What Role Do Economic Conferences Play in Uzbekistan’s Development?

Back in November, I travelled to Samarkand to attend the Uzbekistan Economic Forum. I had been to the ancient city nearly a dozen times, but this was my first professional event there. The Uzbekistan Economic Forum did not suddenly convince everyone that Uzbekistan is a special country. But it did show that Uzbekistan was becoming a more normal one.

Not everyone in Uzbekistan was happy with the conference. Some journalists and bloggers questioned why Uzbekistan’s government needed to convene yet another major and costly event. Others wondered if the return on investment would be worth it. Concerningly, the costs of the forum were not disclosed. Clearly, the organisers could have done a better job in publicly communicating the rationale for such a large event and why such conferences matter. To me, there are three reasons why they do.

First, Uzbekistan needs to foster regular dialogue with businesses partners, investors, and lenders who are independent from the government. Such actors are accountable to their shareholders, are subject to intense international media scrutiny, and must follow varied regulations around governance and sustainibility. Therefore, they can audit Uzbekistan’s achievements and shortcomings more honestly, generating important information for local media and civil society.

A country whose debt burden is equal to 40 percent of its economic output must be open to scrutiny of its economic policies and institutions. The forum’s thoughtful programme presented the opportunity for such scrutiny, with topics ranging from political reforms to economic inclusivity. The organizers brought in people who could ask tough questions (including former CNN and Bloomberg journalists) as chairpersons for the panel discussions. Senior representatives from the IMF, IFC, World Bank, European Bank for Reconstruction and Development (EBRD), Asian Development Bank, Asian Infrastructure and Investments Bank, regional central bankers, financiers, investors, and many consultants featured on these panels.

There was a time when frankness came at a cost. In May 2003, panelists from the EBRD, which was leading Uzbekistan through its protracted post-communist transition, spoke truthfully about the country’s economic and political shortcomings at the Annual Meeting in Tashkent. By 2005, EBRD war hardly making any loans in Uzbekistan and by 2007 it had exited the country altogether, unable to operate in an environment in which the authorities demanded deference. It was not until a decade later that EBRD returned to Uzbekistan. Today, the bank has 65 active projects with over EUR 2 billion in total portfolio value. With that much at stake, it is reasonable to expect that the EBRD and peer institutions will continue to speak up, especially as its activists continue to push the bank to live-up to its pro-democracy mandate.

Second, Uzbekistan needs a platform to prove its bureaucratic capacity, as it seeks to stay the course of increasingly difficult structural reforms. In contrast to heavily protocolled political events with predetermined outcomes such as the Shanghai Cooperation Organization or Inter-Parliamentary Assembly, participants of economic forums in Uzbekistan are more demanding, represent diverse stakeholders, and care about performance dynamics. The newly formed Ministry of Economy and Finance, the Ministry of Labor and Poverty Reduction, and the Ministry of Justice—which oversee social policy—face new challenges every day. The nominally independent Central Bank and the judiciary are undergoing significant changes with unclear outcomes. They will all need to prove that they can uphold Uzbekistan’s domestic and international commitments and pay the bills.

At the same time, reform-minded public administrators themselves need businesses, civil society groups, and international professionals to get their president's attention in the highly centralized system. In Uzbekistan, the presidential administration can be reactive, prioritizing issues in response to media coverage, expert commentary, formal reports, and face-to-face meetings. It is no secret that certain business leaders may enjoy better access to the president that many ministers do not have. So, it is good when investors are both long-term thinkers and legally bound to seek clean deals. These investors and reform-minded public administrators can form coalitions as part of two-level game through which domestic reformers in transition economies find the means with which to amplify their voices.  

Alongside many countries “stuck in transition,” the Uzbek government continues to face challenges outlined by the IMF in its 2014 review marking 25 years after the end of communism in Europe. Uzbekistan needs to reign in its exorbitant public expenditures, improve the business climate, enable market competition, enforce state divestment, and ensure rule of law. It was reassuring that almost all keynote speakers in Samarkand said the same. By the end of the first day (most discussions can be watched freely online), it was clear that there was broad consensus about what needs to happen to enable prosperity.

