Republic of Uzbekistan: Recent Economic Developments
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International Monetary Fund
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Publication Date:
04 Nov 1998
eISBN:
9781451839784
Language:
English
Keywords:
ISCR; CR; exchange rate; yield; government; market; price; last quarter; Uzbek economy; U.S. dollar; joint stock; wheat import parity price; Agricultural sector; Producer prices; Market exchange rates
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This paper reviews economic developments in the Republic of Uzbekistan during 1992–97. It compares growth in Uzbekistan with that of other transition economies and seeks to shed light on why Uzbekistan has suffered a smaller transformational recession than other transition economies. The paper covers the existing arrangements for production and trade in agriculture, and estimates the costs for agriculture arising from state procurement and the multiple exchange rate system. The paper also traces the effects of multiple exchange rates and other quasi-fiscal operations on the economy as a whole.

Abstract

This paper reviews economic developments in the Republic of Uzbekistan during 1992–97. It compares growth in Uzbekistan with that of other transition economies and seeks to shed light on why Uzbekistan has suffered a smaller transformational recession than other transition economies. The paper covers the existing arrangements for production and trade in agriculture, and estimates the costs for agriculture arising from state procurement and the multiple exchange rate system. The paper also traces the effects of multiple exchange rates and other quasi-fiscal operations on the economy as a whole.

II. Agricultural Producer Price Policies AND Marketing Arrangements

A. Introduction

38. Since independence, Uzbekistan has pursued policies in support of rapid industrialization based on import substitution. On a net basis, resources have been channeled out of agriculture, which remains the key sector of the Uzbek economy, to finance an ambitious industrial investment program and to subsidize consumers, especially in urban areas. Resource extraction from cotton—Uzbekistan’s most important crop and foreign exchange earner—has played a prominent role in this strategy. The authorities have taxed the cotton and wheat subsectors through a variety of implicit and explicit mechanisms, including the foreign exchange system, the state order system, low producer prices, and controls over agricultural collectives as well as marketing and processing organizations. All land has remained under government ownership, farm restructuring and privatization have been limited, and property rights have remained insecure. At the same time, substantial explicit and implicit support has been provided to agriculture through subsidization or free provision of inputs, preferential tax treatment, directed lending at favorable terms, and cancellation or rescheduling of tax and other arrears.

39. The maintenance of a complex, nontransparent system of direct and indirect controls and implicit and explicit taxes and subsidies has led to severe distortions in relative prices, disincentives to agricultural producers, and an inefficient allocation of resources both across sectors and within agriculture. This, in turn, has hampered growth and the exploitation of Uzbekistan’s large agricultural production potential. At times, the provision of large directed credit through banks and budgetary onlending to compensate for the burden imposed on agriculture has contributed to large fiscal deficits, rapid monetary expansion, and inflation. Uzbekistan’s slow export growth and poor balance of payments results can in large part be traced to problems in reforming and developing agriculture.

40. On balance, the agricultural sector has lost substantial resources in the past 5–6 years as a consequence of government policies.27 There are clear and increasing signals of distress: cotton area yields have declined, the condition of agricultural infrastructure and machinery has deteriorated, and a number of recently created new private farms have ceased to operate over the past two years. Average real incomes of the rural population have stagnated at best, and poverty has reportedly increased at least in some parts of the country (e.g., Karakalpakstan). Agricultural practices have contributed to a deterioration of the environment and the pollution and drying of the Aral Sea. They have also resulted in health risks in certain areas.

B. Agricultural Performance

41. Under the Soviet system, Uzbekistan’s primary role was to produce cotton, fruits and vegetables, along with energy, gold, and other natural resources largely for export to other Soviet republics or CMEA countries. Agriculture was the most important sector of the Uzbek economy with a share in GDP of over 30 percent (IMF 1994, World Bank 1993).28 Cash crop production depended on a large number of state farms (sovkhoz) and collectives (kolkhoz), with households being allowed to produce food crops mainly for subsistence purposes on small plots adjacent to their houses. After independence, agriculture has remained the key sector of the economy with an average share in GDP of around 25 percent (Chapter IV). The production and distribution of agricultural inputs (e.g., fertilizer, machinery) plus the transport and processing of agricultural produce accounts for a significant share of non-agricultural GDP. About 60 percent of the population live in the rural areas, depending mostly on agriculture for their incomes and employment. According to official data, approximately 3.5 million persons are employed in agriculture, equivalent to about 40 percent of the total number of all employees in the economy.

