Tashkent, Uzbekistan (Uzbekistan Today)---The further reformation of banking-financial sphere in the country and the attraction of foreign investment into the economy of Uzbekistan were among the priorities outlined by the President of the Republic of Uzbekistan Islam Karimov at the session of the Cabinet of Ministers devoted to the results of socio-economic development of the country in 2006 and the most important priorities for 2007. The cooperation of Uzbekistan with world's top banks and financial institutions has always been the factor that boosts the country's efforts in its economic development. These factors definitely speak for the wide-range of innovation and sensitization work carried out by the state for the years of its sovereignty. The Country Manager of the World Bank in Uzbekistan Loup Brefort agreed to answer questions with respect to Uzbekistan - WB cooperation for the years of Independence.
- WB and Uzbekistan have gone a long way of mutually beneficial cooperation since the Bank started its activity here in the country. What would You site as a most promising sector of bilateral collaboration between the Bank and Uzbekistan? Why?
- The World Bank is active in three major sectors, infrastructure being the largest one. It includes big investment projects such as Tashkent Solid Waste Management, Rural Water Supply and Sanitation, and Bukhara and Samarkand Water Supply projects. Irrigation, drainage and land improvement is the second largest sector in the Bank's project portfolio. With the launch of the Basic Education Project and the ongoing "Health 2"Â project that follows on the very successful "Health 1"Â, the share of social sectors is growing since the demand for improving the quality and efficiency in the delivery of basic social goods is great. The World Bank is also working with the Uzbek Government in providing support in the agriculture sector, through the Rural Enterprise Support Credit and its very successful equipment credit component which was recently visited as a model by a high level delegation from the Republic of Georgia. Further collaboration between the Bank and the country will be demand-driven and based on the Bank and the Government's mutual agreement. Basic infrastructure, rural development and human resources development are likely to remain key sectors of mutual interest.
- The WB's latest fact sheets for Uzbekistan draw the picture of observable improvements in the country's economic and financial performance as of late. What do You think helped the country achieve those improvements?
- Uzbekistan has great economic potential that remains to be fully exploited. It is the most populous country in Central Asia, with a well-educated and entrepreneurial population, a strong agricultural base and abundant natural resources, including hydrocarbons, gold, copper, and uranium. Since the early 2000s, Uzbekistan has benefited from a favorable external environment due to significant steps to create a favorable macroeconomic environment and to diversify the country's export base. This has translated over the past few years in strong economic growth and a very favorable balance of payments situation. The current account registered large surpluses due to favorable commodity prices on world markets, growth in non-commodity exports, increased remittances, and managed imports of tradeable goods. Fiscal policy was disciplined, and structural reforms continued at a gradual pace, including tax reform, treasury reform, some streamlining of licensing, inspections and reporting requirements for SMEs, restructuring of collective agricultural enterprises (shirkats) into private leaseholds, and easing of restrictions on bank's access to their correspondent accounts at CBU and cash withdrawals from bank deposits.
- Thank you for your answer. The country has been investing substantial efforts as to accelerate its advancement towards international standards. How would you evaluate the role of Uzbekistan in realizing MDGs?
- Together with 184 countries of the world Uzbekistan has signed the Millennium Declaration, thus committing to create the internal conditions and to develop investment programs necessary to reach the Millennium Development Goals (MDG). One of the MDGs reiterates the need to undertake the collaborative efforts to enhance economic growth and reduce poverty. It calls for multilateral cooperation, open, rule-based trading and financial system, and, from the developed countries, the granting of more generous aid and debt relief to less developed countries committed to welfare improvement. The Interim Welfare Improvement Strategy developed by the Government of Uzbekistan in 2004 sets out concrete targets, the achievement of which mostly depend on the actual assessment of the financial resources, correct prioritization of trends and their efficient management.
We think that the main basis for cooperation of both multilateral and bilateral partners would be the finalization and implementation of the Government's full-fledged Welfare Improvement Strategy for 2007-2010, in which the Government will identify key multi-year priorities, targets, and action plan to improve the living standards of population in Uzbekistan. The very impressive economic growth rate of the past few years has resulted in the subsequent percentage increase in Uzbekistan's economic indicators. This may be due to the fact that exports of extractive and other capital-intensive industries, automobiles to cite one for example, have played a large part in the recent growth. The preparation of the Welfare Improvement Strategy 2007-2010 is a unique opportunity for Government, its foreign bilateral and multilateral partners, and stakeholders, to develop and rally around the approaches and programs that would significantly enhance the elasticity of growth to poverty reduction in the future. In this regard, international experience clearly confirms the role that a vibrant SME sector can play in job creation and its consequent impact on poverty reduction.