The Uzbek ministers and senior officials speaking at the conference shared this consensus and acknowledged problems. Some even joked, earning sincere laughter from the diverse audience. Importantly, the conference was held in Uzbek and English — this was more than political symbolism. Russia’s war on Ukraine has had varied effects on the Uzbek economy. These have been mostly negative (e.g. reduced financial inflows and increased social policy burden), though there have been a few silver linings (e.g. capital relocation, higher commodity prices, and parallel exports). After independence, Uzbekistan, like other post-Soviet states, pursued legislative and regulatory harmonisation with Moscow. But the country’s bureaucracy is starting to look beyond Russia. The use of the Uzbek language helps the central government connect to a wider swath of society. The use of English, meanwhile, represents a search for a wider cooperation with foreign countries.

Finally, these conferences help set expectations—and there are many expectations being set. That Uzbekistan will privatise the promised 1,000 more state-owned enterprises. That utility and energy prices will be liberalized. That the economic growth will be increasingly supported by foreign direct investment rather than direct borrowing. That more will be done to empower and separate the judiciary from the executive branches. That the Oliy Majlis, Uzbekistan’s legislature, will pass new competition law and that it will be signed. That Uzbek GDP will rise to USD 100 billion by 2026 and USD 160 billion by 2030. That the country embraces a free market economy, trusting that its people can achieve more with less state intervention. Whether Uzbekistan meets these high expectations is something that can be assessed when it is time to gather for another forum.

Uzbekistan is seeking a dialogue with the world. We can quibble about the optics of such conferences, but they do serve to build trust and generate credibility. There was a time when economic conferences in Uzbekistan had long titles, glorified the present, and discussed the future in only abstract terms. Back then, the desired outcome was applause—those conferences played no role in the country’s economic development. In Samarkand, a different kind of conference took place.

Photo: Uzbekistan Economic Forum

Iran's Government Falling into a Debt Trap of Its Own Making

President Rouhani’s budget proposal for the upcoming Iranian year will see the government run a deficit amounting to about 10 percent of GDP or 60 percent of the state’s general budget, excluding oil revenues and withdrawals from the National Development Fund.

Rather than increase tax collection to ease budget gaps, the Rouhani administration plans to tap Iran’s nascent debt markets to cover its public spending requirements. Rouhani’s cabinet intends to issue at least IRR 5 trillion government treasury bills and sukuk bonds in the next Iranian calendar year. For debts already nearing their maturity, it will have to repay close to IRR 3.3 trillion in 2019-20. The recourse to debt markets has economic commentators increasingly concerned over state’s ability to cover rising liabilities in the coming years.

The concern extends to the think tank of the Iranian parliament. Their assessment is that over the next four to five years Iran’s government debt may reach 50-70 percent of GDP, leaving little “fiscal space.” According to the Sixth Development Plan (2016-21), the government is required to keep government debt, including the debt of state-owned enterprises, at below 40 percent of GDP. But it looks likely that the government will exceed this level. Should Iran’s government debt exceed 70 percent of GDP, the fiscal position would be high-risk. Meanwhile, by 2021, interest charges on bonds will constitute 4 percent of GDP, while the total budget deficit is meant to remain below 3 percent of GDP according to parliamentary researchers.

Looking worldwide, high government debt is associated with financial crises. According to data from the OECD, two third of countries hit by the 2009 financial crises were those whose government debt-to-GDP ratio exceeded 60 percent.

When looking to the fraction of the total debt ratio, it is important to consider both the numerator and the denominator. The fact that government bonds in Iran offer 20 percent returns means that interest payments can quickly balloon. Unlike Japan or the United States where interest rates on government bonds are zero percent and 2.4 percent respectively, keeping tabs on fiscal space in Iran requires accounting for the cost of the debt to the government, not merely the amount of debt issued.  ‘

Moreover, given that Iran has experienced limited economic growth in recent years and is poised to enter a recession, its fiscal space is expected to decrease. According to the study conducted by The Center for the Management of Debt and Financial Assets of Iran, this proportion was approximately 55.6 percent in 2015.

Putting aside the risks posed by the Rouhani governments turn to debt markets, it is worth asking whether there have been any clear macroeconomic benefits. In the assessment of parliament researchers, the Rouhani administration’s turn to debt markets is only sensible if increased government spending helps generate economic growth.

But with government revenues expected to stagnate, it is unlikely that Rouhani will have sufficient means to encourage the infrastructure projects and other investments to keep Iran’s economic growth at the 2.5 percent level experienced in the first six months of this Iranian year—particularly given the reimposition of US secondary sanctions.

