Within a period of a week, Uzbekistan has lost two of its leading lights in the world of economics: Fayzulla Mullajonov and Rustam Azimov. The small amount of time elapsed between the death of the long-time Director of the Central Bank and the dismissal of Deputy Prime Minister Azimov is no coincidence; it is the result of a turbulent fight over the future economic policy of the Republic. Mr. Azimov was the head of a faction of Uzbekistan’s top economic leadership who sought to restructure Uzbekistani economic policy around Keynesian principles, a project which he hoped the reformist President Mirziyoyev would support. Instead, just as under the Karimov administration, Mr. Azimov found his ambitions stymied by a conservative faction who wish to preserve the risk-adverse economic model designed by President Karimov. This conservative faction was headed by Dr. Mullajonov, who had run the Central Bank of Uzbekistan since its establishment in 1991 and had been a major engineer of the ‘Uzbek model of development’, and Mr. Azimov sought to take advantage of his death to advance his own economic agenda. Convinced of the rightness of the traditionally risk-averse economic policy, a point he believed he had made clear earlier that year during a rare public criticism of Mr. Azimov’s proposed budget, President Mirziyoyev dismissed Mr. Azimov for pursuing these projects instead of concentrating on his assigned duties. While tensions over budgets and economic policy have existed for years, Rustam Azimov — the former Minister of Finance and Deputy Prime Minister — is certainly the most high-profile casualty of the conflict.
The schism in Uzbekistani leadership over economic policy is ultimately about how willing the country is to take risks in order to spur faster economic growth. For the conservative faction, the answer is not at all willing. The economic policy of the conservative faction in government was personally developed by Islom Karimov and a small set of trusted advisors during the early 1990s, designed to save Uzbekistan from the catastrophic economic decline experienced elsewhere in the former USSR. Named the ‘Uzbek model of development’, this set of policy stressed autarky in strategic resources, especially food and petrochemicals, import substitution industrialization, intense regulation of the financial sector, and self-propelled development financed via budgetary surpluses. This economic model has allowed Uzbekistan to avoid major declines in living standards during the 1990s, and shield itself from the effects of both the 1998 Russian economic crisis and the 2008 global financial crisis. The most salient element of this economic model, however, is its financial model. Almost all major projects in Uzbekistan are funded by the state from its budgetary surplus, a surplus generated primarily through the export of cotton, gold, and petrochemicals. The exchange of cotton, gold, and petrochemicals — all operated by state-owned companies — for cash, which is then used to finance industrialization, is the keystone of contemporary Uzbekistani economic policy, and the point of present contention between the conservative and Keynesian factions.
The Keynesian faction within the Uzbekistani government wishes to introduce some of the economic principles of renowned economist Maynard Keynes into budgetary planning, namely his concepts of deficit financing. Whereas the conservatives wish to finance Uzbekistani development entirely through the budgetary surplus produced through taxation and the sale of state-controlled exports, the Keynesian faction wants to begin supplementing the capital available for development projects with money borrowed from third parties, either private banks or foreign investors. Importantly, the Keynesian faction does not wish to deny the remarkable success of the Uzbek model of development, but puts forth their own budgetary policies as a way of further accelerating economic development. According to Dr. Keynes, the use of borrowed money (debt) to finance projects is preferable to the use of budgetary surpluses if the interest rates are low. The logic of this statement is that if you build a factory immediately using debt, then you incur the cost of the factory and any interest on the debt, but you gain immediate access to the revenue of that factory, whereas if you are financing a factory solely through account surpluses, then you may need to wait several years to build the factory and receive its revenues. From a Keynesian perspective, the years when the factory is not built should be considered an additional ‘cost’: the loss of potential revenue from the factory if it had been built immediately. This means that, unless the interest rate on debt is prohibitively high, it is usually less costly for states to fund development projects with debt. Based on this notion of economics, the Keynesian faction believes that the conservative bent of the current Uzbekistani budget is holding back the country’s true economic potential. The downside of this Keynesian turn is that, by having the government borrow money from foreign creditors, it entangles the Uzbekistani government in international financing. Since the chance of Uzbekistan’s creditors going bankrupt and being unable to supply promised loans is minimal, the two main risks involved in adopting Keynesian economics are: the revenues from the project are less than expected, making debt financing more expensive than the alternative; inflation or currency devaluation makes Uzbekistan unable to pay back loans taken in a foreign currency. By using only its own budgetary surpluses for financing, Uzbekistan remains accountable only to itself and entirely independent — an attitude which fits in while with its other protectionist economic and trade policies — but develops less rapidly; the validity of this exchange has driven the schism within the Uzbekistani finance community.
