Tamerlane #31: April 26-May 3
Constitutional amendments pass with 90% of vote, inflation falls to 11% in April, Tashkent investment forum yields agreements worth USD 11 billion, Mirziyoyev visits Germany to deepen bilateral ties
Top News
Amendments to Uzbekistan’s constitution overwhelmingly passed in a national referendum with 90.21% of the vote and turnout of 84.54%, with the widely expected results extending President Shavkat Mirziyoyev’s rule for two additional seven-year terms while ostensibly strengthening rights for Uzbeks. The Organization for Security and Cooperation in Europe (OSCE), which had a limited observation mission in Uzbekistan, noted the April 30 referendum was “technically well-prepared” and promoted as part of the government’s broader reform program but “took place in an environment short of genuine political pluralism and competition.” In addition to extending presidential terms, the sweeping amendments include measures to enshrine rights to education, gender equality, workplace standards, and healthcare; strengthen property rights; introduce elements of habeas corpus; grant rights of freedom of expression (albeit with “special responsibilities”); establish an independent judiciary, and others. Critics of the tightly controlled referendum accused the government of using the amendments to give a veneer of democratic legitimacy to an authoritarian regime, while others praised the vote as important reform milestone and a break with the autocratic system of former president Islam Karimov.
Inflation fell sharply in April to 11% yoy from 11.7% yoy in March, with mom inflation slowing to a five-year low of 0.82%, as the prices of several key food staples declined after months of increases. Significant monthly price decreases for onions (12.4%), cucumbers (52.9%), potatoes (2.8%), wheat flour (2.4%), eggs (4.3%), sunflower oil (4.5%) contributed to the overall slowdown in inflation, while other categories such as tomatoes (21.3%) and fresh fruit (5.4%) recorded mom increases. Inflation for manufactured goods fell monthly by 0.5% to 9.3% yoy, although household appliances increased 0.7% mom and reached 9.3% yoy while prices for medicines were up 17.6% yoy. Prices for services rose from 8.4% yoy in March to 8.6% in April, despite a slight monthly decrease in rents. The Central Bank of Uzbekistan is expected to hold the policy rate at 14% at its next meeting on May 4 after cutting rates from 15% in March as a result of falling inflation indicators.
The Tashkent International Investment Forum (TIIF), held from April 27-29 in the Uzbek capital, brought together global business and political leaders and resulted in the signing of agreements totaling more than USD 11 billion. President Shavkat Mirziyoyev delivered the keynote address where he emphasized Uzbekistan’s commitment to fostering a welcoming business environment for foreign companies, announced the establishment of an International Commercial Court based on English law, underlined the government’s commitment to reforms and joining the World Trade Organization, pledged to accelerate the ambitious privatization program, and offered personal guarantees the success of international businesses in the country. Of the 164 commercial contracts signed totaling USD 11 billion (a 40% yoy increase from last year’s forum), highlights included agreements with major energy companies, food producers, pharmaceutical firms, banks, hotel groups, metals and mining enterprises, and education companies hailing from Germany, Turkey, China, Russia, India, Pakistan, France, Austria, Azerbaijan, Vietnam, Saudi Arabia, and others.
President Shavkat Mirziyoyev visited Germany from May 2-3 and met with German Chancellor Olaf Scholz and President Frank-Walter Steinmeier to discuss increasing cooperation and strengthening bilateral trade and economic ties. Mirziyoyev’s visit to Germany was timed to coincide with the results of Uzbekistan’s constitutional referendum and came after the president pitched the country to foreign investors at TIIF. In the meeting with Scholz, Mirziyoyev highlighted deepening bilateral economic ties, with German investments in Uzbekistan reaching USD 5.5 billion, and called Germany a “reliable and strategic partner.” Scholz pledged to support Uzbekistan’s accession to the World Trade Organization and expressed openness to the early singing of an enhanced partnership agreement between Uzbekistan and the European Union. The respective foreign ministers signed a declaration on deepening multifaceted cooperation, while both sides agreed to launch a C5+1 dialogue platform, continue humanitarian assistance to Afghanistan, and develop the Trans-Caspian corridor as a major route between Europe and Central Asia. During Mirziyoyev’s visit, an Uzbek-German business forum was held in Berlin where agreements totaling more than USD 9 billion were signed by companies in the energy, chemicals, pharmaceuticals, transportation, and agricultural sectors.
