Could Uzbekistan’s growing debt to China push Tashkent to search for alternative partners?
Marina Gruzer | 14 August 2024
Summary
Through the Belt and Road Initiative (BRI) and loans provided by the China Development Bank (CDB), China's foreign economic policy has made it the largest provider of development financing to smaller resource rich economies such as Uzbekistan.
Despite the benefits of Chinese investment in areas such as telecommunication and transportation, there is a risk that increasing accumulation of debt and project delays will limit economic benefits
Project construction delays and growing economic dependency on China has pushed Uzbekistan to seek out additional partners to ensure development financing flexibility.
Over the last 22 years, China has spent $1.34 trillion on development financing across 165 low and middle income nations, with Uzbekistan receiving over $18 billion. This policy has manifested in the form of loans and grants from institutions such as the China Development Bank (CDB) for the construction of energy and infrastructure projects. Large projects include the China-Kyrgyzstan-Uzbekistan (CKU) railway and the Uzbekistan Oltin Yo'l gas-to-liquids (GTL) plant. While the loans have been beneficial in the development of crucial sectors, such as the $15.5 million loan to Uzbektelecom in 2007, significant delays in large projects and an increasing dependency on China may carry risks of limited economic benefit to Uzbekistan.
In 2023, Uzbekistan’s debt to China reached $3.775 billion, which is approximately 13% of the country’s total external debt. Consequently, there is a significant dependency on Chinese investment, especially with China being Uzbekistan’s largest trading partner. This risks limited flexibility in development financing sources and reduced access to resources if debts are not repaid. For example, some of the loans given by CDB for larger projects in neighbouring states, such as the Central Asian-China gas pipeline, will be repaid via gas sales to China". With rising energy demands and security pressures, losing control over key resources could limit Uzbekistan's economic development.
Furthermore, delays in the CKU railway project, arising from route planning and funding risk disagreements between the three countries, may also indicate limited economic benefit for Uzbekistan due to rising costs and continuous setbacks in local infrastructure development progress. China, Kyrgyzstan and Uzbekistan signed the CKU deal in 1997 and the 523 kilometre railway is meant to provide opportunities for economic development in Central Asia while giving China access to a shorter route to European markets. However, despite close economic ties with China, delays in construction have pushed Uzbekistan to pursue a diversification of its partnerships. This includes closer engagement with the EU from 2022 and work towards accession to the World Trade Organisation (WTO). So far, the EU has provided funds to support Uzbekistan’s green energy transition. Even though Chinese investment currently accounts for 25.6% of total FDI in Uzbekistan, the European Investment Bank provided a $83.6 million loan for the construction of photovoltaic power plants in 2023. Therefore, Uzbekistan may seek alternative financing resources to overcome the challenges of high cost infrastructure projects.
Nosirjon Saminjonov/Unsplash
Forecast
Short-term
While it is uncertain whether the EU will provide sufficient funds for infrastructure projects, such as the CKU railway, Uzbekistan is highly likely to continue seeking out other partners to diversify financing resources. Ultimately, Uzbekistan’s search for other funding sources outside its traditional partners, China and Russia, may open opportunities for Western actors to consolidate their position in Central Asia and undermine the economic influence of regional hegemons.
Medium-term
China is highly likely to remain as Uzbekistan’s main economic partner as seen in the number of Chinese firms that operate in the country growing from 1,800 in 2021 to 2,000 in 2022.
Long-term
If the CKU railway construction delays continue and alternative financing sources are not established, Uzbekistan risks gaining a limited economic benefit from the project as well as limited infrastructure development progress while also deepening debt dependency on China.
