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RR RUEHAG RUEHAST RUEHBI RUEHCI RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK
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DE RUEHNT #1960/01 3080652
ZNR UUUUU ZZH
R 040651Z NOV 09
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 1487
INFO ALL SOUTH AND CENTRAL ASIA COLLECTIVE
EUROPEAN POLITICAL COLLECTIVE

UNCLAS SECTION 01 OF 03 TASHKENT 001960 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON EINT UZ
SUBJECT: UZBEKISTAN: SMEs - ARE THEY ALL THEY'RE CRACKED UP TO BE? 
 
REF: 08 TASHKENT 951 
 
¶1. (SBU) SUMMARY.  Small businesses play an important role in the 
economy of Uzbekistan, a country with the largest labor resources 
in Central Asia, but the degree to which small to medium 
enterprises (SMEs) drive the Uzbek economy is not clear.  GOU 
officials repeatedly trumpet the growing role of SMEs as evidence 
of the progress of their economic reform model.  GOU statistics for 
2008 claim a 48.2 percent GDP share for SMEs.  However, internal 
inconsistencies in GOU economic reports combined with a large, 
poorly documented shadow economy make it difficult to determine the 
extent to which the reported values are an accurate reflection of 
small business growth.   END SUMMRY. 
 
 
 
SMEs IN THE WORLD AND IN UZBEKISTAN 
 
--------------------------------------------- --------------- 
 
¶2. (SBU) There is no universal term for what constitutes an SME, 
although all definitions consider thresholds in terms of a 
business' employment, turnover, and balance sheet.  The European 
Union standardized SME categories in 2008: a business with a 
headcount of fewer than 250 is classified as medium-sized; a 
business with a headcount of fewer than 50 is classified as small, 
and a business with a headcount of fewer than 10 is considered a 
micro-business.  The United States generally uses the term "SMB" -- 
small and medium business, but the concept is the same: a business 
with 100 or fewer employees is generally considered small, while 
one with 100-999 employees is considered to be medium-sized. 
Globally, SMEs account for 99 percent of business numbers and 40-50 
percent of GDP. 
 
 
 
¶3. (SBU) In Uzbekistan, SMEs are further subdivided into the 
following categories -- Individual entrepreneurship:  a business 
conducted by one individual; Micro-firms:  businesses with from 5 
to 20 employees; and Small enterprises:  businesses with up to 100 
employees. 
 
 
 
SMEs GROWING - BUT HOW MUCH? 
 
--------------------------------------------- --------------- 
 
 
 
¶4. (SBU) SMEs' contribution to Uzbekistan's GDP has increased 
slowly but steadily over the last decade.  In 2005, the GOU set a 
goal of raising the share of the GDP contributed by SMEs to 45% by 
¶2007. According to the State Statistics Committee of Uzbekistan, 
the GOU met this goal: in 2000, SMEs accounted for 31 percent of 
GDP with 3 million people employed in the sector. By 2003, SMEs 
accounted for 35.5 percent of Uzbekistan's GDP and provided 57 
percent of the total jobs in the economy. In 2008, the SME share 
reached 48.2 percent of GDP, and its share of jobs totaled 72.7 
percent. Agriculture accounts for the greatest number of active 
small businesses.  (NOTE:  GOU statistics claim the private sector 
as a whole about 79.4 percent of GDP and provides 78.4 percent of 
the country's employment. End Note.) 
 
 
 
¶5. (SBU) There are no independent estimates of the role of SMEs in 
the Uzbek economy, and GOU statistics may actually underreport the 
true contribution of SMEs to GDP. Small businesses in Uzbekistan 
have traditionally straddled the line between the legal and grey 
(shadow) sides of the economy. Open markets, kiosks, pavilions and 
small shops operating unofficially have considerable retail 
turnover, and unofficial consumer services (e.g., hair dressers, 
caterers) also generate income that feed into GDP and which the 
government statistics may not capture. 
 
 
 
¶6. (SBU) Further complicating the issue, GOU reports are internally 
inconsistent and indicate the methodology of accounting for SMEs, 
is, at the very least, not well developed.  According to one GOU 
report, there are 267,658 business entities in the country divided 
into two categories:  state-owned (12.8 percent) and non-state 
(87.2 percent). Of the non-state sector, 39.3 percent -- or 
approximately 92,000 -- are considered to be privately owned. 
Elsewhere, the same report states that there are 219,879 SMEs 
currently operating in Uzbekistan. Official figures for the SMEs' 
share of GDP as of September 2009 also differ: some GOU statistics 
 
TASHKENT 00001960  002 OF 003 
 
 
show the share of SMEs at 40.9 percent while others claim a 6 
percent growth in the sector. 
 