Local Markets
The International Finance Corporation (IFC) signed an agreement with the State Assets Management Agency (UzSAMA) to serve as a strategic consultant for the privatization of Navoiazot. The IFC will assist UzSAMA in the pre-privatization of Navoiazot, one of Uzbekistan’s largest chemical and fertilizer enterprises, after it advised on the successful privatization of Ferganaazot to Singapore based Indorama Corporation in January.
10 brokerage and investment firms published an appeal to the President and the Ministry of Justice against rising fees for using the state-owned electronic trading platform and the Ministry of Economy and Finance’s monopoly position in exchange trading operations. The complaint is aimed at the Stock Market Information Resource Center, a unitary enterprise established in 2016, which owns and manages the Unified Software and Hardware Complex (EPTK), the electronic trading platform developed by South Korean specialists that hosts all trades made on the Republican Stock Exchange Toshkent. In order to access the RSE Toshkent, all market participants must use the EPTK to process trades, and local brokers have accused the Stock Market Information Resource Center of arbitrarily raising fees to use the EPTK and changing contract terms for market participants. The brokers also accused the Ministry of Economy and Finance of holding a monopoly over exchange trading operations by acting as the regulator for the RSE Toshkent and the Stock Market Information Resource Center. The complexity and inefficiency of local exchange trading has been a significant impediment to attracting domestic and foreign investors, and the local brokers are sensibly calling for the EPTK to be transferred to the RSE Toshkent and new regulations to protect the rights of intermediaries and buyers.
In Asia Frontier Capital Uzbekistan Fund’s April update, CIO Scott Osheroff noted that while the fund’s returns have been flat during the current cycle, he remains optimistic that a structural bull market is near as Uzbekistan’s economy continues to grow and companies’ fundamentals are rapidly improving. Osheroff believes that patience is required for Uzbekistan’s privatization program, which has been hampered by a “lack of intellectual capital” and government ineffectiveness, and that local institutional investors are waiting on the sidelines to buy shares in privatized state-owned enterprises once new capital markets legislation is passed.
A delegation from the Kazakhstan Stock Exchange (KASE) visited the Republican Stock Exchange Toshkent, where both sides agreed to strengthen relations and pledged to work together to develop the region’s financial sector. KASE Chairman Alina Aldambergen met with her RSE Toshkent counterpart Giorgi Paresishvili to discuss cooperation between the two exchange and growing trade and economic ties between Kazakhstan and Uzbekistan.
Macroeconomics
Uzbekistan plans to import gas from Russia via the Central Asia-Center pipeline rather than the Urals-Bukhara pipeline, according to Energy Minister Jurabek Mirzamakhmudov. Speaking at TIIF, Mirzamakhmudov noted the ministry was still in the process of calculating the costs of installing compressor stations required for the reverse flow of gas, which is necessary before Uzbekistan and Russia begin negotiating for the delivery of natural gas.
A program to crack down on the shadow economy and promote tax compliance by offering cash back to consumers who scan receipts and upload them to a State Tax Committee app has paid out over UZS 1 trillion (USD 87.7 million). Introduced by presidential decree in January 2022, the program offers consumers up to 1% cash back on retail, restaurant, and services purchases for scanning a QR code on receipts and uploading them to the State Tax Committee’s Soliq app. The program is designed to increase the use of cash registers and electronically recorded transactions, which improves tax collection and cuts into Uzbekistan’s large shadow economy. In March, 2.2 million consumers used the Soliq app and received UZS 118 billion (USD 10.3 million) cash back. The Soliq app will also be used to provide VAT refunds on purchases of essential food products for low-income consumers beginning May 1.
German bank Kreditanstalt für Wiederaufbau (KfW) will provide EUR 200 million in loans and grants to state-owned water management company Uzsuvtaminot for the improvement of drinking water and sewerage systems in the Surkhandaryo and Fergana regions. The German development bank is allocating EUR 130 million in loans and EUR 70 million in grants for projects including the development of drinking water and water treatment in Kokand and Margilan, improvement of sewerage systems in Termez, and the construction of centralized sewer infrastructure in Surkhandaryo. Uzsuvtaminot also signed an agreement with Aqua Consult Ingenieur for a joint project to build sewer systems in the Samarkand region.
The Islamic Development Bank (IsDB) will provide USD 396.7 million in financing to support rural development, transportation infrastructure, and early childhood education. The IsDB signed three agreements with the Ministry of Investments, Industry, and Trade to provide USD 260 million for the bank’s Integrated Rural Development Project, USD 106.7 million for the reconstruction of a major highway, and USD 30 million to enhance access to preschools.
