Investment opportunities in Uzbekistan
...sources of financing 2000 2001 Budget funds % 29.2 24.2 Funds of enterprises % 23 26.2 Bank credits % 9.1 9.2 Foreign investments including loans % 22.7 28.4 Including direct % 2.6 2.4 Table – 1. Structure of capital investments by sources of financing According to the table, the investments done by enterprises increased from 23 to 26.2 %. In addition to that, there is also an increase in Bank credits from 9.1 to 9.2 %. As about the foreign investments including loans, it has increased 5.7% from 2000 to 2001. From the table we can say that the year-by-year government is leaving its role to different investors, which is the golden rule of the free market economy. In addition to the table-1, it can be seen in more details in the following Diagram: Diagram-1. (Source: Lectue10. page-3) We can see from the diagram that there is a decline from 59.3% to 59.1% in 2001 and 2002 respectively in State property. It can be seen as well in Joint – Venture sector: 2% decrease from 13.6% to11.6This figure shows that, year by year the country is loosing its business image or in other words attractiveness. Nevertheless, there is a positive change in private sector which has increased from 13.4% to15.0%. Table-2. Investment by sector 1995 1996 1997 1998 1999 Total 100 100 100 100 100 Agriculture 7.2 5.2 5.2 4.9 4.7 Manufacturing 40.9 24.8 24.4 21.6 22.4 Engineering 18.6 2.7 2 2.7 2.9 Metals 11.8 4.4 4.2 3.1 5.7 Chemical 1.1 1.9 2.5 2.1 3.6 Textile 5 4.3 2 4.4 1 Food industry 1.8 3.5 5.1 3.4 3.8 Others 2.5 7.9 8.6 5.8 5.5 Fuel-energy 11.8 18.4 13.8 12.2 15.8 Transport 7 17.5 19.8 18.1 18.2 As we can see from the Table -2 there is drop in Agriculture sector in 1999 from 7.2% to 4.7% of shares respectively in 1996. While the investment share of transportation has slightly increased from 7% to 18.2 %. But there is a negative change in Manufacturing sector which is one of the main indicators of economic growth: from 40.9% to 22.4 % of shares. Engineering sector has also declined about 15.7% between 1995 and 1999. In addition Metal and Textile industries have declined to about 6.1% and 4% between 1995 and 1999 respectively. On the other hand, there is an increase in Fuel, Chemical and remaining industries to about 4% , 2.5% and 3% respectively. According to the Diagram-2, there is an intensive increase in Foreign Direct Investment From 24mln$ to 167mln$ between 1995-1997 respectively. But from 1998 till 2001 FDI has slightly dropped from 167 to 71 mln$. In general, Uzbekistan’s opportunities and weaknesses in attracting local and foreign investment can be judged in this way: Strengths: Attractive natural resource endowment Uzbekistan has attractive unexploited natural resources and hydrocarbons and attractive exploration potential for additional discoveries. Moreover, Uzbekistan has abundant resources of land which is suitable for agriculture. However some areas are heavily dependent on irrigated water that may have high economic cost. Educated and skilled but cheap labor force According to the general statistics and moreover existing foreign investors the labor force in Uzbekistan is differ from other countries’ workers with high level of education, skills and motivation. Political and Social stability Uzbekistan is socially highly stable country as there are about 110 nations living in peace with each other. Moreover, the legislation of the Republic of Uzbekistan establishes a wide system of guarantees, privileges and incentives to foreign investors. For instance, enterprises participating in the projects included in the Investment program are exempted from paying profit taxes for the a period of seven years. For the enterprises that export 30 or more percent of their production the profit tax rate has been lowered two fold against the usual tax rate. (Please refer to Appendix for the further information about Laws and privileges) Weaknesses: According to the Trade and Investment Committee of the American Chamber of Commerce in Uzbekistan undertook survey which finally resulted that the Government of Uzbekistan had to improve the following business aspects in order to generate appropriate environment: 1. Currency convertibility and exchange regulations: President of Uzbekistan Islam Karimov publicly stated that during 2000, internal convertibility will be introduced in a move that will allow Uzbekistan to sign article VIII of the articles of agreement of the International Monetary Fund (IMF) However, most businesses both – foreign and local faced severe restrictions in exchange operations, which in turn resulted that many foreign investors hold back investments or suspended possible future planned investments in Uzbekistan. Currently, there is an officially accepted multiple exchange rate system. Official Central Bank rate is around 321 soum per USD 1. At the same time, the Government introduced a new commercial rate 675/690 soum per USD 1, which should be used by commercial banks when selling to the CBU and physical entities when buying/selling USD from the authorized banks. The current market rate is about 900 soum per USD 1. One of the major concerns for exporters is that the Government imposes 50% surrender requirement for exports. However, in this case, the government’s requirement is that 50% should be sold to the CBU at the government low rate, not the new commercial rate. The latter requirement seriously discourages export companies from their activities fostering them to find some ways (not always legal) to get around the government regulations . 2. Tax system According to the study of International Finance Corporation (IFC), average SME paid taxes equivalent to 23% of overall revenues in 2002, the same as in 2001. This figure increases with the size of the business, amounting to about 23% for micro-firms, 24% for small businesses and 28% at medium enterprises. The main legislative problem is that taxes in Uzbekistan consists of the Tax Code, laws, presidential decrees, Cabinet resolutions, and various regulations issued by the State Tax Committee. This creates a complex web of laws and regulations that is constantly changing. Factors affecting investment spending and reasons for the good or bad performance of the country in this area What motivates a person or an organization to buy securities, rather than spending their money immediately? The most common answer is savings -- the desire to pass money from the present into the future. People and organizations anticipate future cash needs, and expect that their earnings in the future will not meet those needs. Another motivation is the desire to increase wealth, i.e. make money grow. Sometimes, the desire to become wealthy in the future can make you willing to take big risks. However, investment decision also depends on other factors: 1. The Demand for the output produced by the new investment; 2. The interest rates and taxes; 3. Business expectations; 1. In general, investment decision is optimal when the demand for the new product is high. Because, all organizations make some surveys before investing. And if the Demand will be high investment will be possible. 2. If we refer to the Diagram -2 we realize that Foreign Direct Investment has significantly decreased from 167 mln$ in 1997 to 71mln$ in 2001.What factor can affect to this important section? To answer this question we must understand the relationship between interest rate and investment. If we analyze the Fisher’s theory of Investment we realize that investment is negatively related to the interest rate: Given that Fisher's theory output is related not to capital but rather to investment, then we can posit a production function of the form Y = f(N,I) where N is the labor. According to the Fisher,condition that investment in any time period yields output only in the next period. Let’s assume a world with only two time periods, t = 1, 2. In ...