Friday, 14, June, 2024

This statement summarizes discussions between the authorities and IMF staff in Tashkent during October 30-November 8, 2018. A previous round of discussions took place in July 2018. The authorities have continued to press ahead with economic and social reforms on all fronts. The discussions focused on the economic outlook, especially for inflation, the 2019 budget, reducing credit market segmentation, improving statistics, and better coordinating technical assistance.

Economic Outlook

External trade is supporting growth; but import and export data show early signs of an overheating economy. Import growth remained very strong through the third quarter, reflecting buoyant domestic demand growth, especially for machinery and equipment. Bottlenecks in domestic production of intermediate inputs, especially construction materials, also pulled in imports. At the same time, non-commodity exports have slowed significantly through the third quarter, likely reflecting domestic demand pressures that are partly satisfied by rerouting exports to domestic uses. The external position or current account will shift from a surplus in 2017 into a deficit of 3 percent of GDP in 2018 and remain in moderate deficit over the coming years. Contrary to a widely held view in Uzbekistan, moderate external deficits are beneficial—and are to be expected—when an economy starts to reform and modernize. At the same time, it is important to correct early on macroeconomic policies that create excessive domestic demand pressures, which could eventually result in large and persistent external imbalances.

Gross domestic product (GDP) continued to expand at about 5 percent. Growth in the communication, construction, mining, and some service sectors remained strong through the third quarter. However, growth in sectors that produce goods that can be traded internationally, mainly agriculture and manufacturing, which are especially important for creating jobs, show little sign of pick up. Slow growth in these sectors seems to reflect intermediate input bottlenecks, such as energy and water shortages, as well as land degradation, pests, and bad weather conditions in the case of agriculture. Stronger efforts to attract foreign direct investment (FDI) are needed to stimulate growth in sectors producing internationally traded goods.

Consumer price index (CPI) inflation will remain elevated, primarily reflecting the corrections of distorted relative prices and wages. Since peaking at 20½ percent at the beginning of the year, CPI inflation declined to 16½ percent in October (year-on-year). The GDP deflator—a broader measure of prices of goods and services produced in Uzbekistan—reached 31½ percent through the first nine months of 2018, primarily reflecting higher prices of export goods following the depreciation of the exchange rate in September 2017. In 2019, additional inflationary pressures will be exerted by several factors: increases in regulated energy prices scheduled for mid-November; the 10 percent hike in public wages in November; additional wage increases for education and health care personnel during 2018; higher indirect taxes starting in January 2018; and upward pressures on prices of consumer goods that can be exported, such as fruits and vegetables. In view of these multiple inflation drivers, we project that CPI inflation could rise to

17-18 percent by the end of 2019. This projection assumes implementation of tight monetary, credit, and fiscal policies in 2019, as discussed in the following sections.

Monetary Policy

Monetary policy was appropriately tightened in September. Broad money growth through September, at 11½ percent (year-on-year), was moderate. Nevertheless, given rapid domestic demand growth and the unfavorable inflation outlook, the Central Bank of Uzbekistan (CBU) increased the refinancing rate from 14 to 16 percent in September. At the same time, the CBU allowed the exchange rate to weaken in tandem with depreciation trends in major trading partner countries, in line with its policy of not resisting changes in exchange rate fundamentals. A further tightening of monetary policy may be needed if inflation starts surprising on the upside.

At this point, the CBU’s policy tools have limited impact on overall monetary and credit conditions. The transmission channel from policy tools to credit conditions remains weak due to the heavy segmentation of the credit market, with about 60 percent of credit allocated at preferential terms. While the CBU’s refinancing rate reliably affects the terms of credit extended at commercial terms in the domestic-currency segment, this segment accounts for only about 20 percent of the outstanding credit stock. As the CBU plans to transition to inflation targeting, reducing credit market segmentation is needed to provide the CBU with the tools to better control inflation.

