Country Report and Profile
Presented By:
Alfiya G. Mirzagalamova amirz@indiana.edu
Jason C. Holman jholman@indinanaedu
Dmitri Maslitchenko dmitri@mailroom.com
The concept of transition of the Republic
of Uzbekistan to the market economy consists of five principles formulated by
its President Islam Karimov:
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 groups.
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
Politics
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 AEastern 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, Apreparation, 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 Awomen-mothers@ and presses for better child care
provisions.
Economy
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 market.
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 3,686,800
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 17%.
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 tax).
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 include:
C
Tax on advertising
costs. In Tashkent the rate is 5% of total expense.
C
Fee for cleaning the
local territory, payable by entities and individuals conducting entrepreneurial
activities. In Tashkent the rate is 0.5% of gross receipts.
C
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
C
High tax rates on
modest tax bases reduced not only by economic contraction but also by various
exemptions.
C
Weak tax administration
compounded by corruption.
C
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.
C
Corruption and abuse of
authority by poorly paid tax administrators are serious problems.
C
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 obsolete).
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 institution.
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 years.
2. Companies= profit tax shall be reduced by:
C
20%, for an export
share of 5-10% of the total production;
C
30%, for an export
share of 10-20% of the total production;
C
40%, for an export
share of 20 to 30% of the total production;
C
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
registration.
7. The profit tax base is decrease by 30%
of the expenses for environmental protection.
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 goods.
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:
C
Social Security
Payments;
C
Businesses regulation;
C
International payments;
C
Stabilization of the
foreign currency circulation;
C
Stimulation of
extraction of mineral resources; and
C
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 Uzbekistan.
The authorities levying a specific type of
tax establish:
C
the taxpayer;
C
the tax base;
C
the tax rate;
C
the procedure of
calculation and payment;
C
exemptions and
privileges;
C
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
contributions.
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
Uzbekistan:
A Country Report and Profile
Presented By:
Alfiya G. Mirzagalamova amirz@indiana.edu
Jason C. Holman jholman@indinanaedu
Dmitri Maslitchenko dmitri@mailroom.com
