By Mr Obid Khakimo who review the Entreprenuers’ Dialogue with Uzbekistan’s President Shavkat highlighted some business development guidelines that offered insights about this Central Asian ecionomy for potential investors
ON August 18, the 3rd Open Dialogue of the President Shavkat Mirziyoyev with entrepreneurs took place. The dialogue with business taking place at various levels of government is very widespread in the world, and helps to conduct economic policy optimally combining the interests of business with the interests of the development of the state.
Dialogue in Development
The 1st Open Dialogue of the President with entrepreneurs was organized on August 20, 2021. At the suggestion of the Head of State, this format became traditional and this day became the Day of Entrepreneurs in our country. This was the first experience of this kind in Uzbekistan, which has already managed to show its high efficiency in terms of optimizing the economic policy in relation to business, as evidenced by the results in the field of entrepreneurship development in subsequent years.
During the 1st Dialogue, the President outlined 7 most important areas of further work to solve problems that hinder business activities. The first direction concerned financing issues, the second – improving the tax system and reducing the tax burden on business, the third was related to improving the procedure for providing land, the fourth devoted to the development of the necessary infrastructure, the fifth provided support for exporters, the sixth was related to the transport and logistics sector, the seventh was aimed at simplifying business procedures.
The 2nd Dialogue took place on August 22, 2022. During it, the President outlined 5 main directions of support for the development of entrepreneurship. The first direction was the introduction of separate approaches to supporting enterprises by dividing them into categories: microbusiness, small business, medium business. The second direction was the creation of a more favorable financing system. The third one was the introduction of special approaches to support business based on the conditions of districts and cities. The fourth one was the protection of entrepreneurs’ property. The fifth direction was monitoring the activities of entrepreneurs and holding them accountable.
Accomplished During the Year
During the Dialogue that took place this year, an assessment of what was done during the year in the directions established during last year’s dialogue was carried out.
So, based on the proposals put forward last year, business entities were divided into micro, small, medium and large categories and each one began to apply a separate approach. Similarly, districts and cities were divided into 5 categories, separate tax, credit and financial regimes were introduced in 60 districts, as a result entrepreneurs of these districts over the past 6 months have used benefits in the amount of about 1 trillion sums. Due to this, the income of entrepreneurs in 20 districts increased to 1.5-2 times compared to last year.
The deadline for the refund of value added tax has been shortened. Due to this, from August 1, 2022 to August 1, 2023, 6 thousand enterprises returned 20 trillion sums, and more than 2 thousand conscientious entrepreneurs-exporters, without waiting for the receipt of currency from exports, received 7 trillion sums to their payment accounts. By reducing the rate of VAT to 12%, the number of participants in the value chain increased by 26 thousand, and their activities came out of the “shadow”. The number of VAT payers has reached 184 thousand. As a result of the write-off of tax debts that arose as a result of the use of inefficient tax mechanisms, 2 trillion sums remained at the disposal of business.
In the field of lending, a system has been created for using goods in circulation, export contracts, letters of credit and future revenue as collateral. Due to this opportunity, $1 billion in loans were provided to entrepreneurs. Due to the simplification of the procedure for opening micro-financial organizations, an alternative credit market for banks has appeared in the country. Over the past year, the number of such organizations has increased 1.5 times, the volume of loans allocated by them has increased 3 times. During the year, non-bank organizations allocated 3 trillion sums of loans.
As a result of the simplification of the processing system in the customs territory, the number of entrepreneurs using this customs regime has doubled, thanks to which $455 million worth of products were exported over the year using this opportunity, and $110 million worth of added value was created.
Licenses and permits for 119 types of activities that were previously “inaccessible” to aspiring entrepreneurs were canceled or transferred to the notification form. At the same time, only due to the cancellation of licenses for such type of activity as automobile transportation of goods on the territory of the republic, the volume of cargo transportation increased 1.5 times. In the 6 months this year, the number of inspections decreased by 40% compared to the same period last year, from 104 thousand to 64 thousand.
