Uzbekistan’s Fledgling Textile Industry Will Have To Find Ways To Survive In Open Market

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Uzbekistan – Population 32 million, GDP $ 67.22 billion, 7.8% growth in 2016, GDP per capita of $ 1961.50, public debt of 11.6% of GDP. Uzbekistan is positioned as one of the beneficiaries of the Belt & Road Initiative. Uzbekistan has been an isolationist nation for many years, Economic reforms in the country began in late 2016. And the country has garnered praise from world organisations for the efforts it is making towards opening up its economy, frontiers, and building transparency into its systems.

Uzbekistan's textile industry is still young, and largely focused on cotton farming and spinning. While the government has identified this as a priority sector, and wants to develop the entire textile value chain, this will not happen overnight.

While the BRI will open up opportunities for Uzbek textile entrepreneurs, it will also bring in a deluge of textile and apparel products into the country, which could well thwart growth of its fledgling industry.

While it is early days to comment on this, it is commendable that the Uzbekistan government is going strong on economic reforms, to facilitate business and attract investments. Historically, industries across nations have grown in protected environments. Industry in Uzbekistan is still largely controlled by the government. To help growth of industry, Uzbek government will not just have to disinvest, but more importantly, work out policies and strategies to help industry grow in an open market. For its textile and apparel industry, it's best bet is to identify and produce high value-added, sustainable, functional textiles, rather than conventional textiles which are already being manufactured successfully and competitively by Turkey, and China (which are of more relevance to Uzbekistan), besides India, Bangladesh, Vietnam.

It is these high value added textiles that will find a niche market in Europe, which will become more easily accessible to Uzbekistan, once the BRI gets operational for this country. Exports at the cost of ignoring the special fashion needs and demands of the domestic market is not a wise strategy either. The government, along with private enterprise, must conduct extensive studies to understand the Uzbek consumer, and how she spends her som. With this knowledge, who better to service the domestic market than the domestic manufacturer. A case in point is China, where local brands and manufacturers are better able to cater to the fashion needs of the local population than international brands.

Let's take a brief look at what is happening in Uzbekistan currently.

For a country that is positioned as one of the beneficiaries of the Belt & Road Initiative, Uzbekistan's public debt is not as worrisome as some of the other countries in Central Asia. At least as of now. By the end of 2016, Uzbek President Shavkat Mirziyoyev began putting in place economic, financial and foreign policy reforms. Within a year, world financial and monetary agencies have upgraded sentiments on Uzbekistan. World Bank has praised Uzbekistan's rise in Doing Business rankings. According to World Bank estimates, the country's GDP should grow by 6% this year.

The government has vowed to eliminate forced labour and diversify the natural resource heavy economy through state enterprise divestiture. The country has been in the news more often for its labour rights violations in the cotton industry. Many international brands have stopped using Uzbek cotton.

The government has now identified textiles as a priority sector. The country has a number of cotton spinning mills, many are set up with foreign investments, especially from China. In the period 2010-2014, the textile industry of Uzbekistan received foreign investments worth $785 million while 147 new textile enterprises with participation of investors from Germany, Switzerland, Japan, South Korea, the USA, Turkey and other countries were commissioned. Export potential of these enterprises amounted to $670 millions.

The government has announced plans to reduce the export of raw cotton and increase the processing in the domestic market. "My biggest goal is to provide people with work, a source of income.  From now on, we will export less cotton, process it in the country and produce value-added products," Mirziyoyev said recently. Uzbekistan is the sixth largest cotton producer in the world. Its raw cotton exports of around US$ 300 million, accounted for 28% of the country's total textile exports. Cotton yarn exports at US$ 500 million accounted for 44% of total textile exports. Total textile exports from Uzbekistan are to the tune of $ 1.11 billion.

Uzbekistan increases export of textile products

Textile products' export in Uzbekistan amounted to $316.9 million in 1Q18, which is 14.7% more compared to the 1Q17, the State Statistics Committee of Uzbekistan said. According to the information, the share of textile products in the total export volume was 7.8% in 1Q18. The main export commodity of the Uzbek light industry is still cotton yarn, which accounts for 58.9% ($186.5 million) of the total textile export volume.