This conflict, although it certainly existed, was decidedly muted during the Karimov administration because Uzbekistan’s economic policy was largely decided by President Karimov himself, who by all accounts was an extremely skilled and experienced economist. With the towering figure of the country’s founder departed, all sides felt considerably more willing to advance their own views. Rustam Azimov, in particular, felt at ease expressing his opinions on the economy to President Mirziyoyev, as he had been one of Mr. Mirziyoyev’s strongest supporters within the Cabinet during the 2016 presidential elections. Mr. Azimov had been rewarded for his support by being made personally responsible for improving provincial budgets, coordinating international investment, and negotiating trade agreements with Tajikistan; all positions of considerable importance and prestige. In January, the newly inaugurated President Mirziyoyev entrusted Mr. Azimov with preparing a draft budget. Working alongside the other key members of the Keynesian faction — Botir Xo’djaev, Minister of Finance, and Galina Saidova, Minister of Economy — Rustam Azimov created a budget including deficit financing and presented it at the next Cabinet meeting. Contrary to the faction’s expectations, Mr. Mirziyoyev promptly rejected the proposal for daring to violate the principle of budgetary surplus. His statement was immediately echoed by Dr. Mullajonov, under whose tutelage the Central Bank had become the primary government body advocating a conservative model of financing; the more liberal or Keynesian voices in the bureaucracy, like Nodir Baxromov, having been pruned from the ranks. With the death of Dr. Mullajonov from kidney failure on 23 May 2017, it appeared that the main barrier to Keynesian reform had vanished from the Cabinet, prompting Mr. Azimov to again suggest a reform of economic policy. Mr. Mirziyoyev would not countenance the notion, and sharply criticized him for dereliction in his official work fighting corruption in the financial sector. Several days after this angry encounter, Mr. Azimov was removed from his post as Deputy Prime Minister and transferred to head the Uzbekinvest import-export insurance company. While the Deputy Prime Minister’s lack of progress towards fighting pervasive corruption among bankers and tellers was the immediate reason for his dismissal, it had its roots in the conflict over fiscal policy. It is likely that, seeing that Mr. Mirziyoyev did not possess Mr. Karimov’s esteemed record as an economist, Mr. Azimov believed Mr. Mirziyoyev would be susceptible to suggestions from his Cabinet about economic policy. Contrary to Mr. Azimov’s political calculus, however, Mr. Mirziyoyev had developed his own independent perspective on budgetary issues and, when Mr. Azimov did not drop the issue after the January Cabinet meeting, removed him from positions with influence on national economic policy.
The transfer of Mr. Azimov to a major, but self-contained, position at Uzbekinvest demonstrates that, even following the death of its strongest advocates, the conservative model of financing will continue to dominate Uzbekistan in the foreseeable future. Whereas the death of Mr. Karimov and the prominent position of figures such as Mr. Azimov and Mrs. Saidova could potentially have signaled a change in Uzbekistani economic policy, this recent incident demonstrates that the new president is just as committed to avoiding economic risks as his predecessor. The appointment of Mamarizo Nurmuratov, a recently elected Senator, as the Central Bank’s new chairman also cements the continued control of that institution by fiscally conservative elements. The dismissal of Mr. Azimov seems to have temporarily ended the rift in the financial community, the move likely sending a clear message to Mrs. Saidova and Mr. Xo’djaev about what would happen should they decide to adopt Mr. Azimov’s mantle as the outspoken advocate of Keynesian economics. While Mr. Mirziyoyev has indicated that scores of economic reforms are planned during his term, the introduction of deficit financing will not be one of them.
The conservative model of financing has served Uzbekistan well and continues to promote economic growth at the level needed to meet employment needs, this means that Uzbekistan has the luxury of having change in financial policy being an option, not a necessity. It is an option, however, of which the Uzbekistani government should avail itself.While the caution of the government is understandable, a more limited version of Keynesian reforms where loans are only sourced from domestic creditors could potentially improve growth while keeping risk acceptably low. Every abstract percentage increase in the growth rates squeezed from policy change translates into the creation of real jobs which could lift citizens out of poverty and improve lives. The principle risks of deficit financing stem from taking loans from foreign creditors, the vast majority of which the government would have to take in foreign currency. The high inflation rate of the Uzbekistani so’m, the government’s dependence on commodity prices to accumulate foreign currency reserves, and the increased risk of miscalculating the benefits of certain development projects due to pervasive corruption all point towards a possible future where Uzbekistan is unable to repay loans owed in foreign currency. Sticking to domestic sources of financing, despite the severe restrictions on the use of what limited private savings exist in Uzbekistani banks, removes the risks implicit in owing debt in foreign currencies. While the potential for deficit investment projects to go awry due to accidental or intentional misrepresentation of costs and benefits still exists with domestic financing, the benefits of a substantial increase in economic growth — perhaps up to 2 or 3 percentage points — make this risk acceptable in my opinion. The hope for Keynesian reform in the short term may have died with Mr. Azimov’s dismissal, but Uzbekistan is a democracy, which leaves issues like this up to constant debate and consideration. If ideas like the moderate compromise between stability and growth proposed above gain traction among elected representatives, Keynesian reforms may yet be introduced by the Mirziyoyev government.
McKinley, Terry and John Weeks. “A Proposed Strategy for Growth, Employment, and Poverty Reduction in Uzbekistan”. In Economic Alternatives for Growth, Employment and Poverty Reduction: Progressive Policy Recommendation for Developing Countries, edited by Terry McKinley, 241-271. Palgrave Macmillan, 2009.
Karimov, Islom. “Uzbekistan on the Threshold of the Twenty-First Century”. Curzon Press, 1997.