A Country Report and Profile — Republic of Uzbekistan

A Country Report and Profile

Presented By:

Alfiya G. Mirzagalamova [email protected]
Jason C. Holman jholman@indinanaedu
Dmitri Maslitchenko [email protected]

The concept of transition of the Republic of Uzbekistan to the market
economy consists of five principles formulated by its President Islam

1. Economy should have priority over politics. Economic reforms should not
follow the lead of political processes.

2. The State is the main reformer. The representatives of legally elected
authorities have to determine priorities and pursue balanced policy of no
social shocks.

3. Along with economic reforms it is necessary to create a system of social
protection of the Republic population especially of most vulnerable

4. Superiority of Law and Constitution.

5. Stage by stage movement to the market economy. The transition to next
stage only after the current stage targets have been met..

[1]I. Political and Economic Background


To understand the politics of Uzbekistan it is important to delve into
it’s most recent history. The leader from 1959-1983 was Sharaf Rashidov,
who ruled in a quasi-feudal fashion, much like the newly elected leader.
Rashidov kept the USSR content through a combination of patronage,
corruption, and repressive behavior. Once Mikhail Gorbachev was elected,
Rashidov was the prime target for his drive to eliminate corruption.
Although there was an upsurge of national identity among the Uzbeks and a
feeling of victimization by the thousands of corrupt officials who where
soon imprisoned, incredibly through more repression the elections for new
leaders would go unopposed. The Republic of Uzbekistan declared its
independence from the former Soviet Union on August 31, 1991. Although it
was not recognized by the United States until December 25, 1992.
Uzbekistan is a member of the United Nations and the Commonwealth of
Independent States (CIS). Although Glasnost led to many open media
discussions of the environment and ethnic issues, the elections held in
1990 were one-sided. The main opposition party was not allowed to stand,
therefore leaving many communist candidates to be elected. Islam Karimov
was first elected President in 1990 by the Supreme Soviet and later was
reelected by a popular vote in 1991.

In 1995 Karimov held a national referendum which would extend his term
into the year 2000. He had 99% of the electorate’s support. Karimov
proclaims he is a supporter of “Eastern Democracy.” He stresses the
importance of stability of eastern democracy over it’s western counterpart.
The stability that Karimov suggests many believe is just a ploy for
Karimov to use his dictatorship power to cling to the old world status.
Karimov is one of the strongest supporters of continued cooperation among
the Soviet Republics. Karimov supported the new Union Treaty in spring of
1991 and did not oppose the August 1991 coup in Moscow. Once the coup
collapsed Uzbekistan declared independence. Karimov proclaims Uzbekistan
is a multiparty system, yet the Erk (Freedom) Democratic Party, the Birlik
(Unity) People’s Movement (BPM) and the Islamic rebirth Party (IRP) have
been banned.

[2]Policy makers still remain suspicious of unregulated market
mechanisms, although Karimov officially commits to a market-oriented
reform. Prices were slowly liberalized and the new trade policies are less
harmful toward exports. The import tariffs proposed in 1993 are
preferential toward CIS communities and extra low tariffs toward Central
Asian countries. It is going to be very difficult for him to explain why
many of the neighboring Central Asian countries are becoming richer through
liberalization and privatization while Uzbekistan continues to stay stable,
but poorer then the other nations. Karimov stresses stability as a reason
why Uzbekistan has not seen the high inflation rates characteristic to
other CIS communities in transition.

2Karimov gives little mention to human rights. He believes that
economic stability is necessary for socio-political stability. In his new
book, Along the Road of Deepening Economic Reform, Karimov states,
“preparation, discussion and adoption of fundamental laws regulating and
providing guarantees of human rights and freedoms, rights and freedoms of
public organizations and freedom of conscience and religion have been
something principally new in practical law making in this country.” He
also briefly mentions the women’s rights and acknowledges their special
role as “women-mothers” and presses for better child care provisions.


3At independence, the economy was dominated by cotton production.
Uzbekistan hoped to benefit from this by selling the cotton on the
international market, but the early 1990s were a time of depressed prices
on world cotton markets. This created a dispute with Russia, which
responded by seeking to purchase cotton on the world market. Uzbekistan
lost a considerable amount of revenue due to this conflict with Russia.
Eventually the two countries reached an agreement to barter Uzbek cotton
for Russian petroleum products.

