Central Asia's economic powerhouses are changing, but to what extent?
Kazakhstan and Uzbekistan are the two most important economies in Central Asia, and upon the breakup of the Soviet Union in 1991 both attracted significant amounts of foreign investment.
In the 2000s, Kazakhstan outperformed Uzbekistan in terms of FDI by a factor of six, receiving USD10 billion annually, and also attracted a great deal of investment from major international oil companies in the 1990s.
Investment in construction, real estate, and industry additionally make it one of the most open and competitive Central Asian economies.
The country was one of the first post-Soviet countries to enact economic reforms, and its banking sector in the early 2000s was considered one of the most advanced in the Commonwealth of Independent States.
Former President Islam Karimov of Uzbekistan was much more conservative when it came to enacting economic reform, his primary concern being stability and security.
State control over the financial and banking sectors deterred FDI, leading to the state acting as the chief financier of Uzbekistani businesses, in contrast with Kazakhstan where economic policies led to the flow of debt and private equity financing from foreign companies from around the globe.
In September 2017 the new Uzbekistani president Shavkat Mirziyoyev did as promised and removed a major obstacle to investment in the economy when he removed currency exchange restrictions that had hindered investors from moving money out of the country. Since 2017, the government has been working on a new tax code in cooperation with the World Bank and the European Bank for Reconstruction and Development.
In recent years FDI around the world has slowed, and this trend is even more pronounced in Caucasus and Central Asia countries such as Kazakhstan and Uzbekistan. While portfolio inflows—foreign purchases of stocks and bonds—have been on the rise in these countries, IMF research shows that portfolio inflows to the region are sensitive to changes in perceived global risk, making reliance on these risky in today’s economic environment.
Healthy FDI carries with it many benefits for a country, including a boost to productivity aided by an inflow of new technology, job opportunities, and stable sources of finance. Therefore, steps such as increasing the ease of investment, increasing protections for investors and increasing opportunities for investors are key.
With this in mind, Uzbekistan has recently taken steps to grant foreign investors preferential treatment with regard to travel.
Uzbekistan has already implemented the first wave of important economic reforms promised when President Shavkat Mirziyoyev came into office in 2016 and announced his intention to remove barriers to investment in the Uzbekistani economy.
The government has taken steps to enact tax reforms and to foster job creation by reducing the enormous tax burdens on private firms and workers. The government’s reform agenda is extensive and it is working to accelerate reforms by creating an asset management agency, unbundling responsibilities in the energy and transportation sectors, and identifying enterprises for restructuring or privatization.
Other reforms aim to implement land reform and streamline regulations. Due to its large working-age population, creating more jobs that pay better is a high priority for Uzbekistan, and the authorities are redesigning labor policies to help with this.
The country is also focusing on education, health, gender equality, infrastructure, and financial inclusion. Policies are being directed toward more inclusive growth. Poverty rates have declined significantly, and the next challenge to be addressed is the large number of unskilled and disadvantaged workers.
The authorities are basing their inclusive growth agenda on the UN’s Sustainable Development Goals, especially with regard to education, health, public infrastructure, and financial inclusion. In the banking sector, state banks have a share of around 85% of banking system assets and mainly function to support government investment and development plans.
Indications are that these banks are sound, and the Central Bank has taken steps to minimize risk and upgrade its supervisory capacity and intervention tools. However, it would be beneficial for banks to be restructured to build private sector trust.
The Kazakhstani economy has shown promise over the past 25 years, reforming several key industries and drawing in FDI.
There have even been some international IPOs conducted by large, state-controlled and private Kazakhstani companies.
However, progress slowed with the 2014-2017 slump in global commodities prices and the failure to deliver on promised privatization plans. On the other hand, the government still seems to be committed to economic diversity, including developing its large amounts of arable and pastoral land for agriculture and livestock, which is also ideal for both wind and solar energy generation.
Kazakhstan and Uzbekistan will benefit from the achievement of even some of the economic goals they have set. Reaching these goals depends not only reform and the desire to collaborate with knowledgeable advisors, but also on the willingness to engage with long-standing challenges.