42. Since independence, the cumulative decline in agricultural output has been moderate, which has contributed to the relatively mild “transformational recession” of the Uzbek economy (Chapter I). However, in 1996, agriculture experienced an output decline of about 7 percent, which was followed by a partial rebound in 1997, primarily because of better weather.29 Cotton—”the white gold”—is still the most important agricultural crop in Uzbekistan, despite the increase in the production of wheat as part of the government’s policy to achieve national food self-sufficiency (Table 10). In large part, this policy entails shifting area under cultivation from cotton and fodder crops toward wheat. According to World Bank and other estimates, however, this switch runs counter to Uzbekistan’s comparative advantage, which lies in the production of cotton and other crops (e.g., fruits, vegetables, rice) on irrigated land.30 Combined, cotton and wheat account for about 70 percent of the area under cultivation.31

Table 10.

Uzbekistan: Production of Selected Agricultural Products, 1991–97

(In thousand tons, unless stated otherwise)

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Source: Ministry of Macroeconomics and Statistics.

43. Investment in agriculture has been modest and much smaller than in other sectors. Official investment data provide a clear indication of government priorities as regards sectoral allocation. Over the past three years, the share of agriculture in total investment in the economy averaged only 7 percent, compared with a share of 38 percent for the industrial sector, which included large investments in energy (Table 11). As a consequence, and in part also reflecting the lack of imported spare parts and inadequate maintenance due to insecure ownership rights and lack of privatization, the capital stock (infrastructure and machinery) has deteriorated rapidly in recent years. Most investments in agriculture have been financed from domestic public sources, while foreign investment has largely been confined to a few joint ventures in processing and an agricultural machinery leasing company.

Table 11.

Uzbekistan: Sectoral Shares in Investment, 1995–97

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Source: Ministry of Macroeconomics and Statistics.

Investment may include significant current expenditures.

Cotton

44. Cotton cultivation in Uzbekistan expanded massively between 1960 and 1980, when the area under irrigation increased from 2.3 million to more than 4 million hectares. More than 2 million hectares of irrigated land were planted with cotton during the 1980s, which was the peak period of cotton cultivation. Prior to independence, most of the cotton fiber was shipped to other Soviet republics for processing. Since independence, cotton exports have increasingly shifted to western markets, including the United States and Europe.32 In recent years, Uzbekistan has been the world’s fifth largest cotton producer (with a world market share of 6 percent) and the second largest exporter (17 percent of world exports) (Table 12). Cotton export earnings peaked in 1995 at US$1.6 billion, significantly boosted by high world market prices. These earnings fell to US$1.4 billion in 1997, reflecting in part lower world market prices and the poor 1996 harvest. Although cotton’s share in total exports declined to less than 40 percent in 1997, the “white gold” remained by far the single largest source of foreign exchange for the economy (Table 13).

Table 12.

Cotton World Production and Exports, 1992/93–1997/98 1/

(In thousand metric tons)

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Source: United States Department of Agriculture, Cotton: World Markets and Trade, May 1998.

Season beginning August 1.

Table 13.

Uzbekistan: Cotton and Wheat Indicators, 1991–97

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Sources: Ministry of Macroeconomics and Statistics; World Bank 1996; and Fund staff estimates.

More than 90 percent of the cultivated land is irrigated, requiring that 80–90 percent of available water resources are used in agriculture.

GDP converted at the official exchange rate.

At the official exchange rate.

45. In the past few years the area under cotton has been lowered to 1.5 million hectares, which in part explains the decline in cotton output observed in recent years. A second important factor in 1996 and 1997 was the reduction in yields, reflecting the distorted incentive structure for cotton growers, including low remuneration for cotton pickers (Box 1), poor agricultural practices, and environmental degradation (Box 2). Although Uzbek cotton yields are still higher than in neighboring Tajikistan and Turkmenistan, they are below those in China and other countries where cotton is grown under similar conditions.33

Cotton and Labor

Cotton cultivation is very labor-intensive. Under the Soviet regime, picking cotton was generally undertaken during a 2–3 month long campaign with the forced participation of students and teachers in exchange for very low remuneration. Reportedly, this practice—which involves child labor—still exists to some extent in Uzbekistan, partly because more and more agricultural machinery has fallen into disrepair. Since independence, agricultural wages have remained very low in U.S. dollar terms, and they have fallen sharply relative to those in industry and other sectors of the economy (Table 13 and Figure 3). Moreover, agricultural workers are often compensated partly in kind, while cash payments are delayed.

