Background Paper and Statistical Appendix

This Background Paper and Statistical Appendix highlights that starting in 1994, financial policies in Uzbekistan were tightened so as to reduce inflation and stabilize the exchange rate in anticipation of the introduction of the new national currency, the sum. The Central Bank of Uzbekistan raised the interest rate on its rediscount credits several times and credit to loss-making state enterprises was curtailed. The average monthly rate of price increase fell from more than 22 percent in the first half of the year to less than 2 percent in the third quarter, partly in reflection of seasonal factors.


This Background Paper and Statistical Appendix highlights that starting in 1994, financial policies in Uzbekistan were tightened so as to reduce inflation and stabilize the exchange rate in anticipation of the introduction of the new national currency, the sum. The Central Bank of Uzbekistan raised the interest rate on its rediscount credits several times and credit to loss-making state enterprises was curtailed. The average monthly rate of price increase fell from more than 22 percent in the first half of the year to less than 2 percent in the third quarter, partly in reflection of seasonal factors.

I. Introduction and Overview

Since independence in 1991, the Uzbek economy has been subject to large macroeconomic shocks resulting from higher energy import costs and disruptions in the trade and payments systems. Although real GDP fell by II percent in 1992 and by a further 2 ½ percent in 1993, the fall in output and demand in Uzbekistan has been substantially less than in most other states of the former Soviet Union. The natural resource endowment of Uzbekistan has permitted a relatively rapid diversification of export markets toward new trading partners, and increased production of gas and oil has helped to limit the contraction of the economy. Uzbekistan is endowed with large reserves of petroleum, natural gas, and coal, as well as substantial deposits of gold, silver, copper, and other strategic metals. The external current account deficit declined from 11 percent of GDP in 1992 to about 9 percent of GDP in 1993; at the same time gross international reserves rose to the equivalent of nearly 4 months of imports at end-1993.

The structure of production in Uzbekistan is dominated by agriculture and industrial output related to the agricultural sector; agriculture accounts for over 30 percent of Net Material Product (NMP) and employment. Prior to independence, Uzbekistan exported raw materials and imported finished goods. The Government’s development policy is aimed at shifting the economy to a more industrialized structure. In an attempt to increase the self-sufficiency of the economy, the Government is following a policy of import substitution, and to improve resource allocation, incentives are given to shift the acreage of cultivated land away from traditional crops (cotton) towards nontraditional crops (grain) while employing new technologies to improve yields.

In the two years following independence, the thrust of financial policies was to cushion declines in output and domestic demand through the subsidization of consumption and production. Wages were increased in real terms and the banking system extended credits to loss-making enterprises. As the macroeconomic imbalances widened, inflation accelerated in 1993, shortages emerged, and there was a rapid accumulation of short-term external debt. Following the breakdown in 1993 of talks on the formation of a new ruble area, the Uzbek authorities issued the sum-coupon in November 1993. At first the exchange rate between the sum-coupon and the ruble was maintained at par, but the rate depreciated by 50 percent in April 1994 when the link with the ruble was severed and the exchange rate determined by the outcome of foreign currency auctions.

Starting in 1994 financial policies were tightened so as to reduce inflation and stabilize the exchange rate in anticipation of the introduction of the new national currency, the sum. The Central Bank of Uzbekistan (CBU) raised the interest rate on its rediscount credits several times and credit to loss-making state enterprises was curtailed. The average monthly rate of price increase fell from over 22 percent in the first half of the year to less than 2 percent in the third quarter, partly in reflection of seasonal factors. Monetary policy was tightened further in October when the refinance rate of the CBU was raised sharply, and in an attempt to increase private sector savings, the Savings Bank introduced several new categories of deposits with positive real interest rates. On July 1, 1994 the sum was introduced at an initial exchange rate of sum 7 per U.S. dollar. One month later, the CBU introduced a cash exchange rate (determined weekly on the basis of developments in the parallel market), for the conversion of cash balances of private individuals. In early October, the official and cash exchange rates were unified at sum 22 per U.S. dollar, and in the aftermath of the currency turmoil in Russia, new regulations were issued on October 15, 1994, which made it mandatory that all payments and settlements in Uzbekistan be effected in sum. In the wake of these new rules, the exchange rate in the parallel market depreciated, as did the official rate, which as of end-November 1994 was sum 25 per U.S. dollar.

The pace of systemic reform was moderate during 1992 and 1993. However, following the issuance of a Presidential decree of January 21, 1994 on measures to speed up reforms, significant progress was made during 1994, particularly in the area of price liberalization. Direct subsidies for consumer goods (including bread and flour) were eliminated and the retail prices for energy increased significantly. In the area of privatization, virtually all housing has been transferred or sold to residents, and a substantial number of small enterprises have been privatized. In the agricultural sector, the reform program included the transformation of state and livestock farms into collective, cooperative and leased forms of ownership, and the privatization of agricultural support enterprises. A new law permitting private ownership and the transfer of land for trade and services enterprises was adopted, as were long-term leases of 99 years for agricultural and industrial land. Also in 1994, a real estate market and a stock exchange were established and a new foreign investment law guaranteeing repatriation of dividends and profits or capital was adopted.

For 1995, the Government has prepared a program of macroeconomic stabilization and reform aimed at reducing the monthly rate of inflation to 2 percent by the end of the year, and to limit the decline in real GDP to 4 percent. It is expected that this program will receive support from the Fund under the Systemic Transformation Facility and from the World Bank with a rehabilitation loan.

II. Developments in the Domestic Economy

Since independence, the economy of Uzbekistan has faced major challenges arising from both external and internal adjustments in the wake of the collapse of the old Soviet regime. The external shock reflected a sharp deterioration in the term of trade, mainly due to higher energy import prices. In an attempt to avoid a decline in output and domestic demand, the Government subsidized consumption and production, and as a result, the rate of increase in prices accelerated in 1993 and living standards declined.

The sharp declines in output experienced elsewhere in the former Soviet Union have been avoided so far due in part to the natural resource endowment of the Uzbek economy. In addition, the strong performance of the economy in 1994 reflects largely a good outcome in the agricultural sector and production increases in priority sectors such as fuel. However, inflation in 1994 remained high, while the employment level was maintained notwithstanding a real wage much higher than that before independence.

1. Output, growth and sectoral developments

After a sharp decline in 1992, output (GDP) stabilized during 1993-94 (Chart 1). Real GDP, which declined by about 11 percent in 1992, fell by only 2 ½ percent in 1993, due in part to a strong performance in the trade and services sectors. Agricultural output fell slightly in 1993, while activity in the industrial, construction and transport and communication sectors declined sharply. Output in the trade sector increased by almost 10 percent.

Chart 1
Chart 1


Citation: IMF Staff Country Reports 1995, 023; 10.5089/9781451839753.002.A001

Source: Data provided by the authorities; and staff estimates.

Over the first nine months of 1994, real GDP declined by about 2 percent compared with the same period of the previous year. Output of the agricultural sector increased by about 19 percent, with a strong outturn in the third quarter due largely to an earlier harvest of cotton this year, owing to good weather conditions (Table 1). Output in the industrial sector decreased by almost 6 percent as heavy industry such as chemical and petroleum, timber and wood processing, metallurgy, and building materials continued to suffer from the disruption of economic ties with other CIS countries (Statistical Appendix Table 9). However, partially offsetting these declines were strong performances in the fuel sector (a priority sector) and the light industry and food processing sectors, which depend mainly on the domestic market. The trade, transportation and communication sectors all deteriorated considerably. Real investment is expected to decline by 15-20 percent in 1994.

Table 1.

Uzbekistan: Sectoral Shares of Output, 1991-941/

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Source: State Committee for Forecasting and Statistics.

Shares of Net Material Product at current prices.

January - September.

The agricultural and industrial sectors accounted for two-thirds of NMP in Uzbekistan in the first nine months of 1994, although the share has been declining steadily since 1991 (Table 1). With the exception of 1993, 1/ the share of agriculture in NMP was the largest among the sectors.

a. Agriculture

Agricultural policy in Uzbekistan has placed emphasis on three fields: (i) import substitution of grain, meat and sugar; (ii) export promotion of fruits and vegetables; and (iii) development of the cotton sector.

In order to increase grain production, the Government has been encouraging a shift away from cotton, in part by guaranteeing the purchase of all grain produced. Acreage under grain cultivation increased by 1.5 times in 1993, while in 1994 the acreage increased to 700,000 hectares with a crop yield of 2,000 kg/hectare. At present, grain production is about 2 million tons, of which 0.9 million tons are used for seeds (Statistical Appendix Table 12). The remaining grain accounts for 30 percent of domestic consumption. The Government’s program aims to increase production to 3-4 million tons by the year 2000 so that domestically produced grain would account for 70 percent of consumption. Uzbekistan currently imports 3 million tons of grain. Regarding meat, Uzbekistan currently imports 120,000 tons per year, while domestic meat production is 820,000 tons.