Knitted clothes and garments accounted for 21.3% ($67.4 million) of the total volume. The third position was held by cotton fabrics and knitted fabrics ($15.2 million). The silk export valued $10 million, which is 92.3% more than in the 1Q17. President of Uzbekistan completely reorganised the light industry of the republic in December 2017. Uzbekistan has been counting on the creation of cotton textile clusters since the beginning of 2018. This model implies the organisation of a single production cycle, which includes cultivation of raw cotton, primary processing, further processing at cotton cleaning enterprises and production of final textile products with high added value. In 2018, some 140,900 hectares of land were allocated to cotton textile clusters. The organiser of a cotton textile cluster independently signs and advances direct contracts on cultivation and supply of raw cotton with farms. The price of raw cotton, purchased by textile enterprises, is set independently by the organiser of a cotton textile cluster, taking into account the costs and profitability of farms.

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Uzbekistan exports 110 products with revealed comparative advantage (meaning that its share of global exports is larger than what would be expected from the size of its export economy and from the size of a product's global market). Textiles has an export RCA of 3.63, second highest after vegetable products.

Cross border relations on the mend

The Uzbek government is fervently working towards improving foreign relations with neighbours, and is entering into trade agreements, to bring in foreign investments.

Uzbekistan, Kazakhstan to expand co-op in textile industry

Uzbekistan and Kazakhstan are planning to create a joint cluster for the processing of cotton. Work on the project has already begun. Uzbekistan and Kazakhstan will take control of the whole process, from processing of "white gold" to receiving finished products. "The textile industry is one of the important calling cards of the country. A lot of experience has been accumulated in the production of textile products. This is very important – starting with the planting of cotton, ending with its processing, thus bringing it to export potential," Yerik Utembayev, Kazakhstan's ambassador to Uzbekistan, said.

Within the framework of the new project, the two sides also plan to build new joint ventures. This will be the basis for the development of the textile industry of Uzbekistan and Kazakhstan. In addition, work is underway to implement an investment project to increase the volume of exports and imports between the countries. This was facilitated by the agreement signed during the meeting of the leaders of Uzbekistan and Kazakhstan.

"As many as 180 enterprises, thanks to the support of foreign investors, operate in the Andijan region today. Basically, these projects are implemented with the help of investors from China, South Korea, Kazakhstan and Kyrgyzstan. Taking into account the potential of the region, we invite investors. To date, there is an agreement to implement an investment project with Kazakhstan in the amount of $18 million," said Abdusattor Ahmadov, head of the investment department of the Andijan region.

Kazakhstan mainly exports transformer equipment and other industrial goods to Uzbekistan. In the future, this list will be replenished by the products of the pharmaceutical and cotton textile industries. Experts believe that, as a result of the upcoming forum on interregional cooperation, investment opportunities between the two countries will expand substantially.

By 2020, taking into account the potential of the mutual trade, the two sides intend to bring it up to $5 billion. Over 200 companies with Kazakh capital currently operate in Uzbekistan. As a result of 2017, the trade turnover between Kazakhstan and Uzbekistan has increased by 30% and amounted to about $2 billion. It should be noted that 2018 is declared as the year of Uzbekistan in Kazakhstan whereas 2019 will be the year of Kazakhstan in Uzbekistan.

SEZ for only Indian companies in Tashkent soon

Country-specific special economic zones (SEZs) are not common but given Uzbekistan's push to its India policy, Tashkent is setting up an SEZ exclusively for Indian companies amid President Shavkat Mirziyoyev's decision to modernise the local economy.

With the frequency of flights operating between the two countries set to increase from 2018, the officials are hoping quantum increase in business travellers besides tourists from India. The government here is planning to further simplify visas for Indian nationals.

For Indian business houses, Central Asian countries can be promising markets and Uzbekistan holds multitude of opportunities in various sectors. The country has created a number of free industrial economic zones (FIEZ) to promote foreign businesses.

One of them, 'Navoi' FIEZ offers a wide range of opportunities for foreign investors and initially endows business with important comparative advantages. This territory is subject to special legislative regulations including for taxes, currency, customs and simplified order for entry, stay and departure for non-residents of Uzbekistan. To ensure the favourable conditions for investors, production sites in Navoi FIEZ are provided with high-level infrastructure, claim officials. FIEZ enterprises are provided adequate transport and service infrastructure, labour security systems and comfortable living conditions.