Although a labor shortage exists during the peak cotton harvesting season, there is otherwise considerable hidden unemployment in agricultural collectives. According to official information, about 800,000 persons are underemployed in agriculture (equivalent to almost 10 percent of the total number of employed persons in the country). The creation of more employment opportunities especially in the rural areas is of crucial importance, as about 50 percent of the rural population is below 18 years. At the aggregate sectoral level, labor productivity has declined since 1991, as overall output has fallen and the overall level of employment in the sector, as officially measured, has remained broadly the same.

Cotton Cultivation and its Environmental and Social Implications

Heavy use of fertilizers and pesticides in large-scale cotton irrigation has resulted in salinization, decreasing soil fertility, and falling area yields. Water use in cotton cultivation is excessive due to poor water management and low or unenforced water fees. Reportedly, cotton growers in parts of the country use 3–4 times as much water as in other countries.

The massive diversion of water from the two major rivers (the Syrdarya and the Amudarya) for cotton irrigation has contributed to the sharp decline in the supply of water to the Aral Sea, which is drying up. Once the world’s fourth largest inland sea, it has lost about one-third of its surface area since the 1960s. In addition, the excess irrigation water that is drained off irrigated land is heavily contaminated with mineral salts and fertilizers, polluting what remains of the lake. The fishing industry has collapsed, and human health has also been adversely affected as both the supply and quality of drinking water has worsened. Owing to air pollution through wind-borne salts, there has been a large increase in respiratory and other diseases among the population around the Aral Sea. The natural climate around the Aral Sea has also changed. 1/

A regional program is being undertaken by Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan to reduce the ecological and social problems associated with the shrinking Aral Sea. This program is supported by the World Bank, the UN, and other donors. However, the implementation of this program is slowed down by divergent national interests and the region’s complicated geography. The Aral Sea straddles the border between Kazakhstan and Uzbekistan and the Syrdarya and Amudarya flow through four countries—Tajikistan, the Kyrgyz Republic, Turkmenistan and Uzbekistan. With assistance from the World Bank and the Asian Development Bank, the Uzbek government also intends to improve cotton cultivation in the context of pilot projects in selected regions.

1/ On the environmental and social consequences of cotton cultivation in Uzbekistan see World Bank (1993).

46. Cotton procurement and processing remains essentially a monopsony of the government. The state-owned association Uzkhlopkopromzbyt in charge of these activities was established in December 1992, succeeding the previously responsible ministry for the cotton sector. It operates around 135 ginneries and more than 600 procurement points. The ginneries are in the process of being corporatized as open joint stock companies, in which the government intends to retain eventually only up to 25 percent of the shares. Up to 26 percent can be sold through the stock exchange, with the collectives of workers retaining the remaining ownership shares. The association itself holds around one third of the shares in the Pakhta Bank, which is the major provider of credit for cotton operations. So far, no cotton ginnery has been privatized, despite the fact that a number of foreign investors have indicated strong interest in this sector.

47. Following the poor 1996 crop, the government decided to provide substantial additional assistance to the sector. This included experimenting with a new technology (use of plastic foil) applied on slightly more than 10 percent of the area sown in 1997. However, while adding significantly to the already high production costs, only a moderate increase in yields was achieved. Overall, cotton output fell again significantly short of the target in 1997 (3.6 versus 4 million tons). Subsequently, the government openly acknowledged the problem of declining cotton yields. In a recent speech, President Karimov attributed this decline to “excessive spending, obsolete management, poor land reclamation and neglect in seed growing.”

Wheat and Other Crops

48. The production of wheat has increased significantly since independence, reflecting primarily the substantial expansion in area under cultivation. According to official data, wheat output rose to slightly more than 3 million tons in 1997, equivalent to more than 80 percent of total grain output.34 Official data suggest that wheat yields have increased somewhat in recent years, although they have remained low compared to those achieved in other countries (World Bank 1993). The wheat import bill rose sharply in 1996 when, at a time of high world market prices, the government replenished stocks. While the domestic production of 2.7 million tons in 1996 was well below the plan target of over 4 million tons, it was higher than the 1995 harvest (2.3 million tons).

