Economic ties with Russia impact growth

While Uzbekistan has managed to control the COVID-19 pandemic, sanctions against Russia following its invasion of Ukraine will affect economic growth in 2022. Russia is a crucial trading partner for the country (12% of its exports and 22% of its imports in 2021) and an essential source of funds through expatriate Uzbek workers (13% of GDP) and investment in the energy and mining sectors. As a result, the recession in Russia will cause a decline in consumption (54% of GDP) and investment (42% of GDP). Inflation will be high due to soaring international food and fuel prices. The price of bread, a sacred staple in the country, rose drastically (up to +75%) in mid-June after the government ended state-subsidized grain purchases to increase domestic flour production by encouraging private millers, as the system was not profitable for producers. The Central Bank of Uzbekistan (CBU) raised its key interest rate from 14% to 17% in mid-March to stem the pressure on the exchange rate and its impact on the prices of imported goods and to gradually bring inflation back to target (5%). However, with limited monetary policy transmission, the CBU will probably have to tighten it further by the end of the year.

Between January and April 2022, exports increased by 120% year-on-year, mainly due to sales of gold (40% of total exports), natural gas, and textiles (cotton and clothing). However, Uzbekistan could be affected by slowing growth in its other major trading partners, including China, Turkey, and Kazakhstan, reducing demand for its output and declining commodity prices.

The fiscal situation remains comfortable

The approved budget for 2022 called for the deficit to be reduced to 3% of GDP, and it is expected to come close to the target. Increased revenues from gold sales will offset the decline due to reduced activity in other sectors. Nevertheless, the government will likely announce support measures to protect vulnerable households from falling remittances and inflation to counter potential discontent. For this reason, spending will be higher, and the deficit may widen. However, although still rising, the level of public debt (94% is external) will remain relatively low and foreign exchange reserves high. The latter cover 18 months of imports, 60% in the form of gold, and will continue to be bolstered by the price of gold. In addition, the Chinese government has provided almost USD 40 million in unconditional aid to finance social projects (health, energy, and agriculture could be among the sectors targeted). Tax reforms initiated in recent years are beginning to bear fruit. For instance, a new mandatory online platform with information on participating companies’ ownership reduces corruption opportunities.

The current account deficit is expected to widen as higher commodity export earnings only partially offset the remittance decline. The trade balance will remain structurally in debt due to the effect of the weight of capital goods imports. It will be financed mainly by recourse to public and private sector borrowing, reserves, and foreign direct investment. The external debt (58% in 2021) will increase.

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Moving away from Russia, closer to other partners

In December 2021, President Mirziyoyev called for changes to the 1992 constitution. He wants to reform it on issues such as the development of the family institution, strengthening inter-ethnic harmony, banning child labor, protecting the rights of people with disabilities and older people, but also ecology, and making the principle “New Uzbekistan - a social state” a constitutional norm. The web portal “My Constitution” has been launched to collect public proposals on constitutional amendments.

Internationally, relations with Moscow, which had been excellent until now, are weakening. Although the country wishes to remain neutral in the face of Russia’s invasion of Ukraine, it remains very attached to the respect of territorial integrity in the Central Asian region, where Russian-speaking minorities exist. The expected recession in Russia will reduce its influence in Central Asia, especially in countries like Uzbekistan, where cultural influence has diminished in recent years. This leaves room for China to expand its influence. Indeed, the Uzbek government has presented a new development strategy for 2022-2026 in which the focus is very clearly on China, without even mentioning Russia. Moreover, discussions on constructing the China-Kyrgyzstan-Uzbekistan railway line are in the spotlight, with construction scheduled for 2023. Uzbekistan is also getting closer to Turkey: on 30 March 2022, a comprehensive strategic partnership treaty was signed between the two countries. Bilateral trade has tripled in the last three years. In addition, the country is expected to benefit increasingly from its participation in the Organization of the Turkic States. With joint military exercises, India is also getting closer, especially on the military level.