The role of the updated Constitution of the Republic of Uzbekistan

By Dimitry Trostyansky

DSc in Economics, chief researcher at ISRS under the President of the Republic of Uzbekistan

The entire course of the market reforms carried out in Uzbekistan since 2017 is closely related to the problem of the formation and development of the real owners’ class. The solution of this problem will make it possible to fill the domestic market with the necessary consumer goods and services, create new jobs, and make products that are competitive in the domestic and foreign markets.

The consistent and phased institutional building has made a favourable impact on the development of the entrepreneurial sector in Uzbekistan. During years 2018-2022, the number of operating small enterprises and microfirms increased by almost 2.3 times and amounted to 523.6 thousand units as of January 1, 2023. The number of small businesses per 1000 people has increased over this period from 12.2 to 17.9 units in the republic; precisely, in the city of Tashkent – 35.9 units, Navoi region – 24.8 units, Syrdarya region – 23.0 units, Jizzakh region – 21.5 units.

Dimitry Trostyansky

DSc in Economics,

chief researcher at ISRS

under the President of the Republic of Uzbekistan

At the same time, the experience of constitutional development in foreign countries, including the CIS space, has proven the reasonability of more complete enshrining in the Basic Law of the country the norms guaranteeing the rights of domestic and foreign investors and entrepreneurs. This is conditioned by the fact that only a real owner and the competition under the conditions of the guaranteed rule of law will ensure sustainable business development, and attract foreign direct investment in the implementation of the priority investment projects, thus, solving the problem of employment and income growth in the country.

The renewed Constitution has united all sectors of society around the main goal – the building of a New Uzbekistan, the special place in the realization of which is given to the business sector.

The Basic Law adequately reflects the guarantees from the state to introduce free market mechanisms, to ensure healthy competition, the inviolability of private property and the protection of entrepreneurship.

In this regard, the Constitution contains the norms that directly affect the formation of a favourable business environment in Uzbekistan, in particular in the field of taxation. Thus, an important addition has been included to Article 63 that taxes and fees must be fair and must not interfere with the exercise by citizens of their constitutional rights. Just by reducing the value-added tax rate from 15 to 12% starting from January 1, 2023, will grant the entrepreneurs by approximately 14 trillion soums per year at their disposal. Fair taxes will allow the population and the entrepreneurs of Uzbekistan to invest their savings in investment projects and receive high incomes.

Of paramount importance for the development of the private sector is also the administrative pressure on entrepreneurs from the side of management and control bodies, which hinders the development of market relations, fetters business initiatives, and worsens the competitive environment. For this reason Article 65 emphasizes that the state creates conditions for the development of market relations and fair competition, guarantees freedom of economic activity and entrepreneurship.

Declaring the constitutional support for ensuring a favourable business and investment climate, the legislator thereby provides both business entities and investors with state guarantees.

World practice shows that the current system of protecting the rights of potential investors determines the scope and the effectiveness of privatization processes in the country, as well as the attraction of portfolio investments in them. The demand for the shares of privatized enterprises in the presence of an effective protection system increases significantly, and consequently, their market price rises. As a result, income from privatization grows, and an enterprise receives funds for the modernization of technological processes and the creation of competitive products.

The practice of maintaining monopoly and a high share of state ownership in the leading sectors of the economy of Uzbekistan, of violations of the rights of foreign and local shareholders, which has been operating for a long time, made an extremely negative impact on the state of industrial enterprises. The lack of own funds for the purchase of equipment reduced the quality and the competitiveness of products, and the presence of state guarantees led to the purchase of obsolete imported equipment at inflated prices and to the flourishing of corruption in public management at the sectoral and territorial levels. This was also reflected in the volume of foreign investments attracted to the national economy, the average annual volume of which until 2017 did not exceed 1 billion US dollars.

As the practice of foreign countries (USA, Great Britain, etc.) has evidenced, the main source of financing for the national economy is carried out mainly through equity capital and bonds; and the bank financing has a much smaller share.

