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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 “TOSHKENT” REPUBLICAN STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Economic and Political Environment With Islam Karimov's second presidential term due to expire in December 2007, the question of who is to succeed him will increasingly dominate the domestic political scene during the forecast period. Mr. Karimov has ruled the country for 18 years, first as head of the Soviet republic's Communist Party, and then as president of independent Uzbekistan. Uzbekistan's opposition groups will remain too weak in 2006-07 to mobilise a mass civil movement against the authorities. Nevertheless, the risk of popular unrest is high, as social and economic grievances are likely to mount. The authorities will act swiftly, and with force when necessary, to quell such protests. Although measures such as these will probably ensure that Mr. Karimov sees out his term in office, his position is not impregnable. A small risk to his continued tenure comes from the possibility that discontent could build up within the political elite, if it were to judge that Mr. Karimov was no longer capable of protecting its interests. Pressure on the president to make way for an alternative leader could then render his position untenable, resulting in his ouster by a rival from within the political hierarchy. Uzbekistan's relations with Russia and China will continue to strengthen over the forecast period, but ties with the West will deteriorate. Neither Russia nor China shares the West's concerns over the lack of democracy in Uzbekistan, and the three countries will continue to find common cause in their respective campaigns against Islamist extremism. Growing economic links will also give Russia and China a stake in maintaining stability in Uzbekistan. The support of these countries will be useful in political terms for Mr. Karimov, but is unlikely to translate into more concrete aid to him personally–in the form of military assistance, for example–in the event that he comes under pressure from within the political elite to resign. The World Bank has become the latest multilateral financial institution to downgrade its program in Uzbekistan: in mid-March it announced that it was suspending lending to the country, but that it would continue to offer technical assistance. Although not explicitly stated, concerns at the way in which the loans were used appear to have motivated the suspension. The World Bank's decision reduces the already limited influence that the international financial institutions have over the Uzbek government in terms of promoting reform. Large, albeit narrowing, trade and current account surpluses, in conjunction with investment from Russia and China, will allow the government to avoid economic reforms. Instead, it will retain a plethora of regulations on private-sector activity, including currency controls and high tariffs on imports–measures that in the past two years have sometimes sparked protests. Economic Performance New investment into Uzbekistan's hydrocarbons and telecommunications sectors will provide the main impetus to economic growth in 2006-07, when annual average growth rate of just over 6% is expected. New gold-mining projects will also support economic expansion. However, the government's failure to implement substantive reforms will preclude stronger growth in the agricultural sector. On the expenditure side, wage and payments increases are likely to stimulate domestic demand, although the effect will be inhibited by the government's tendency to run up arrears. High tariffs and restrictions on access to foreign currency will limit growth in consumer goods imports, but purchases of capital goods will remain sizeable, reflecting the undeveloped state of much of the domestic manufacturing sector. A loosening of monetary policy, driven in part by large public-sector wage rises, contributed to an acceleration in inflation in 2005, when the official year-end rate was 7.8%, up from 3.7% in 2004. Increases in utility tariffs and in public-sector salaries are likely to exert further upward pressure on prices in 2006-07, pushing inflation to about 10% by end-2007. The som depreciated against the US dollar by about 11% in nominal terms in 2005, to end the year at Som1,180:US$1. The loosening of monetary and fiscal policies is expected to result in a slightly more rapid pace of depreciation over the forecast period, bringing the exchange rate down to about Som1,460:US$1 by end- 2007. The accelerating rate of nominal depreciation will ensure that the currency continues to weaken in real terms, despite the pick-up in inflation.* * The Economic Intelligence Unit Ltd., July 2006 Key Information Contacts State Property Committee www.spc.gov.uz Ministry of Finance www.mf.uz/eng National Bank of Uzbekistan http://eng.nbu.com/about/history/index.php State Central Securities Depository www.deponet.uz/english.shtml Portal of the State Authority www.gov.uz/en 2003-ORIGINS OF GROSS DOMESTIC PRODUCT (%) 2003-COMPONENTS OF GROSS DOMESTIC PRODUCT (%) Services Industry Agriculture & forestry Private consumption Public consumption Gross fixed investment Exports of goods & services Imports of goods & services 33.2 60 54.8 50 44.2 40 30 37.9 31.1 22.6 20 18.5 19.9 10 0 PAGE 136
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 “TOSHKENT” REPUBLICAN STOCK EXCHANGE UZBEKISTAN ECONOMIC CHARTS AND TABLES 2001 (a) 2002 (a) 2003 (a) 2004 (b) 2005 (b) GDP at market prices (Som billions) 4,925 7,450 9,664 10,559 12,083 GDP (US$ billions) 11.6 9.7 10.0 10.4 10.8 Real GDP growth (%) 4.1 3.1 1.5 7.4 (a) 7.0 (a) Consumer price inflation (av; %) 27.2 24.2 13.1 1.7 (a) 6.9 (a) Population (millions) 25.0 25.3 25.6 25.9 26.0 Exports of goods FOB (US$ millions) 2,740 2,510 3,240 4,290 4,930 Imports of goods FOB (US$ millions) -2,554 -2,186 -2,405 -3,060 -3,460 Current account balance (US$ millions) -115.8 (b) 97.8 (b) 862.8 (b) 936.7 1,081.8 Foreign exchange reserves excl gold (US$ millions) 903 (b) 850 (b) 1,162 (b) 1,546 2,000 Total external debt (US$ billions) 4.8 4.7 5.0 5.1 5.0 Debt-service ratio, paid (%) 26.8 25.2 21.3 27.2 23.5 Exchange rate (av) Som:US$ 423.8 771.0 971.3 1,020.0 (a) 1,115.0 (a) (a) Actual. (b) Economist Intelligence Unit estimates. ECONOMIC FORECAST SUMMARY 2004 2005 2006 2007 Real GDP growth (%) 7.4 7.0 6.1 6.5 Consumer prices (% change) 1.7 6.9 7.5 8.3 Budget balance (% of GDP) -0.4 0.1 -1.0 -1.4 Merchandise exports (US$ billions) 4.29 4.93 5.49 5.57 Exchange rate (Som:US$1) 1,020 1,115 1,255 1,429 2003-PRINCIPAL EXPORT (%) 2003-PRINCIPAL IMPORTS (%) Cotton Energy products Machinery & equipment Other Machinery & equipment Foodstuffs Other Plastics & plastic goods 60.8 19.8 44.4 12.8 9.8 9.9 9.6 32.9 2004-MAIN DESTINATION OF EXPORTS (%) 2004-MAIN ORIGINS OF IMPORTS (%) Russia China Turkey Tajikistan Russia South Korea USA Kazakhstan Bangladesh Other Germany Kazakhstan China Other 22.0 14.7 12.6 26.8 8.0 6.4 7.7 42.6 6.1 4.2 4.0 32.8 5.8 6.3 The Economist Intelligence Unit ViewsWire, July 2006 PAGE 137
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