Credit Policies

The authorities agreed that restraint on credit growth is needed to contain inflation. Through September, credit to the economy expanded 43½ percent (year-on-year). About 60 percent of this credit growth was funded—and directed—from government sources, including the Fund for Reconstruction and Development (FRD). It is estimated that more than half of the additional credit was extended on preferential terms. Compared with the frameworks guiding monetary policy and traditional fiscal spending and tax policies, the framework for setting the amounts and terms of directed credits is less transparent, and decisions to expand or slow credit growth seemingly take place with little coordination with other macroeconomic policies. We estimate that average growth of credit to the economy during 2019 would need to be reduced to about 25 percent to keep CPI inflation in the projected 17-18 percent range by the end of 2019. Achieving the slowdown in credit growth will require restraint on the government’s policy-based lending operations as well as restraint on directed credit operations taking place outside the budget.

The authorities also agreed that reducing credit market segmentation should be a priority for reform. The benefits from this would be fivefold: First, as already noted, a more unified and market-based credit market would greatly enhance the CBU’s ability to control inflation. Second, less credit market segmentation would reduce the presently high loan concentration in a small number of state-owned enterprises (SOEs), lowering financial stability risks. Third, directed credit at preferential terms depresses banks’ profitability, and a less segmented credit market would therefore reduce the need for regular capital injections to maintain banks’ capital buffers. Fourth, a more market-based credit market would reduce the misallocation of capital in the economy. Directed credit is often extended at highly negative interest rates, which results in misallocation of credit to low-return investment projects. It is noteworthy that almost 50 percent of total outstanding credit is owed by SOEs, which—according to available labor statistics—did not contribute to job creation over the last ten years. And fifth, credit market segmentation tends to hide the differences in credit terms across different borrowers. A better approach would be to subsidize credit terms—if there is a good rationale for doing this—and report the subsidies transparently in the budget.

Fiscal Policy

Fiscal policy in Uzbekistan encompasses both traditional fiscal operations and policy-based lending operations. In staff’s revised presentation of the fiscal accounts, the traditional fiscal spending and taxing operations of the government are reflected in the consolidated fiscal balance as the difference between all revenues and expenditures of the state budget and specialized public funds but excluding policy-based lending operations. Policy-based lending operations include investment project financing and on-lending by the FRD, recapitalization or capital injections in SOEs including state banks, and loans extended to construct affordable housing in rural and urban areas. Combining the consolidated fiscal balance with the estimate of policy-based lending operations yields the overall fiscal balance, which is staff’s preferred measure to gauge the impact of fiscal policy on domestic demand. At this point, fiscal policy remains the primary tool to control inflation. The government should therefore focus on targeting an overall fiscal balance that is consistent with preventing the first- and second-round effects of price and wage adjustments from spilling over into permanently higher inflation rates.

Fiscal policy in 2018 was moderately expansionary relative to budget plans:

  • From January to September, the consolidated fiscal balance registered a surplus of 3.4 percent of GDP, relative to a budgeted surplus of 0.9 percent of GDP for the full year. The over-performance of the consolidated budget reflected better-than-expected revenue collections across all revenue categories as nominal GDP grew faster than projected, improvements in tax administration, and increased financial autonomy of local governments. The authorities are aiming at a full-year surplus of 2.3 percent of GDP, significantly tighter than budgeted (but close to the 2017 consolidated surplus outcome of 2.1 percent of GDP). 
  • By contrast, policy-based lending operations added significant stimulus relative to the budget. The mission estimates that in 2018 lending operations will add a fiscal impulse of 4.7 percent of GDP to domestic demand, significantly above the budgeted 2.4 percent of GDP. The mission’s net lending figures include lending operations financed by external borrowing that were not included in the budget and which are estimated at 0.6 percent of GDP in 2018.
  • Combining the two parts of fiscal policy, the overall fiscal deficit in 2018 is projected to reach 2.5 percent of GDP, 1 percent of GDP above the budgeted overall fiscal deficit of 1.5 percent of GDP. The moderately expansionary overall fiscal stance relative to budget projected for 2018 therefore reflects an unexpected and significant increase in policy-based lending operations. In the authorities’ budget presentation, the estimated fiscal deficit in 2018 amounts to ¼ percent of GDP.

