Uzbekistan is a dry, landlocked country of which 10 percent consists of intensely cultivated, irrigated river valleys. More than 60 percent of its population lives in densely populated rural communities. Uzbekistan is now the world's third largest cotton exporter, a large producer of gold and oil, and a regionally significant producer of chemicals and machinery. The main industries are mining (gold, diamonds, non-ferrous metals), mechanical engineering, the textile industry, the chemical industry, automobile industry, agricultural machinery, and aircraft construction. In addition, there are a number of companies in light industry, leather processing, and the food industry. Most have antiquated technical equipment and lack investment. On account of the poor investment conditions, a short-term improvement in the situation through privatization with the help of foreign investments is unlikely. Large areas of the economy are still firmly in the hands of the state. A reform of the energy sector, where electricity and gas continue to be consumed largely free of charge, is urgently required. In December 2001, the IMF and the Uzbek Government agreed upon a programme of economic reform.

Table-1 Main Macro-economic Indicators (2002)

(*) Figures in national currency converted at average official exchange rate UZS 769: US$1.

In 2002, Uzbekistan's official growth rate was 4.2 percent. The increase is largely due to record wheat and a good cotton harvest, as well as to the higher gold price. Neither in the industrial sector, nor in the sphere of small and medium-sized enterprises (including agriculture) was there discernible growth. The average per capita income amounted to US$ 383. Agriculture is the most important economic sector, although its significance is in decline. It currently produces approximately 30.6 percent of GDP, employing around 40 percent of the labour force. Cotton is the main export product, accounting for roughly one third of the country's foreign currency revenue (US$ 800,000). In 2001, around 3 million tons of raw cotton were produced, making Uzbekistan the fifth largest cotton producer in the world (after the US, China, India and Pakistan). It is probably the second largest exporter of cotton (after the US).

According to official statistics, the inflation rate (22 percent) is at its lowest level since Uzbekistan gained independence, thanks to price controls and a strict money supply policy. The weak investment quota (11.1 percent of GDP) shows that the banking system could hardly mobilize deposits for domestic investment and that Government policy has had even less impact on foreign direct investment (only US$ 73 million annually). Most investments are made in textile finishing and in the energy sector. Uzbekistan's state budget does not reflect state-controlled business transactions (subsidies in the form of energy supplies free of charge to enterprises and public servants, control over credits via state banks). The rather moderate budget deficit of 1 percent of GDP was partly achieved by ending the handing out of state guarantees for investment projects. The external debt is roughly US$ 4.4 billion, while the debt ratio is currently around 45.6 percent of GDP. The tight import restrictions led in 2002 to a balance of payments surplus of 2 percent of GDP and currency reserves stabilized at US$ 1.1 billion or three months of imports. However, the scarce currency reserves would quickly disappear if foreign trade were to be liberalized. In the case of a high import pressure on the one hand and a weak export potential on the other, balance of payment aids would be required.

Despite the higher gold price and a good cotton harvest, exports from Uzbekistan fell by 9 percent in 2002 compared to the previous year. Additional trade barriers have resulted in a fall of 12 percent in imports. Uzbekistan continues to be isolated in terms of foreign trade and has demonstrated a strong tendency towards self-sufficiency. Export amounted US$ 3.18 billion and imported goods amount to approximately US$ 3.16 billion in 2002. Uzbekistan is the second largest producer of gas after Russia among the CIS states and ranks ninth in the world. The exploitation of oil and natural gas, the primary sources of energy, has been successfully extended. The oil and condensate output has nearly quadrupled from 2.8 million tons in 1991, and the output of gas is up by another third from around 42 billion m³. Energy carriers make up around 10 percent of total exports. British and Russian companies have made long-term commitments in product share agreements. In July 2002, accession negotiations were started between the WTO and Uzbekistan.