If we evaluate in general how the business developed during the year after the previous Dialogue, then over the year the number of small entrepreneurs increased by 40 thousand and amounted to 490 thousand, medium–sized entrepreneurs by 2 thousand and reached 10 thousand. The number of large enterprises increased by 400 over the year, reaching 1.5 thousand. Due to the use of the provided benefits, the annual turnover of 155 enterprises exceeded $100 million. The annual volume of foreign investments has reached $10 billion for the first time. This is 3 times more than in 2017. Over the past 2 years of constant Dialogue with business, domestic enterprises have exported products worth $25 billion, and also started production of previously imported products worth $10 billion.
Designated Areas of Business Support
During the Dialogue with entrepreneurs this year, President Shavkat Mirziyoyev in his speech outlined 5 main areas in which further support for the development of business and entrepreneurship will take place.
New opportunities for small businesses. A lot of attention is paid to the development of small businesses. More than $1 billion is allocated annually for financial support of micro-businesses. At the beginning of the year, it was clearly defined who belongs to the small business category. However, the targeted support system for small businesses and the creation of the necessary conditions for it have not yet been fully formed. Therefore, a holistic ecosystem will be created to support this sector.
Qishlok Qurilish Bank will be transformed into a Business Development Bank, under which 14 Centers for Small Business will be created in each region. Entrepreneurs who wish to switch from micro to small business will be assigned to these Centers every month with the participation of assistants to the khokims in makhallas. Entrepreneurs who have studied in such Centers in the regions will be provided with loans on favorable terms. When an entrepreneur invests 10% in a small business project, the Business Development Bank will invest 45%, and the remaining 45% will be allocated by the State. Loans will be provided to entrepreneurs on preferential terms for a period of 5-7 years. From October 1, credit lines for $150 million of these funds will be opened.
A separate Law on the implementation of this new system will be adopted. At the same time, a simplified procedure will be defined for all processes related to the implementation of small business projects together with the Center. With the launch of a new small business project, all taxes received from it will be transferred to the Business Development Bank for working capital within two years. That is, a system is being created in which the bank will be interested in a high level of income for an entrepreneur. In general, this system will help 150 thousand small businesses to get back on their feet, 25 thousand will be able to move to the middle category, 250 thousand new permanent jobs will be created.
Initiatives related to the development of medium-sized businesses. Despite the fact that medium-sized businesses are an important link in our economy, nevertheless, the conditions for its dynamic growth are not yet sufficient, since only the Entrepreneurship Fund provides guarantees or compensation for commercial loans. Therefore, new approaches will also be established to support entrepreneurs who want to move from small to medium-sized businesses and the activities and working methods of existing business support funds will radically change.
The Entrepreneurship Fund will be responsible for providing financial assistance to projects in the field of services and services, “green” and energy–efficient projects, and the Industrial Development Fund for industrial projects. These funds will not be limited to budgetary means alone, but will receive powers to independently attract investments, due to which they will attract an additional $1 billion for medium-sized businesses next year.
From September 1, loans at a rate of 5% in foreign currency and at a rate of 10% in national currency for 10 years period will be allocated from the newly created Industrial Development Fund to finance new projects, loans for working capital for up to 1 year in foreign currency at 4% rate and at 10% rate in national currency. At the same time, the fund will also provide 15% advance payments for imported equipment in the form of a loan.
An industrial mortgage system will also be established, production sites in the form of a “ready-made business” will be built and transferred to entrepreneurs. In particular, at least 3 new industrial zones will be created in each region, in which it is allowed to privatize land plots after fulfilling investment obligations.
The Entrepreneurship Fund will be responsible for the service sector and will be given the authority to enter medium-sized businesses as a participant. For this purpose, an additional $25 million will be allocated to the Fund this year, and another $100 million next year. At the same time, it also issues a guarantee for a loan in foreign currency for medium-sized businesses. The Fund will introduce a system of “mortgage services” in the fields of tourism, trade and services.
These two new systems will be fully launched from October 1. Next year, 2,000 new projects for medium-sized businesses in industry and 10,000 in the service sector will be financed, which will allow additional services to be provided for $1 billion, new products to be produced for $5 billion and 350,000 new jobs to be created.
