Respondents to the survey raised a number of concerns relating to the ease of trade in Uzbekistan. These concerns dovetail with a large body of work the OECD has conducted, in co-operation with the government, on issues around trade facilitation and connectivity. Despite the geographical connectivity penalties Uzbekistan faces due to its double landlocked status, the country has potential to be an attractive destination for market-seeking investment: a large and expanding population, nestled in the midst of a number of other small but potentially high-growth markets. Yet, for both domestic and international firms to harness potential market opportunities, there remains much to be done to lower the cost of trade and raise awareness of external opportunities for the domestic private sector. This chapter introduces a number of insights from the survey, before giving an overview of recent progress, opportunities, and challenges in trade facilitation and export promotion in Uzbekistan.
Insights on the Business Climate in Uzbekistan
4. Trade facilitation and firm internationalisation in Uzbekistan
Abstract
4.1. Survey observations and overview
A large share of respondents to the survey underscored the importance of market opportunities as a factor in their decisions to enter the country. Some 46% of firms stated that access to the domestic market was one of their main reasons for doing business in the country, indicative of the fact that Uzbekistan’s large and fast-growing population and the steady growth in national income are a significant draw for investors. Similarly, over a quarter (27%) of firms emphasised the importance of the regional market in their entry decisions; despite recent disruptions, a third of respondents expected to have seen revenues from domestic trade increase in 2022, while a quarter expected an increase in their international trade. The significance of market-seeking firms is an important one, particularly when contrasted with the fact that access to natural resources (17%) and cheaper labour (10%) appear to have been less important to the surveyed firms.
Nevertheless, there remain a number of issues that limit the market opportunities for local and international firms, both within Uzbekistan and in the broader region. Within Uzbekistan, trade-oriented firms are affected by the same business climate issues as those focussed on the domestic market, such as: weak regulatory enforcement, insufficient competition, and underinvestment in critical connectivity infrastructure. At the same time, firms that have an export-orientation, or which potentially could have, face a number of specific issues: hard and soft infrastructure constraints and broader issues around trade facilitation, a lack of awareness among SMEs of external market opportunities, and an underdevelopment of the export promotion infrastructure necessary to champion Uzbekistan’s firms abroad (OECD, 2017[1]; OECD, 2021[2]).
Concerns around these longer-standing trade issues, as well as the impact of recent disruptions to trade, were widely raised in the survey. Some 50% of surveyed firms noted that the war in Ukraine had had a serious impact on supply chains due to logistical challenges, while a further 35% said that they had some impact. A similar picture emerged regarding shortages, with almost half (44%) saying that they had had some kind of effect on their business supply chains due to shortages, with 35% saying shortages had had a serious effect on firm operations.
The impact of recent disruptions on the external aspects of firms’ operations in Uzbekistan comes amidst a generally positive, if uneven, appraisal of reforms to support exporting firms. A majority of firms (61%) said that there had been progress over the past five years in improving customs procedures and tariffs, though only 6% said that this progress had been significant. Yet the absolute levels of approval remain low, with 54% of respondents saying that the regulatory framework for customs procedures and tariffs remains weak, and a further 43% rating it as only satisfactory. For exporters, a third of respondents were unable to assess the benefits of the export promotion agency, perhaps indicative of a lack of awareness of its functions and services, or the focus of the surveyed firms on the domestic market. Nevertheless, almost a third (31%) considered the agency to be somewhat useful, and a further 15% very useful. A plurality (41%) of respondents noted that the quality of customs controls were an impediment to the business climate, while respondents also noted a range of areas where improvement could have a significantly positive impact on the business climate, ranging from more support for service exports, elimination of grey imports, and the creation of alternative trade routes.
Supporting export promotion and improving trade connectivity more broadly could bring major benefits to the Uzbek economy, and the market-seeking aspect of respondents’ motivations is indicative of certain basic geographical and demographic characteristics that distinguish Uzbekistan from its regional peers. For one, the country is by far the most populous in Central Asia, with its 2021 population of 35 million well above the next most populous country in the region, Kazakhstan, which had a population of 19 million in the same year. The population is less urban than Kazakhstan (58% vs. 50%), but urban population growth is robust (2% in 2021), the country is more densely populated (78 people per square kilometre of land vs. 7 in Kazakhstan), and, with certain historical constraints on internal mobility having recently been lifted it will likely grow more strongly in the years ahead.