Uzbekistan faces a potential shortage of 7 billion cubic meters of water by 2030, with Boston Consulting Group partner Igor Alekseev estimating USD 10 billion in future water conservation costs. Speaking at TIIF, Deputy Minister of Water Resources Azimjon Nazarov noted 80% of Uzbekistan’s water resources come from foreign sources, while most of the country’s water infrastructure was built 30-40 years ago. Alekseev estimated that Uzbekistan needed USD 4 billion for pumping stations and USD 6 billion in subsidies for the development of water-saving technologies.
The number of Uzbek citizens working in Russia has quadrupled over the past seven years, according to Russian Minister of Economic Development Maksim Reshetnikov. Speaking at TIIF, Reshetnikov also noted that over 3,000 companies with Russian capital are currently operating in Uzbekistan.
Microfinance companies increased their assets by 18% to UZS 359 billion (USD 31.5 billion) in Q1 2023 as non-bank credit institutions’ total assets grew 10% to UZS 4.8 trillion (USD 420.6 million), according to the Central Bank of Uzbekistan. Total lending by microfinance companies and pawn shops reached UZS 1.5 trillion (USD 131.5 million) in the first three months of the year, while the Mortgage Refinancing Company provided commercial banks UZS 1.9 trillion (USD 166.5 million) in financing. There are currently 165 non-banking credit institutions operating in Uzbekistan, 83 of which are microfinance companies.
Abu Dhabi Sewerage Services Company will begin construction on a water treatment plant in Tashkent in early 2024 with the capacity to collect and treat 1.5 million cubic meters of wastewater per day. The project, which is being undertaken jointly Uzsuvtaminot, will also integrate and modernize the existing pipeline infrastructure of the capital’s water treatment facilities, which are reportedly at capacity, and will connect to the New Tashkent urban development.
Business
The National Bank of Uzbekistan (NBU) signed agreements with Deutsche Bank and Landesbank Baden-Württemberg (LBBW) totaling EUR 230 million at the Uzbek-German business forum in Berlin. Deutsche Bank agreed to extend a EUR 130 million credit line to the NBU to support lending for transportation, mining and metallurgy, and electrical industry projects, while LBBW is providing a EUR 100 million credit line for NBU’s financing of investment projects in alternative energy and textile production.
Agrobank signed two trade finance agreements with German banks Kreditanstalt für Wiederaufbau (KfW) (EUR 30 million) and Commerzbank (EUR 20 million), while Landesbank Hessen-Thüringen agreed to provide USD 30 million to Asaka Bank for small business financing at TIIF on April 28.
Management of the Andijan, Namangan, Bukhara and Urgench airports will be transferred to the private sector in 2023, according to President Mirziyoyev’s TIIF keynote address. Uzbekistan has been gradually transferring the operation of state-owned airports to the private sector and plans to embark on an airport modernization program that analysts expect will cost USD 800 million.
Government & Politics
On April 29, President Shavkat Mirziyoyev signed a law restricting state debt from exceeding 60% of GDP. The new law, originally passed by the Oliy Majlis (parliament) in March 2022, maintains the Ministry of Economy and Finance’s control over public debt management and adopts the International Monetary Fund’s “safe” state debt level of 60% of GDP as the maximum borrowing limit.
The Europe-Uzbekistan Association for Economic Cooperation (EUROUZ) and the European Union’s Delegation to Uzbekistan hosted an informal gathering between the EU’s Sanctions Envoy David O’Sullivan and representatives from leading Uzbek and European business on April 27 in Tashkent. The discussion centered on the impact of the EU’s sanctions on Russia for Uzbek businesses and European companies with operations in Uzbekistan in advance of formal sanctions seminars hosted by the EU in Tashkent. EUROUZ and its Secretary General Oybek Shaykhov organized the event to promote dialogue and provide a forum for questions and concerns about the Western sanctions regime.
Journalist, women’s rights activist, and founder of the Nemolchi.uz project Irina Matvienko has fled Uzbekistan after receiving death threats. Matvienko, one of Uzbekistan’s leading activists and campaigners against gender violence, played a major role in the passing of legislation criminalizing domestic violence against women and children in March.
In an interview with Kun.uz, tax consultant Murad Muhammadzhanov suggested new regulations that require information about money transfers to be sent to the State Tax Committee could be used to block P2P transfers. Muhammadzhanov also claimed tax authorities might gradually increase the price of money transfer invoices for P2P transfers that as of now are free and sees the overall purpose of the new regulations as an assertation of digital control over the flow of money in Uzbekistan.