 
 
 
 
HISTORICAL DEVELOPMENT OF SMEs IN UZBEKISTAN 
 
--------------------------------------------- --------------- 
 
 
 
¶7. (SBU) After independence in 1991, the GOU focused on specific 
industries -- for example, automotive -- that would underpin its 
import-substitution, export-oriented industrialization policy. 
This led to the collapse of much of the Soviet-era industrial 
economy, thereby leaving large segments of the population 
unemployed or underemployed (reftel).  This was particularly true 
in rural areas.  For many, creating a small business became a means 
of survival. 
 
 
 
¶8. (SBU) Initially, small businessmen were hampered by an 
inadequate and complicated tax system; excessive, burdensome 
inspections; corrupt officials; problems with settlement operations 
in banks; and severe foreign trade restrictions.  Beginning in 
2005, however, the GOU undertook a number of measures to improve 
the business climate for small entrepreneurs.  New business 
registration procedures were simplified; complicated tax 
legislation and procedures were consolidated into one Tax Code; and 
some administrative barriers were removed. 
 
 
 
¶9.  (SBU) Foreign organizations also contributed to improving the 
business environment for SMEs.  The Asian Development Bank (ADB) 
provided USD 100 million in credit to finance the foreign exchange 
component of several investment projects in the SME sector.  Other 
major donors, such as the European Bank for Reconstruction (EBRD), 
UNDP, and USAID, funded various programs focused on developing 
micro-credit sources and providing SME training for entrepreneurs. 
Uzbek NGOs, such as the Business Women's Association and the 
Tashkent Business Club, are also active in SME development 
activities. 
 
 
 
ITS NOT ALL FUN AND GAMES 
 
--------------------------------------------- --------------- 
 
 
 
¶10.  (SBU) Many of Uzbekistan's reforms to benefit SMEs have fallen 
short of expectations. Introduction of the new Tax Code did not 
alleviate the heavy burden on SMEs, which continue to pay a large 
amount of taxes:  in 2007, the total tax payments (the sum of all 
taxes and obligatory payments) for small businesses amounted to 15 
percent of annual turnover. (Note: This figure was 18 percent of 
turnover in 2005.) In other cases, the rules and regulations on 
protection of small businesses are not implemented in practice. 
Post hears anecdotal accounts from businessmen who say they must 
periodically make "unofficial payments" when dealing with taxes, 
licensing, or gaining access to the public sector. 
 
 
 
¶11.  (SBU) Other businesses report problems related to restrictions 
on withdrawal of cash from bank accounts, a problem that is 
heightened by the periodic unavailability of cash at banks. 
Although the Uzbek Soum became convertible in October 2003, in 
practice, unofficial regulations continue to limit access to 
foreign exchange. International Finance Corporation's (IFC) 2007 
survey on the procedures for small business registration also 
documented a number of continuing registration obstacles, including 
inspectors requiring the submission of documents not required by 
law, charging registration fees higher than the legal public 
registration fees, and forcing entrepreneurs to pay fines for 
delayed data submission even if the delay was the fault of the 
registration authorities. 
 
 
 
¶12. (SBU) Today in Uzbekistan, export-oriented businesses engaged 
in manufacturing have the greatest chance of succeeding. Government 
policies specifically do not encourage private businesses engaged 
 
TASHKENT 00001960  003 OF 003 
 
 
primarily in import. The World Bank's "Doing Business 2009" survey 
ranks Uzbekistan 138 among 181 countries, with unfavorable scores 
for trans-border trade and receiving credit/loans. (Note: 
Uzbekistan advanced two places from 2008, driven by the development 
of credit information sharing.) Import contract implementation in 
Uzbekistan also takes longer than in other Central Asian countries. 
The GOU, however, continues to make strong statements regarding its 
commitment to develop entrepreneurship and remove barriers 
hampering development of business.  The GOU has set the ambitious 
new goal of raising the share of SMEs to 52.5 percent of GDP by 
2010, with export-oriented businesses comprising 18.2 percent of 
the total. 
 
 
 
 
 
COMMENT 
 
 
 
¶13.  (SBU) The GOU frequently claims that its policies have 
encouraged private sector development in general and small 
businesses in particular; however, the business environment for 
private entrepreneurs is still far from comfortable.  Moreover, 
although there clearly are infinitely more SMEs in Uzbekistan today 
than there were in the Soviet era, continued SME growth will 
require, at a minimum, that Uzbekistan enforce in practice those 
SME protections already enacted into law. 
NORLAND