49. Output performance of other crops has been mixed. According to official data, the production of potatoes has increased substantially in recent years, primarily because of an expansion in cultivated area. By contrast, overall production of vegetables has fallen sharply, reflecting in part a switch to potato cultivation in the collective sector and an inadequate measurement of private sector production in the official statistics.35 Following the liberalization of marketing and abolition of state order prices in 1992–93, fruits and vegetables are now overwhelmingly sold in the bazaar, leaving state-owned food processing plants without adequate input supplies due to the significantly lower prices that they offer. According to the official data, tobacco output dropped sharply in 1992 and 1993, but has since rebounded from very low levels, largely reflecting increased producer prices and support provided through a joint venture in tobacco processing.

Livestock

50. Output and productivity performance in the livestock sector have been uneven. Overall, the subsector has experienced a sharp drop in the total number of animals (except cattle), and there has been a decline in fodder and feedgrain production, partly on account of the increase in the area planted with wheat. Productivity in the livestock sector fell sharply (e.g., milk yields per cow) on state farms and partially privatized but still government-controlled large-scale joint stock companies.36 By contrast, production and productivity in private sector livestock operations improved, helped by the liberalization of marketing in the first 2–3 years of transition. Official and other sources estimate that by now up to 80 percent of livestock products are sold on the free market.37 As in the case of fruits and vegetables, this has caused supply shortages for those dairy factories and meat-processing plants remaining under government ownership. These generally pay relatively low prices (noncash, and at times, delayed), while their private sector counterparts pay higher prices on a cash basis.38 Cash withdrawal restrictions continue to exist and tax authorities have direct access to bank accounts, which are additional reasons for sellers to prefer cash payments.

C. Property Rights Reforms

51. Following independence, all state farms were transformed into collectives. In 1997, there were approximately 1,400 collectives (called shirkat) that cultivate about 70 percent of arable land and produce virtually all of Uzbekistan’s cotton and most of the grain. In recent years, a number of collectives underwent various forms of internal reorganization, which resulted in new forms of ownership, including joint stock companies, shareholder unions, and farmers’ associations. All of these entities are de jure autonomous, but de facto continue to be tightly controlled by the government, which, for example, appoints the managers, and, at least for cotton and wheat, controls inputs, production, and marketing. Workers and collective members are generally paid low wages, partly in-kind, and at times with delay, which creates incentives to misuse inputs and divert part of the harvest from collective fields for private purposes.39

52. All land remains under state ownership. The government has granted long-term leases (up to 50 years) to private farmers, but leasing has so far been limited to small plots and land tenureship has generally remained insecure. By end-1997, about 30 percent (1.3 million hectares) of the total cultivated land (approximately 4.1 million hectares, mostly irrigated) was leased to farmers under the following schemes:

  • Some 750,000 hectares were transferred to individual families for so-called “lifetime inheritable use” (i.e., land can be passed on to heirs). Such land cannot be sold or exchanged; while it may be pledged as collateral for a loan, this remains difficult.

  • Approximately 180,000 hectares were leased by collectives to about 13,000 individual members.40

  • About 20,000 private farms (dehkans) were established with an average of 20 hectares. According to official information, more than 1,000 of these farms had to close down during the past two years.

53. The Land Code has been amended several times since independence, and a new draft code is currently under preparation. Private ownership of land has remained a highly controversial issue in Uzbekistan, and according to the new draft code all land will remain under state ownership. The new draft land code, which has been prepared in conjunction with draft laws on cooperatives and other farms, allows various types of short- and long-term land lease arrangements.41 According to the World Bank’s assessment, however, in their current form these laws hinder private sector participation in agriculture and they will not result in any material change for collectives and others in terms of land ownership, land and water use rights, and the transferability of these rights.

D. Producer Price Policies and Marketing Arrangements

54. The production of the two major crops, cotton and wheat, has remained tightly controlled by the government with the objective of channeling resources out of agriculture and into other sectors of the economy. The principal mechanisms used for this purpose have included state order purchases, low producer prices, and (quasi-) monopsonistic marketing arrangements. Marketing arrangements were strictly enforced, including with road blocks to control interregional shipments of commodities within Uzbekistan. Agricultural exporters have been implicitly taxed through the restrictive foreign exchange system and multiple currency practices. The latter have become increasingly important since late 1996, when foreign exchange restrictions were intensified and the differential between the official and curb market exchange rates increased to more than 100 percent.