The aforementioned reform efforts have already started to have a material impact on Uzbekistan’s economy, both in terms of its external sector and the spill-over into the domestic economy. Domestic and international trade have grown substantially since the government of Uzbekistan began its wide-ranging reform programme in 2017, with merchandise trade as a share of GDP having more than doubled between 2016 to the last pre-pandemic year of 2019, from 23.6% of GDP to 59.9% (World Bank, 2023[3]). The expansion of exports has been primarily driven by a large increase in the export of gold, while the export of higher value added and more technologically advanced goods remains low, owing in part to the higher cost of trade and prevailing business climate issues that affect innovation and productivity. Imports have more than doubled between 2010 and 2020, rising from USD 9.2 billion to USD 20 billion (Figure 4.1). Unshackled from previously onerous trading regulations, Uzbekistan’s firms have actively been importing new machinery and other capital goods in recent years.
Figure 4.1. Trade decomposition (in value)
Despite significant reserves, Uzbekistan is not a major exporter of natural gas, but its export structure is nevertheless dominated by primary resources. Uzbekistan continues to direct its major natural gas reserves towards the domestic heating and energy sectors as opposed to exporting them, with the country exporting around 25% of gas production and then selling the remainder domestically at below international-market prices (IEA, 2022[5]). The government plans to stop gas exports entirely by 2025, and to use surplus gas for petrochemicals production, which should have a positive impact on the domestic value added of industrial exports (Ibid.). Extractive sectors have been important sources for international currency for the authorities, with the extraction and trade of such primary goods generally the purview of monopolistic SOEs and with transactions directed through the state-managed banking sector. A lack of diversification in exports, and a generally low level of SMEs in international trade, means that Uzbekistan remains largely peripheral to global value chains (GVCs), the integration with which would provide an important source of investment, knowledge and technology transfer (OECD, 2021[2]).
Figure 4.2. Firm dynamism in trade related sectors of the economy
The wholesale trade sector has seen the fastest rate of firm growth across the economy, though the contribution to employment growth has been minimal, perhaps owing to the small, fragmented nature of the private sector in this area and prevailing issues around informality (Figure 4.2 ). The positive trends in Uzbekistan’s external sector and the dynamism in its trade-oriented business sector indicate the significant potential that domestic and international trade, as well as the internationalisation of the domestic private sector, can have for the country’s economic development
4.2. The government is pursuing a number of regulatory reforms to support firm internationalisation
Uzbekistan has made substantial progress in recent years in opening its economy to foreign trade and enabling the internationalisation of its domestic private sector. Since 2017, legal and regulatory reforms to support trade have generally focussed on three areas: exchange rate reforms and issues relating to foreign currency transactions, tariff liberalisation and issues relating to export restrictions, and, relatedly, integration into the global trade architecture.
4.2.1. Reforms have significantly liberalised exchange rates and currency restrictions
One of the first major reforms undertaken by the current wave of reforms the unification in September 2017 of the multiple exchange rates that had existed up until that point. The government devalued the som by 50%, bringing it in line with the black-market rate that had existed prior to the reform package. In August 2019, the government abolished the limits to the som’s daily fluctuations, moving instead to a free float arrangement (OECD, 2019[7]).
At the same time, the government began to liberalise foreign exchange transactions for firms, which had hitherto been highly restricted. The government abandoned the requirement for firms to surrender foreign exchange earnings, immediately easing one of the major blocks on firm growth and reinvestment for both domestic and foreign firms, with this having acted as a de facto partial expropriation of foreign earnings (the ‘foreign exchange revenue surrender requirements’, whereby firms were required to forfeit a part of their export earnings at the official exchange rate).
The exchange rate reforms were accompanied by significant additional reforms relating to the handling of foreign currencies. In addition to the abolition of the surrender requirements, firms were now able to freely purchase foreign currency without restrictions, whether for imports of goods or services, profit repatriation, or other business needs. Similar freedoms were extended to individuals, who from 2017 could purchase foreign currencies for business and travel purposes, and from August 2019 could purchase such currencies with no restrictions.