The level of cotton production is expected to stabilize at 4 million tons per year. A program for developing cotton farming concentrates on four areas: (i) improvement of seeds (setting-up of 5 regional cooperatives with foreign technology); (ii) increased efficiency of the irrigation system; (iii) certification of the cotton output; and (iv) improved use of fertilizers. Existing cotton fabricating plants are being remodelled and new ones built. In 1993, 1.3 million tons of cotton fiber was produced in Uzbekistan, most of which was exported.

Uzbekistan is self-sufficient in the production of fruits and vegetables. Although crop yields are very low, the quality is good. The Uzbek melon has a high sugar content and is of good quality; cognac and wines are also of good quality. The export potential for these products is favorable, but has not been fully exploited due to problems such as a lack of packing materials. To overcome this obstacle, the Government has been encouraging foreign participation in joint-ventures.

Although farmers pay world prices for equipment and machinery imported mainly from Russia, agriculture is generally profitable, since mineral fertilizers are produced locally at low costs and prices of output have been liberalized. One-third of cotton and grain production, which is not subject to state order, can be sold by farmers at free prices, mainly through local governments. The procurement price 1/ for state orders has been increased closer to world prices and attempts to ensure a profitability of not less than 25-30 percent to farmers. A considerable amount of subsidization is provided to the agricultural sector however: water is free of charge; farmers do not pay VAT; the price of electricity and petroleum products to farmers is relatively low; and communication facilities and environment protection are provided by the state.

b. Industry

Light industry and food processing (accounting for 37 percent of industrial production during the first nine months of 1994) and power engineering (electricity) and fuel (15 percent of industrial production) performed relatively well in 1994, owing to their reliance on the domestic market. Machine building, which accounts for 9 percent of industrial production, recovered in 1994, partly owing to activities of a joint-venture with foreign participation. Other sectors such as metallurgy, chemistry, and building materials continue to be affected severely by shortages of, and higher prices for, imported materials and equipment from CIS countries.

One priority of industrial policy is to promote the processing domestically of cotton into finished goods. A special commission for cotton processing headed by the Prime Minister was set up in 1994, and its task includes: (i) establishing large-scale enterprises; and (ii) saturating the domestic market with consumer goods. The share of cotton production processed domestically into finished goods rose from 9 percent in 1991 to 14 percent in the first three quarters of 1994, and the Government plans to increase this share further to 23 percent by the end of the decade. To this end, the construction of spinning factories, which will enable Uzbekistan to produce cloth and yarn, and the formation of joint-ventures with foreign companies, are being encouraged.

Another priority area is the development of the fuel and energy sector. Uzbekistan plans to become self-sufficient in fuel by 1996. In 1994, 3 million tons of oil are expected to be imported from Russia, one-half of the volume of imports in 1990. Domestic production of oil and condensed gas has increased from 2.8 million tons in 1990 to 3.9 million tons in 1993 (Statistical Appendix Table 11). In 1994, the same volume of oil has already been extracted in the first nine months as in all of 1993. Imports of petroleum products such as diesel and heavy oil (mazut) have decreased substantially, while Uzbekistan has increased exports of heavy oil considerably in 1994. Uzbekistan is a major exporter of natural gas and self-sufficient in coal. A major impediment to expansion of production in the energy sector has been the lack of supply of equipment from other CIS countries (for example Ukraine and Belarus), as well as processing capacity. Foreign direct investments are expected in the further development of the energy sector in Uzbekistan.

The electricity sector, like other industrial sectors, faces difficulties in obtaining equipment and spare parts from traditional trading partners. Uzbekistan, however, is a net exporter electricity and plans to remodel turbines and ensure supplies of spare parts for all power stations by 2000. Currently, 85 percent of electricity is generated by thermal power (71 percent with gas, 10 percent with oil and 4 percent with coal) and 15 percent by the lower cost hydropower. In thermal production, oil will be substituted for gas, with the gas being exported instead to other CIS countries. No nuclear power plants exist.

Another expanding sector is the electronics industry, which produces microchips for televisions and transistors. A joint-venture with participation of a Korean company has started producing televisions and tape-recorders. A German company is planning to open a factory to produce small electric motors, which are used in the production of home electronics, such as mixers and vacuum cleaners.

c. Transport and communication

Uzbekistan has a well-developed transport system, but it is becoming outmoded for present purposes. During the first nine months of 1994, the volume of cargo dropped by around 5 percent due to higher transportation costs in trade with CIS countries resulting from the switch to payment for such services in convertible currencies. Foreign companies have expressed interest in investing in the construction of railways; currently 60 percent of the total rail system operates on electricity. Uzbekistan has relatively good airline facilities. There is an aircraft building plant with a well-developed aircraft repair department in Tashkent. However, aircraft engines are not produced domestically.

Over the last 3-4 years, there has been no modernization of the telephone network, which is obsolete with poor quality of service. At present, only 15 percent of all households have telephones. In cities, the share is 60-70 percent, and in Tashkent 85 percent. A Korean conglomerate is developing an automatic telephone system in Fergana, and German companies are also participating in the improvement of the telecommunication system. A transcontinental network is under consideration.

d. Other sectors and infrastructure

During the first nine months of 1994, the volume of construction decreased by 17 percent compared to 1993, due to an increase in the duration of construction projects caused by a lack of purchases of new equipment and machinery resulting from a shortage of working capital. However, capital investment in the construction sector (as a percent of total investment) has been increasing steadily since 1991, as a result of the state investment program which offers incentives such as tax privileges and technical assistance (Statistical Appendix Table 13). Uzbekistan is self-sufficient in cement production. However, timber, equipment, machinery and glassware have to be imported from other CIS countries.

2. Price liberalization and inflation

a. Price reforms

Uzbekistan made major progress in price reform during 1994. All explicit and implicit subsidies for foodstuffs and consumer goods have been eliminated, and the prices of all but few goods—three rationed goods and one type of bread–are now determined freely. Energy prices are based on cost of supply and prices of communal services have been raised substantially.

Only three items–flour, sugar and vegetable oil–remain subject to rationing. The Government maintains these rations to ensure a stable supply. Although the prices for these rationed foodstuffs and for loaf bread are subject to approval by the Ministry of Finance, the prices are adjusted on the basis of full cost recovery. Amounts of these goods in excess of the rationed quantities can be purchased, subject to availability, at market prices. All other prices are freely determined by the enterprises. Reflecting these developments, prices of major foodstuffs and consumer goods have increased substantially (Table 2). The bread price in November 1994 was 50 times higher than in January 1994. The retail price margins of most items’ are now positive (Table 3).

Table 2.

Uzbekistan: Changes in Prices of Selected Items, 1992-94

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Source: Price and Anti - Monopoly Committee; and Ministry of Finance.

Average price to households.

Price for supply of product imported from Russia.

Price of A -76 grade gasoline to retail customers.

Price to residential customers in urban areas.

Price approved by the Ministry of Finance.

Through end of preceding month and based on monthly price increases, as reported by the State Committee for Forecasting and Statistics.

October 17, 1994.

Table 3.

Uzbekistan: Retail Prices and Wholesale Costs of Selected Items

(As of October 1994: in sums per unit, unless otherwise indicated)

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Source: Price Committee of the Ministry of Finance; and staff estimates.

Price of consumer goods in state shop (as of October 1, 1994) or of state-provided utilities (as of October 26, 1994).

As of October 1, 1994 (consumer goods) or October 26, 1994 (utilities).

Approved by Ministry of Finance.

Price effective from November 5, 1994.

Per month.

Prior to February 1994, price margins for both state and private enterprises were limited to 20 percent except for producers of flour. In February 1994, a Government resolution abolished this limit for private enterprises in order to encourage business. The resolution also increased the margin for enterprises with up to 45 percent state ownership except in the case of seven goods: flour, vegetable oil, bread, sugar, meat, tea and milk. The margin for these latter goods remained at 20 percent. 1/

The only prices remaining subject to government control are those of monopoly enterprises. After receiving the declared wholesale prices from the enterprises, the Ministry of Finance sets up profitability margin guidelines for each sector as the basis for retail prices increases. The Ministry of Finance allows for specific profit margins, using various considerations, such as the sector in which the monopolist operates. The components of the wholesale price are cost of inputs, wages, deductions for social insurance, depreciation and profits.

Although there is no central government subsidy given for communal services, budgetary subsidies for central heating, hot water and housing are provided by the local governments. The retail prices of these services have been raised substantially; for example, the price of central heating increased by 140 times during 1994 (Statistical Appendix Table 16). However, cross subsidies from one class of consumers to another still remain. A subsidy for operating costs of urban transportation, which was also given by the local governments, was abolished in 1994.