55. Although the scope of state orders for cotton and wheat has officially been reduced, the authorities have de facto maintained a system that ensures sales of most of the cotton and wheat to the government at low state order prices. In the past few years, state orders were determined as percentages of planned output, and farms that did not meet the often unrealistic plan targets were forced to surrender the whole crop at the state order price.42 In the past two years, purchases at state order prices were estimated at 60–70 percent of the total harvest for both crops. For 1998, the state order system was maintained unchanged from 1997.

56. In 1996 and 1997, the government had committed itself to pay state order prices equivalent to 70–80 percent of the average world market price to domestic cotton and wheat producers under the state order system. Cotton farmers, however, received about 50 percent of the world market price, if calculated at the official/auction exchange rate, and only 45 percent on the basis of the cash/commercial bank market exchange rate (Table 14 and Figure 4). Owing to the existence of (quasi-) monopsonistic marketing organizations (Uzkhlopkopromzbyt for cotton and Uzchlebprodukt for wheat), “contractual prices” for above-plan cotton and wheat sales in the past few years also remained well below world market price levels.

Table 14.

Uzbekistan: Cotton and Wheat Producer Prices, 1994–97

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Sources: Ministry of Macroeconomics and Statistics, Ministry of Agriculture and Water Resources; and Fund staff estimates and projections.

F.O.B. Uzbek border.

At the average official exchange rate for the last quarter of the year.

At the official cash/commercial bank market exchange rate for the last quarter of the year.

At the average curb market exchange rate for the last quarter.

Farm-gate price in percent of world market price.

U.S. NO. 2 soft red winter wheat, excluding transportation costs (benchmark as used in the 1995 World Bank Rehabilitation Loan).

Figure 3.
Figure 3.

Uzbekistan: Average Wages, 1991–97

(In U.S. dollars)

Citation: IMF Staff Country Reports 1998, 116; 10.5089/9781451839784.002.A002

Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.
Figure 4.
Figure 4.

Uzbekistan: Agricultural Producer Prices, 1995–97

(In percent)

Citation: IMF Staff Country Reports 1998, 116; 10.5089/9781451839784.002.A002

Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.1/ At the official cash/commercial bank market exchange rate for the last quarter of the year.

57. Through the state order system, low producer prices, and marketing controls for cotton and wheat, the government effectively placed a heavy implicit tax burden on the agricultural sector. Calculated at the auction exchange rate, this tax amounted to about US$800 million per year in 1996 and 1997, equivalent to almost 7 percent of GDP.43 44 As shown in Table 15, an additional implicit tax on agriculture, and in particular on the cotton subsector, was applied through the exchange system and the overvaluation of the currency. Preventing cotton proceeds from being converted at the 10–12 percent more depreciated official cash/commercial bank market rate created an additional implicit tax of US$125 million or about 1 percent of GDP. Moreover, basing, for illustrative purposes, the calculations on a hypothetical market-clearing exchange rate of sum 100 to the U.S. dollar, the implicit additional tax amounted to US$360 million or 2.5 percent of GDP in 1997.45

Table 15.

Uzbekistan: Cotton and Wheat Taxation and Support, 1995–97

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Sources: Ministry of Macroeconomics and Statistics, Ministry of Agriculture and Water Resources; and Fund staff estimates and projections.

GDP and gross transfers recomputed using the average annual official cash/commercial bank exchange rate.

GDP and gross transfers recomputed using the hypothetical market exchange rate.

Gross value is the difference between the actually paid producer prices and a producer price equivalent to 80 percent of the f.o.b. price. Conservatively assuming purchases at the state order price of 63 percent of the total harvest.

Gross value is the difference between the actually paid producer prices and a producer price equivalent to 90 percent of the wheat import parity price. Conservatively assuming purchases at the state order price of 75 percent of the total harvest.

Inputs include mainly water, electricity, and fuel, as well as chemical inputs. In 1997, excluding water charges.

Includes also debt write-offs.

Including capital investment outlays and machinery services, estimated at 20 percent of the value of other inputs.

58. An implicit tax that was not explicitly incorporated in the analysis arises from the sale of cotton by-products (seed, lint) by the cotton marketing organization. The proceeds from the sale of these products are not passed onto the producers, except for about 25 percent of the cotton seed which farmers receive from the ginneries for the planting of the next crop. The remaining value of the seed and lint is used to subsidize consumers of cotton seed oil. To some extent, the receipts from the implicit taxation of cotton producers are passed on as a subsidy to the domestic textile industry, which purchases cotton fiber at below world market prices.