FDI is encouraged in Uzbekistan following the implementation of reform and structural adjustment policies to achieve a free market-based economy. Priorities are given to investments that are export-oriented or import substituting, particularly those in the manufacturing, mining and agricultural sectors with a high technology content. Foreign Investment Agency (FIA), a semipublic agency established in 1995 under a President Decree, serves as a one-stop shop assisting potential foreign investors in investing in the country, including assisting in finding local joint-venture partners. Other investment-related institutions that have been established include Agency of Foreign Economic Relations (AFER), which was established in 2002. AFER took over the functions previously carried out by the Department for Foreign Economic Relations and Foreign Investments and the Ministry of Foreign Economic Relations.

FDI in Uzbekistan are governed by the Law on Foreign Investment and the Law on Guarantees and Measures to Protection of Foreign Investors’ Rights, which were enacted on 30 April 1998. These laws replaced the legal regime that was first implemented in May 1994 and its subsequent amendments. To be considered “an enterprise with foreign investment” under the new laws, a firm must be at least 30 percent foreign-owned and have an initial capital fund of 150,000 US$. Contrary to WTO standards, the government grants some tax benefits, such as tax holidays for Uzbek or foreign joint venture exporters. A number of other important regulations have also been enacted. These include the Law on Investment Activities, the Tax Code and a number of presidential decrees and resolutions of the Cabinet of Ministers of Uzbekistan that aim to attract FDI. These decrees and resolutions include the Decree on Additional Stimulation of Creation and Activities of Enterprises with Participation of Foreign Investment and the Decree on Further Stimulation of Foreign Project Implementation, and the Resolution by the Cabinet of Ministers on "Additional Measures to Strengthen the Protection of Direct Foreign Investments."

Foreign investors are permitted to invest in any business activity not otherwise prohibited by legislation, and there are no business activities reserved exclusively for national investors. Except in banking, where licensing is controlled by the Central Bank of the Republic of Uzbekistan and foreign ownership is limited to 49 percent, there are no ownership limitations. The Government, however, encourages joint ventures with local partners or state-owned enterprises. Businesses must be registered with the Ministry of Justice. In March 2001, the state privatization programme for 2001-2002 lists more than 600 enterprises with state shares to be sold to both domestic and foreign investors. Various incentives are provided to investors according to sector-specific provisions and the level of foreign ownership in the enterprise. In April 2000, through a Presidential decree, more favourable conditions to attract foreign investment in the oil and gas sector were granted. Foreign investors are given protection against expropriation, national treatment, and the right to repatriate profits. Assurance is given of a 10-year exemption from a new legislation having a negative effect on the operations of a foreign investor subsequent to the formation of a joint venture. The laws prevailing at the time of initial investment will be applicable, or the investor may choose to adopt, at his own discretion, any new legislation that may improve the terms. A state investment programme of December 2002 promised that cotton finishing in the country would be doubled and envisaged major investment projects totaling US$ 200 million by 2010.

Table-2 Foreign Direct Investment (FDI) (millions of US$)

(a) Estimates.

Source: UNCTAD, FDI/TNC database

FDI flows to Uzbekistan plummeted to US$ 65 million in 2002, down from the peak of US$ 570 million in 2001. On the other hand, FDI stock in the country in 2002 continued to increase to US$ 1,332 million as compared with US$ 106 million in 1995. Most FDI to Uzbekistan is in the primary sector, in particular in mining. FDI flows as a percentage of gross fixed capital formation shot up significantly in 2001 as a result of significant increases in FDI inflows, as compared to the level during the period 1992-2000. FDI inward stock as a percentage of gross domestic product grew steadily during 1995-2002, with the exception in 2000. The three largest industrial affiliates of foreign TNCs in Uzbekistan in 2002 came from the United Kingdom, the Russian Federation and Turkey, while the three largest foreign services affiliates came from the Russian Federation, Switzerland and the United States. The State Airlines of Uzbekistan and the National Bank for Foreign Economic Activity were the two largest investors abroad in 2002.

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