Energy prices were raised for wholesale customers on September 20 and for retail customers on October 1, 1994, based on full-cost recovery. Including those increases, prices of electricity, coal and gasoline rose by 25, 42, and 17 times, respectively, during 1994 (Statistical Appendix Table 15). Currently there is no explicit budgetary subsidy for these products, but cross subsidies remain. Any energy price increase must be approved by the Ministry of Finance. Currently, these price increases are determined by developments in world prices and the exchange rate for the sum, with the full increase in the import cost being passed through to domestic customers.

b. Inflation

During the past three years, inflation has been a serious macroeconomic problem in Uzbekistan, reflecting among other things, expansionary monetary policies, wage increases, supply shortages, and increases in import input prices, in particular for energy products. As a result of the liberalization discussed above, prices rose sharply during the first half of 1994 (Chart 1). Inflation, as measured by changes in the retail price index, rose from 885 percent in 1993 (end-period) to 1,134 percent in the 12-month ended June 1994 (Statistical Appendix Table 18).

The rate of increase of the retail price index slowed significantly in the third quarter of 1994 to a monthly average of about 2 percent, reflecting seasonal factors and a tightening of monetary policy (see Section IV). Wholesale prices have risen more rapidly over the past three years than have retail prices, increasing by 1,919 percent during 1993 and by 1,539 percent during the twelve months ended June 1994. There was no deceleration in the rate of increase in wholesale prices in the third quarter of 1994. (Statistical Appendix Table 19). A particularly sharp increase (over 70 percent), was recorded in September, reflecting in large part the increase in energy prices. 1/

3. Wages and employment

It is estimated that of a total population of Uzbekistan of 22.1 million in 1994, 8.9 million persons are economically active. According to the official unemployment statistics the number of registered unemployed is still very low, numbering only 20,043 in September 1994 (Statistical Appendix Table 23). The number of vacancies increased 1.5 times from 1993 to 1994. Total open unemployment (including those not registered at the unemployment office), is 4 ½ percent of the work force, while individuals on forced leave amount to 250,000 (they are paid 70 percent of their salaries by law). Disguised unemployment in the agricultural sector is estimated to be around 1,000,000 persons and the Government is addressing this problem by creating job opportunities in rural areas.

The number of workers was 4.3 million in August 1994 (Statistical Appendix Table 22), down from 4.7 million in 1992. Most of the decline was recorded in industry, construction, agriculture, commerce and food supply and transportation. Industry, agriculture and education now account for 21 percent, 14 percent and 19 ½ percent of total employment, respectively. Meanwhile, the number of workers in the service sector has increased, owing in part to the privatization of small enterprises and service-related businesses.

Wages in the budgetary organizations are determined by a grid system, in which wages are set according to multiples of the minimum wage. 1/ Although neither private nor state enterprises are required to follow this system, most have adopted it to some extent. It is estimated that this system covers 94 percent of all workers. Following an erosion of real wages in 1991, the government has frequently adjusted the minimum wage and thus wages in budgetary organizations to compensate for price increases (Statistical Appendix Table 20).

The minimum wage is set by the Ministry of Labor on the basis of a family budget survey conducted by the State Committee for Forecasting and Statistics. The Government’s current policy for setting the minimum wage is that it should cover 75 percent of the consumer basket, with the remaining 25 percent of the basket being covered by other income, such as from the cultivation of private plots of land. The monthly minimum wage, which was sum 24.3 on December 31, 1993, was increased by 23 percent on January 1, 1994, 50 percent on March 1, 6 percent on July 1, and by 43 percent on August 1, 1994 (to sum 100). On October 1, 1994 a flat monthly allowance of sum 100 was introduced for virtually every adult to compensate for price increases for food and energy; this allowance was raised to sum 150 on November 1. Taking this allowance into account, the real minimum wage has increased by about 250 percent since December 1991.

The average monthly wage in September 1994 was sum 362, an increase in real terms of some 230 percent compared with December 1991. In August 1994, in order to dampen a wage-price spiral, the Government introduced a “wage brake” system to regulate the payrolls of both state and private enterprises in the production sector. According to this system the increase in wages cannot exceed 70 percent of the increase in output of the enterprise. 2/

Wages vary considerably among sectors (Statistical Appendix Table 21). Based on data for the first half of 1994, financial sector workers earn the highest wages (1.8 times the average), followed by industrial workers (1.5 times the average). Health and social services receive the lowest wages (60 percent of the average). By type of organization, workers in small business (1.7 times the average) and in joint ventures (1.5 times the average) earn the highest wages.

4. Systemic changes

There has been significant progress in systemic reform in Uzbekistan in 1994, following the issuance of a presidential decree on deepening structural reforms on January 21, 1994. This decree addressed the issues of developing the second stage of the privatization program by extending the coverage to medium and large enterprises; reducing and eliminating state orders; passing a new law on foreign investment; and establishing real estate and stock exchanges.

a. The state order system

Uzbekistan has now largely abandoned the old style Soviet planning system and the state order system exists only for cotton, grain and a limited number of industrial goods—gold, copper and cable wire. In August 1994, state orders for milk, livestock, meat, and poultry were eliminated and those on cotton and grain were reduced from 75 to 67 percent of the 1994 crop. The procurement prices of products subject to state order are determined by the Ministry of Finance taking into account factors such as enterprise profitability and the budget situation. The volume of production not subject to state orders can be freely sold to domestic customers, including state procurement organizations (in the case of cotton, Uzgoskomkhlopkopromsbit), or exported at market prices.

The Government has replaced the system of state orders with the procurement of goods for state needs at market prices. The state needs include: (i) demands of budgetary organizations such as hospitals, schools and kindergartens; (ii) defence industry; (iii) reserve for natural disasters; (iv) irrigation system; and (v) energy sector. The State Committee for Forecasting and Statistics (GKPS) is responsible for satisfying these state needs both through domestic procurement and bilateral trade agreements with foreign suppliers. Individual ministries, such as the Ministry of Health and the Ministry of Energy, must apply to the GKPS for needed products under their jurisdiction. In some cases, state enterprises must apply to the relevant ministry for their needs before the ministry applies to the GKPS.

With the elimination of state orders, enterprises can procure the necessary equipment and material from abroad by: (i) state bilateral agreements; (ii) direct contracts with foreign companies; or (iii) use of Uzoptbirzhetorg (Wholesale Exchange). The state bilateral trade agreement between Uzbekistan and Russia is implemented by the respective national wholesale exchanges at world prices. Trade with other CIS countries through state bilateral trade agreements has decreased substantially and the other two options are becoming more common. One of the main reasons for the maintenance of state orders is the need to comply with bilateral trade agreements. However, as these agreements expire, they will be renewed according to competitive procurement.

b. Enterprise reform and private sector development

The Government’s privatization program concentrated in its first stage on housing and small enterprises. Housing privatization was carried out by the local authorities and to date virtually all housing and 49,000 small enterprises have been privatized. In 1994, the Government adopted new regulations to clarify and strengthen property rights of owners of privatized and individuals dwellings, including the right to freely sell or lease dwellings, or to use dwellings as collateral.

During the first nine months of 1994, a total of 6,797 enterprises, more than had been planned (5,127), have been privatized (Statistical Appendix Table 25). Among the privatized enterprises, 20 percent were joint-stock companies and 56 percent were family and private businesses. By sector, the largest share was accounted for by services (social complex). The proceeds from privatized objects (sum 221 million) were used to support privatized enterprises. Approval has been given to 67 applications for establishment of joint ventures with foreign capital, with the average share of the foreign party being 49 percent.

A stock market was established in 1994 to ensure the issuance of shares of the newly-created and transformed joint-stock companies. Through September, 12,971 shares of stock companies were sold with a total value of sum 1.9 million. The National Depository, which was set up to reduce the cost of the share issuance, maintains records on the flow and availability of shares, and tries to streamline all related processes. To date, thirty-nine issuers have placed 317,100 shares with a total value of sum 26 million. The number of investors is 2,467, of which 2,422 are individuals who have purchased 32,200 shares. The state owns 89,400 of all shares placed in the Depository.

Privatization auctions started in early 1994 but they remain a minor part of the overall privatization program. The State Committee for Property (GKI) chose the method of privatization that was most beneficial for the state and the worker collectives. Auctions or other mechanisms to sell to other buyers were employed only when the workers were not interested or did not have the necessary financing.

Uzbekistan has ruled out the use of vouchers for mass privatization of medium- and large-scale enterprises. Instead, enterprises have remained under the control of worker collectives during a transitional stage of privatization through the formation of closed joint-stock companies and transfer of stocks to worker collectives. The joint-stock companies have been converted gradually to open form, giving citizens free access to privatization. Laws on bankruptcy and foreign investment are already effective.

The Government is working with the World Bank on an action plan specifying the scope, approach and timetable of the privatization program, including actions required to widen and speed up privatization through a greater emphasis on the role of private investment funds. The program will also include a range of measures aimed at giving privatized firms greater autonomy in their production through the removal of profile restrictions. The Government intends to complete the bulk of privatization of the medium-sized enterprises by mid-1995. Privatization of large-scale enterprises will require three to four years due to the need to break up monopoly enterprises.