59. Low domestic producer prices for wheat, in combination with price controls and subsidized wheat imports, due to the application of the overvalued official exchange rate, have been used to ensure low consumer prices for flour and bread. Urban consumers are the primary beneficiaries of this subsidy. Price controls and subsidized wheat imports provide strong disincentives for domestic farmers to increase production, while they encourage smuggling to neighboring countries where higher wheat prices are paid.

E. Subsidies

60. The implicit taxation of agriculture is to some extent offset by implicit and explicit state support which has included the subsidized or free provision of inputs (e.g., fertilizer, pesticides, fuel, water, electricity), investments financed from the budget, tax exemptions and preferences, directed credit from the central bank and commercial bank at concessional interest rates, and debt rescheduling at favorable terms or debt cancellation. Over the last two years, the government provided on average about US$700 million, or 6 percent of GDP, in support to agriculture through these mechanisms (Table 15). The implicit tax burden is thus quantitatively offset, at least in part, through subsidization. However, the subsidy mechanisms distort the incentive structure for agricultural producers even further, with detrimental effects not only for production and productivity, but also for the environment and the health of parts of the rural population.

61. On input subsidization, irrigation water was effectively provided free of charge prior to 1997, when low water tariffs were introduced. Foreign exchange for necessary imports of fertilizer and other chemicals has been provided at the official exchange rate, and these inputs have generally been provided by government monopolies at prices not reflecting economic costs. Overuse of chemical inputs and water has had a disastrous impact on the health of the rural population and the environment around the Aral Sea (Box 2). Uzbek farms reportedly use 3–4 times as much water for cotton irrigation than their counterparts in other countries, and fertilizer application rates are much higher than in countries where higher yields are achieved. Electricity tariffs have remained below their long-run cost recovery price or internationally comparable price, even if calculated at the overvalued official exchange rate. Despite the introduction of moderate water charges in 1997, the overall level of input subsidization has changed only little in the past few years.46

62. An important quasi-fiscal subsidy arises from the provision of directed credits from the budget, central bank, and commercial banks on concessional terms. Repeatedly, agricultural arrears were dealt with through debt write-offs or concessional rescheduling, and new loans.47 Rescheduling of arrears under negative real interest rates implied a substantial reduction in the net present value of the debt and constituted a hidden subsidy to the agricultural sector. The credit subsidy is estimated for 1997 at about sum 13 billion or 1 percent of GDP. Directed credits do not benefit all agricultural producers equally and tend to crowd out other, more profitable investment projects from the private sector. Large, inefficient collectives and state-owned enterprises were the primary beneficiaries of these credits.48 By contrast, private farmers have often experienced problems in obtaining credits from commercial banks. This was in part because they found it difficult, or impossible, to use leased land as collateral, but also because the large state-owned banks, including the Pakhta Bank, were not prepared to service small farmers (Box 3). Large directed credits to agriculture have contributed, at times, importantly to excessive monetary expansion and balance of payments pressures, and played a major role in derailing in late 1996 the progress toward macroeconomic stability. At that time, the government lent about sum 20 billion (3.6 percent of GDP) to agriculture at an interest rate of only 10 percent, largely to clear agricultural arrears to other sectors and for the preparation of the 1997 cropping season.49

Agricultural Financing Through the Pakhta Bank

The Pakhta Bank is a specialized state-owned bank that finances agriculture, and specifically cotton sector operations. It was founded in 1991 as the successor of the former regional branch of the Soviet Agroprombank, and was incorporated as a joint stock company in 1995. It currently operates 186 branches plus 13 regional offices all over the country. In terms of assets, it is Uzbekistan’s second largest bank (after the NBU). Although over the past couple of years it has sought to diversify its operations to become a universal commercial bank, its main activity has remained the financing of agriculture, which accounts for an estimated 80 percent of the loan portfolio.

In 1997, the Pakhta Bank and other commercial banks (e.g., NBU, Promstroibank) were required to sharply increase their lending to agriculture. As a consequence, Pakhta Bank’s credits expanded by 160 percent in nominal terms; according to official information, the Pakhta Bank lent about sum 61 billion to agriculture. About 90 percent of all of Pakhta Bank’s loans are government-guaranteed and these are officially classified as “good loans.” By contrast, in 1994 a foreign auditing firm estimated that almost 40 percent of Pakhta Bank’s loan portfolio was “substandard.” In 1996, reportedly about 10 percent of the bank’s total loan portfolio became delinquent due to the poor cotton harvest. The central bank repaid the Pakhta Bank for these loans, and the agricultural sector was provided with a repayment moratorium until the year 2000. In turn, Pakhta Bank was required to write off all overdue interest on these loans.