Other important agricultural products include grain, fruit, vegetables
and natural silk from cocoons. The main problem of Uzbekistan is that
about three-fifths of the country is desert or semi-arid desert: almost all
cultivated land must be irrigated. This has resulted in the gradual drying
up of the Aral Sea. By the 90's the available water supply had been
exhausted to the point that there was no possibility of increasing the
amount of land used for agricultural purposes. Grain production only
covers a quarter of Uzbekistan’s total consumption. Therefore Uzbekistan
relies heavily on imports from countries such as the United States to
support their supply of grain. Uzbekistan complains that the USSR
destroyed it’s grain-growing capacity in order to create the cotton
monoculture. This has remained a very difficult obstacle for Uzbekistan
and grain continues to be a major import.

4Uzbekistan’s other primary product exports include gas and minerals.
Uzbekistan has few energy sources besides gas and untapped hydro power.
Although a major oil field was recently discovered in the Fergana Valley in
1992. Uzbekistan is the largest importer of oil by all the CARs. The most
accessible mineral export is gold, of which Uzbekistan was the USSR’s
second-largest producer. Joint ventures are bringing foreign technology to
exploit Uzbekistan gold mines. Other mineral deposits include silver,
lead, copper, zinc, and tungsten. Uzbekistan’s minerals have a low ore
content, which suggests that it would not be as valuable on the world

5After World War II, Soviet resources were concentrated on rebuilding
industrial enterprises in European areas. With less investment the growth
rate of Uzbekistans industry declined. There was a long trend of falling
industrial growth rates. Manufacturing industry in Uzbekistan was
originally developed in close relation to its primary product base which of
course was cotton and fruits and vegetables. Machinery for the cotton
sector was a major output and food processing industries were also
important. These are the only two substantial forms of manufacturing in
Uzbekistan. This is somewhat disturbing considering the large amounts of
resources that are available.

6The general problem was of lack technical ability and low standards
of quality. The main approach to correct this problem was to encourage
joint ventures. Many joint venture agreements were signed in 1992 and
1993, but there was little actual foreign investment. There was also a
problem with Uzbekistan’s communication capabilities. In 1993 a joint
venture was formed with the Turkish company, Teletas, to install seventy
thousand lines.

Uzbekistan also would like to become the hub of Central Asia. When
the Aeroflot fleet was shared out after the dismemberment of the USSR,
Uzbekistan utilized its share of the planes productively to earn vast
amounts of hard currency. It created an international network in the
spring of 1993 with the goal of making Tashkent a hub for budget and travel
between Europe and Asia. Flights would be established to Karachi, Delhi,
Kuala, Lumpur, Bangkok, Beijing, Frankfort, and London. Israel provided
training assistance to Uzbekistan Airways, and the airline raised its
credibility by purchasing several Airbuses.

Economic reform in Uzbekistan has been very slow. Until 1994 Mr.
Karimov opposed reform. Since then he has had to start some reforms to
obtain IMF backing for his stabilization program and to get World Bank
financing. Uzbekistan has been officially committed to economic reform
since independence. The government has favored gradual change, and the
pace has become increasingly slower as the years have went on. Labor
market and enterprise reform have been limited, and indeed the ultimate
reason behind Uzbekistans slow price liberalization has been to maintain
the value of real wages and subsidies. The government has promised to keep
wage and benefit increases ahead of future price rises.

7Privatization in Uzbekistan has progressed extremely slow. Karimov
dominates economic policy; he has issued a raft of decrees that are on
occasion contradictory, but aim to convince the multilateral institutions
that reform is taking place. The first form of privatization took place in
1994. The process lacked transparency, was corrupt and resulted in Mr
Karimov’s allies owning the viable firms. Other obstacles are that land
liberalization ahead of establishing a guaranteed water supply would be
meaningless for the irrigation-based agricultural sector. In industry, not
only has privatization of state enterprises been slow but there was also
very little privatization created from many small-scale entrepreneurs.

8II. Budgetary and Monetary Conditions

Uzbekistan’s statistics are notoriously inaccurate and in small
quantities. The government views economic data as a state secret, and
circulation of the more informative data is restricted. All figures from
Uzbekistan must be treated with a degree of caution as the government is
trying show that the country is handling the post Soviet government better
then its neighbors. The country is attempting to switch from the old
communist national accounting method using National material product (NMP),
which excludes most services and depreciation, to the standard System of
National Accounts (SNA).