Low or negative growth rates combined with the high interest rates of debt securities mean that the government’s insatiable appetite to underwrite its budget through bond markets may backfire, forcing the Central Bank of Iran to print more money to pay debts, exacerbating the cycle of inflation and devaluation to the detriment of the whole economy. To avoid such an outcome, the Rouhani government must match its turn to debt markets with an effort to expand the tax base.

Photo Credit: IRNA

Europe Can Use Local Currency Bonds to Sustain Economic Ties with Iran

For over a year, European governments have been struggling to determine how they can create a financing facility for projects in Iran. Access to external finance was a major expectation of the sanctions relief promised in return for Iran’s implementation of the JCPOA nuclear deal. With the full return of US sanctions just weeks away, the prospect that Europe will be able to contribute to Iranian economic development through project finance is growing slim.

The European Investment Bank has rejected calls to invest in Iran citing its reliance on global institutional investors, many of them American, to raise capital. A mooted European Monetary Fund, which would source its investment capital from European central banks, is still just a policy idea. Member-state financing vehicles, such as Italy’s Invitalia and France’s Bpifrance have proven unable to engage Iran, despite encouragement from government leaders.

But what if it is a mistake to focus on “external” finance? What if rather than try to source capital from outside of Iran to finance projects within the country, Europe sought to make use of the wealth already within Iran?

One underreported effect of Iran’s currency crisis has been the rapid expansion of liquidity in the market. Iranians are scrambling to convert their devaluing rials into safe-haven assets such as dollar and euro banknotes, gold, property, and even cars. But this scramble, which has seen Iranians draw down their vulnerable rial savings, has led to a rapid expansion in liquidity, which is itself creating inflationary pressure. The Central Bank of Iran is even considering raising interest rates in an effort to reabsorb some of over USD 350 billion floating around the economy.  

Perhaps surprisingly, as the currency crisis has unfolded, the Tehran Stock Exchange has hit historic highs. Iranians investors—particularly those whose wealth exceeds that which can be reasonably protected through the purchase of property and gold coins—are increasingly seeing securities and other forms of equity investment as a way to hedge against devaluation. The only problem is that this kind of reinvigorated investment is unlikely to help Iran avoid a recession, particularly in the non-oil sector. Investments on the Tehran Stock Exchange does not lead to the efficient and smart fixed capital formation the country needs to achieve real growth.

The demonstrable hunger for investment opportunities resulting from inflation fears and rising liquidity presents a valuable opportunity. In other emerging markets, such investor demand has been successfully use to source the capital necessary for impactful development projects. The best example can be seen in the financing methods of the European Bank for Reconstruction and Development.

EBRD was established in 1991 to support the liberalization of the Eastern Bloc economies after the fall of the USSR. Just a few years after its launch, EBRD began to tap local investors as a source for its project financing by borrowing and lending in local currencies. EBRD issued its first local currency loan in 1994, denominated in the Hungarian forint. Since then, the bank has issued 722 loans across 26 currencies valued at EUR 12.4 billion.

Local currency financing has been made possible through the issuance of local currency bonds. These bond offerings are issued under local laws and regulations, but are backed by the creditworthiness of ERBD and the steady strength of the Euro. Such “local currency Eurobonds” can be particularly useful to offer domestic investors a hedge against inflation.

In November 2016, EBRD issued a “pioneering” EUR 92 million “inflation-linked Eurobond” in the local currency of Kazakhstan. The bonds have a five-year maturity and “pay a coupon of 3-month Consumer Price Index (CPI) rate plus 10 basis points per annum.” EBRD is also seeking to have the security listed on the Kazakhstan Stock Exchange to make the bond even more accessible to local investors.

When the note was launched, Philip Brown, managing director at Citi Global Markets Limited, which managed the issuance, commented on the “demand for inflation protection from the increasingly sophisticated investor base in Kazakhstan. This trade highlights the useful role the EBRD can play in helping local investors meet their needs and in doing so, develop new markets.” While the likes of Citibank would not be managing such a bond issuance in Iran for obvious reasons, it is easy to see how Iran’s own sophisticated investor class would see a rial Eurobond as an attractive asset to guard against rising inflation.

A local currency bond offering would help Europe and Iran achieve several goals. First, European governments would finally be able to source and deploy the the billions of euros in financing that had been promised to Iran in various credit lines, only to be stymied by the hesitance of European banks to facilitate the underlying transactions in the project finance. Second, it would empower European governments to more directly influence regulatory reform in Iran’s banking and finance sector—a role EBRD has actively and successfully played in the markets in which it has investment since its inception. Third, the new bond would help the Central Bank of Iran reign-in excess liquidity in the market in a manner that is likely to create the greatest long-term value for the economy at large. Fourth, the establishment of a European-Iranian development bank would be a powerful political signal at a time when support for the JCPOA is wavering.