4.2.2. A large number of tariffs have been removed
Throughout 2017-2018, the government began to implement a process of unilateral trade liberalisation, primarily through tariff reductions, reducing import tariffs for around 8,000 out of 10,800 items, of which around 5,000 were removed entirely (World Bank, 2021[8]). The reduction of tariffs had the effect of lowering effective tariff rates from 14.9% in September 2017 to around 7.5% in 2020 (Ibid).
In addition to lowering most peak tariffs, reforms moved the remaining tariffs from mixed and compound tariffs to a more transparent system of ad-valorem tariffs, and removed most discriminatory excise taxes on certain imports (World Bank, 2021[8]). At the same time, the government also lifted export bans on flour, rice, meat, and vegetable oil, while a green corridor for simplified customs procedures was implemented for the export of fruit and vegetables to a number of key markets, notably Russia, Kazakhstan and the Kyrgyz Republic. Taken together, these reforms have helped make Uzbekistan’s trade more competitive, as attested to by the rapid growth of merchandise trade since 2017.
4.2.3. Uzbekistan has reignited its engagement with the global trade architecture
Discussions on WTO membership resumed in 2020, some 15 years after the last formal meeting on the country’s accession (World Bank, 2021[8]). Since then, the government has prepared a roadmap for accession, submitted an updated Memorandum on the Foreign Trade Regime, something which marks a crucial step in resuming accession negotiations, and included achieving WTO membership as a stated aim of the government’s 2022 Development Strategy of New Uzbekistan for 2022-2026 (Republic of Uzbekistan, 2022[9]). Should Uzbekistan be successful in implementing the necessary WTO principles for accession, the country is likely to see a significant reduction in the costs, time, and uncertainties that continue to characterise the existing regulatory framework for foreign trade (World Bank, 2021[8]).
Co-operation between the EU and Uzbekistan on trade issues has also intensified in recent years. In July 2018, the Council of Europe adopted directives to negotiate an Enhanced Partnership and Co-operation Agreement (EPCA), an upgraded version of the Partnership and Co-operation Agreement in force since 1999. The EPCA was concluded in February 2021, and Uzbekistan then obtained the aforementioned GSP+ status in April 2021. This status allows Uzbekistan to benefit from the basic GSP system (permitting the export of 3,000 goods to the EU without customs duties, and 3,200 goods at reduced rates), and grants Uzbek producers and exporters unilateral preferences when exporting to the European market, such as a doubling of duty-free exports (OECD, 2021[2]).
4.3. Uzbekistan has simplified its trade facilitation framework, though a number of barriers remain
The government has undoubtedly made progress in removing barriers to trade. Nevertheless, there remain a number of issues relating to trade facilitation – i.e., the ease in fulfilling the logistical and procedural requirements necessary for importing and exporting – that continue to weigh heavily on the business climate. Addressing these issues is a policy goal of the government, and success in doing so would have a significant and positive impact on the ability of Uzbekistan to expand and diversify its trade.
Issues that fall into the category of trade facilitation can affect firms in a number of ways. By virtue of being double-landlocked, Uzbekistan’s traders already suffer from a geographical connectivity penalty, one which is also felt by international firms who may seek to expand into the market (ITF, 2019[10]). As discussed in a, much of the cost for traders in the region is incurred through soft infrastructure problems, in contrast to the hard, physical infrastructure to which policy attention can often gravitate. The implication is that higher costs involved in moving goods and services across borders, compounded by a high degree of uncertainty in the time and processes involved in doing so, can either discourage firms from exporting or importing, or, once the cost is factored in, render their exports uncompetitive on external markets.
Box 4.1. The OECD Trade Facilitation Indicators
To help governments improve their border procedures, reduce trade costs, boost trade flows and reap greater benefits from international trade, the OECD has developed a set of Trade Facilitation Indicators (TFIs) that identify areas for action and enable the potential impact of trade facilitation reforms to be assessed. The OECD TFIs help track the specific areas where progress has been made on the implementation of the TFA, as well as other trade facilitation policies. The TFIs also help identify where further reforms are needed.
Their key value added is in identifying changes in both the regulatory frameworks for trade facilitation measures and their implementation in practice. The indicators thus cover the full spectrum of border procedures for more than 160 economies across different income levels, geographical regions, and levels of development. The TFIs take values from 0 to 2, where 2 designates the best performance that can be achieved.