What is clear is that Uzbekistan’s economy has been in decline
since the collapse of the Soviet Union. After a 3.7 % fall in 1991
National material product declined by 14.4% in 1992. GDP in those two
years has dropped by 0.5% and 11.1%. In 1993 the fall in GDP was 2.4 %
according to IMF estimates, with national material product down by 3.5%
mainly due to continued government subsidies. The IMP initially estimated
that, due to tighter policies, GDP contracted by 10.1% in 1994. However,
the Uzbek authorities claim that despite a severe credit crunch and a
confiscatory change of currency, GDP shrank by only 2.6%, the figure that
the IMF now accepts.

9Net Material Product

1989 1990 1991 1992 1993

Total(Rb m)

At current prices 21,588 23,402 49,636 386,071

Real Change ( %) 3.1 11.3 -3.7 -14.4 -3.5

Per Head (Rb)

At current prices 1,091 1,157 2,407 18,287 170,622

Real change (%) 0.8 8.9 -5.5 -16.4 -5.7

*Derived from the World Bank mid-year population estimates.

Budget Deficit

Uzbekistan’s government budget has suffered from large deficits since
the collapse of the Soviet Union. The IMF has put the 1993 fiscal deficit
at 12% of GDP, while the governments figure released through the World Bank
was 2.5%. The main reason for the deficits is lost revenue subsidies from
the Soviet Union. Uzbekistan had one of the largest subsidy share of
revenue compared to many of the other (CIS) countries. During the 1980s
the proportion of revenue actually increased form 20.8% in 1987 to 43.2% in
1990. Soviet grants which has once accounted for 7% of GDP in 1987 rose to
19.5% of GDP by 1991.

10III. Expenditure Policies and Assignments

Although Uzbekistan is now engaged in the necessary fiscal and revenue-
raising reforms demanded by multilateral institutions, very little revenue
is received from taxes. Corruption, weak institutions, economic recession
and poor tax compliance have hindered revenue collection severely. The
government claims that actual revenue to GDP has risen in recent years from
26.4% to 41%in 1993. Given continued state control of the economy, tax
compliance among state enterprises would tend to be greater than in
countries with a growing private sector, although figures may be
overstated. On the expenditure side, increased outlays on defense and
security, welfare payments, and subsidies to industry have been the most
important developments since 1991. Increased expenditure was financed
through huge expansion of domestic credit, montised by courtesy of the
Russian Central Bank until 1993 when this tactical trend was eliminated
once it was found to be unsustainable. The government then went to the
IMF. The figures on the preceding page show this information

11State Budget (Rb bn)

1988 1989 1990 1991 1992 1993

Revenue 9.7 11.8 15.1 30.2 139.8 1,814.5

of which:

Turnover Tax 3.3 3.8 4.0 6.1 3.3 n/a

VAT 0.0 0.0 0.0 0.0 38.4 477.1

Excises 0.0 0.0 0.0 0.0 9.5 44.9

Company income Tax 1.7 1.3 1.5 3.8 23.9 382.9

Personal Income tax 1.1 1.5 1.3 1.8 11.4 145.3

Grants from Union Budget 2.3 3.6 6.4 11.4 0.0 0.0

Expenditure 10.1 11.0 14.9 32.4 193.9 1,923.4

of which:

Economy 4.6 5.0 8.1 5.9 20.9 392.7

Defense and Public Order n/a n/a n/a 0.2 11.7 n/a

Social and Cultural 5.2 5.5 6.2 9.2 70.8 n/a

Balance -0.4 -0.8 -0.2 -2.4 -54.1 -108.9

% of GDP -1.4 -1.0 -1.2 -3.6 -12.1 -2.5

* 1993 data are from the World Bank. They exclude non-budgetary accounts.

Sources: IMF, Economic Review: Uzbekistan; World Bank, Statistical
Handbook: States of the Former USSR, 1994

IV. Tax Structure and Administration12

Corporate Taxation

Profit Tax

Uzbek entities — taxed on their profits from all sources worldwide.

Foreign Entities — taxed on profits from the entrepreneurial activities of
their establishments in Uzbekistan.