- A very wide range of world's top organizations repeatedly stressed the strategic significance of Uzbekistan in the geopolitics of the Central Asian region. And WB is one of the pivotal financial institutions successfully taking advantage of favorable conditions created in the country. What are the biggest projects the Bank has been successful in implementing in the country as of today?
- Among the lately completed projects we can definitely mention the Tashkent Solid Waste Management, Urban Transport and Health- I Projects as examples of good success of our cooperation with Uzbekistan.
Having implemented Tashkent Solid Waste Management Project the World Bank and other donors have worked in close support from the Government to restore the municipal solid waste management system in the capital of Uzbekistan. This has helped reduce the incidence of some diseases and created over 1,000 jobs. Here is an interesting fact, when the Project started, only a third of residents were satisfied with the quality of the city's waste management services. Most recent surveys show that the number of satisfied customers has more than doubled.
Achievements under the Urban Transport Project were impressive. The main achievement of the project is the policy reform that instituted municipal franchising of bus routes to private operators. This resulted in increase competition and significant improvement in quality and availability of transport services. The project led to improved reliability, efficiency, and affordability of bus transportation services in the five project cities. It increased supply of public transport due to a substantial increase in the share of the private sector transport operators as a result of competitive biddings for bus routes. Also, capacity of the City Transport Departments was improved as well as institutional, financial and regulatory framework for the urban passenger transport sector.
Health I Project helped to establish a model of the primary health care system that is accessible, affordable and efficient. It contributed to reducing avoidable illnesses by improving ordinary people's access to primary health care in five regions of Uzbekistan. Close to 700 primary care centers, serving 3.5 million people, were constructed or rehabilitated and have received new equipment. By the end of the project the majority of upgraded primary care centers managed their work based on the per capita financing. Also, the World Bank is financing training of medical professionals and advising on health care finance.
There are more examples in ongoing projects, though, to be honest, both parties had to put much effort to make these projects successful. While admitting the Government's efforts to create better business conditions, we also have to say these efforts of the state have laid a firm foundation for its current improvement.
- What are the numeric indicators of the bank's cooperation with other financial institutions of Uzbekistan? How far has it gone with its collaboration with local banks in terms of loan-contract operations, bilateral agreements and projects of mutual interest?
- The WB group cooperates with financial institutions of Uzbekistan mainly through International Finance Corporation (IFC), which is a private sector arm of the World Bank. IFC promotes sustainable private sector investment as a way to reduce poverty and improve people's lives.
Due to the favorable investment environment created in Uzbekistan, the IFC executes a major donor-funded program of private sector advisory services projects. The objectives of the program are to promote direct investment in the private sector, build local businesses and financial intermediaries, and help improve the business environment.
The goal of the Central Asia Leasing Facility is to expand leasing for SMEs in the region. The Facility, supported by IFC significant advisory services program, strengthens the capacity of participating financial institutions in leasing operations through organizational restructuring, trainings, improvements in procedures and policies, and upgrading of management information systems. And all of this would undoubtedly be very far from reality without support of the Government of Uzbekistan.
- What do You see as the biggest challenge for the economic environment within the country in the nearest future? How do You believe the reforms led by Islam Karimov are to add to tackle those issues to emerge?
- The Government managed to reduce inflation in recent years; privatization is moving fast, the investment climate is being further improved to increase FDI inflows; in particular equity investment rather than just arrangements linked to the supply of equipment and machinery, and the banking system is far from what it used to be like before. Current protective and complex trade regime and policies are being brought to fully comply with those expected in a market economy. International experience demonstrates that protectionism and administrative management of the trade regime very often result in distortion in resource allocation, reduce competition which is one of the drivers in the research of efficiency and productivity gains and their resulting downward pressure on prices of goods and services for consumers, it contributes to the difficult business environment, it creates opportunities for corruption, and encourages smuggling. The very favorable external environment and current macroeconomic situation of Uzbekistan has always provided an excellent opportunity to accelerate structural reforms in these areas. And there is no chance for the aforementioned negative effects to occur given the present legislative ground and protection in Uzbekistan.
As mentioned by the President in his recent speech, a new challenge for Uzbekistan is connected with reforming of public utilities. This could be envisaged by encouraging increased private sector participation through the effective commercialization of public utilities, the creation of economic incentives for efficient operation, and the strengthening of the accountability of public utility companies, including through the promotion of information disclosure and transparency. Finally, Uzbekistan is working harder compared to other market economies as regards the availability and disclosure of detailed economic and sectoral statistics and this is an area where the authorities may witness an accelerated growth for the years to come.
