Islam Karimov with new construction projects in Tashkent on August 29 © UzA
If a country experiences an annual increase in GDP of 8%, every citizen should be able to observe an increase in production, more available jobs, and their own purchasing power strengthened. If such evidence is unavailable, the numbers are either false or the profits are being siphoned off.
The legislative chamber of the Uzbek parliament, the Oli Majlis, voted on the 2015 budget on October 23, which projects an 8% growth in the country’s GDP for next year. Incidentally the same amount of growth, 8%, was reported to have occurred in Uzbekistan 2012, 2013, and the first half of 2014.
By comparison, China’s GDP growth was 7.9% in 2013. Poland, which is catching up to the Western European standard of living, experienced GDP growth of 1.9%. In the most economically sound European countries’ growth varies between 0% and 1% of the country’s GDP.
As it turns out the Uzbek economy is growing by leaps and bounds. World Bank’s numbers seem to confirm such rigorous growth. The international institution predicts Uzbekistan’s GDP to grow by about 8% in 2015. Uzbekistan’s growth is thought only to be surpassed among the post-Soviet countries by Turkmenistan.
In order to work out what it is that we are missing – between the grave reality in the country and the seemingly glowing numbers – Uznews.net turned to Pavel Melnik, an economist at Ukrainian-based MPP Consulting, to explain the wide gap between real life and economic data. MPP Consulting has been doing economic research for Ukraine and other former-Soviet countries for nearly a decade.
The key to growth: A fixed official exchange rate
“The calculation of GDP growth is a mathematical formula that consists of several indicators: such as how many goods are produced in a country and how many goods are sold domestically and abroad,” explains Pavel Melnik. “International organizations, like the World Bank, do their calculations in a common currency, usually in US dollars, and they use the officially stated exchange rate to convert any currency into dollars.”
So here lies the first discrepancy: The official exchange rate is 1 USD to 2,420 Uzbek soms. That rate, however, is unattainable for most Uzbeks, who are forced to do their currency exchanges at black market rates, currently at about 3,100 Uzbek soms per dollar.
The difference between the real and official exchange rates vis-à-vis other currencies influences the predicted GDP growth, says the expert.
“It is easier to estimate the commodity and cash flows in developed countries with transparent economies,” continues the economist, “That is why we can predict growth much more accurately. While in developing or emerging economies countries many indicators are impossible to find.”
“For instance in Ukraine, 40% of financial transactions take place on the so-called “gray market”; in Central Asian countries the number is closer to 70%. Cash and commodity flows in the gray market are not taken into account by these calculations even though they have a significant impact on the economy.”
Millions of Uzbeks work in Russia
If you do not believe in Uzbek prosperity, reassure yourself with banners like these © Uznews.net
“Future GDP growth is forecast on the basis of a specialized database, which consists of the data provided by the country’s Bureau of Statistics for the last ten years, previous GDP growth numbers, estimates of the potential for growth in key production sectors, as well as the likelihood of an increase in exports. For instance, will Uzbekistan be able to increase its key exports to Kazakhstan, Russia, and China next year?”
Other indicators are also taken into account. For instance, population growth in the country indicates an increase in goods and services consumption. We should, however, note here that a recent report by the Uzbek Bureau of Statistics failed to notice the absence of about 26% of Uzbek population from the country.
The Russian Federal Migration Services reports that currently there are about two and a half million Uzbeks in Russia. Other estimates, especially those that consider illegal migrants, put this number at about twice as high, at about five million Uzbeks. And then there are of course other countries where Uzbeks live and work – Kazakhstan, Turkey, Ukraine, among others.
Most or some of the money made abroad is remitted back to Uzbekistan. This, however, cannot be considered as growth in the Uzbek economy.
“Actually, 8% growth is a very high number,” says the expert, “For a stable developing economy 2% or 3% growth is normal and desirable. 8% growth can be seen when something has changed drastically. When the economy is recovering after a deep crisis, for instance. 15% growth, for instance, can been seen after a long war has ended and foreign capital starts returning to a country. Ukraine had a dramatic 10% increase in 2009 after the 2008 financial crisis. But that was preceded by a very drastic decline.”
Have you felt a 4-point improvement?
Pavel Melnik believes that an 8% growth rate indicates that citizens in Uzbekistan should be experiencing about a 4% improvement in their purchasing power. It should also mean that new technologies are being developed and new jobs are becoming available. Salaries should be going up as well. If none of this can be observed, then either the GDP growth is not actually happening, or the income from the economic growth is not being equally distributed.
Why is the Uzbek budget a secret?
76.7% of people in Uzbekistan live below the poverty line according to the Global Food Security Index 2014
Only very few insiders know the actual shape of the Uzbek economy. The country’s budget has never been made public.
Pavel Melnik believes this non-disclosure is a logical step on the part of the government if it wishes to artificially fix the exchange rate, hide the real amount of national currency in circulation, and print money whenever it is short of cash.
“Were we to see the real economic data for Uzbekistan, or if the currency were to be traded on the open international markets, we would see a country in a deep economic decline,” says the expert. “The key to economic success in countries like Uzbekistan are an absence of market mechanisms and financial data kept in total secrecy.”