Foreign entities receiving income from Uzbek sources other than through
Permanent Establishments are subject to withholding tax on the gross
amounts of the income without reduction for any expenses.

The general profit tax rate is 37%. This rate is reduced to 25% for
entities with foreign investment of 30% or greater.

A tax return and activity report should be filed with the tax authorities
by February 15. An audit opinion or an agreement for audit services should
also be submitted by the appropriate deadline.

Social charges

Employers must make social insurance and employment fund contributions, as
well as contributions to a trade union if applicable. The total amount
payable, which is deductible for profits tax purposes, is 38% to 40% of
each employee's gross salary, made up as follows:

Fund Rate

Social insurance 36%

employment 2%

Trade union (if applicable) 2%

Individual Taxation

A resident is defined as an individual who is physically present in
Uzbekistan for 183 days or more in a calendar year. Residents are taxed on
their worldwide income, while non-residents are taxed only on their Uzbek
sources income.

Taxable income for 1995 and 1996 is taxed at the following rates:

Taxable income (less annual non-taxable minimum)

Up to 2 annual minimum wage 15%

2 to 5 annual minimum wage 25%

5 to 10 annual minimum wage 35%

Over 10 times annual minimum wage 40%

Social security contributions

1% of the gross salary to the Social Insurance Fund.

Deductions and Exemptions

All income is taxable in Uzbekistan unless it is specifically exempt. The
list of specifically exempt income includes alimony, gift, severance and
pension income.

Capital gains

Capital gains in the disposal of shares are exempt for taxation. Capital
losses are not deductible.

Other taxes and fees

Value Added Tax («VAT»)

VAT was introduced in Uzbekistan on February 15, 1991. The current rate is

VAT is levied on turnover from the supply of all goods and services
(including barter transactions), unless they are specifically exempt.
Imports are exempt. Though, VAT is levied on the Uzbek seller's markup of
imported goods. Exported goods and services are specifically exempt from
VAT. Exported goods are defined as having cleared customs. Exported
services are defined as being supplied to a «foreign person». For the
determination of whether services are exported, neither the place of
providing the services not the place where the benefits are used are
considered, only that the purchaser is a foreign person (entity). It could
be argued that Uzbek VAT legislation allows representative offices of
foreign legal entities (which are non-resident), paying for services in
foreign currency through authorized Uzbek banks to also be classified as
«foreign person».

Effective January 1 1996, the exemption on exported goods and services is
only applicable if the importing country does not impose VAT on exports to
Uzbekistan. This restriction is especially important with respect to some
members of the CIS as VAT is charged on exports to member states.

The VAT legislation of Uzbekistan allows a credit for VAT incurred, when
such goods or services are «charged to the cost of production».

Excise taxes

Excise taxes are payable by domestic producers and importers of excised
goods. The list of excised goods is determined by the Cabinet of Ministers
and includes tobacco, jewelry, gasoline, liquor and other goods. Exported
goods are exempt. Tax rate vary from 5% to 75%. The amount of excise tax is
determined by the taxpayer, based on the volume of goods sold and
established tax rates on such goods.

Property tax

The 2% rate tax is based on the historical cost of fixed assets used in
production. Legislation specifically includes buildings, machinery,
equipment and vehicles. Accumulated depreciation does not reduce the
taxable base. The following assets are specifically excluded from he
taxable base for property tax purposes:

— housing, social and cultural facilities;

— environmental protection assets;

— agricultural equipment;

— transportation networks (including roads and pipeline);

— communication and power transmission lines (including

— maintenance structures);

— communication satellites; and

— automobiles.

Profit tax is deductible for profits tax purposes.

Subsurface use tax

Taxes on the mining, and oil and gas industries. Subsurface uses tax is
deductible for profits tax purposes.

Land tax

A fee on land owners is imposed at a fixed rate per hectare.

Vehicle fees

A minimal fee on motor vehicle owners is imposed at a fixed rate per
horsepower. Individuals must also pay this fee, though only at half the
corporate rate. Only vehicles registered for road use are subject to this
tax (e.g. not those used for production which would be subject to property

In addition there is a fee on the purchase of vehicles, defined as a
percentage of the purchase price of the vehicle excluding VAT or duties, 5%
for cars and 10% for trucks, buses, trailers and semi-trailers.