Like European Investment Bank, EBRD is too exposed to the United States in order to pursue projects in Iran itself—the US is a 10 percent shareholder of the bank. In order to pursue local currency financing, European governments would need to establish a new state-owned development bank in order to issue the rial-denominated Eurobonds.

Unlike EBRD and for reasons related to sanctions risks, this should be done through the creation of an Iran-registered financial institution owned by European governments, which would enlist the support of local investment banks and brokerages to bring the bond to market. This European-owned and Iranian-registered development bank would raise capital locally and invest locally, reducing the needs to engage in international transactions that are complicated by the returning sanctions. Conceptually, such an institution would be a kind of inverse of the Hamburg-based EIH Bank, but with a development finance rather than trade finance focus.

The creditworthiness of the new bank would be assured based on a sovereign guarantee for the bank and its liabilities from the European shareholders. The fact that the ownership of the bank will not overlap with its country of operation also limits risk. For similar reasons, no multilateral development bank worldwide has had to resort to its callable capital to date.

The envisaged bank would face several challenges including a lack of robust monetary policy in Iran, a relative lack of transparency within capital markets, and high domestic interest rates which could undercut the attractiveness of the bond offering. It would also need to conduct know-your-customer due diligence above and beyond that conducted by Iran’s own brokerages. But the myriad challenges in Iran are probably no greater than those faced in countries such as Kazakhstan, Georgia, and Ukraine where European financial actors have been able to successfully structure the credit facilities.

Encouragingly, the bond market in Iran has matured considerably over the last few years, and local companies and government agencies have developed capabilities in structuring debt instruments with the help of local investment banks and in compliance with the rules of Islamic finance. In the seven years since Islamic sukuk bonds were first introduced to the market, around USD 4 billion in debt has been issued.

Today, Iran’s leading companies regularly raise financing on the order of USD 100 million through individual bond offerings. A local currency Eurobond, which would be used to finance the transformative projects that had been envisioned for post-sanctions Iran, would easily raise amounts on this order. To bring this idea to fruition, European governments would simply need to combine a proven capacity for financial innovation and the commitments of their central banks, two contributions that cannot be sanctioned by the United States.

Photo Credit: Depositphotos

7 Charts That Challenge the Distorted View of Iran's Economy

Recently, a number of people have insisted to me that Iran has squandered its chance to joint the ranks of the BRICs—Brazil, Russia, India, and China—which count as the great emerging markets of the world. As sanctions return, as the rial sheds value, and as protests become routine, Iran is increasingly portrayed as an economic basket case where state collapse is just around the corner.

But even a cursory look to the recent experiences of BRIC markets makes it clear that Iran’s pains are not unique. In particular, Brazil has been in a near constant state of political and economic crisis since 2014, when an investigation called Operation Carwash uncovered massive corruption within Petrobras, a state-owned energy company, which was at the center of a “corruption machine” enriching allies of then President Dilma Rousseff. Since these revelations, millions of Brazilians have participated in protests around the country, their anger only increasing as a recession brings higher inflation and rising unemployment.

As I relayed in an interview with Brazilian newspaper Folha de S.Paolo, in January of this year, the slogans of the protests then emerging across Iran and still visible today, echo those of the protests that have been roiling in Brazil. The reason for this is simple. From a developmental standpoint, Iran’s economy is very similar to those of the BRIC countries, especially Brazil.

The policy failures of the Iranian government have garnered much attention in light of the recent protests. But they are not unique. They are the same failures that can be observed in Brazil, as well as other upper-middle income economies undergoing complex economic transitions. The frustrated cry of the Iranian protestor is the same cry as that of the Brazilian protestor. Sure, there is some local political and economic dialect. But the language of corruption and inequality is the same.

Despite this, the economic crisis in Iran has been characterized as a uniquely Iranian phenomenon, resulting from a set of political circumstances which can be traced back to the 1979 Islamic Revolution. Looking to Iran and Brazil in a comparative framework offers an important corrective to this characterization. Similar combinations of macroeconomic conditions produce similar political manifestations—protests against corruption, anger at social injustice, even calls to overthrow the government.