The old state procurement and distribution organization, Uzkontracttorg (Uzbek State Joint-Stock Association for Contracts), has been demonopolized and transformed into Uzoptbirzhetorg (Uzbek Republican Joint-Stock Association for Wholesale and Exchange Trade) with a view to creating the necessary infrastructure for a free and equal participation of producers, consumers and entrepreneurs in the market of commodity resources. Through September 1994, registered transactions were more than sum 100 million.

c. Agricultural sector reforms

The Government has gradually pursued a program of reform in the agricultural sector, including transformation of state farms into collective farms, leasing land from collective farms to private farmers, distributing small plots of land to households, privatizing agricultural support enterprises, and reducing the scope and coverage of state orders for agricultural products. By mid-1994, all state farms, including livestock farms, had already been converted to collective farms or leased to private farmers. Of total irrigated agricultural land (4.2 million hectares), 179,500 hectares had been leased from state or collective farms to 13,200 private farmers, and 750,000 hectares had been distributed free of charge to private farmers and families as small plots.

In 1994, the Government introduced a law permitting private ownership and transfer of land for trade and services enterprises. For agricultural and industrial land, long-term leases of 99 years were permitted. These leases are transferable and usable as collateral.

d. Anti-monopoly policy

Producers or products with a market share of 35 percent or greater are regarded as monopolies. Through October 1994, the Ministry of Finance had identified 611 monopoly enterprises and 1,534 monopoly products at the national and oblast level, of which foodstuffs accounted for 160 enterprises and 493 products (Statistical Appendix Tables 28 and 29). Price increases for goods and services provided by monopoly enterprises are subject to the approval of the Ministry of Finance based on profit margin guidelines, which vary among sectors. The sectoral profit margins range from 7 to 80 percent, with the lowest applied to processing of cotton fiber, milk and meat, while the highest is applied to mining.

III. Public Finance and the Social Safety Net

1. Introduction

Following the loss of sizable transfers from the Soviet Union, the overall budget deficit widened to over 18 percent of GDP in 1992 from 4 percent of GDP in 1991 (Table 4). These transfers were intended to pay for special protection measures and development needs, and thus expenditures declined by far less than revenues. In light of this outcome, the Government tightened fiscal policy in 1993 by introducing a number of new taxes. 1/ Although total revenue in 1993 increased by 10 percentage points of GDP, the overall deficit declined by only 6 percentage points of GDP because of higher total expenditure in relation to GDP combined with sizable on-lending to loss-making enterprises (Chart 2). The budget deficit in 1993 was financed entirely by credit from the domestic banking system. Thus, notwithstanding some tightening of fiscal policy, the overall stance continued to place upward pressure on inflation. In 1994 the authorities took additional steps to limit the budget deficit by implementing both revenue enhancing and expenditure reduction measures.

Table 4:

Uzbekistan: Fiscal Operations of the General Government, 1991-941/

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Source: Ministry of Finance: and staff estimates.

Turnover and sales taxes in 1991.

Chart 2
Chart 2


Citation: IMF Staff Country Reports 1995, 023; 10.5089/9781451839753.002.A001

Source: Data provided by the authorities; and staff estimates.

2. Overall developments in 1994

During the first half of 1994 the deficit amounted to about 7 percent of GDP, but as a result of strict cash management during the third quarter the deficit was reduced to about 4 ½ percent of GDP for the first nine months of the year.

a. Revenues

Total revenues as a percent of GDP are expected to increase in 1994 compared with 1993 owing to several changes in the tax system, which should give rise to large shifts in the composition of revenues (Statistical Appendix Table 30).

The cotton excise tax is the difference between the selling price and the wholesale price (purchase) of cotton subject to state order (67 percent of the 1994 crop) which accrues to the budget. 2/ Starting in 1994, all exports to CIS countries took place at world market prices and ministries were required to pay close to world market prices for the cotton allocated to them 1/ (previously cotton fiber was sold at a low administered price thus subsidizing imports of various commodities). Ministries were to pass the increased costs of their imports on to consumers through higher wholesale and retail prices.

During 1994, new excise taxes were imposed on jewelry (10 percent as of February 4, 1994) and on soft drinks in 1 ½ liter bottles (56 percent as of August 31, 1994). On March 1, 1994, the excise taxes on alcoholic beverages and cigarettes were increased, 2/ and the tax rate on gasoline was increased to 40 percent from 5 percent on July 1, 1994. On October 3, 1994, the rate on gasoline was increased further and differentiated: the new rate for gasoline, kerosene and diesel was set at 60 percent with A-72 and A-76 gasoline taxes at a 70 percent rate. On September 1, 1994, rates on cigarettes were lowered to 40 percent for filtered cigarettes and to 25 percent for non-filtered cigarettes, but at the same time the new rates were imposed on imported cigarettes. Cigarettes are currently the only imported good subject to excise tax.

A new land tax was introduced on January 1, 1994. The rates for the land tax are specific and depend on size, quality, location, water supply, and use of land (industrial or private). Agricultural land has been subject to this tax since July 1, 1994.

Although the VAT rate was lowered from 25 to 20 percent from April 15, 1994, at the same time the possibility for enterprises to retain 6 percent of their VAT liability for wage payments was eliminated, resulting in an effective increase of one percent in the tax rate. However, despite this increase in the effective rate, collections from the VAT are lagging in relation to nominal GDP reflecting: (i) the decision to switch from an accrual basis to a cash basis for VAT collection on September 1, 1993, combined with slow settlements among enterprises for transactions, and (ii) a buildup of arrears during 1994.

There were also several changes with respect to enterprise income taxation in 1994. While the general rate of 18 percent was maintained, there were small increases in the rates for specific sectors (banks, insurance companies, etc.) and a 3 percent tax was imposed on agricultural income. An amendment on May 6, 1994 to the law limited the total amount of deductions that could be taken by an enterprise to 50 percent of the original amount of tax owed. While these two changes would tend to boost tax revenues, there were two offsetting provisions. First, as of January 1, 1994, profits used to increase working capital were deductible from the taxable base, and second, in connection with the introduction of monthly compensation payments to adult Uzbeks (see below), a Presidential decree dated August 31, 1994, stipulated that 50 percent of the amount of this compensation, which enterprises were required to pay their employees, would be paid from the state budget through a deduction in the enterprise income tax. This last deduction is not subject to the 50 percent limit on the total of deductions.

b. Expenditures

In 1994, the Government’s policy has resulted in major shifts among expenditure categories, particularly away from unlimited subsidies towards targeted transfers and allowances to the population (Statistical Appendix Table 31).

At the beginning of 1994, subsidies remained on bread, flour, and free breakfasts for school children. Prices for flour and bread were increased substantially on September 1, 1994, to sum 3.5 per kilogram and sum 3 per loaf, respectively, thus eliminating the need for budgetary subsidies (see Statistical Appendix Table 17). 1/ As of September 1994, all remaining subsidies on food items were eliminated and the authorities announced a policy of allowing further price increases to fully cover costs to prevent subsidies from re-emerging in the budget (Statistical Appendix Table 31). In line with this policy, prices for bread and flour doubled on November 5, 1994. With respect to non-food items, subsidies on medicines, children’s clothes, and coal were eliminated as of April 1, September 1, and October 1, 1994, respectively. In connection with this move, the price of coal increased by about 900 percent on October 1, 1994.

Subsidies for public urban transport were eliminated on July 1, 1994, by raising fares four-fold compared to the price at the beginning of the year (Statistical Appendix Table 16). Further price increases for public urban transport took place on September 16 (50 percent) and October 26 (33 percent). Central heating and hot water remain subsidized from the state budget, but tariffs for these items were increased substantially on October 26 to reduce the amount of budgetary subsidies. 2/

In the wake of the price increases for bread and flour in September, a new system of compensation payments was introduced as of October 1, 1994, whereby virtually all adult Uzbeks 1/ were granted monthly compensation payments of sum 100 starting in October. On November 1, 1994, these compensation payments were increased to sum 150 per month in response to the increases in energy prices that occurred in October. Compensation payments for workers in budgetary institutions, students, unemployed, and mothers are made directly from the state budget, while the payments for pensioners are made by the Social Insurance Fund.

Family allowances, which had deteriorated in real terms due to inflation, were increased and restructured as of September 1, 1994, while as of October 1, the Government introduced a new system of income support for low-income families (see below).

On April 15, 1994 the tax on foreign exchange earnings was replaced by a surrender requirement. Of the 30 percent of foreign exchange earnings sold to the Central Bank, the Ministry of Finance has the option to buy one half of the surrendered amount at the official exchange rate–of this two thirds accrues to the Republican Foreign Exchange Fund and one third to the Local Foreign Exchange Funds.

Expenditures for gold purchases from the mining enterprises decreased substantially in 1994. Since approximately the same volume of gold was bought in 1994 as in 1993, the reduction in expenditures is due to the erosion of the administered price of gold in real terms.