Road use tax

All entities are subject to road use tax which is applied to gross sales,
excluding VAT and excises. For transportation companies a rate of 2% and
for all other companies a rate of 1% applies. The tax is deductible for
profits tax purposes.

Water use fee

There is a nominal charge for the use of water resources at a fixed rate
per cubic meter of water consumed. For most companies, the rate is 0.09
soum per cubic meter. The fee is deductible for profits tax purposes within
statutory water use limits.

Local taxes

There are numerous different taxes, though most are insignificant except
for the administrative burden. Example of more significant local taxes

Tax on advertising costs. In Tashkent the rate is 5% of total expense.

Fee for cleaning the local territory, payable by entities and individuals
conducting entrepreneurial activities. In Tashkent the rate is 0.5% of
gross receipts.

Fee for the right to trade, payable by entities and individuals conducting
retail trade. In Tashkent the rate is two minimum monthly wages per month.

Revenue collection problems13

High tax rates on modest tax bases reduced not only by economic contraction
but also by various exemptions.

Weak tax administration compounded by corruption.

The effective tax burden on those who comply with the tax code is increased
since large numbers of taxpayers successfully evade taxes — equity and
efficiency problems.

Corruption and abuse of authority by poorly paid tax administrators are
serious problems.

Another major cause of poor tax revenues is dollarization and the
continued use of barter, payment in kind.

The Investment Policy of Uzbekistan

Priority areas14

1. Gold-mining and non-ferrous (Uzbekistan ranks 4th in the world in terms
of gold reserves).

2. Power engineering.

3. Processing of cotton (40% of the gross agricultural production is
cotton, however only 10% of produced raw cotton is processes in Uzbekistan,
the rest is exported as raw material. The existing textile industry is

4. Processing of vegetables and fruits (The production makes up 60% of the
total fruit and vegetables production of the former USSR; agricultural
infrastructure development needed — processing, transportation, storage
facilities, packing).

5. Transport and communication.

6. Tourism (4000 architectural monuments, many of them are under the
protection of UNESCO;. world famous cities Samarkand, Bukhara, Khiva;
tourism infrastructure is a potential area of investment).

7. Financial and monetary. Create a network of banks and insurance

8. Environmental Protection (degradation of the ecosystem of the Aral Sea,
irrational use of water resources).

Guarantees and privileges granted to foreign investors15

1. If subsequent legislation of the republic of Uzbekistan impairs
investment conditions, then the legislation which was valid at the time of
making the investment shall apply for a period of time not exceeding 10

2. Companies’ profit tax shall be reduced by:

20%, for an export share of 5-10% of the total production;

30%, for an export share of 10-20% of the total production;

40%, for an export share of 20 to 30% of the total production;

50%, for an export share of 30% or above of the total production.

The purpose here is encourage export oriented manufactures and producers.
«The great success stories of economic development in the last decade have
been the newly industrialized countries of East Asia, especially the so-
called «Four Tigers» (South Korea, Taiwan, Hong Kong, Singapore) and,
increasingly, Thailand and China. In these countries, rapid growth of
manufactured exports has produced dramatic increase in income. NICs have
undertaken a host of interventionist measures to create incentives for
export-oriented manufacturing firms, often in particular targeted
industries at particular stage of development.»16

The heritage of the old socialist system — exports of primary commodities
and raw materials (cotton and cotton products in case of Uzbekistan)- has
to be gradually replaced by exports of manufactured goods. «It makes a
difference not only because of the recurring problem of gluts resulting in
falling process in commodity markets but also because of the greater
potential for raising technological capabilities».17

3. Receipts in hard currency earned by a company due to increase in export
production (product, jobs, services) shall be exempt from profit tax.

4. A 25% profit tax shall apply to the profits of Joint Ventures with a
foreign capital of above 30%.

5. Joint Ventures with a foreign capital investing into projects in
priority industries included in the Investment Program of Uzbekistan shall
be exempt form taxation for the first five years of operations.

