Download Impacts of the financial crisis on the Republic of Uzbekistan

Impacts of the financial crisis on the Republic of Uzbekistan
Introduction
In comparison to its neighbours and many other countries in the world, Uzbekistan has been less impacted
by the financial crisis. Conservative macroeconomic management has been an important factor. The
decrease in revenues from exports of copper, cotton and chemicals have been partly offset by relatively
stable prices for gold and natural gas. This coupled with a large fiscal reserve as to some extent shielded
Uzbekistan from the impact of the crisis. The Government forecasts a growth rate of 8.2% for the first half of
2009 and growth forecasts for next year are expected to remain positive.
Uzbek Government’s Response: Anti-Crisis Programme
Uzbekistan is relatively well positioned to successfully mitigate the impact of the global financial crisis.
Following the release of a book by the President of Uzbekistan on ways and measures to overcome the
crisis, the Government of Uzbekistan has acted swiftly and adopted an Anti-crisis Programme to help mitigate
the impacts of the crisis.1 The Anti-crisis Programme is backed by funding from the Government budget and
the Government’s Reconstruction and Development Fund.
The Programme envisions the implementation of a set of measures aimed at supporting the real sector of
economy, stimulating the internal demand and investment activity, introducing the system of energy saving,
supporting the small business and employment generation. Key elements of the Programme include:

Upgrading production, speeding up technical and technological modernization of enterprises in the
priority sectors. Export-oriented enterprises and companies specializing in producing importsubstituting domestic goods will get special attention.

Undertaking specific measures to support export-oriented businesses and providing additional
stimulus to exports.

Carrying a strict regime of saving, boosting competitiveness of enterprises by encouraging cuts in
production costs.

Capping an increase in prices for fuel and public utilities by 6-8 percent a year;

Supporting domestic producers by stimulating demand in the domestic market in the circumstances
of falling demand in the international markets
The anti-crisis measures have mainly targeted big domestic enterprises by providing them cheap credits,
preferential access to foreign exchange and stimulating domestic demand. These measures have had a
positive impact on manufacturing by maintaining production levels and employment. Aggressive cost-cutting
measures at the export-oriented enterprises have helped maintain overall export volumes at the level of
2008. Much is needed in terms of social and economic policies to mitigate the impact of the crisis on the most
vulnerable groups such as the unemployed, migrants, elderly, women and children.
In May 2009, the Government of Uzbekistan organized an international conference on the economic crisis to
draw attention to the issue and to highlight measures being undertaken to mitigate impacts of the crisis.
Impacts of the Crisis
Despite the above, some impacts are being felt: First, inflow of foreign currency is being reduced due to: (1)
decreased prices for and revenues from major export commodities; (2) lower inflow of foreign investments
and loans; (3) decrease in remittances and worsening of the social safety of the rural poor; and (4) inflation
and currency devaluation. The situation could be exacerbated by the continuing drought and water shortage
that is affecting price and production of food in the country
The Decree of the President of Uzbekistan No. UP-4058 dated November 28, 2008 “On program of measures to
support the enterprises of the real sector of economy, ensure their stable operation and enhance export capacities”.
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
Commodities and trade: Decline in international prices for main export commodities such as
copper, chemicals and cotton fiber will lead to lower export revenues. The prices of natural gas and
gold, the other two major export items, have stayed stable, but natural gas prices have followed
downward trend of oil prices with 6-9 months lag. Among others, price of Certified Emission
Reductions (CER) have dropped to less than 10 Euros, putting UNDP’s innovative Carbon Finance
project under jeopardy.
The demand for the manufacturing products has been hit hard in major export markets. For example,
the collapse of consumer lending in Russia has affected the export of UzDaewoo Auto cars
negatively.

Investments and capital flows: Uzbekistan has defied common trend of falling foreign investments
into developing countries by reporting that in the first half of 2009 inflow of foreign direct investments
has increased by 30% and reached US$ 1,067 million. The increase in FDI has taken place mainly in
oil and gas sector.