63. From the more narrow perspective of the budget, agriculture has been a major net drain. While providing large implicit and explicit subsidies, the budget has received in return only relative modest revenue from the cotton excise tax, which has only been applied to the nominal, and declining, state order portion of the crop. During 1997, the cotton excise tax revenue was only sum 5.6 billion, or 0.6 percent of GDP, compared to explicit expenditures on agriculture of about sum 33 billion, or 3.4 percent of GDP. A sizable loss of revenue results from agriculture being exempt from the VAT and from the application of preferential profit and land tax rates for agricultural collectives and enterprises.

F. Conclusions

64. Macroeconomic and sectoral policies have caused severe financial stress for Uzbekistan’s agriculture. On balance, massive resources have been channeled out of the sector since independence, as implicit and explicit taxation has generally outweighed the government support for agriculture. The net outflow was particularly large in 1995, when Uzbekistan benefitted from exceptionally high cotton world market prices, which were not passed onto producers. The net resource transfer declined, but remained substantial in the following two years, especially in 1997 when the implicit taxation through the exchange system is considered. Perhaps even more important, during 1996 and 1997 the incentive structure for cotton and wheat producers remained seriously distorted through producer price controls and the state-order system on the one hand, and the free or subsidized provision of inputs on the other hand.

65. Pursuing the goal of food self-sufficiency has run counter to Uzbekistan’s comparative advantage. By contrast, the liberalization of the livestock subsector and the production of other crops (e.g., fruits, vegetables, tobacco) has resulted in efficiency gains and a modest favorable supply response from the private sector. Under free market conditions, the same could be expected for other crops, especially cotton. Based on a market-determined exchange rate, undistorted domestic price signals, fewer government controls, and more secure properly rights, agricultural producers can be expected to chose to grow the most profitable crop, increase productivity and use inputs more efficiently, and better preserve the land and the environment. Agricultural liberalization and privatization will reduce the financial problems within the sector and contribute to macroeconomic stabilization and sustained growth for the economy as a whole.

66. Uzbekistan’s agriculture has a large growth potential that could be tapped once a different sectoral and macroeconomic policy framework is in place. In recent speeches, President Karimov announced that agricultural reforms are key to the Uzbek economy. However, he explicitly opposed private ownership of land, and instead emphasized the need to support and restructure cooperatives and joint stock enterprises in agriculture. The president said that cotton is of strategic importance to the nation and therefore it cannot be grown on private plots of land. For the time being, Uzbekistan’s agriculture remains one of the most regulated among the transition countries.

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  • World Bank, 1996, Statistical Handbook of the Former Soviet States” (Washington D.C.).

27

“Milking the cow” is the expression a government official used to describe the government’s policies toward agriculture. As regards cotton and wheat production, policies continue to resemble those of the Soviet Union. For an overview of agricultural policies under the socialist system see IMF et al. (1991). See also Schiff and Valdes (1995) who show that a large number of developing countries in the 1960s and 1970s failed to achieve macroeconomic stabilization and growth by “plundering agriculture” through similar policies. For general reviews on agricultural policies in transition countries see, for example, Brooks and Lerman (1995) and Csaki and Lerman (1996). Galbi (1995) provides an analysis of credits and subsidies in Russian agriculture since 1992.

28

Detailed studies on agriculture prior to independence and during the first years of the transition are provided by Craumer (1995), Khan (1996), and Pomfret (1995).

29

Owing to the poor quality of official data, there is a substantial margin of error in agricultural output measurement. The official output data for cotton are relatively reliable. However, fruits, vegetables, and livestock products are increasingly produced by small-scale private farmers who generally do not report to the statistical authorities.

30

It is estimated that, even on current low yields, farmers could achieve gross returns of more than US$600 per hectare of cotton, compared to less than US$500 per hectare of wheat.

31

A number of other crops are also produced, including tobacco and silk cocoons. Since 1991, output of these crops has generally declined from already low levels (Table 10).

32

About 10–20 percent of total production is used domestically.

33

In recent years, Uzbekistan has achieved an average yield of about 750 kg of cotton fiber per hectare, compared to 340 kg in Turkmenistan and 880 kg in China (World Bank 1993; United States Department of Agriculture 1998).

34

According to official statistics, the total grain harvest in 1997 was 3.8 million tons. It is estimated that Uzbekistan needs to produce at least 4.2 million tons of grains to meet domestic requirements.

