Uzbekistan

major macro economic indicators

Risk Assessment 

Economic liberalisation, the main source of growth

Economic growth will remain dynamic in 2024 and 2025 despite slower trade with Russia and China, Uzbekistan's two biggest trading partners, concomitantly with the cessation of natural gas exports by the end of 2025 to ensure domestic supply. Nevertheless, exports of gold (20.3% of total exports in 2022), cotton (8.0%) and copper (5.5%), buoyed by favourable prices, will further support foreign trade. In addition, the structural reforms undertaken since 2016 to liberalise the country's economy and make it more attractive to investors will sustain solid growth. The government's aim is to ensure the development of the private sector by disengaging from the economy through the privatisation of state-owned companies and banks. The trend is set to continue in 2025, with two more banks (Asaka and SQB) set to follow suit, bearing in mind that 68% of banking assets are still held by public institutions. These efforts are impacting investment spending (34.8% of GDP in 2023) which is rising steadily, mainly in favour of the energy and infrastructure sectors. The renewable energy sector has a long list of new projects, with dozens of solar and wind power stations under construction, attracting the interest of foreign investors, starting with the Gulf States. However, despite undeniable progress, the business environment is still plagued by endemic corruption, which undermines the entire economy.

The increase in regulated electricity tariffs in 2024-2025 will maintain inflationary pressures over the period, despite the Bank of Uzbekistan's (CBU) monetary policy which is considered to be restrictive, but moderated by the limited financialisation of the economy. Inflation is therefore likely to remain high and well above the 5% target. However, the CBU has not hesitated to cut its main key rate by 350 basis points since June 2022 to a current level of 13.5%. Consequently, growth in household consumption (57.9% of GDP in 2023), while still buoyant, is expected to stall. This is all the more the case given that migratory remittances (11% of GDP in 2023), which are in the process of being normalised, will be less able to compensate for domestic difficulties than before, notably because of the slowdown in activity in Russia, the main destination for Uzbek emigrants, and rouble depreciation.

Electoral setback for public finances

In the middle of an election year, the government is multiplying populist measures and further postponing consolidation efforts, prompting the budgetary situation to deteriorate slightly, with a deficit above the 4% of GDP ceiling defined in the 2024 budget. The current budget envisages an increase in civil service salaries as well as additional social spending on education, health and pensions. Conversely, efforts to improve tax collection, a rise in corporation tax and increases in various taxes on cigarettes, fuel and heavy vehicles will only partially offset the above-mentioned largesse. Nevertheless, the situation should improve from 2025 thanks in part to the abolition of major non-targeted energy subsidies or other inefficient subsidies for state-owned companies as a result of additional privatisations. At the same time, stable but solid tax contributions from mining companies, which are benefiting from the durably high prices of gold and copper, will leave the way clear to maintain a high level of capital spending and social protection without widening the imbalance. The bulk of the financing requirements will continue to be met by non-concessional external borrowing, with the remainder coming from domestic bond issues and privatisation revenues. As a result, public debt as a percentage of GDP, 61.3% of which was held by foreigners in 2023, is expected to fall marginally over the period to an already moderate level in the wake of persistently robust growth.

The slowdown in workers' remittances from Russia and the rise in imports should push the current account deficit slightly wider in 2024-2025. Increased demand for consumer goods and capital goods, in line with high capital spending, as well as for transport services, will probably keep import growth higher than export growth, which will be weighed down by the gradual halt to gas trading despite decent results for the rest of Uzbekistan's export basket that consists mainly of raw materials, namely gold, copper and cotton. The deficit is nonetheless sustainable due to the growing inflow of FDI (2.4% of GDP in 2023, compared with an anticipated 3.5% in 2025) and long-term borrowing, including from international financial institutions and bilateral lenders. This is keeping foreign exchange reserves at a comfortable level and equivalent to nine months' imports at the end of 2023.

Toughening of the regime and international balancing strategy

Shavkat Mirziyoyev, the head of state since 2016 and successor to Islom Karimov, who had led Uzbekistan since its independence, governs the country with an iron fist. He won the snap Presidential election of 2023 by a wide margin – the ballot was marked by fraud and the muzzling of the opposition – following the constitutional reform of April of the same year, enabling him to remain legally in power until 2037. Supported by the economic and political elite, Shavkat Mirziyoyev maintains his image as the moderniser of Uzbekistan. Solid growth, sustained by the liberalisation of the economy, has also won him the support of a relatively satisfied population despite corruption, power cuts and the breach of a number of fundamental freedoms. The risk of political instability therefore remains contained, especially as the violent clashes that broke out in July 2022 in Karakalpakstan, an autonomous region in the north-west of the country, in reaction to the central government's desire to abolish its special status, have now been brought under control. There is no doubt either as to outcome of the next parliamentary elections scheduled for October 2024 as all the parties represented in Parliament support the President's policies.

Internationally, Uzbekistan seeks to balance its interests between China and Russia, its two main partners, to avoid being overly dependent on either. Moscow's cultural, political and particularly its economic footprint is being increasingly challenged by Beijing, which has invested significant amounts in the country in recent years, even though a large proportion of FDI still comes from Russian state-owned companies. Nevertheless, Uzbekistan has chosen diplomatic neutrality in Russia's war in Ukraine, while sanctions against Russia are weakening its influence in the region, opening the way a little more for China to step in. The war of influence between the two powers is reflected in the projects under way in the country. During a visit in May 2024, Vladimir Putin pledged to have Rosatom build the country's first nuclear power station at a time when Uzbekistan is importing more and more Russian gas. Conversely, in June, China, Kyrgyzstan and Uzbekistan agreed to build an EUR 8 billion railway line to better connect the three countries. This is an opportunity for the two landlocked central Asian nations to develop trade with their Chinese neighbour. Cooperation with other countries in the region is also taking rapid hold. Uzbekistan is also strengthening ties with the West, in particular with the European Union, by signing a partnership and cooperation agreement on political, cultural, financial and legal issues in July 2022 after three years of negotiations.

Last updated: September 2024