Remittances and employment: According to estimates by a money wiring company “Unistream”,
the labor migrants from Uzbekistan have transferred record amount of remittances - more than US$
3.5 billion in 2008. But by the end of 2008 and early 2009 the pace of remittances has slowed down.
The construction sector in Russia and Kazakhstan, the main employer for the Uzbek migrants, has
come to a virtual halt. As a result, compared to the same period of last year in the first quarter of
2009 remittances from Russia has declined by 30 percent (from US$ 407 million to US$ 88 million,
respectively). Another consequence of this development is the increasing number of the semi-skilled
and unskilled migrants who are returning home due to the economic and social hardships in the host
countries. The returning migrants will increase the unemployment and contribute to the social
insecurity of the poor, especially in rural areas.

Inflation and currency devaluation: Reduced export revenues and waves of currency devaluations
in Russia, Kazakhstan and other countries in the region are putting pressure on market exchange
rate of the Uzbek soum. Since the beginning of 2009, a dual exchange rate regime has reappeared
(the difference between market and official exchange rates has reached 25% by early August 2009).
Rapid devaluation of the market exchange rate has made imports (especially imports of consumer
goods) more expensive.
In addition, the financial and economic turmoil could be exacerbated by water shortages due to low
precipitation in winter months since 2007. It is anticipated that in 2009 water shortage will continue due to
lower precipitation compared to the average for many years. If the water shortage continues, yields of
agricultural crops may decrease and food prices increase, leading to food insecurity.
Impact on Human Development
UN agencies in Uzbekistan have continually stressed the importance of looking beyond the economic
aggregates and properly assessing the impact of the current crisis on human development. It is clear that
unemployment has risen and household income has dropped. It is also likely that the global recession sets off
severe economic cutbacks in the country undercutting progress made in economic and human development
in recent years. In particular, the following groups of population are most vulnerable to the risks of global
crisis:

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Impact on poverty rates and employment. Past experience shows that during the economic crises
many families, especially those with many children may fall into poverty. Malnourishment may
become widespread because of insufficient amount of food and lack of nutritious food. From 2004 to
2008 Uzbekistan experienced quite high growth rate of GDP that averaged 8%. But economic growth
has been mainly driven by strong external demand for country’s major export commodities – gold,
copper, cotton and natural gas. These capital and natural resource-intensive sectors have generated
few new jobs, so the impact of economic growth on the poverty rate has been low. In 2007, the
poverty rate was estimated at 23.6%, with urban and rural poverty rates at 17.6 and 27.1%,
respectively2. The global crisis is likely to affect the most vulnerable harder, especially those living in
Welfare Improvement Strategy of the Republic of Uzbekistan for 2008-2010, Tashkent, 2007
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poor northern (Autonomous Republic of Karakalpakstan and Khorezm region) and southern
(Kashkadarya and Surkhandarya) regions.
In times of economic downturn even more people may resort to internal and external labor migration
as a means for survival. Uzbekistan is likely to experience some influxes of returning migrants, which
may result in economic and social instability. Moreover, increase in unregulated internal labor
migration combined with reduced external labor migration flows are possible outcomes of the crisis.
In this regard the UN has been advocating that the Government of Uzbekistan to adopt ILO’s Decent
Work Programme and implement it to mitigate the impact of the crisis. In this regard, the UN system
in Uzbekistan has emphasized the importance of job creation through the public works projects and
other active labor market schemes. The Government has acknowledged public works programmes
such as construction of roads as an important tool for employment creation. To alleviate the food
security concerns, the UN system has called for increased land allocation for food crops at the
expense of cotton production.

