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Uzbekistan: Still Struggling With Economic, Investment Challenges, Despite Some Successes

Since independence, Uzbekistan's economic record has been mixed. It has succeeded in avoiding an economic crisis and has made some progress from being simply a producer and exporter of raw materials. However, the country has failed to implement currency reforms or set the preconditions needed to attract long-term foreign investment. This weekend (3 and 4 May), Tashkent hosts the annual meeting of the European Bank for Reconstruction and Development, RFE/RL reports.

Prague, 2 May 2003 (RFE/RL) -- Economist Rustam Jumayev, a professor of political science at Tashkent State University, says Uzbekistan has made great progress from being simply a producer of raw materials such as cotton, oil, gas, gold, and other strategic metals.

"The importance of the development of micro-economic stability and the growth of the economy become more impressive if you objectively take into consideration the great difficulties of the beginning of the 1990s, when we inherited from the Soviet economy a one-way direction [as a supplier] of raw materials," Jumayev said.

This progress has been all the more remarkable, Jumayev said, in light of the ups and downs experienced by the global economy during this period and the severe drought that has affected agriculture in Central Asia over the past few years.

Whereas Uzbekistan earlier exported almost all the cotton fiber and natural gas it produced, it developed its own textile industry to use locally produced cotton. And instead of exporting natural gas, it built a plant to use that gas to produce polyethylene.

Jumayev, who holds a post in the Uzbek government, listed several new branches of industry established since 1991, including automobile manufacturing under a joint venture with South Korea's Daewoo, as well as ventures in the microbiological, pharmaceutical, and information technology spheres.

As part of the reform of agriculture, Jumayev added, the Uzbek government has carved up huge Soviet-era collective farms into family-based farms. It has also introduced micro-loans for such farms and a scheme under which farmers can lease agricultural equipment.

At the same time, Jumayev said, measures have been taken to promote the establishment of small and medium-sized businesses, and legislation has been passed on banking and auditing that is intended to expedite and facilitate the transition to a market economy.

Jean Lemierre, the president of the European Bank for Reconstruction and Development (EBRD), stressed the importance the group attaches to support for small and medium-sized businesses and for reform of the banking sector in Uzbekistan.

"We are expecting also a few changes in the economic sector to promote investment in the country and job creation. And you know, for instance, that we invest quite a lot in the small-business sector and the banking sector," Lemierre told RFE/RL.

Lemierre told the French news agency AFP today that Uzbekistan must open up more to its Central Asian neighbors if it wants more help from the bank. Lemierre said Uzbekistan must cooperate with its neighbors and that if Uzbek companies want to export they should accept imports. He said the EBRD has already invested $180 million through a network of Uzbek banks to finance small businesses.

At the same time, however, Tashkent economist Jumayev admits some local officials are hindering economic reforms in the agricultural sphere, which employs 60 percent of Uzbekistan's working population.

"Positive changes are taking place in the implementation of agricultural reforms. Sometime in our last talks, we said it is a very difficult sphere, and do you know that in the agricultural sphere, 60 percent of the population is involved? This is a very great figure," Jumayev said.

But the most important economic problem still facing the country is currency convertibility.

In its assessment of the Uzbek economy, the EBRD notes that Tashkent failed to meet the most recent deadline set by the International Monetary Fund (IMF) for introducing full currency convertibility and recently imposed new barriers to cross-border trade.

The IMF suspended lending to Uzbekistan in 1996 and failed to replace its outgoing representative in April 2001 because of the Uzbek leadership's reluctance to move toward making the national currency fully convertible.

Uzbek President Islam Karimov has said he intends to meet this month with the IMF's John Odling-Smee on the sidelines of the EBRD meeting to discuss the prospects of a new loan to support the Uzbek currency, the som.

When asked whether the EBRD is complying with the IMF deadline on convertibility, Laurent Guye, the executive director for EBRD affairs in Uzbekistan, said: "Well, we very much hope that the dialogue between the IMF and the Uzbek authorities will progress over the weeks to come. We can see that big progress has been made towards convertibility in the sense that the gap that was more than 100 percent between the two exchange rates is now about 12 percent, and what we have been saying to our Uzbek partners is that the convertibility would be a very strong incentive for private investors, and as long as we have this problem of convertibility, of course, the pace of investments by private investors, consequently for the EBRD, will be much slower."

Foreign companies are unlikely to invest in Uzbekistan unless the government abolishes the last remaining restrictions on the free exchange of soms into dollars or other currencies. Further plans to expand cooperation between Uzbekistan and the EBRD and to increase the scale of investment in the Uzbek economy will depend on efforts by the Uzbek leadership to make the national currency fully convertible and create good conditions for the private sector.

Guye said, "we hope that the EBRD annual summit will give Uzbekistan an opportunity to demonstrate its huge potential and create conditions for attracting foreign investment in the country."

According to of 27 April, Karimov told reporters he favors resumption of cooperation with the IMF.

In the same interview with RFE/RL, Jumayev said he believes the demands by international financial organizations for introducing full convertibility will be met.

"I think that all the demands of the IMF and other international organizations will definitely be met within the required time frame," Jumayev said.

He said all foreign exchange transactions within the country now use the free market, not the fixed exchange rate.