Business Environment of the Agro-Industry Sector in Uzbekistan

SMEs are expanding in Uzbekistan partly because of the support from the government. The number of active SMEs in 2004 was 237.5 thousand, which is much higher compared with 177.7 thousand in 2001. The SME's share of GDP was 35.6 percent of nominal GDP in 2004 and is projected to be 45 percent in 2007. This governmental supports to SMEs will facilitate the agro-industry development, and many entrepreneurs are by and large optimistic about the possibilities for business growth.

The speed of privatization is slow in Uzbekistan. According to the World Bank estimates, Uzbekistan agricultural reform to market-oriented economy is still a long way to go. In terms of privatization of agro-processing and input supply industry, spontaneous privatization and mass privatization are just in the early implementation stage.1 Rural banking systems and governmental and public institutional frameworks are also in the modest restructuring stages.

The Uzbekistan government has formally declared its pro-foreign investment policy. In 1993, the foreign investment comprises only 0.8 percent of total capital investment, but in 2003, it increased to over 20 percent. Foreign investors have had more interests in manufacturing sectors including oil and gas industries.

The largest share of foreign direct investment in 2002 comes from Russia (15.7 percent), Korea (9.8 percent), and the U.S. (8.7 percent). The data on the amount of foreign investment by sector are not easily available, but in view of the number of investment, manufacturing sector has received the largest portion of FDI with 58 percent, while the agricultural sector takes only 2.7 percent.

Table 1. Foreign Investment as of June 2004

Investment		Number of company	Percentage (%)
Manufacturing	Consumer goods	602	26.3
	Others	733	32.0
	Total	1,335	58.3
Trade, restaurant		472	20.6
Agriculture		61	2.7
Transportation & communication		96	4.2
Construction		85	3.7
Health & sports		55	2.4
Culture & others		185	8.1
Total		2,289	100.0

Source: Korea EXIM Bank, 2005

In 2005, the government of Uzbekistan declared a new unified tax system. Under the system, venture companies jointly invested by foreign investors are exempted from profit tax for seven years. Here, the foreign joint venture means the company with foreign capital of at least 150 thousand US$ or over 30 percent of its capital. The conditions get better in remote areas. Assets of foreign investors are protected through the “Laws on Property of Foreign Direct Investment”.

Those companies producing agricultural products are exempted from asset tax; for individual agricultural production unit, tax rate is decided based upon yield, geographical characteristics, accessibility to irrigated water, and so on.

It is problematic in terms of development of agricultural and agro-industry sectors that most joint ventures are in the manufacturing sector. And many SMEs, in spite of government’s efforts to stimulate domestic and foreign investment, are not active in reinvesting their earnings.

Internal turbulences, as envisaged in May 2005, have negatively affected the investment intention of both home and abroad. Slow privatization is also a major factor hindering the investment promotion.