Role of social safety nets: According to World Bank data, Uzbekistan allocates some 2% of its
GDP for social protection (excluding pensions). This figure is above average for the Europe and CIS
region, and speaks well for Uzbekistan’s commitment to social solidarity. However, the efficiency of
these programmes needs to and can be improved. These schemes, without an effort to enhance their
targeting through such means as the conditional cash transfers, will typically not reach as much as
half of those classified as poor. Uzbekistan here is no exception. This means that in addition to
ensuring that Uzbekistan's companies are protected from the global economic crisis, the government
may wish to ensure that its limited social protection resources are used to maximum effect.

Impact on women, youth and children. The economic crisis disproportionally affects women and
young people. International experience shows that the fall in household incomes could further
increase infant and child deaths, with disproportionate effects on women and girls. A study conducted
in 59 developing countries showed that while boys and girls benefit equally from positive changes in
per capita GDP, negative shocks are much more harmful to girls than to boys: a one or more unit fall
in GDP increases average infant mortality of 7.4 deaths for 1,000 births for girls and 1.5 deaths for
1,000 births for boys.
The current crisis will reduce women’s income in Uzbekistan as a result of losses in employment in
export oriented industries, tightening micro-finance lending, and drop in remittances. The loss of
women’s income has greater long-term negative implications for the welfare of poor households than
a similar loss in men’s income because of both the contributions women make to current household
income and their ‘preference’ to invest scarce resources on child well-being. Studies conducted in
many countries show that children’s welfare in poor households improves more when income is in
women’s hands rather than in men’s.
Another group that is highly vulnerable to the crisis is elderly people since most have fixed incomes
and limited, if any, pensions. Increases in illness and disability among the elderly are to be expected
as result of less affordable food and medication. This will, in turn, pose an additional burden on
already strained national resources.
Preliminary findings of the child wellbeing study in Uzbekistan show that about 28% of children do not
take minimum level of 2100 kilocalorie a day. In places like the Republic of Karakalpakstan, it
reaches 49% of children being affected by insufficient intake of calorie that they require for child’s
normal healthy growth and development. Though Uzbekistan is not hit today by the crisis as many
other countries are, if no preventive measures taken, achievements in reduction of infant and child
mortality can be reversed. Lessons learned by other countries that were hit by economic crisis years
back prompt necessary preventive measures to address child vulnerability.
Crime and drug abuse. As a rule, crime rate rises about a year after the start of a financial crisis
and ends two years after its end. However, crime statistics do not yet clearly demonstrate an
increase in the number of drug-related crimes in the Central Asian states. In the first 9 months of
2008, Uzbekistan has reported the 7% increase in drug related crimes (compared to the same period
in 2007
At the same time as the current financial crisis, the volume of opiate trafficking through Central Asia
is increasing and, in so doing, increasing the burden on law enforcement agencies. The volume of
opiates seized by Uzbek law enforcement agencies in 2008 doubled the amount seized the previous
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year. In total, 1,472 kg of heroin and 1,062 kg of opium were seized. Overall, 2008 produced the
largest ever total annual heroin seizures and the largest ever total annual opiate seizure (in heroin
equivalence). This illustrates that law enforcement agencies are already dealing with a sizable threat.
If the government is forced to reduce the budget to law enforcement agencies as has already
happened in neighbouring countries, this could mean that fewer border guards and law enforcement
officers having to tackle an increasingly large threat.
Gender issues: The crisis may reverse gains achieved in gender equality and limit workforce
opportunities for women and. As job opportunities shrink, women are forced to accept more marginal
and low-paid jobs and reduce use of even basic services, including health and education, to secure
food and shelter for their families and themselves.
Moreover, the crisis may have a detrimental effect on women’s rights. Women and girls are often
exposed to greater risk of violence in times of hardship, and their economic and social rights may
also be jeopardized. They are at more risk to remain in abusive relationship, migrate for work, to
accept risky labor arrangements or even sex trade.
Crises are associated with rising crime rates, including abuse and violence against women. At the
same time, while demand for support of victims of gender-based violence may increase during a
crisis, its provision is likely to be limited by the budgetary constraints. Also availability of counselling
to the victims of violence and other forms of assistance may shrink.
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