On present plans, fiscal policy in 2019 would remain somewhat expansionary:

  • The mission projects that the consolidated fiscal surplus will amount to 0.3 percent of GDP, a relaxation relative to 2018 (surplus of 2.3 percent of GDP). The decline in the surplus in 2019 reflects mainly the cost of the tax reform, estimated at about 2 percent of GDP. 
  • Regarding policy-based lending operations, the authorities plan to scale them back to 2.8 percent of GDP in 2019. This estimate includes 0.5 percent of GDP lending operations financed off-budget by external borrowing. 
  • Combining the two parts of fiscal policy, the projected overall fiscal deficitwould remain at its 2018 level of 2.5 percent of GDP. In the authorities’ 2019 budget submitted to parliament in early November, the fiscal deficit amounted to 1.8 percent of GDP

Given looming inflation pressures, curbing the projected overall fiscal deficit for 2019 to 2 percent of GDP would be prudent. This could be achieved by scaling back further policy-based lending or by reducing non-priority spending. In view of the experience of past years, the main challenge for fiscal policy implementation will be to keep policy-based lending operations within the limit of 2.8 percent of GDP.

The tax reform in 2019 will have to be complemented by additional tax policy measures over the medium term and steps to strengthen tax administration. Tax reform in Uzbekistan will be a multi-year project, needing strong supervision by the Ministry of Finance. This will inter alia require increasing the Ministry of Finance’s capacity to design tax policy, addressing challenges in collecting VAT and excises, and creating a more level playing field regarding taxation of labor. On the administrative side, the addition of some 19,000 firms to the standard tax regime at the beginning of 2019 will raise administrative challenges. Short-term priorities should include restructuring and strengthening of the organization of tax administration at the headquarter, as well as setting up a large tax payer office. In the medium term, the main tasks will be consolidating the field office network, transforming business processes, and improving tax payer compliance. An IMF technical assistance program will support the authorities’ in meeting these challenges over the medium term.

Some progress was made in 2018 in increasing the coverage of fiscal operations, but the authorities noted that it will take more time to include in the budget all off-budget operations. For the first time, the 2019 budget featured medium-term projections and an assessment of risks. A comprehensive fiscal risk statement that quantifies contingent liabilities will become available in subsequent years. The legal basis and resources for compiling government finance statistics (GFS) have been enhanced. More work is needed to bring budget presentation in line with GFS guidelines. The important objective of achieving coverage of all fiscal operations in the budget, including all off-budget accounts of budgetary organizations and the activities of institutional units that should be classified as general government, has been postponed beyond 2019.

The authorities noted that they are considering introducing numerical fiscal rules. Uzbekistan’s past fiscal policy—as measured by the consolidated fiscal balance and level of public debt—has been prudent. The authorities hope that putting numerical ceilings on the consolidated fiscal deficit and public debt would preserve past prudent budgetary habits. However, the specific context of Uzbekistan raises two questions regarding the usefulness of numerical fiscal rules in the short run: First, as noted already, some fiscal transactions remain outside the reported fiscal data; in addition, macroeconomic data, including the level of nominal GDP, could be significantly revised in the future, potentially rendering numerical rules based on ratios to nominal GDP unstable. Second, fiscal policy measured by the overall fiscal balance is for now the primary tool for stabilizing the economy. This means that fiscal policy as measured by the consolidated fiscal balance may need to be able to adjust more flexibly to counteract destabilizing swings in domestic demand than typically allowed for by fiscal rules.