In 1994 the authorities no longer separately reported expenditures on defense, public order, and safety. 2/ These expenditures are now included in “Other” which partly explains the large increase in this expenditure item.

c. Extrabudgetary funds

There are currently six extrabudgetary funds in operation in Uzbekistan. These are the Employment Fund, the Fund for the Replenishment of Mineral Resources and Raw Materials, the Road Fund, the Uzgosfund, the Social Insurance Fund, and the Fund of the Trade Union Federation Council. Revenues and expenditures of these extrabudgetary funds are reported to the Ministry of Finance on a monthly basis.

The largest extrabudgetary fund is the Social Insurance Fund. 3/ Its revenues consist of social security contributions of 32.5 percent of the wage bill paid by enterprises plus a 1 percent obligatory payment by employees. 1/ The Social Insurance Fund is responsible for paying old age and disability pensions, and for paying sick leave, childbirth, maternity, and funeral benefits. The deficit in 1994 shown in Table 4 for the overall balance of the extrabudgetary funds is due to a deficit of the Social Insurance Fund; all other extrabudgetary funds have been either in balance or registered a small surplus for the first nine months of the year.

d. External sector budget

All government revenues and expenditures in hard currency and in Russian rubles are recorded separately from the state budget in the external sector budget. This budget is a consolidation of all convertible foreign currency operations recorded in the Republican Foreign Exchange Fund and the Oblast (local government) Foreign Exchange Fund, as well as operations in Russian rubles. The main revenue item for the external sector budget is the sale of gold abroad. In addition, receipts from the 15 percent tax on hard currency earnings (in effect until April 15, 1994) and receipts from one-half of the surrender requirement are also recorded as revenues in the external sector budget, as well as small amounts received from fees paid in foreign exchange and amounts surrendered in Russian rubles. During the first nine months of 1994, the external sector budget recorded a deficit of sum 23 million as the authorities sold a large amount of gold domestically rather than abroad 2/ in the third quarter of 1994.

Major items on the expenditure side are related to foreign debt repayment obligations and imports of military equipment. A small share of total expenditures is for contributions to international organizations and embassy expenditures.

3. Social safety net

The Government maintains an extensive social safety net, which consists of various benefits, transfers, and allowances. As discussed above, with the dismantling of all remaining subsidies on food and non-food items during 1994, most of the implicit social safety net arrangements have disappeared. The authorities have replaced the subsidies with two new social security arrangements–allowances for low-income families and compensation payments for a large part of the adult population in Uzbekistan.

Responsibility for social protection is distributed among several ministries. The Ministry of Labor is responsible for employment and wage issues, drafts new laws on social protection, and supervises the activities of the Employment Fund. The Ministry of Social Protection supervises the activities of the Social Insurance Fund. Family allowances, allowances for low-income families, and compensation payments (except for pensioners) are all paid from the state budget.

In 1994, there were about 2 ½ million pensioners in Uzbekistan, including 300,000 who received pensions while working. A large share of total pensioners receive the monthly minimum pension, which was sum 105 as of August 1, 1994, and was increased to sum 135 as of December 1, 1994.

On September 1, 1994, a new system of family allowances was put into place under which all families receive benefits based on the number of children under the age of 16; these allowances are linked to the minimum wage, with benefits equal to 10 percent of the minimum wage for families with one child, 20 percent for families with two children, 40 percent for families with three or four children, and 50 percent for families with 5 or more children. During October 1994 about 2.6 million families received an average benefit of about sum 30 per month.

Unemployment benefits are paid by the Employment Fund. In 1994, benefits paid remained very low, as the number of officially registered unemployed persons receiving unemployment benefits at end-September was about 20,000.

On October 1, 1994, a new program of allowances for low-income families was introduced. It provides for a monthly payment of 1 ½ to 3 minimum wages to low-income families as identified by local authorities. It is estimated that more than 500,000 out of a total of about 4 million families receive these allowances and that a family receives an allowance equivalent on average to two minimum wages per month.

As discussed above, from October 1994, virtually all adult Uzbeks were paid a monthly nontaxable compensation in addition to their other income.

4. Statistical issues

Data on revenues and expenditures of the state budget, the extrabudgetary funds, and the external sector budget are collected on a monthly basis within the Ministry of Finance and are available with a lag of 15 days for the state and the external sector budgets, and of about 20 days for the extrabudgetary funds.

The breakdown of expenditure for the state budget on a monthly basis is available only by the functional classification used by the Ministry of Finance. A breakdown of expenditure for the state budget by economic classification is available on an annual basis only. Revenues and expenditures of the extrabudgetary funds and of the external sector budget are not fully consolidated with the state budget, and the extrabudgetary funds typically classify transfers from the budget and credit from the banking system as revenue.

IV. Monetary Developments

In Uzbekistan, the functions of a monetary authority are performed by several institutions. The Central Bank of Uzbekistan (CBU) has the exclusive right to issue banknotes and coins and to regulate the use of foreign currency within the territory of Uzbekistan. The CBU provides cash, deposit and transfer services to the Government and extends credit to the Government. The CBU also provides liquidity services, including the lend-of-last resort function to commercial banks. The management of the international foreign exchange reserves is shared by the CBU and the National Bank for Foreign Economic Affairs (NBFEA), while gold reserves are held at the CBU and with the Precious Metal Depository Institution. On September 15, 1994 the Government transferred 25 tons of gold to the CBU. Until then, the foreign assets of the CBU consisted mainly of US$100 million of Government funds placed with foreign banks, and starting in 1994, the receipts from the foreign exchange surrender requirement used for working balance purposes. 1/ As of end-September 1994 about one-third of Uzbekistan’s international reserves were at the CBU.

The banking legislation enacted in 1992 allows for cooperative and private banks, but requires that new commercial banks can be established only as joint-stock companies. While there has been a significant increase in the number of registered financial institutions, three banks–the Agroprombank, the Promstroibank and the Savings Bank–dominate the lending activities of the banking system. Although commercial banks are authorized to accept saving deposits from households, the majority of these deposits are concentrated with the Savings Bank of Uzbekistan. In early 1994, the restriction limiting commercial banks’ (except for the Savings Bank) holdings of household deposits to no more than capital was eliminated, with the result that several banks have started to compete aggressively for deposits. However, the deposits of the Savings Bank are guaranteed by the State, while other banks are required to establish their own deposit insurance funds.

1. Monetary policy

In 1993 widespread shortages contributed to inflationary pressures, and credit policy was aimed at maintaining production and employment levels in the face of rapidly increasing wage and input costs. Credit expansion in 1993 reflected in part operations to monetize interenterprise arrears, and also in part loans from the CBU to the Ministry of Finance which were onlent to enterprises for their working capital. Over the year, domestic credit of the banking system increased by almost 5 percent in real terms (Chart 3). On November 15, 1993 Uzbekistan issued the sum-coupon at an exchange rate of par with the Russian ruble. Although each household was allowed to deposit up to Rub 200,000 in a bank account from which funds could be used to make payments, cash withdrawals were possible only in small denomination notes which were generally unavailable. Deposits in excess of Rub 200,000 were required to be placed in non-interest bearing accounts that were frozen for 6 months. As a result, the currency/deposit ratio fell sharply in the fourth quarter.

Chart 3
Chart 3


Citation: IMF Staff Country Reports 1995, 023; 10.5089/9781451839753.002.A001

Source: Data provided by the authorities; and staff estimates.

In 1994, the stance of monetary policy has been geared toward bringing down inflation and stabilizing the exchange rate for the sum which was introduced on July 1, 1994. Thus, the CBU raised its rediscount rate to 50 percent at the beginning of the year, to 150 percent on May 1, and further to 225 percent on October 1, 1994. Central bank lending to commercial banks has been restricted, and during the first nine months of 1994 banking system credit fell by over 28 percent in real terms, notwithstanding a large seasonal increase in credit during the third quarter, mainly for the harvesting of the cotton crop (Table 5). In April, the CBU started organizing inter-bank 1/ credit auctions; however, the amounts of credit offered and bid for in these auctions have been small. Notwithstanding a decline in real terms of 2 percent in CBU domestic credit, reserve money during the first nine months of 1994 rose by 355 percent, or by 33 percent in real terms. The increase in reserve money was mainly the result of a large inflow of convertible foreign exchange reflecting the strong balance of payments performance during this period. Broad money increased somewhat less than reserve money during the same period, as the money multiplier declined (Table 6).

Table 5.

Uzbekistan: Reserve Money and Net Domestic Assets of the Monetary Authorities. 1992-94

(In millions of sum)

article image
Sources: Central Bank of Uzbekistan; Ministry of Finance; and staff estimates.

Valued at current exchange rates.

Gold valued at US$390 per ounce.

Table 6.

Uzbekistan: Broad Money and Net Domestic Assets of the Banking System, 1992-94

(In millions of sum)

article image
Sources: Central Bank of Uzbekistan, Ministry of Finance; and staff estimates.

Valued at current exchange rates.

Gold valued at US$390 per ounce.