Competitive Products Will Enter New Markets
Last year, the program “New Uzbekistan – a country of competitive products” was launched, 100 leading exporting enterprises were selected, as a result of which the exports of these enterprises will increase by 1.5 times this year. At the same time, due to the situation in the international arena, logistics costs have increased 3-4 times. Therefore, an additional $100 million will be allocated to compensate for their logistics costs. Another $25 million will be allocated for the certification of products abroad, the introduction of international standards and the training of specialists in this field. This year, this program will continue, the number of participating enterprises will be increased to 500, all benefits under the program will be preserved for them.
Another great opportunity for expanding exports is to attract prestigious foreign brands to our country. So, the 50 most popular brands in the world, whose annual market exceeds $100 billion, are very interested in cooperation and are ready to place an order worth $3 billion to our enterprises. This will help to implement international standards, environmental and certification requirements for production, train our specialists and create decent working conditions for workers. In this regard, a favorable customs regime will be introduced for the import and export of products of well-known brands, and a grant of 500 million sums will be allocated to enterprises that have attracted large brands.
Projects of highly profitable enterprises. To date, 140 ready-made projects have been developed with the involvement of international consultants in the fields of electrical engineering, production of building materials, textile, leather and footwear, jewelry, furniture, polymer, chemical and food industries. Their total cost is $10 billion, it is planned to create 60 thousand jobs, produce products worth $5 billion a year and export $2.5 billion. These projects are posted on an electronic platform and are offered to entrepreneurs on open and transparent terms.
In this regard, the President proposed to conclude contracts with entrepreneurs participating in the Dialogue who showed interest in participating in the program. The enterprises included in the program will be allocated loans from the Industrial Development Fund with a low interest rate for a period of 10 years.
Simplification of Tax Administration
Over the past 7 years of tax reforms, benefits and preferences granted to entrepreneurs, they have more than 120 trillion sums at their disposal. According to the conducted surveys, 62% of entrepreneurs positively assessed the reforms in the tax sphere, but tax administration remains difficult, there are cases of interference in business and corruption in the system. From now on, the tax authority will be radically reformed, and tax administration will be simplified.
The majority of value-added tax payers have declared an unfair application of the tax deduction coefficient for tax refunds, that is, the “tax-gap” system. Starting from October 1, 2023, when the value added tax is refunded, this practice will be canceled.
An open rating of entrepreneurs will be introduced. At the same time, starting from January 1, 2024, enterprises with a high rating will be exempt from all types of tax audits, they will be refunded an excessive part of the value added tax within one day, the practice of temporarily suspending the validity of the certificate of the value added tax payer will be abolished.
All disputes between entrepreneurs and tax authorities will be transferred to the jurisdiction of the administrative court, and any restrictions on entrepreneurs filing complaints directly to the court will be lifted. The deadline for filing a claim against entrepreneurs for tax will be reduced from the current 5 years to 3 years.
At present, entrepreneurs are required to submit about 8 thousand indicators to 16 state bodies within the framework of more than 140 reports. As a result, 500 thousand entrepreneurs annually spend 300 billion sums on preparing such various reports. In this regard, from January 1, 2024, outdated reports will be discontinued, all reports will be submitted through a single electronic system, and their paper form will be canceled.
In conclusion, it should be said that if, following the results of the President’s Dialogue with entrepreneurs last year, the transition to targeted support of business was indicated based on its characteristics and regional conditions of activity, then the results of work in this direction during the year have already fully confirmed the effectiveness of this approach.
Nevertheless, during the dialogue held on August 18 this year, much larger and more ambitious tasks were set – to create a single comprehensive business development system that will stimulate the growth of successful enterprises from micro to small, from small to medium, from medium to large, producing highly competitive products on the world market. And it is the targeting and individuality of support for all types of businesses in all regions that is a necessary condition for such an evolution and the successful development of the most competitive enterprises.
This is necessary in order for the economy of Uzbekistan to maintain sufficiently high growth rates, without which it is impossible to ensure a decent increase in the standard of living of citizens. And therefore, it was quite natural to award 44 entrepreneurs with honors and medals on the Entrepreneur’s Day, and 126 with the badge “Faol Tadbirkor”.
Author’s Note: Obid Khakimov is the Director for the Center for Economic Research and Reforms under the Administration of the Republic of Uzbekistan