In Uzbekistan, the assets of the banking sector are 130 times higher than the share of stocks that are in free float and account for only 0.3% of the country's GDP, and the capitalization of the securities market does not exceed 2 trillion soums. According to the program for the capital market development in Uzbekistan, the share of securities in free circulation should reach at least 5% of GDP, and the capitalization of the securities market in monetary terms – up to 45 trillion. soums. This ambitious task will be solved by placing the securities of 15 largest domestic enterprises with a state share in the international capital market. Furthermore, by 2023 Uzbekistan plans to privatize at least 20 large state-owned companies. An increase in the volume of portfolio investments for large enterprises of the republic will make it possible to better satisfy the needs of medium and small republic enterprises in credit resources and to support them at the initial stage of development.

The similar situation develops with the domestic competition. To date, there have been registered the cases of unfair competition in the Uzbek market, which in turn damages not only producers and consumers, but also the country's international image. Moreover, the range of counterfeit products is not limited to high-end products, but can also be found among brand-name clothing, food, infant formula, medicine and software. Thus, at the level of the Basic Law, comprehensive support for the development of entrepreneurship is provided in the country, including legal mechanisms for the protection from and prosecution of monopolization and unfair competition.

In addition, the renewed Constitution enshrines the norm according to which the economy of Uzbekistan is based on property in its various forms. Unlike the previously acting version of the Constitution, the inviolability of private property is guaranteed. An owner may not be deprived of his/her property, except in cases and in the manner prescribed by law, and on the basis of a court decision. Thus, only the Constitution, the law and the court become the protector of property in Uzbekistan.

The introduction of worldwide practice in the procedure for the seizure of property for public needs will allow for transferring all emerging problems in this area into the legal field, relieving tension in society, ensuring maximum protection of the population and business from the arbitrariness of territorial authorities, as well as receiving fair compensation for all the costs incurred.

In order to implement the Strategy for development of New Uzbekistan for years 2022-2026, as one of the main directions of increasing the role of the private sector in ensuring economic growth, creating favourable conditions for its development in all sectors and areas, the continued institutional and administrative reform has been determined in the field of guaranteeing the inviolability of private property and the freedom of entrepreneurial activity.

Thus, from September 1, 2022, the procedures, requirements and limitations that provide for direct or indirect restriction of the right to own, use and dispose of private property, which prevented the full implementation of the principles of the market economy in property relations, were cancelled.

The Ministry of Justice together with the involved ministries and departments has prepared and submitted to the Cabinet of Ministers a draft law "On the protection of private property and the guarantees of the rights of owners" in a new edition, as well as amendments and additions to some legislative acts of the Republic of Uzbekistan, insuring the establishment of liability for unreasonable write-off of funds from bank accounts of business entities, for failure to return excessively collected and overpaid funds at the first request of a business entity.

Article 67 states at the constitutional level that the state provides a favourable investment and business climate in the country, guarantees freedom of entrepreneurial activity, as well as the unity of the economic space, free movement of goods, services, labour resources and financial funds. This creates prerequisites for equalizing the level of development of the depressed regions and increasing the incomes of the population in them.

In this regard, cardinal measures are being taken in the republic to create equal conditions for entrepreneurs, by introducing new mechanisms for regional development, based on the existing conditions, potential and opportunities, as well as by improving the procedure for providing state support to business and increasing its efficiency. Thus, according to the Decree of the President of the Republic of Uzbekistan “On measures to divide the territories of the republic into categories and to introduce a differentiated system of business support” dated December 30, 2022, 208 districts and cities of Uzbekistan were divided into 5 categories, based on the attractiveness of the business environment and the level of development of entrepreneurship in them. To equalize the territorial level of development, tax rates will be differentiated for entrepreneurs, as well as subsidies, loans and compensation will be allocated.

Of much importance here is the fact that a guarantee is provided to businesses taking into account the priority of consumer rights, which will ensure the saturation of the local market with competitive products at affordable prices.

To conclude, with the adoption of the new edition of the Basic Law, constitutional guarantees have been created to further ensure a favourable business and investment climate in Uzbekistan, which will serve to form a class of real owners, who will create a solid foundation for building New Uzbekistan.