The decline in the money multiplier was largely due to a substantial increase in the currency/deposit ratio. The increased demand for currency by the public reflected partially the freeing-up of deposits that had been frozen in 1993, but also a lack of confidence in the banking system. Following the introduction of the sum in July, there had again been restrictions on cash withdrawals from bank accounts. The fluctuations in the reserve/deposit ratio during 1994 reflected to some extent the change in the obligatory reserve requirements introduced in May, as well as the lifting of the requirement that the Savings Bank place 70 percent of its deposits at the CBU. In an attempt to improve monetary management, the CBU increased and simplified the reserve requirements for banks in May 1994; at the same time a penalty rate of 350 percent was set for banks which overdrew their correspondent accounts. The unremunerated reserve requirements were set at 30 percent for deposits of less than three years and at 10 percent for other deposits. 2/ This move was prompted by the apparent excess liquidity of the banks at the end of 1993. Banks continued, however, to hold a large amount of excess reserves, which could explain in part the lack of demand for credit in the credit auctions. The high level of excess reserves also suggests difficulties in the payments system, as well as the preference of banks’ clients to deal in cash. Also in May, the CBU moved to improve the payments system by lifting the control of the purpose of a transaction from individual payment documents. This allows the CBU to process payments orders in batches and thus improves the speed of the transfer of payments instructions.

2. Credit, deposit, and interest rate developments

Although credit to the non-government sector increased by about 170 percent during the first nine months of 1994, most credit was directed for short-term activities as the maturities were generally for less than six months. The short maturity of loan portfolios reflected banks’ risk aversion in an uncertain economic environment, combined with generally negative real rates of interest charged for credits. An exception to the short maturities has been the portfolio of the Savings Bank, the vast majority of which is still granted for housing mortgages of 20 years. A large source of credit to enterprises came from refinancing credits of the CBU to commercial banks, mainly the Agroprombank and the Promstroibank.

In May 1994, a Credit Commission was established, chaired jointly by the Minister of Finance and the President of the CBU. The main purpose of this Commission was to review and approve all applications for credit from enterprises to the commercial banks (and from the banks to the CBU) to ensure observance of the overall limits on credit from the CBU that had been established by the authorities. The Commission also has the authority to grant a refund on interest payments to an enterprise from budgetary sources; the CBU does not subsidize its credits to banks and banks are expected to charge the enterprise the cost of funds from the CBU plus a margin of 3-5 percentage points. The interest subsidy is paid directly from the Ministry of Finance to the enterprise. The amount of subsidy payments from the budget through September, however, has been very small. In light of the Government’s tightened fiscal stance, credit from the banking system to finance the budget deficit grew by only 30 percent in the first nine months of 1994, a decline of some 60 percent in real terms.

There are indications of financial disintermediation in Uzbekistan. Notwithstanding removal of the requirement that the Savings Bank maintain 70 percent of its deposits at the CBU, thus freeing up large resources for credits extended by banks, activity in the credit auctions remained low in 1994. Although the Savings Bank does participate in the auction, it also extends some credit directly to the Promstroibank and Agroprombank, at times at the request of the Government.

Enterprise and household deposits at commercial banks grew substantially during the first nine months of 1994 (by 12 ½ percent in real terms) owing to a large increase in foreign currency deposits. The share of foreign currency deposits in the total rose from less than 10 percent at end-1993 to almost 50 percent by end-September. Deposits in domestic currency declined by almost 20 percent in real terms during the first nine months of 1994 reflecting removal of restrictions on withdrawals, negative real interest rates paid on deposits, and a lack of confidence in the banking system due to the difficulties encountered during the currency reforms in 1993-94.

Nominal interest rates on bank deposits and credits remained low during most of 1994. While adjustments to lending rates reflected in some part the slowness of the CBU to increase its refinancing rate, it is also probable that the low lending rates reflected excess liquidity of banks during this period. Interest rates on deposits were sharply negative in real terms largely due to the Savings Bank’s reluctance to raise the rates paid on deposits when much of its lending portfolio was at low nominal rates which could not be adjusted. There is evidence that households and enterprises respond positively to higher interest rates–when the Savings Bank doubled its interest rates paid on deposits in April 1994 there was a large increase in new deposits. In October, the Savings Bank raised its minimum deposit rate and also introduced new 3-, 6- and 12-month deposits with significantly higher interest rates (30 percent quarterly for 3-month deposits, 60 percent semi-annually for 6-month deposits, and 120 percent for the 12-month deposits). 1/ The lifting of the restriction on commercial banks’ ability to attract deposits has resulted in increased competition for household deposits, with some banks now offering substantially higher rates than the Savings Bank. The spread between lending and deposit rates remains high reflecting, inter alia, the high reserve requirement, inefficiencies of the payments system, and a risk premium for lending to enterprises.

V. Balance of Payments 2/

1. Overall developments

Uzbekistan’s consolidated current account recorded as deficit equivalent to 9 percent of GDP in 1993 (Table 7). The current account deficit was more than offset by capital inflows, which allowed Uzbekistan to build up its gross official international reserves (gold and foreign exchange holdings) to the equivalent of nearly 4 months of imports by end-1993.

Table 7.

Uzbekistan: Consolidated Balance of Payments Summary, 1991-94 1/

(In millions of U.S. dollars)

article image
Sources: Estimates provided by Uzbek authorities and staff estimates.

Figures for traditional trading partners in the consolidated balance obtained by converting quarterly sum data into U.S. dollars.

Excludes the changes in monetary gold holdings stemming from transactions with residents.

During the first nine months of 1994, the current account deficit amounted to about US$360 million (7 ½ percent of GDP), in absolute terms less than one-half the deficit recorded during the same period in 1993. A small merchandise trade surplus was recorded, owing mainly to a reduction in imports. This improvement in the trade balance was offset, in part, by a sharp deterioration in the balance on the services account, due mainly to rising transportation costs. Net capital inflows during the first three quarters of 1994 were only about one-third the level recorded in the same period of 1993, due in part to much higher repayments of commodity credits as well as lower disbursements of credits from Russia. The overall balance of payments recorded a surplus, and by end-September 1994 gross official reserves were equivalent to 5 ½ months of imports. The outstanding stock of external debt at end-September 1994 was about 24 percent of GDP, and the debt service ratio about 14.5 percent of exports.

2. Merchandise trade

The consolidated trade deficit in 1993 is estimated to have been equivalent to almost 8 percent of GDP, reflecting a deficit of 9 percent of GDP in trade with its traditional trading partners 1/ and a surplus of 3 percent of GDP in trade with other countries (Chart 4). 2/ Exports of cotton fiber accounted for over 40 percent of total export earnings while imports of energy products and foodstuffs were equivalent to about 40 percent of total imports. About one half of total exports were directed to traditional trading partner countries, while imports from these countries were about 61 percent of the total.

Chart 4
Chart 4


Citation: IMF Staff Country Reports 1995, 023; 10.5089/9781451839753.002.A001

Source: Data provided by the authorities; and staff estimates.

During the first nine months of 1994, the merchandise trade balance is estimated to have registered a surplus equivalent to about 1 percent of GDP. Imports were about 20 percent lower than during the first nine months of 1993, as some extraordinary imports in 1993, e.g. a buy-lease arrangement for two airplanes by Uzbekistan Airlines, were not repeated in 1994. Reflecting the Government’s policy of increasing self-sufficiency in energy and food products, imports of energy products were almost 30 percent less than in 1993, and imports of foodstuffs declined significantly. Exports were about 11 percent higher than during January-September 1993, reflecting primarily higher exports of cotton and gold. Although the volume of cotton exports was 7 percent lower compared with the same period in 1993, an increase in the international price of cotton, as well as a movement in the export price to traditional trading partners toward international levels, resulted in the value of cotton exports increasing by almost 10 percent in the first three quarters of 1994.

a. Developments in trade with traditional trading partners

Reflecting decades of close production and trade links with its traditional trading partners, about 55 percent of Uzbekistan’s total trade in 1993 was conducted with these countries. Russia continued to be Uzbekistan’s main trading partner, accounting for about 61 percent of trade with traditional trading partner countries (Statistical Appendix Table 34). 1/ Other major trading partners in 1993 among those countries were Kazakhstan, Turkmenistan, Ukraine, Belarus, Tajikistan, and the Kyrgyz Republic. In 1993 the Central Asian republics represented about 28 percent of Uzbekistan’s trade with traditional partners, but during the first nine months of 1994 trade with these republics had increased to about 50 percent of such trade, due mainly to a sharp increase in trade with Tajikistan. During the first nine months of 1994 Russia’s share in the total of trade with these countries declined to 44 percent.

Uzbekistan’s main exports to these countries in 1993 were cotton, energy products, and products of light industry, machine-building and metal working industry, metallurgy industry, and chemical and petrochemical industry (Statistical Appendix Table 35). Exports of cotton fiber, which accounted for about 43 percent of total export earnings from these countries in 1993, rose by about 30 percent in volume terms, and tripled in value terms reflecting the rise in unit prices toward world levels. Exports of energy products to these countries rose to about 37 percent of total exports in 1993 from about 13 percent in 1992, and this trend continued during January-September 1994.

