The World Bank identifies three challenges for Uzbekistan's economic growth, as the services sector now accounts for over 50% of total employment.

Growth Prospects of the Service Sector in Uzbekistan: Challenges, Opportunities, and Development Paths

The service sector in Uzbekistan plays a central role in the structural transformations of the economy. Over the past three decades, the share of services has exceeded 50% of total employment, compensating for the decline in agriculture's share. In early December, during a press conference attended by Ilkhom Norkulov (First Deputy Minister of Economy and Finance) and Timur Ishmetov (First Deputy Advisor to the President of the Republic of Uzbekistan), the World Bank presented a first-of-its-kind detailed report on the service sector in Uzbekistan, which, as noted by the Director of the Reconstruction and Development Fund of Uzbekistan, Shukhrat Vafaev, was based on a direct request from the President of the Republic of Uzbekistan.

According to the report, despite significant achievements, the service sector in Uzbekistan faces a number of challenges, including low competitiveness, insufficient connectivity to external markets, and limited competencies.

Key Trends in Uzbekistan's Service Sector

According to World Bank data, the service sector has become the main compensator for structural changes in Uzbekistan's economy. From 1991 to 2022, the share of employment in agriculture has almost halved, while services have provided growth in employment and added value. However, although productivity growth in the service sector has surpassed similar indicators in industry, productivity remains significantly below the global average.

• Employment Share: Services have emerged as the leader in employment share, surpassing agriculture and industry.
• Added Value: The service sector is showing a steady increase in its share of GDP.

Lead Economist of the World Bank Gaurav Nayar elaborated during the presentation of the report “Growth Prospects Through the Service Sector in Uzbekistan,” which took place on December 6, 2024, in Tashkent, explaining how different categories of services impact the country's economy. He emphasized that the service sector is not homogeneous, and its contribution to the economy depends on the skill level, degree of integration with other sectors, and opportunities for international trade.

Differences in Service Categories in Uzbekistan's Economy

Nayar identified four main categories of services, each with its own characteristics:

1. Global Innovative Services

These include sectors such as information and communication technologies (ICT), professional, and financial services. They are highly skilled, closely linked to other sectors of the economy, and have strong potential for international trade.

“Global innovative services account for only about 5% of jobs, but they provide approximately 40% of the added value growth in recent years,” Nayar noted.

2. Low-Skilled Supporting Services

Low-skilled supporting services account for 60% of total employment but only one-third of added value growth. Services such as transport and telecommunications are less dependent on highly skilled labor but are still connected to other sectors.

“These services provide linking functions, such as the transportation of goods involved in international trade,” the economist added.

3. Low-Skilled Consumer Services

Retail and hospitality are examples of services that do not require significant skills and have weak links to other industries. They are directly aimed at serving consumers, including tourists.

4. Social Services

This category includes government sectors such as education and healthcare.

“Social services created about three out of four jobs over the past five years; however, their connection to the rest of the economy is limited,” Nayar emphasized.

Productivity and Competitiveness Gaps in Uzbekistan

Despite positive trends, Uzbekistan lags behind OECD countries (Organisation for Economic Co-operation and Development) and neighboring countries in terms of labor productivity. The average annual productivity growth rate in Uzbekistan remains below the regional average.

• Labor Productivity: The service sector in Uzbekistan shows higher growth rates than agriculture and industry, but productivity levels are still significantly lower than those in OECD countries.
• Gaps: The productivity gap with leading countries reaches 3-5 years.

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Main Challenges for Uzbekistan's Service Sector

Gaurav Nayar outlined three key challenges faced by the country in its efforts to develop the economy through the service sector. These challenges are related to the insufficient integration of services into the economy, low share of innovative services, and inadequate productivity in low-skilled sectors.

1. Insufficient Integration of Services with the Rest of the Economy

Nayar noted that the share of services used in the manufacturing sector in Uzbekistan is only 9%. By comparison, in developed countries, particularly in the EU, this figure reaches 30-40%.

“Uzbekistan needs to strengthen the ties between the service sector and other sectors of the economy,” the expert emphasized.

2. Low Share of Global Innovative Services in Exports

Despite the potential for growth, global innovative services account for only 10% of Uzbekistan's total service exports.

“The structure of the service sector needs to be revised to increase the share of high-performing segments,” Nayar stated.

3. Low Productivity in Low-Skilled Services

These sectors, despite being some of the largest employers in the country, suffer from insufficient adoption of digital technologies. Only about 20% of companies use even basic digital solutions.

“Global experience shows that digitization can significantly increase productivity, but in Uzbekistan, the level of technology adoption remains extremely low,” the speaker added.

Shukhrat Vafaev emphasized that the service sector in Uzbekistan faces two significant challenges: high financing costs and tax burdens.

“Today, in Uzbekistan, one can achieve returns of 20-25% per annum in US dollars; however, against the backdrop of tax and fee barriers, it is extremely difficult for businesses to scale up and reduce costs,” he noted.

In this context, the development of infrastructure, IT technologies, telecommunications, logistics, and transport services plays a crucial role.

Among the successful initiatives highlighted in the report, Vafaev noted companies such as TBC Bank and OTP Bank, as well as IT park residents. He emphasized that to foster growth in these areas, it is necessary to eliminate barriers such as the lack of a legislative framework for data protection. This hinders development and scaling of operations.

Service Exports and Attracting Investments in Uzbekistan

Service exports and inflows of foreign direct investment (FDI) into the service sector are increasing; however, growth rates remain insufficient. Contrary to global trends, service export growth lags behind goods exports in Uzbekistan, which limits Uzbekistan's integration into the global economy.

• Trade Dynamics: The total volume of trade in the service sector is significantly lower than in goods sectors.
• FDI Inflows: Although investments in the service sector are growing, they lag behind other sectors, such as utilities.

Social and Low-Skilled Services in Uzbekistan: Structural Features

The structure of the service sector in Uzbekistan leans towards social and low-skilled services, which provide a large share of jobs but contribute less to added value growth.

• Social Services: Healthcare, education, and public administration occupy a significant share, ensuring employment growth. Social services and the public sector account for about 75% of new jobs over the past five years, have a 25% share in added value of services, but occupy only 35% of employment.
• Low-Skilled Services: Trade