- How do You think the tendency that we term as globalization is to affect the economic performance of the country and do You think the financial institutions are strong enough to withstand the territorially significant effects of economic integration taking place due to globalization?
- As you know, the current trend of globalization of markets and production was based on the lowering of barriers to trade and investment, and technological change in information processing, communication and transportation.
Globalization holds not only more opportunities, but also some new risks, if a country's financial system is weak and if domestic companies have used protectionist barriers as a shield to "live comfortably"Â rather than as a strictly temporary interval that gives them a chance to become as efficient, as innovative, as technologically and managerially state-of-the-art, as quality and customer oriented and as price competitive as the best companies in the outside world they would face when the economy is opened up.
Strong banking sectors in well functioning market economies are characterized by a number of factors, among which, for instance: the presence of effective banking supervision, operational independence for the central bank; full disclosure of the size of foreign reserves, bank balance sheets and non-performing loans; effective enforcement of bankruptcy and repossession of collateral procedures; capacity to conduct objective risk-analysis and market-based credit allocations decision; elimination of political and administrative interference with banks' operation and decision-making process; close monitoring of maturity structure of foreign loans and domestic credits; etc, etc"¦. Indeed, the liberalization of capital accounts of the balance of payments which would signal the "coming of age" of a modern domestic financial sector can probably only be safely envisaged upon the introduction and successful completion of the reforms mentioned above. Not quite much of a risk than an opportunity does globalization sound for Uzbekistan.
- Finally, quite a personal question. Where do You see the banking sphere and country's performance in 5 - 10 years period in succession?
- This is a tricky question since five to ten years is a long time to make prediction with confidence, given the speed of change in our world today, but also a very short period of time in the history of a nation. But I would risk making the following statements: First, I believe that the successful implementation of the proposed Treasury modernization project pursued by Government, with the assistance of its partners from the Asian Development Bank, the IMF and the World Bank, is a very important - and probably necessary step - to foster further banking sector reform and thus unleash the full potential of the Uzbek banks to play a greater role in accompanying and supporting the future economic development of the country. Second, and more broadly, with its human and resource endowment, it is obvious that Uzbekistan has a tremendous potential to join the group of nations that have achieved and sustained "middle-income"Â levels (GDP per capita of $3,000-$8,000) and above. How quickly this objective can, and should be, achieved, and what models of economic reform and development to implement to make this objective become a reality are decisions drawn from Uzbekistan's efforts to ensure appropriate welfare of its people.
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Since 1994 up to now IFC has invested and committed in Uzbekistan around US$36mln., into the following projects:
ABN Amro NB Uzbekistan - $1mln. equity financing
"Uzbek Leasing International"Â - $0.9 mln. equity financing and $2.5 mln. credit line
NBU - $15 million (originally committed) Credit Line for SME business financing.
Asaka Bank - $15 mln Credit Line for SME business financing, consisting of $10 mln. SME Credit Line I and $5 mln. SME Credit Line II
Parvina Bank - $1 mln. SME Credit Line.
Hamkor Bank - $1 mln. SME Credit Line was fully utilized and in end 2006 Hamkor Bank signed SME Credite Line II for $3mln.
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The IFC Central Asia Leasing Project is an example of its advisory services working with Uzbek leasing sector. Since the Project launch in 2002 the following was achieved:
"¢ Legislation regulating leasing in Uzbekistan became one of the most progressive in the former Soviet Union and overall throughout the world.
"¢ The number of lessors has considerably increased. 27 new lessors entered the leasing market and totaled 36 leasing companies, banks and microfinance institutions conducting leasing operations in the country.
"¢ Value of lease has significantly grew - in 2006 UZS131 billion worth assets were leased to SMEs as compared to UZS19 billion in 2001.
"¢ Lease financing provided by commercial operators has considerable job creation/retaining impact: almost 15,000 jobs were created and over 3000 jobs were retained.
"¢ In 2005, IFC approved US$30 million Leasing Facility to finance lessors in Central Asia.
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New global conditions give new positive opportunities for higher economic growth:
"¢ Increased information and communication technologies lead to reduction of transportation and communication costs that is particularly beneficial countries such as Uzbekistan;
"¢ Trading opportunities and new institutions arising from Uruguay Round of the GATT/WTO (e.g. dispute resolution, information regarding international economic laws and policies) and the permanent and unconditional access to the markets of 150 WTO member countries (as of January 2007), which embrace more than 90% of the world trade of goods and services;
"¢ Opportunities related to international capital flows: increased importance of multinationals and flows of FDI that is also accompanied by modern technology and managerial skills inflow.
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