OECD TFIs: Overview of key dimensions and measures
In 2022, the OECD reassessed Uzbekistan’s performance in the OECD Trade Facilitation Indicators (TFIs) (Box 4.1), the country’s first update since 2019, two years into the ongoing reform process (OECD, Forthcoming). At that point, the country had already begun to make progress from the earlier benchmarking, particularly in the areas of procedural formalities and the involvement of the international trade community. Since that point, the country has continued to improve its general performance, with the most significant progress being made in the areas of availability of trade-related information, the involvement of the trade community, simplification and streamlining of fees and charges, simplification and harmonisation of trade-related documents, and domestic and cross-border agency co-operation (Figure 4.3). In contrast, limited progress has been made with respect to advance rulings, appeal procedures and the automation of border procedures.
Figure 4.3. Uzbekistan in the OECD Trade Facilitation Indicators, 2017-2022
Source: (OECD, 2023[11])
The performance of Uzbekistan in the TFIs is broadly in line with the average performance for lower-middle income economies (LMICs) in a number of areas. This includes transparency and predictability (the latter includes aspects such as the involvement of the trade community and advance rulings, and appeal procedures) (Figure 4.4). A comparison with the LMIC group also highlights a number of more challenging areas, such as information availability, fees and charges, simplification and harmonisation of trade-related documents, automation of border processes, and co-operation with border agencies. While progress has been made, Uzbekistan lags the LMIC group on most of these areas, and significantly lags the OECD average.
Figure 4.4. Trade facilitation in international comparison, 2022
Source: (OECD, 2023[11])
In a 2023, the OECD noted a number of notable improvements due to recent policy reforms, as well as certain areas where additional improvement could meaningfully improve the local business climate (OECD, Forthcoming[12]). By increasing the user-friendliness of information concerning the rate of duties, export and import procedures, and general trade-relevant legislation, information on trade agreements and by providing user manuals on how new border systems would work, the government has markedly improved transparency for trading firms. Progress was also made in improving the inclusion of a new and broader array of stakeholders in consultation processes on trade-related policy changes, while progress has also been made through the introduction of an advance rulings system as well as the introduction of procedural rules for appeals on trade-related matters. Work in all of these areas has helped improve transparency and predictability for traders in and with the country.
The government has also made progress in streamlining border processes, this being achieved through the establishment of a Single Window for trade, of Post-Clearance Audits, and of an Authorised Operators (AOs) programme. These changes have been added to with new procedures for the treatment of perishable goods and their treatment in customs clearance, pre-shipment inspections, the use of customs brokers, and the temporary admission of goods. The streamlining of border processes has also been improved by the simplification and harmonisation of trade-related documents and the automation of procedures, with Uzbekistan having made particular progress in the introduction of electronic payment possibilities of duties, automated risk management, the acceptance of copies and the use of international standards.
The government also has taken steps towards strengthening inter-agency mechanisms in support of border agency co-operation, with co-operation, coordination, information exchange and assistance now involving all domestic agencies that are involved in cross-border trade. There are now regular meetings between the different public agencies involved in the procedures required to import or export goods, supplemented by informal and ad hoc coordination mechanisms between agencies to address particular events at the border. Importantly, national legislation now allows for cross-border co-operation, coordination, information exchange and mutual assistance with border authorities in neighbouring countries.
Assessments by the OECD on Uzbekistan’s performance also highlighted a number of areas for improvement, which largely dovetail with observations in the survey and other OECD work on trade facilitation and connectivity in the region. For example, in a context of continuous disruptions, the need for transparency and predictability takes on additional importance, since it can support firms by providing early warnings and help build supply chain resilience. As noted above, Uzbekistan has made progress in this area, but there is much more that can be done in terms of increasing the availability and comprehensiveness of information online.
The OECD also noted the need for improvement in a number of areas. This included further simplifying trade documentation (for example, by increasing the share of supporting documents for which copies are accepted), automating border processes (for example, increasing the share of import and export procedures that can be processed electronically, or allowing advance electronic payment for duties and taxes), and streamlining border processes (for example, by finalising the introduction of an automated risk management system for customs and other agencies involved in cross-border trade). Enhancing border agency co-operation – for example by introducing an institutionalised mechanism for supporting inter-agency coordination, or introducing the possibility of government agencies to delegate controls to another agency – was also highlighted as key areas for improvement.