Put in its proper context, what is most unique about the crisis in Iran is not the economic reality, but the political reaction. Despite the clear parallels between the cases in Brazil and Iran, we do not see foreign powers “reaching for a regime change strategy” to alleviate the frustrations of the Brazilian people. No doubt, the failures of the Iranian government to create a robust economy are partially political failures. The country has an antagonistic relationship with the world’s superpower and its political elites are continually embroiled in needless scandal.

But as the seven charts below show, Iran is not an outlier when it comes to its economic performance. Governments of very different political persuasions and institutional frameworks—like those of Brazil and Iran—routinely fail to solve the fundamental challenges of economic development precisely because economic growth is difficult to achieve, harder to sustain, and insufficient to improve living standards. This is the context in which we ought to objectively understand and grapple with the idea of economic reform in Iran.

1. Struggles with Inflation

Both Iran and Brazil have long tried to keep inflation in check. Brazil suffered from extreme inflation in the early 1990s, hitting nearly 3000 percent. Iran also went through a period of chronic inflation, hitting an official rate of 50 percent in 1995. By the later part of the decade, both countries began to bring inflation under control. In 2016, the inflation rates in Brazil and Iran converged. Both are back on an upward trend, contributing to public frustration over the cost of living.

2. Stubborn Unemployment

One of the main drivers of recent protests in both Iran and Brazil has been anger over chronic unemploument. In Brazil, unemployment has risen sharply due to the recent economic downturn, and is now approaching levels seen in Iran. Revelations of deep-seated corruption in government have led Iranians and Brazilians to share the belief that their government officials are more concerned about their personal economic wellbeing than about creating jobs and tackling inequality.

3. Ease of Doing Business Rankings

Weak rule of law and the lack of transparency which enable corruption also serve as barriers to investors and entrepreneurs. Iran and Brazil are ranked 124th and 125th respectively in the World Bank’s Doing Business rankings. While the performance of Iran and Brazil varies across the constituent parts of the overall score, it is clear that conducting business in the two countries is similarly onerous and risky.

4. The Role of Foreign Direct Investment

However, despite the fact that Brazil is just as difficult a place to do business as Iran, the Brazilian economy has attracted nearly 25 times more net foreign direct investment (FDI) than Iran in the period from 1980 to 2016. Brazil’s economy has been burnished with over USD 1 trillion dollars in FDI, while Iran’s economy has secured just USD 44 billion in the same period. Brazil’s success in attracting foreign investment began around 1995, when the country was coming out of its hyperinflation crisis and when a new class of emerging market investors began to finance the new wave of globalization. Iran missed out on this emerging markets gold-rush. The passing of the Iran Libya Sanctions Act in 1996 by the U.S. Congress and the intensification of sanctions in 2008 at a time when global investors sought elusive growth in emerging markets in the aftermath of the global financial crisis, saw Iran’s FDI inflows stagnate.

5. Similar Growth, Differing Volatility

Despite missing out on FDI inflows, Iran has not been a growth laggard. Over the period of 1980 to 2017, Brazil and Iran achieved the exact same average annual GDP growth: 2.45 percent. The key difference is that Iran’s growth has been more volatile given that it is principally driven by oil revenues and is therefore tied to fluctuations in the global oil price. International sanctions have also frustrated economic growth in Iran.

6. Brazil’s Debt-Fueled Growth

But if Iran’s growth has been fueled by oil, Brazil’s growth has been fueled by its own global market—the debt market. Brazil’s external debt has skyrocketed, exceeding 70 percent of GDP, as the country has repeatedly turned to international bond markets and IMF loans in order to counteract domestic economic fragility and soften the impact of recessions. The recourse to debt allows Brazil to reduce economic volatility. While Iran’s oil buyers can be fickle, creditors are always ready to offer Brazil more financing.

7. GDP Per Capita

Iran and Brazil have seen similar overall levels of economic growth in the last four decades and standards of living, as measured by purchasing power, have likewise been improving at a similar rate. But this is all the more remarkable given that Brazil has enjoyed much greater access to international investment and financing. Even so, the average Iranian today enjoys greater purchasing power than the average Brazilian. The gap in GDP per capita widened during Brazil’s recent economic downturn, but it will likely narrow again as Iran enters its own economic crisis, marked by returning inflation and a devalued currency. Nonetheless, Iran can be said to have delivered greater economic dividends to its population than one of the vaunted BRICs, even without the stimulus of international finance.

Photo Credit: Bourse & Bazaar