent bureaucratic control complicated by red tape. Before 2000 there were several designated strategic industries that were not subject to privatization, such as mining of precious metals and gems, oil and gas drilling and processing, defense, aerospace, and communications. But by 2000, about 20 enterprises with foreign capital were expected to manufacture a wide variety of consumer and other goods, from tomato paste to electrodes to marble and granite. Unfortunately, a large South Korean investor, Daewoo Motors, went bankrupt in late 2000, threatening the future of its automotive plant in Uzbekistan.

By 1995 the country had returned to the level of industrial production that it had reached before the collapse of the Soviet Union. By the late 1990s, however, reforms had not been able to restructure the economy. The International Monetary Fund (IMF) suspended a US$185 million loan due to the failure of Uzbekistan to meet its structural adjustment program requirements. Without IMF aid and without hard currency, external debt default (suspension of all debt repayments) became likely. However, the IMF insisted that Uzbekistan adopt a stabilization program requiring a radical change in economic policy, including further privatization, an end to import substitutions, and a shift to the convertibility of the sum.

In early 2001 a 2-year government program was launched, envisaging the privatization of 1,244 enterprises. Thirty-eight of these, including several strategic enterprises and banks, were to be turned into joint-stock companies with the participation of foreign investors who would be offered between 39 percent and 70 percent of the shares. Approximately 49 enterprises were to be sold directly to foreign investors on the understanding that they would renovate their production processes, introducing modern technology and management. The number of firms with shares placed on the securities market and the off-exchange market to foreign investors in early 2001 reached 535, covering practically all sectors of the economy. Convertibility of the sum, however, was not yet on the government's agenda in 2001.

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