4.4. Additional targeted support could help SMEs access foreign markets
Demand-side issues to trade, such as the awareness of external opportunities and raising firm capacities to navigate customs procedures, are also important for firm internationalisation. Helping firms – specifically SMEs – in Uzbekistan to internationalise was a key motivation of the government and the OECD when it undertook a 2017 peer review of the country’s export promotion policies to support firm internationalisation, a report that was further developed in 2021-22 through a monitoring exercise (OECD, 2017[1]; OECD, 2021[2]).
SMEs play a significant role in creating growth and employment in Uzbekistan, accounting for 55% GDP and 75% of formal employment in 2020. Their contribution to exports, however, remains limited, suggesting that barriers to exporting continue to mitigate their potential contribution to growth. In the last pre-pandemic year of 2019, SMEs generated 27% of exports, with the share falling to 20.5% in 2020. These figures reflect direct exports, that is, they omit the indirect exports to which SMEs contribute through their integration into global value chains (GVCs) and their roles in the broader industrial ecosystems of larger firms in the country. The inclusion of Uzbekistan in OECD databases such as the Trade in Value Added (TiVA) database would make it easier to capture the broader role of Uzbekistan’s SMEs in its export-orientated industries.
In the face of the connectivity penalties faced by Uzbekistan and the relatively high cost of international trade, the country’s SMEs generally remain oriented towards the domestic market or immediate regional neighbours, particularly in the trade and manufacturing sectors. Targeted support programmes to increase SMEs’ knowledge of new export opportunities, and to help them to navigate the procedures necessary to access them, has become a key area of policy activity in recent years.
After undertaking its initial peer review of Uzbekistan’s export promotion policies in 2017, the OECD made a number of recommendations to the government Many of these recommendations remain relevant, including the following:
developing consulting activities to improve SMEs’ knowledge of foreign markets, including export market potential and product certification requirements and opportunities;
expanding the export-promotion network abroad and providing a clear branding strategy in target markets in co-operation with the business community: and
monitoring the work and impact of export institutions to allocate resources more effectively using key performance indicators and comprehensive evaluation strategies across different institutions.
Since these recommendations were made in 2017, Uzbekistan has made significant progress in a number of areas. Several export promotion institutions have been developed in the intervening period, including the Export Promotion Agency (EPA), which was established under the Ministry of Investments and Foreign Trade (MIFT). The establishment of the EPA allowed the government to consolidate and rationalise the mandates of several pre-existing institutions, including the Small Business and Entrepreneurship Development Agency under the Cabinet of Ministers. Since its establishment, the EPA has become a key actor in the export promotion landscape, helping SMEs to access trade-related finance, engaging with authorities and negotiating export contracts. It also provides information on export markets to the country’s SMEs, in collaboration with research centres like the Centre for Economic Research and Reform (CERR) and the Centre for Research on Sectoral Markets and Productivity in Manufacturing. The agency also has the important role of overseeing and implementing the Made in Uzbekistan promotional brand.
The government has also deepened its co-operation with the private sector as it seeks to expand the internationalisation of the private sector. One important area of work in this regard has been work to support SMEs with standardisation and quality infrastructure, for example efforts by the Agency for Technical Regulation to provide exporting business with support on certification issues. The EPA has also sought to address knowledge and skills gaps that may prevent SMEs from exporting by establishing consulting and marketing services, with these now a crucial element of its mandate. The EPA has six thematic divisions, of which two are dedicate to export market research and analysis.
Nevertheless, there remain a number of areas where additional policy intervention could markedly improve the capacities of Uzbek SMEs to internationalise. The supply, for example, of certification services could be increased and made more accessible. As noted in the monitoring note in 2021, the EPA could provide cost-sharing options for these and other services in order to broaden the scope of SMEs that can access them. Partnerships with international certification bodies and companies could also improve the ‘quality infrastructure’ knowledge necessary for Uzbekistan’s SMEs to make the most of opportunities that have emerged through GSP+ and which may emerge through further WTO harmonisation.
The Made in Uzbekistan brand was an important step in creating a recognisable identity for Uzbekistan in potential export markets, but work still has to be done to associate Uzbek SMEs with a clear value proposition. This is an area where the network of the EPA abroad, particularly through embassies and trade houses, could be used more strategically.
References
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