The FDI Angle

• FDI inflows to Uzbekistan reached over $2.5bn in 2023, increasing by 86% since 2016.
• Key projects include the $2.4bn Karakalpakstan wind project and a new EV manufacturing plant.

Why it matters: Uzbekistan’s reform-driven growth and young population present substantial opportunities for foreign investors, despite ongoing challenges in economic and political reforms.

Uzbekistan has come a long way since the strict isolationism imposed by long-time autocratic leader Islam Karimov. Following Mr Karimov’s death in 2016, his successor, president Shavkat Mirziyoyev, embarked on a reform agenda to open up the economy to foreign trade and investment. He engendered hope of change and a first wave of foreign direct investment (FDI). 

FDI inflows reached more than $2.5bn in 2023, according to Unctad data. Uzbekistan’s three-year moving annual average increased by more than 86% in 2023 from 2016, according to fDi calculations based on Unctad data. 

However, the pace of economic and political reform is now struggling to match the high expectations generated by the change in presidency in 2016.

Young population 

Uzbekistan is the most populous country in central Asia. Some 60% of its 34 million citizens are under the age of 30, offering significant opportunities for market-seeking companies.

“The population [of Uzbekistan] is set to reach 50 million by 2050 which will be a sizeable consumer market for major international companies,” says Daniel Zaretsky, global advisor for Central Asia at the Global Chamber, a trade and investment promotion consultancy. 

Accordingly, several multinational companies including Nestlé, Samsung, General Motors and Coca-Cola have established activities in the country.

Uzbekistan has a good endowment of natural resources, which has made it a major natural gas producer in the region, and has good prospects across key minerals such as copper, gold, coal, lead and zinc. The country had developed a strong agriculture sector before its independence from the Soviet Union in 1991, and a solid domestic industry in sectors like automotive and heavy industries. 

From 2018 to 2023, despite external shocks such as the Covid-19 pandemic, the Russia–Ukraine war and higher global interest rates, Uzbekistan averaged a growth rate of 6%, according to the International Monetary Fund.

Reform agenda

Uzbek authorities enacted several reforms to open up and liberalise the economy and reduce the role of state-owned companies via privatisation. 

Among the reforms are the liberalisation of the national currency, the som, in September 2017, as well as a new investment law in 2019, which offered greater protection for foreign investors. 

The country even established a footprint in international financial markets, with its first sovereign and corporate bond issuances in 2019. 

Odilbek Isakov, CEO and co-founder at Infrasia Capital, a London-based finance advisory, says that the country has bilateral investment treaties with more than 50 countries to ensure the protection of foreign investments. 

The country has also been pushing to join the World Trade Organization since 1994 and it hopes to double its FDI inflows to $5bn annually by 2026.

Uzbekistan currently hopes to double its FDI inflows to $5bn annually by 2026.

FDI wins

Key FDI projects in recent years include the $2.4bn 1.5 gigawatt Karakalpakstan wind project being developed by Saudi Arabia’s ACWA Power, one of the biggest of its kind in the world. 

“This is in line with the government’s announced strategy of increasing the share of renewable energy in the total energy mix to 40% by 2030,” says Arvind Ramakrishnan, director of Fitch Ratings’ sovereign team. 

A large proportion of FDI projects are concentrated in the energy, oil and gas sector, but the government is looking at other sectors. For example, in September 2023, Chinese electric vehicle manufacturer BYD partnered with state-owned automobile firm UzAuto Motors to manufacture electric cars. The factory opened in July. 

The involvement of institutions like the European Bank for Reconstruction and Development (EBRD) has also boosted Uzbekistan’s attractiveness. The country has been the largest recipient of EBRD lending in Central Asia since 2020. 

The financial sector has attracted some investment too, thanks to the market being underbanked and the emergence of digital banking/e-commerce, according to an EBRD spokesperson.

Oliver Hughes, head of international business at TBC Bank Group, a London-listed Georgian Bank that entered Uzbekistan through the acquisition of  a controlling stake in Payme in 2019, says: “We see tremendous opportunities for nimble digital banking players like TBC Uzbekistan and for fintech investors more generally.”  

The road to Tashkent

Despite early wins, the reform process seems to have lost some momentum.  

According to the Economic Freedom Index compiled by the Washington-based think tank The Heritage Foundation, the reform process slowed in the wake of the Covid-19 pandemic. In the latest (2023 edition) index, the organisation highlights that although Uzbekistan has pursued reforms to develop a more competitive and free-market economy, the overall regulatory system lacks transparency and clarity.

Mr Ramakrishnan at Fitch says the pace and implementation of structural reforms, including reducing the state footprint in the economy, improving capacity and efficiency of institutions and governance standards are key challenges to Uzbekistan’s FDI drive.

“There appears to be a slower pace of implementation of phasing out subsidised lending, which has been a long-standing characteristic of the economy,” he says. “This is particularly relevant for banks that are set to be privatised, given that some of them have substantial preferential loans on their books.”

A few clouds loom on the country’s political horizon too. In April 2023, in a tightly controlled referendum, Uzbeks voted to constitutional amendments that enabled Mr Mirziyoyev to run for two more seven-year terms. So far, he has been able to strike a delicate balance between pursuing reform and safeguarding the status quo. But the path ahead remains uphill and the country’s FDI potential has yet to be fulfilled. 

Hassan Jivraj is a freelance journalist based in London.

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This article first appeared in the August/September 2024 print edition of fDi Intelligence.