Uzbekistan's Economic Transformation: New Investment Opportunities Emerge as the Informal Economy Shrinks

Located in Central Asia, Uzbekistan has been advancing remarkable economic reforms in recent years. Particularly noteworthy is the dramatic reduction of its informal economy and shadow economy. This is not merely a statistical change; it significantly impacts the domestic and international business environment and holds the potential to create new investment opportunities.From the perspective of an international financial journalist, we delve into the background, impact, and future outlook of this transformation.

According to a January 29, 2026, report, Uzbekistan's informal economy has significantly decreased. This represents a clear outcome of the government's bold economic liberalization and transparency enhancement policies implemented over the past several years.The shrinking of the informal sector, which once accounted for a substantial portion of economic activity, is critically important for strengthening the nation's fiscal foundation and promoting a fair competitive environment. This development sends a positive signal that cannot be overlooked by companies considering foreign direct investment, including M&A.

Reform Achievements and the Shrinking Informal Economy: The Path to Transparency

The Uzbek government has adopted a multifaceted approach to combating the informal economy. Key initiatives include:

• Implementation of Tax Reform: Simplifying the previously complex and opaque tax system and lowering tax rates strengthened incentives for businesses to transition into the formal economy. This led many small businesses and individual entrepreneurs to register formally.
• Promoting Digitalization: Advancing the digitalization of government services and financial transactions has reduced reliance on cash and increased transaction transparency. The introduction of e-governance has reduced corruption risks and contributed to more efficient administrative procedures.
• Deregulation and Business Environment Improvement: Lowering barriers to business establishment and simplifying licensing processes has made it easier for entrepreneurs to start businesses. This has reduced activities in the gray zone and led to the creation of formal employment.
• Strengthening the Rule of Law: Enhancing the independence of the judicial system and ensuring contract enforcement have advanced the development of a legal framework that allows both domestic and foreign investors to conduct business with confidence. This is critically important from the perspective of investor protection.

These reforms have made the "hidden costs" of the informal economy visible and clarified the benefits of the formal economy.In the informal economy, businesses lacked legal protection and faced difficulties accessing financing. Workers also missed out on social security benefits. Government efforts have highlighted these disadvantages, accelerating the voluntary transition of many economic actors into the formal economy. This shift is dramatically improving the reliability and predictability of Uzbekistan's entire economy.

Improved Investment Environment and Impact on M&A: New Business Frontiers

The reduction of the informal economy has had an immeasurable positive impact on Uzbekistan's investment environment. This is particularly attractive for companies considering foreign direct investment (FDI) or M&A activities. The reasons are as follows:

• Enhanced Transparency: The reduction in the informal economy allows for more accurate assessment of corporate financial health and market data. This simplifies the due diligence process and significantly improves risk assessment in M&A. With reduced risks of hidden liabilities and compliance violations, investors can make decisions with greater confidence.
• Fair Competition Conditions: The risk of formally registered companies facing unfair competition from informal sector entities diminishes. This fosters innovation and productivity gains, promoting long-term business growth. A healthier market also enables strategic M&A to function more effectively.
• Legal stability: Strengthening the rule of law and regulatory transparency are among the most critical factors for investors. An environment where contracts are reliably enforced and property rights protected encourages long-term investment commitments. This stability is also essential for post-M&A business integration and asset protection.
• Expanded Market Opportunities: Potential markets previously hidden within the informal economy become visible within the formal economic framework. This brings new consumer segments and business models to the surface, expanding growth opportunities for foreign companies. Particularly in sectors like retail, finance, and IT, vast untapped markets may exist.

The M&A relevance score stands at 8/20 points, suggesting Uzbekistan is still developing as a mature M&A market. However, the shrinking informal economy is building a solid foundation to potentially raise this score in the future. Early-stage entry could present an excellent opportunity to gain first-mover advantages.

Economic Growth and Socioeconomic Benefits: The Foundation for Sustainable Development

The reduction of the informal economy brings widespread benefits to the entire national economy. This is a crucial change that directly improves the standard of living not only for businesses and investors but also for ordinary citizens. Key benefits include:

• Increased Fiscal Revenue: As more businesses and individuals formally pay taxes, government fiscal revenue steadily increases. This enables investment in public services (education, healthcare, infrastructure development, etc.), improving the quality of life for citizens. The construction of new hospitals and schools, along with improved roads, can further stimulate economic activity.
• Improved Employment Conditions: Workers in the informal sector often lack access to social security benefits and face poor working conditions. Transitioning into the formal economy means increased formal employment, fair wages, access to social insurance, and pension systems, contributing to the protection of workers' rights and greater livelihood stability. This also leads to expanded domestic consumption.
• Deepening the Financial Sector: The expansion of the formal economy promotes capital inflows into the banking system, strengthening financial intermediation. Businesses gain easier access to financing, accelerating investment and expansion. Additionally, financial services for individuals become more robust, expanding opportunities for savings and investment.
• Enhanced International Credibility: An economy characterized by high transparency and the rule of law gains greater trust from the international community. This proves highly advantageous in securing support and recognition from international institutions and attracting foreign investment. Ratings from organizations like the World Bank and IMF are likely to improve, enabling access to financing on more favorable terms.

These socioeconomic benefits demonstrate that Uzbekistan is building a solid foundation for achieving sustainable and inclusive economic growth. As the economy becomes more transparent and predictable, domestic savings and investment will be stimulated, fostering development from a long-term perspective. This holds the potential to contribute to the stability and prosperity of the entire Central Asian region.

Challenges and Future Outlook: Potential as a Growth Market

While Uzbekistan has achieved the remarkable feat of reducing its informal economy, challenges remain for further growth and development. As international investors, it is essential to objectively assess these challenges and future prospects.

Key challenges include the following:

• Overcoming Bureaucracy: Some administrative procedures remain cumbersome, which can hinder business operations. Further digitalization and administrative reforms are needed to enhance efficiency.
• Human Resource Development and Education System: As the economy becomes more sophisticated, the demand for high-quality specialized personnel is increasing. Reforming the education system and strengthening vocational training are essential to support future growth.
• Infrastructure Development: Particularly in rural areas, continued development of infrastructure such as transportation, power, and communications is necessary. This will help correct regional economic disparities and promote nationwide development.
• Continued Market Liberalization: State-owned enterprises still hold significant influence in some industries. Further privatization and liberalization are needed to foster competition, accelerating efficiency and innovation.

However, these challenges also present investment opportunities. For instance, infrastructure development offers business opportunities for construction and related technology companies, while human resource development creates opportunities for education services and IT training firms. The Uzbek government has demonstrated a proactive stance in addressing these challenges, indicating a strong commitment to reform.

Uzbekistan's long-term growth potential is underpinned by its geographical advantage as a Central Asian hub, abundant natural resources, and a young working-age population. The shrinking informal economy is clear evidence that the country's economy is transforming into a more robust and reliable one. For business owners considering overseas expansion, Uzbekistan will become an "unmissable market" in the coming years.We look forward to the country's continued transformation and growth.