Uzbekistan is ready to create the most favourable investment climate for Indian business, according to senior Uzbek officials. Uzbek companies are willing to offer wide opportunities for establishing partnership with Indian business in industry and organisation of modern high technological productions, as well as introduction of innovation technologies, such as nanotechnologies, pharmaceuticals, textile, information and communication technologies (ICT) and alternative energy.

Indian presence can be further buoyed by the fact that the World Bank is planning budget-support loan of up to $1 billion for Uzbekistan. The Uzbek government lifted most of the restrictions on foreign exchange by allowing companies and citizens to freely trade in foreign currencies. India accounted for 0.4% of Uzbekistan's total volume of exports in the six months to June 2016, occupying the 20th place among its trading partners, and 2.9% of its imports, occupying the seventh place, according to local government statistics. In 2017, mutual trade reached $323.6 million, which is almost twice as much as five years ago.

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Uzbekistan works towards improving business and trade relations

Uzbekistan and Turkey are preparing an agreement on preferential trade. The two sides are also compiling the list of benefits and other privileges applied to a certain scale of products within the trade relations between the two countries. After years of isolation, Uzbekistan and Tajikistan are building economic ties, and recently organised an exhibition in Uzbekistan to showcase their products to Tajik entrepreneurs. The Chamber of Commerce and Industry of Uzbekistan and the Center for Global and Strategic Studies of Pakistan intend to create an Uzbek-Pakistani business council. An agreement on this issue was signed recently on the sidelines of the international conference "Pakistan: A land of opportunities for the Central Asian Republics".

This document envisages the attraction of private Pakistani investments and the implementation of joint projects to promote the export of Uzbek goods. In 2017, the countries celebrated the 25th anniversary of the establishment of diplomatic relations. Despite friendly ties, they could not reach an acceptable level of turnover, which is less than $50 million. Afghanistan to export its cargo to China through Uzbekistan, Kyrgyzstan

Afghanistan will supply its products to China through Uzbekistan and Kyrgyzstan

Proof of improving cross border relations between Central Asian countries is the lastest discussion between Afghanistan and Uzbekistan in transport cooperation, and taking bilateral trade to $1 billion in the coming years.

The sides agreed on using the new Tashkent – Andijan – Osh – Kashgar automobile corridor for supplying Afghan products from Mazar-i-Sharif to Kashgar by transit through Uzbekistan. The new transport corridor Tashkent – Andijan (Uzbekistan) – Osh – Irkeshtam (Kyrgyzstan) – Kashgar (China) is the shortest automobile route from the Fergana Valley to China. In late October, Uzbekistan, Kyrgyzstan and China successfully organised the first pilot caravan of nine cars that passed along this route. The Afghan side intends to send its cargoes from Mazar-i-Sharif along the already established railway up to Andijan, then load them onto trucks going through Uzbekistan and Kyrgyzstan to Kashgar.

To create additional conveniences for consignors and consignees in the Andijan region, a multimodal transport and logistics center has been created on the basis of the terminal of the station of Akhtachi, allowing cargo to be transported from all corners of Uzbekistan to Andijan by rail and then to China by road. In addition, the sides agreed on equipping the international logistics center "Termez Cargo Center" with sorting and packing lines for processing and exporting fruit and vegetable products of Afghanistan enterprises to the third countries.

The countries also intend to continue the active work on construction of the Mazar-i-Sharif – Herat railway. The need for timely preparation of the feasibility study of the project for further attracting appropriate financing was noted.

Uzbekistan to simplify its tax system

The Uzbek government is contemplating reducing the tax burden, reducing the VAT rate, unifying and abolishing a number of taxes and mandatory payments, as well as measures to improve tax administration. The System for Assessing Legislative Acts, in a document has proposed that the corporate profit tax will be abolished (with the exception of commercial banks and insurance organisations), with the establishment of an order according to which only dividend-paid profits will be subject to dividend tax at a rate of 25%. It is also proposed to reduce the VAT rate from 20% to 12%, with the extension of the obligation to pay it to all categories of taxpayers, including individual entrepreneurs with a turnover of over 1 billion soums. In recent years, the country has taken a number of measures to improve the tax system and tax administration.

The current state of the tax system and tax administration still does not meet the principles of a free market economy as it does not allow to increase the competitiveness of the economy because of the continuing high tax burden on businesses, a large number of taxes and the complexity of their administration procedures.