35

Private sector fruits and vegetable production and bazaar sales, mainly from household plots, reportedly increased strongly in recent years. This, however, is not fully captured in the official statistics due to inadequate primary data collection methods. At the same time, production data reported by collectives and the few remaining state-owned enterprises are likely to show an upward bias because of pressures to meet plan targets. Therefore, the data for these crops as reported in Table 10 can only be regarded as broad estimates.

36

For example, during 1991–96 the average annual milk yield per cow dropped from more than 3,100 kg to approximately 1,700 kg on government-controlled farms.

37

Note, however, that the private sector accounted for a large part of livestock operations even prior to independence. Reportedly, small farms owned about 75 percent of all cows prior to 1991.

38

In 1996, for example, state-owned milk factories paid 16–18 sum/liter, while the price on the free market was 30–45 sum/liter. Meat was purchased by state-owned factories at sum 80–110 per kilogram, while private processing plants paid sum 200 or more.

39

In 1997, the government reportedly deployed security forces to protect the grain harvest in some areas.

40

These “family contracts” are highly restrictive: they have to be renewed annually and include a general obligation to increase yields and enhance the quality of the land as well as more specific stipulations on the type, quantity, and quality of agricultural products cultivated on the land; the sale of, and payment for, the produce; and labor compensation.

41

Two of these laws (on farming and peasants) were adopted by parliament and published in newspapers in early June 1998.

42

Specific production targets are set for individual producers through the local administrations (see, for example, Resolution No. 441, dated December 13, 1996 for the 1997 cotton season). Nominally, state orders were reduced during the period 1991–97 from 95 percent to 25 percent in the case of wheat, and from 100 percent to 30 percent for cotton.

43

Connolly and Vatnick (1994) estimated the implicit tax on the cotton sector alone at US$1 billion in 1992.

44

To some extent the implicit tax on the cotton sector also reflects the existence of a quasi-monopoly for cotton exports, cotton export licencing, and the export tax on cotton (which was abolished effective November 1,1997). Reportedly, there are inefficiencies in the operations of the cotton export trading companies due to the lack of competition, but it has not been possible to quantify how much of the total implicit taxation accrues because of this.

45

The curb market rate averaged about sum 150 per U.S. dollar in 1997, while the cash/commercial bank rate averaged sum 74 to the U.S. dollar. In line with analyses undertaken by the World Bank and the Asian Development Bank, for all computations the fourth quarter average exchange rates were used as most sales of wheat and cotton occur in that quarter. GDP estimates were recomputed on the basis of average annual exchange rates (Table 15). Note that these hypothetical calculations are based on actual output data; under free prices output levels would likely be different.

46

According to a World Bank estimate, input subsidies for cotton cultivation can amount to about $250 per hectare.

47

In late 1996, for example, agricultural arrears were partly rescheduled and partly written off and paid from the budget, including to the pension fund and the energy supplier, Uzneftegas. This exercise was repeated in early 1998 when the government decided to defer arrears of about 100 agricultural enterprises to the budget until the year 2000, and those to the pension fund and others to the year 2001. Other arrears were partly converted into an interest-free credit of the Ministry of Finance, with repayments due by the agricultural enterprises beginning in the year 2003 (Resolution of the Cabinet of Ministers “On Measures to Rehabilitate Agricultural Enterprises,” February 1998).

48

Typically, many of these loans are nonperforming. In the analysis presented here, it has been assumed that 50 percent of the net annual increase in lending to agriculture is not repaid and thus represents an unrequited transfer.

49

At that time, the annualized central bank refinance rate was 60 percent and officially measured annual inflation was 64 percent.

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Cover IMF Staff Country Reports
Uzbekistan: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1998: Issue 116
Publisher:
International Monetary Fund
ISBN:
9781451839784
ISSN:
1934-7685
Pages:
133
DOI:
https://doi.org/10.5089/9781451839784.002
  • Figure 3.
    View in gallery
    Figure 3.

    Uzbekistan: Average Wages, 1991–97

    (In U.S. dollars)

  • Figure 4.
    View in gallery
    Figure 4.

    Uzbekistan: Agricultural Producer Prices, 1995–97

    (In percent)

Figure 3.

Uzbekistan: Average Wages, 1991–97

(In U.S. dollars)
Figure 4.

Uzbekistan: Agricultural Producer Prices, 1995–97

(In percent)