Structural Reforms

Price liberalization will remain a key theme of structural reforms. The liberalization of bread prices in September was important to incentivize the farm sector to adopt more market-based grain production arrangements. The announced increases in regulated energy prices in mid-November are an important and welcome step toward stemming the losses at energy SOEs; the increases will also increase incentives to save energy and could attract foreign investors to the sector. Uzbekistan has chosen a gradual approach to price liberalization to lower short-term social and output costs of the liberalization. The gradual approach also recognizes the high uncertainty surrounding appropriate cost-recovery benchmarks and the need to gain time to build enforcement mechanisms that ensure competition and regulation of liberalized markets. Given this gradual strategy, the mission noted that it is important to clearly communicate the “why” of price liberalization to the public, reduce price uncertainty of firms and households by issuing an advance calendar of regulated price hikes and liberalizations over the next 1-2 years, and protect vulnerable households by improving the targeting of the present social safety net.

Price liberalization should be complemented by SOE reform . Given the magnitude of needed reforms, the government has opted for a sequential firm-by-firm approach. Reforms will first focus mainly on energy companies, followed by reforms of transportation companies, especially the national air company, and other SOEs. Unbundling SOE activities, removing non-core activities, and improving governance by separating management, supervision, and regulation are all rightly on the SOE reform agenda. That said, designing a roadmap for reforms that spells out the overall strategy for transforming the SOE sector would usefully complement the firm-by-firm approach.

Inclusive Growth

The authorities have put the UN’s Sustainable Development Goals (SDGs) at the center of their inclusive growth agenda. A recent Cabinet of Ministers’ resolution lays out national development goals and targets until 2030 and details steps to achieve them. This process overseen will be overseen by a Coordination Council chaired by the Minister of Finance. The key SDGs focus on promoting the accumulation of human capital (education, health, gender) and real capital (public infrastructure, financial inclusion). As such, the SDGs match Uzbekistan’s ambition to create jobs for its bulging working-age population and to achieve upper middle-income country status before the country’s demographic window of opportunity starts closing around 2040.


Progress on improving economic statistics has been impressive . As little as one year ago, few statistics were publicly available, and available statistics were often of dubious quality. This undermined trust in the government’s policies and adversely affected foreign investors’ perceptions and available ratings. The authorities have already joined the IMF’s enhanced General Data Dissemination Standard System (e-GDDS), and, starting in May 2018, began publishing all key economic, financial, and social statistics on a National Summary Data Page. Moreover, an Uzbekistan country page in the IMF’s International Finance Statistics (IFS) is planned to be launched before the end of the year.

The authorities envisage further building on these achievements. First, the Statistics Committee, the Ministry of Finance, and the CBU plan to develop a roadmap for further improving statistics. Second, the authorities will continue to take full advantage of IMF technical assistance to further improve the statistics for the national accounts, the balance of payments, and the government finances. Third, the authorities will seek to participate in the IMF’s Special Data Dissemination Standard (SDDS), a step that would require expanding coverage of statistics but would also improve the timeliness or periodicity of several data categories. And fourth, the government’s inclusive growth agenda will require producing additional statistics to monitor and report on SDG targets, especially in the area of labor market statistics.

Technical Assistance Coordination

The mission and the authorities agreed that delivery and coordination of technical assistance could be improved. Ongoing reforms touch on practically every economic, financial, and social area; and the reforms involve both changing policies and building capacity to implement the changed policies. This is a complex process and can easily lead to technical assistance efforts lagging in areas that are becoming bottlenecks, such as SOE and financial sector reforms. And with a wide range of potential providers, this process is prone to duplication or—worse—conflicting advice. The World Bank has already compiled a list of reform priorities, and the creation of an Economic Council chaired by the Prime Minister could also prove useful. One other option to further improve technical assistance coordination would be to create a public depository of existing reform roadmaps in key areas, while identifying the areas where roadmaps are incomplete or missing. Such a depositary would not only help inform the public about reform plans, but could also highlight major delivery gaps and help prioritize and coordinate technical assistance across providers.

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