Earlier, it was reported that the entire tax system of Uzbekistan will be revised until July 1, 2018.  In addition, Uzbekistan introduces a modern form of control – tax monitoring, which provides for an extensive information exchange between tax authorities and conscientious taxpayers with the provision of comprehensive assistance in solving current tax issues.

New free economic zone coming up in Uzbekistan

A new free economic zone (FEZ) – Syrdaryo – will be built in Uzbekistan. It will be established on the basis of the branch of the Djizak free economic zone in the Syrdarya district and the territory of the small industrial zone in the city of Yangier.

The period of operation of the new FEZ will be 30 years with the possibility of its subsequent extension. All this time, special tax and customs regimes will operate there. All enterprises of the zone, depending on the volume of investment, will be free from payment of land tax, profit tax, property tax of legal entities, tax on improvement and development of social infrastructure, single tax payment for microfirms and small enterprises, as well as mandatory contributions to target state funds for various periods. So, for example, if one invests from $300,000 to $3 million he or she will receive benefits for three years, from $3 to $5 million – for five years, $5 to $10 million – for seven years, and $10 million – for ten years.

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In addition, they will be exempted from payment of customs duties for imported raw materials and component parts used in the production of goods aimed at export for the entire period of FEZ activity.

Uzbek President Shavkat Mirziyoyev instructed to develop a roadmap by mid-June for the placement of production of import-substituting and export-oriented types of finished products, materials and components in the territory of the Syrdaryo FEZ, taking into account the existing mineral resources of the Syrdarya region. As many as 17 free economic zones currently operate in Uzbekistan. They implemented 69 projects for a total of $512 million. Three of them were created in the last two months.

New system of customs control to appear in Uzbekistan

An absolutely new system of customs control, based on generally accepted international norms and standards, will be introduced in Uzbekistan on July 1, 2018. Preliminary declaration of imported goods before their actual arrival to the customs territory of the republic will probably become one of the most important possibilities for business. Under the current legislation, customs clearance is carried out only upon the arrival of the goods in the country. From July 1, the entrepreneur will be able to declare the goods in advance before they arrive in Uzbekistan and dispose of them immediately after passing the checkpoints at the border.

Also, participants in foreign economic activities have the right to fill out and submit cargo customs declarations online without recourse to customs brokers. This will seriously reduce the cost of clearance procedures at customs. For comparison, last year 2,577 or 92% of all cargo customs declarations were filled by specialists in customs clearance. The cost of this service ranged from one minimum wage to 0.5% of the cost of the goods.

Moreover, the customs clearance of identical goods by physical characteristics, quality, manufacturer, code of the commodity nomenclature of foreign economic activity within the framework of a single foreign trade agreement will be implemented through the provision of periodic declarations. Previously, entrepreneurs were forced to declare each shipment of goods supplied under a single contract. The problem with obtaining permits for import of products will also be solved. Currently, businessmen have to apply to various bodies for obtaining the necessary certificates and pay separately each appeal even within the framework of one contract.

However, everything will change from July 1. Now a quarantine permit, a permit for import and export, a certificate of conformity, veterinary, hygienic and ecological certificates for identical goods within the framework of a single foreign trade contract will be issued once, but for a period no longer than one calendar year. In addition, the issuance of permits by customs authorities when placing goods under customs regimes, as well as permission to change the route of movement of foreign road carriers through the territory of the republic, will be canceled.

Amazon, IBM, Alibaba and Google interested in Uzbek market

The world's leading technology companies – Amazon, IBM, Cisco, Microsoft, Alibaba and Google – are interested in the Uzbek market, which is able to provide them with a number of unique opportunities and become a potential point of growth, said Minister for Development of Information Technologies and Communications Azim Akhmedkhadjaev.

These companies pay attention to Uzbekistan, since they do not have data processing centers throughout the CIS that would reduce the costs of doing business, according to the official. "The site in Uzbekistan will enable them to create capacities so that they can more quickly carry out their operations and actions with nearby countries. This greatly influences the decision of the end user, whether he will use the services of these companies or not," he added.

Earlier, representatives of Amazon Web Services (a subsidiary of Amazon) discussed the possibility of building data centers using solar panels in Uzbekistan with representatives of the Uzbek government.


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