1. Recent changes in Uzbekistan’s cotton procurement
Implications and reform agenda ahead
ACES and ASSA Annual Meeting, Atlanta, GA, 4-6 January 2019
Nodir Djanibekov Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Germany
Martin Petrick IAMO & Justus Liebig University Giessen, Germany
I. Background and motivation
The cotton sector, a centerpiece of Uzbekistan agriculture, remained among the least reformed sectors in the post-Soviet space. Farmers are still requested to allocate half of their sown area under cotton, and sell the entire harvest to the state-owned gins at
prices much below than potential export parity price (Fig. 1).
Only in 2017, Uzbekistan’s government has taken several measures to reform the sector via (a) liberalization of currency exchange market, (b) expansion of domestic textile production, (c) export of ready textile products and diversification of export markets, (d) organization of vertically-integrated cotton clusters, (e) administered increase of the procurement price. By estimating the impact of these reforms on the net transfers from the sector, this study discusses the future transformation agenda.
Fig. 1: Procurement and potential border prices of cotton, constant 2016 US$/t
II. Methods and data
The calculations are based on the 2005 World Bank Cotton Taxation Study (Guadagni et al. 2005) through a cost-benefit approach without considering cross-sectoral implications of the policy modernization. Official statistical data were used to update the calculations for , and to run scenarios based on new exchange rate and cotton procurement price policies.
III. Results and conclusions
The net transfers from the cotton sector policy have been declining since 2000, except for caused by the cotton price spike (Fig. 2). The resulting net transfers do not have significant share in GDP, making up only 1.5% it in 2018.
Eliminating the exchange rate and procurement price control will imply a significant reduction in budgetary inflows which is only partly compensated by the input subsidy cuts. Thus, the proposed changes will create a budgetary imbalance if irrigation subsidies and production credit subsidies are continued (Fig. 3).
Fig. 2: Net transfers as percentage of GDP, %
IV. Policy implications
The cotton sector would need to be further transformed to fully remove taxation:
Liberalization of cotton prices, not just administratively increasing the procurement prices,
Abolishment of the centrally-set production targets to increase producers’ decision-making freedom,
Increase in land tax value, and cuts in input subsidy to cotton producers to compensate the reduced budgetary inflows,
Gradual reduction of subsidies related to electricity and O&M in irrigation.
Source: Guadagni M., Raiser, M., Crole-Rees, A., Khidirov, D., Cotton taxation in Uzbekistan: Opportunities for reform. ECSSD Working Paper No 41. Europe and Central Asia Region, World Bank, Washington DC.
Fig. 3: Structure of cotton taxes and subsidies in 2018, million US$
Contacts: Nodir Djanibekov Martin Petrick