Uzbekistan’s imports from its traditional trading partners continue to be more varied and less concentrated in products than exports. Uzbekistan remains a net importer of energy products from these countries; in general, net exports of natural gas and electricity were more than offset by net imports of crude oil, petroleum products, and coal (Statistical Appendix Tables 36 and 37). However, the volumes of energy imports, especially of crude oil and petroleum products, declined steadily during 1991-94 owing to increased domestic production and more efficient use of available supplies.

b. Developments in trade with non-traditional partners

The turnaround in Uzbekistan’s trade balance with its non-traditional trading partners from a deficit in 1992 to a surplus in 1993 reflected entirely exports of gold (equivalent to almost 12 percent of GDP). Excluding gold exports, exports in 1993 remained at almost at the same level as in 1992, notwithstanding a decline in cotton exports reflecting lower international prices. The increase in imports in 1993 largely reflected a buy-lease arrangement for two airplanes by Uzbekistan Airlines and other special imports.

The merchandise trade balance with these countries during the first nine months of 1994 recorded a deficit of about US$160 million, about the same magnitude as during the same period in 1993. Export earnings from cotton increased significantly notwithstanding an 8 percent fall in volume, owing to a higher international price for cotton.

In terms of the composition of exports to these countries, in 1992 raw materials and processed industrial products (including cotton fiber) constituted about 80 percent of total exports; this ratio declined to 65 percent in 1993 reflecting the fall in cotton exports. (Statistical Appendix Table 38). 1/ In 1993 almost one-half of Uzbekistan’s exports went to industrial countries while about one-fourth each went to current and former socialist countries and to developing countries (Statistical Appendix Table 39). During January-September 1994 industrial countries received about two thirds of Uzbekistan’s exports.

While foodstuffs and raw materials are Uzbekistan’s main imports from its non-traditional trading partners, the share of these goods in total imports from these countries has declined steadily from 74 percent in 1992 to about 50 percent during January-September 1994. This decline reflects largely reduced imports of wheat arising from the Government’s policy of import substitution. Industrial countries have constituted the main source of Uzbekistan’s imports from non-traditional partners.

3. Other current transactions

The coverage of other current transactions in the balance of payments continues to be limited, with information available only on services related to trade, the activities of Uzbekistan Airlines, travel payments for business trips abroad, and interest payments on outstanding external liabilities. During the first three quarters of 1994 there was a sharp increase in transportation costs, owing mainly to higher rates being charged by the traditional trading partner countries effected in convertible currencies. In reaction to increases in railroad tariff rates by about 2-5 times in 1994, a number of Uzbek enterprises reoriented their market contacts.

4. Direct investment, external debt, and credits

Although there are reports of significant joint-venture activity in Uzbekistan and official records show a large number of registrations, only small amounts of actual investment inflows have been recorded to date.

The outstanding stock of external debt at end-September 1994 is estimated at US$1,285 million (24 percent of GDP), up from US$1,009 million (13 percent of GDP) at end-1993 and US$258 millon (6 percent of GDP) at end-1992. Debt service payments in relation to exports was equivalent to about 7 percent in 1993 and to 14.5 percent during the first nine months of 1994. At end-September 1994 external payments arrears amounted to US$12.8 million, stemming from overdue interest payments to Russia. At the end of 1993, outstanding arrears had been US$5.2 million.

About 41 percent of the outstanding debt at end-September 1994 was attributable to credits received from traditional trading partners, of which that from Russia reflected three loans totaling US$509 million. Two loans amounting to US$143 million (Rub 57 billion) and US$275 million (Rub 180 billion) are related to credits extended through correspondent accounts in 1992 and 1993, respectively, and converted into state credits in 1993. The third loan is a state credit of US$91 million (Rub 125 billion) extended in May 1993 to finance imports; part of this credit was disbursed in 1993 and the remainder during the first two quarters of 1994. All three credits from Russia are scheduled to be repaid during 1996-2002. Uzbekistan also received a US$14 million (Rub 13 billion) state credit from Belarus, which originated as a correspondent account credit in 1993, and is scheduled for repayment in 1995. With the exception of the US$143 million loan from Russia (which is interest free), the interest rate on all of these credits is based on LIBOR.

The remainder of Uzbekistan’s outstanding external debt at end-September 1994, amounting to US$762 million, was to non-traditional trading partners and reflected mainly commodity credits received at commercial terms. During the first nine months of 1994, US$546 in credits were disbursed, the bulk of which were commodity credits, with only a small amount of investment and/or project financing. The major sources of these credits were Switzerland, the United State, Germany, Indonesia, Turkey, India, and China. The World Bank and the EBRD also made small disbursements during 1994.

At end-September 1994, Uzbekistan had outstanding claims on Tajikistan and the Kyrgyz Republic arising from credits extended through the correspondent accounts during 1992 and 1993. These claims, which were formalized into state credits in 1993 and 1994, amount to US$103 million (US$89 million to Tajikistan and US$13 million to the Kyrgyz Republic). The loan to Tajikistan is to be repaid during 1994-2002 and the one to the Kyrgyz Republic during 1995-1998. Both of these countries were behind schedule in the servicing of their credits to Uzbekistan at the end of September 1994.

Uzbek enterprises had net claims (gross claims minus gross liabilities) against other enterprises in traditional trading partner countries of sum 35 million at end-1992, sum 77 million at end-1993, and sum 40 million at end-September 1994. These data are derived from the balance sheets of Uzbek enterprises.

VI. Exchange and Trade System 1/

1. Institutional background

During 1994 there were major changes in the institutional arrangements relating to both the trade and the exchange system. 2/

On December 21, 1993 it was announced that the Uzbek State Joint-Stock Association for Contracts (Uzkontrakttorg), which was essentially responsible for all centralized trade with Uzbekistan’s traditional trading partners, would be replaced by the Uzbek Republic Joint-Stock Association for Wholesale and Exchange Trade (Uzoptbirzhetorg). The new voluntary association consists of 11 trade firms (open joint-stock companies), territorial brokerage companies, commodity and raw material stock exchanges, a bank, and a transportation expediting agency. The Association also has a number of industrial enterprises (producing among other goods, building materials and consumer goods), processing firms (such as procuring paper from waste paper), production services and leasing services. The major activity of the Association is trade and intermediation activities. However, it also provides marketing and advertising services and fulfills state orders. The Uzbek Republican Joint-Stock Association is responsible for procuring and selling supplies for state needs and thus helping implement interstate agreements. Exports of goods acquired at commodity and raw material exchanges do not require a license or payment of customs (export) duties. However, given the short period since the establishment of these exchanges, such activity has been limited.

The Ministry of Foreign Economic Relations (MFER) continues to be responsible for negotiating trade agreements with non-traditional trading partners as well as those agreements denominated in hard currency with traditional trading partners, and for implementing foreign trade agreements and external trade policy through the issuance of licenses and export quotas.

The authority to control foreign exchange transactions is vested with the Central Bank of Uzbekistan (CBU), the Ministry of Finance, and the State Tax Committee. Foreign exchange transactions are carried out by the CBU, the National Bank for Foreign Economic Activity (NBFEA) and general license banks. The number of such banks authorized to carry out foreign exchange transactions in both Uzbekistan and abroad increased from 6 at the beginning of 1994 to 13 by November 1994. In addition, banks with limited (domestic) licenses are allowed to open exchange offices within the country to carry out foreign exchange transactions. Since 1993, the CBU is responsible only for servicing state credits with traditional trading partners and not for financial arrangements relating to interstate trade. The responsibility for the latter has been assumed by the commercial banks, which are authorized to carry out direct commercial relations with banks in traditional trading partner countries.

In April 1994, the Government started to use the Republican Foreign Currency Exchange to conduct interbank foreign exchange auctions to determine the official exchange rate of the national currency. Authorized banks (those with general licenses) and the CBU participate in the auction. Banks are free to set their own foreign exchange rates, with a maximum spread of 10 percent set by the CBU on the quoted buying and selling cash rates.

2. Trade and payments system

Most trade in Uzbekistan continues to be carried out through government channels. An estimated 65 percent of trade with non-traditional trading partner countries and about 60 percent of trade with traditional trading partners is centralized. The lower percentage for traditional trading partners may indicate that the longer relations with these countries has allowed enterprises in these countries to establish direct contacts. The scope of the state order system, under which the Government procures domestic production for state use (both domestic and external), was reduced in 1994. 1/ State orders do not apply to joint-ventures. Export quotas are set to balance domestic production and consumption, and they are divided into quotas for enterprises and quotas for state needs. The latter category covers goods needed to fulfill intergovernmental agreements and centralized export deliveries.