6. Joint Ventures which specialize in agricultural products and the
processing thereof (except for wines and strong alcoholic beverages),
consumer products, and construction materials, medical equipment, machines
and equipment for agriculture, light and food industries, recycling of
waste materials are exempt from taxation for two years from the date of

7. The profit tax base is decrease by 30% of the expenses for environmental

8. Dividend on governmental bonds are exempt from taxation;

9. Joint Ventures in which the foreign investor’s share accounts for a
least 50% shall be exempt of profit tax provided that whole tax amount is
re-invested into the development and expansion of production of consumer

10. Exporting companies are exempt of VAT for materials resources used in
the production of exported goods (jobs, services)

11. Beginning July 1994 through December 31, 1997 all commercial banks
including those with foreign capital, as well as the branches and
subsidiaries of foreign banks operating in Uzbekistan are exempt from
profits, property, land and vehicle taxes.

V. Intergovernmental Financial Relationship

The Statute of the Republic of Uzbekistan «About Taxes on Enterprises and
Entities» establishes revenue sources of the State budget of the Republic
of Uzbekistan, State budget of the Republic of Karakalpakstan18 and local
budgets for the following expenditures:

Social Security Payments;

Businesses regulation;

International payments;

Stabilization of the foreign currency circulation;

Stimulation of extraction of mineral resources; and

Environmental protection.

Uzbekistan has a unified statewide tax policy for all layers of government.
Local governments are entitled to levy taxes within the format of the state
wide tax policy.

Tax revenue is transferred to the budget of Uzbekistan, budgets of the
Republic of Karakalpakstan, regions, Tashkent city (the capital) and local
budgets according to the norms established annually during the process of
budget approval for the respective fiscal year.

Local governments impose local taxes in their jurisdictions in full
accordance with the Uzbek laws and based on the general tax policy of

The authorities levying a specific type of tax establish:

the taxpayer;

the tax base;

the tax rate;

the procedure of calculation and payment;

exemptions and privileges;

life time of the tax.

IV. Social Insurance

In most transition countries proposals to reform social security have
included the establishment of minimum retirement benefits, compulsory
employment-related benefits, unification of treatment across occupations,
increases in the retirement age, and steps to reduce access to benefits by
younger working pensioners. It is important that pension and social
security reforms help to insure adequate levels of protection without
overburdening contributors to the system. This will require better
collection of private sector contributions and improved targeting of
benefits, including tying future eligibility of pension benefits to past

As a part of the transformation process, most transition countries have
introduced unemployment insurance schemes. In Uzbekistan unemployment
benefits were roughly 80 percent of the average wage in 1993, although the
generosity of the scheme was matched by onerous administrative procedures,
which ensured that few individuals qualified.19


A Country Report and Profile

Presented By:

Alfiya G. Mirzagalamova [email protected]
Jason C. Holman jholman@indinanaedu
Dmitri Maslitchenko [email protected]
[1]Pomfret, Richard. The Economies of Central Asia. Copyright 1995
by Princeton University Press.

[2]Uzbekistan: Master of its Destiny. BISNIS — Uzbekistan report. 10
August 1995.

3The Economist Intelligence Unit. Country Profile. 1995-1996

4Pomfret, Richard. The Economies of Central Asia. Copyright 1995 by
Princton Universtiy Press.

5The Economist Intelligence Unit. Country Profile. 1995-1996.

6The Economist Intelligence Unit. Country Profile. 1995-1996.

7The Economist Intelligence Unit. Country Profile. 1995-1996.

8The Economist Intelligence Unit. Country Profile. 1995-1996.

9The Economist Intelligence Unit. Country Profile. 1995-1996.

10The Economist Intelligence Unit. Country Profile. 1995-1996.

11The Economist Intelligence Unit. Country Profile. 1995-1996.

12″A Tax Guide to Europe. Uzbekistan», Arthur Andersen, April 1996

13 IMF, World Economic Outlook, May 1996

14The Investment Guide for Foreign Companies, National Bank for
Foreign Economic Activity of the Republic of Uzbekistan

15 Guarantees and Privileges granted to Foreign Investors by the
Legislature of the Republic of Uzbekistan, Appendix to Presidential Decree
as of May 31,1996

16 Stephen C.Smith, «Industrial Policy and Exports Success: Third
World Development Strategies reconsidered»

17 Stephen C.Smith, «Industrial Policy and Exports Success: Third
World Development Strategies RECONSIDERED».

18An autonomous republic within the Republic of Uzbekistan

19 IMF, «World Economic Outlook», May 1996, p.77

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