Under the January 21, 1994 Presidential decree cited in Section II, the Government unified the treatment of CIS and non-CIS trade with respect to taxes, licensing, quotas, etc. Consequently, custom duties on exports ranging between 5 percent to 50 percent apply to some 65 items, with only art subject to a customs duty rate of 100 percent. 2/ The 35 percent tax on foreign exchange receipts (from non-traditional trading partners) that was imposed in May 1993 was reduced to 15 percent in January 1994, and, subsequently eliminated on April 15, 1994. The January 21, 1994 decree eliminated all import tariffs until July 1, 1995.

At the beginning of 1994 a mandatory surrender to the Central Bank of 15 percent of foreign exchange receipts at the official exchange rate was introduced. This requirement was modified in April 15, 1994 to 30 percent of export earnings from all countries. Of the 30 percent, one half remained with the CBU, and the other half was to be made available to the Ministry of Finance and local governments. The Ministry of Finance transferred these receipts to the Republican Foreign Exchange Fund. 1/ The surrender requirement has been applied to all centralized trade contracted since April 1, 1994. However, as most contracts were concluded prior to April 1, and various exports were exempted from the requirement, 2/ the total amount surrendered to date has been relatively small. In November 1994, the surrender requirement was modified so that the full 30 percent of foreign exchange receipts is surrendered to the CBU and exemptions are no longer granted.

The MFER must register and review all contracts and agreements by entities requiring licenses as well as those concluded on the basis of intergovernmental agreements and centralized deliveries. Since the January 21, 1994 presidential decree, 26 types of goods are subject to export licenses (to both CIS and non-CIS states) by the MFER according to fixed quotas; these items include cotton fiber and waste, energy products (oil, natural gas, electric power, coal, petroleum products), certain ferrous metals, nonferrous metals, fertilizers, and silk cocoons. 1/ There are also 13 specific goods and services (such as medicines, weapons, precious metals, uranium and other radioactive substances, imports of motion pictures, videos, etc., exports of research, investment aboard, professional activities of Uzbeks abroad, etc.), that require export and import licenses from the MFER; quotas do not apply to these goods or services and licensing requirements are consistent with international procedures. A license is required for each shipment. Nine types of goods are prohibited from being exported from Uzbekistan: Flour and cereals from state resources, livestock and poultry, meat, butter, dry milk, tea, sugar, ethylene alcohol, and antique items.

At present Uzbekistan has bilateral payments agreements with 17 countries. 2/ These and other types of trade agreements, can be differentiated into three categories. The first category includes those agreements with non-CIS countries that focus only on defining trade regimes (tariffs, duties, etc.). In these agreements there are no indicative lists of goods to be traded and trade is generally in freely convertible currencies. The second category of agreements covers those defining trade regimes and involving freely convertible currencies, but also includes a list of indicative goods (that the country wants to sell). The delivery of such goods is not compulsory as governments do not agree to supply such goods. Commercial enterprises carry out such transactions through contracts. Agreements in this category are those with the Baltic States, Belarus, Armenia, and until 1994, East European countries (which are currently in the first category). In 1992, China, Malaysia, and Indonesia were also in this group. The third category includes agreements with CIS states, in which there are indicative lists, as well as lists of commodities to be supplied on a mutual basis. Examples of such agreements are those with Russia, Kazakhstan, Ukraine, and the Kyrgyz Republic, and clearing arrangements are signed with these countries. Such trade agreements incorporate principles of both trade and settlements. Governments assume responsibility for mutual supplies and are thus guarantors of the contracts. In these agreements the relevant trade prices are specified in freely convertible currencies.

The duration of agreements in each of the three categories is different. The first category includes agreements that usually last for 10-15 years; the second category includes those that are for one year, and in the third category are agreements that last less than one year. The Uzbek authorities expect the number of countries in the last category to decline and the list of compulsory good deliveries to be confined to only those that are of strategic importance.

In June 1994 Uzbekistan’s request for observer status at the General Agreement on Tariffs and Trade was accepted.

3. Exchange system

During 1994, the exchange system underwent significant modifications. Until April 1994, the sum coupon, introduced on November 15, 1993 to replace the ruble, was maintained officially at par with the Russian ruble. The official CBU exchange rate was determined by the Moscow interbank exchange, and there was wide divergence between the official and the parallel market exchange rates. On April 15, 1994, the CBU began to determine the official exchange rate on the basis of auctions held by the Republican Currency Exchange. However, the volume of transactions at the auction remained small and the exchange rate remained considerably more appreciated than the parallel market rate.

On July 1, 1994, the national currency, the sum, was introduced with a conversion rate of 1,000 sum coupons per sum, and an exchange rate of sum 7 per U.S. dollar. The exchange rate in the parallel market appreciated rapidly in the period following the introduction of the sum as enterprises and individuals moved out of sum coupons and access to bank credit and cash deposits was restricted. As the auctions of foreign exchange became regularized on a weekly basis, the official exchange rate stabilized at about sum 11-12 per U.S. dollar during July and August, although the volume of transactions at the auction remained small (at about US$1-1.45 million per auction) and the parallel market rate depreciated to sum 18-20 per U.S. dollar. On August 1, 1994, the CBU introduced a separate cash rate, based on the parallel market rate. Beginning in September, the CBU began to allow the official exchange rate to depreciate from sum 12 per U.S. dollar at the beginning of the month to sum 17 per U.S. dollar by the end of the month so that the difference between the official, cash, and parallel market exchange rates narrowed.

On October 10, 1994, the official and cash rates were unified at sum 22 per U.S. dollar and the official exchange rate was determined by the weekly foreign exchange auctions at the Republican Currency Exchange (Chart 5). The auction-determined exchange rate is used for all official foreign exchange transactions (including those of individuals, enterprises, banks, and the Government), with exchange rates for currencies other than the U.S. dollar being determined by cross rates. The CBU intervenes in the auction to smooth out sharp fluctuations in the exchange rate but does not attempt to target a particular exchange rate. The foreign exchange receipts surrendered to the CBU at the official exchange rate are offered at the auction. The auctions include currencies other than the U.S. dollar, including the currencies of some CIS states. Since October 15, 1994 all payments and settlements by legal entities and individuals (residents and nonresidents) must be effected in sum.

Chart 5
Chart 5


Citation: IMF Staff Country Reports 1995, 023; 10.5089/9781451839753.002.A001

Source: Data provided by the authorities; and staff estimates.

Foreign exchange for payments for invisibles, including transportation, is made available once the underlying merchandise transactions have been approved. The foreign exchange allowance for travel was eliminated on November 15, 1993; travelers were expected to secure needed foreign exchange at the parallel market. On January 21, 1994, all restrictions on bringing foreign exchange in cash (including CIS banknotes) in and out of Uzbekistan were removed. Subsequently, beginning in July 1994, residents were allowed to buy up to US$250 in foreign exchange from authorized banks. On August 1, 1994, this allowance was increased to up to US$1,000 until end-1994; however, in early December this limit was reduced to US$300 until the end of the year. To purchase this foreign exchange a resident needs only a passport which is stamped to indicate the amount of the purchase. Foreign exchange in excess of this amount is not made available. At the same time, the customs limit for taking freely convertible currency out of the country was reimposed at US$1,000. Under this arrangement, no documentation is required for less than US$500 in foreign exchange, but for the amount in excess of US$500 it is necessary to provide a certificate that the excess has been obtained through authorized banks in Uzbekistan. 1/

Nonresidents are allowed to take out of Uzbekistan the freely convertible currency brought into the country in accordance with customs declarations.

Both resident and nonresident natural and juridical persons are allowed to open and operate convertible currency accounts without restrictions and interest is paid on these accounts. Until the October 15, 1994 resolution requiring all payments and settlements in Uzbekistan to be effected in sum, natural persons were allowed to open foreign currency accounts upon the presentation of their national passport; the impact of this resolution on such activity is unclear at present. Nonresidents are allowed to open personal accounts in foreign exchange upon the presentation of a passport and a customs declaration showing the amount of foreign exchange brought into the country. Wire transfers into and out of such accounts are allowed. Juridical foreign currency accounts may be opened by foreign companies, joint-ventures, etc, upon presentation of (i) registration at the MFER or the Ministry of Justice, (ii) a power of attorney from the company headquarters, and (iii) the charter of the company. The accounts of resident legal entities are subject to the same requirements as those of nonresidents. Transfers abroad from such accounts have to be based on overseas contracts shoving the underlying transactions. Transfers between accounts are not allowed since the October 15, 1994 resolution.

Foreign investments in the form of enterprise joint ventures may be undertaken with approval from the Ministry of Finance. Foreign equity capital participation of up to 100 percent is allowed. Joint ventures are exempt from the profit tax during the first two years after registration and are allowed to export their products and import inputs without licenses and to retain all foreign exchange earnings. Remittances of the foreign investors’ share of profits is guaranteed, and the repatriation of capital is not restricted.

Uzbekistan: Background Paper and Statistical Appendix
Author: International Monetary Fund