Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix analyzes developments in the domestic economy of Uzbekistan. The paper highlights that after declining by 17½ percent during 1992–94, real GDP fell by only about 1 percent in 1995. The moderation in the output decline was due in part to a strong performance in the agricultural sector. Agricultural output grew by about 2 percent in 1995, owing to increases in grain production, while activity in the industrial, construction, transport, communications, and trade sectors continued to decline.


This Selected Issues paper and Statistical Appendix analyzes developments in the domestic economy of Uzbekistan. The paper highlights that after declining by 17½ percent during 1992–94, real GDP fell by only about 1 percent in 1995. The moderation in the output decline was due in part to a strong performance in the agricultural sector. Agricultural output grew by about 2 percent in 1995, owing to increases in grain production, while activity in the industrial, construction, transport, communications, and trade sectors continued to decline.

Uzbekistan--Basic Data

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Source: Uzbek authorities; World Bank (social indicators); Fund staff estimates.

Population density according to oblast ranges from 6.4 persons per sq. km. (Navoi) to 450.8 persons per (Andijan).

Annual average population growth rate during 1985-92 was 2.4 percent. Annual average growth rate during 1970-92 was 2.7 percent.

Indirect taxes minus subsidies. Net taxes have grown rapidly since 1993 owing to the introduction of excise taxes in 1993, increased excise tax rates and a broader excise tax base in 1994-95, and reduced subsidies in 1994-95. The bulk of this item comes from the agricultural and industrial sectors, although individual contributions cannot be determined.

Combines operations from the domestic currency budget and the hard currency budget.

Includes net lending.

Includes the balance of the extrabudgetary funds. Excludes privatization proceeds.

Change in terms of percentage of broad money at the beginning of the period.

I. Introduction and Overview

Since independence in 1991, the Uzbek economy has been subject to large macroeconomic shocks resulting from disruptions in the trade and payments systems and the move towards market-related prices for trade. However, several specific features of the Uzbek economy have cushioned the fall in output, and the cumulative decline in real GDP of around 18 percent since 1991 has been much lower than in most other countries of the former Soviet Union. Most important of these factors have been the natural resource endowment of Uzbekistan and its role as exporter of raw material and importer of finished goods prior to independence. 1/ Thus, Uzbekistan was able to partly escape the disruption of trade following the collapse of the Soviet Union by diverting its trade to other markets. Further, the structure of the Uzbek economy at the time of the break-up of the Soviet Union was such that it had relatively fewer nonprofitable large industrial enterprises that needed to be closed or restructured than most other countries of the former Soviet Union and a vast potential for establishing new industries to process domestically produced raw materials.

The Government’s development policy since independence has been 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. As a result of this policy, Uzbekistan became a net oil exporter in 1995, and imports of energy products fell from an average of 20 percent of total imports in 1992-94 to virtually nil in 1995. The external current account deficit in relation to GDP was reduced from almost 12 percent in 1992 to less than 1 percent in 1995. At the same time, gross official international reserves rose to the equivalent of over six months of imports at end-1995.

In the first 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. As macroeconomic imbalances widened in 1993, inflation accelerated, shortages emerged, and there was a rapid accumulation of short-term external debt. Financial policies were tightened following the introduction of the new national currency, the sum, on July 1, 1994. The Central Bank of Uzbekistan (CBU) raised the interest rate on its rediscount credits several times and curtailed credits to loss-making state enterprises. The Government halted net lending to state-owned enterprises and reduced other expenditures. As a result, the consolidated fiscal deficit in relation to GDP fell from more than 10 percent in 1993 to 6 percent in 1994.

Stabilization and structural reform efforts were intensified in 1995. 1/ Financial policies were tightened further as the CBU raised its refinance rate to levels that were positive in real terms, curtailed sharply its lending to banks, and soaked up excess liquidity in the financial system through the issuance of central bank certificates of deposit and purchases of credits in the interbank auctions. The consolidated fiscal deficit was reduced to 4 percent of GDP, reflecting largely the impact of new revenue measures. In an attempt to increase private savings, the People’s Bank introduced new categories of deposits with positive real interest rates, and commercial banks became more active in attracting deposits. For 1995 as a whole, real GDP declined by only slightly more than 1 percent, while inflation as measured by the 12-month change in the CPI was reduced sharply to 117 percent from 1,281 percent in 1994. The authorities continued to follow a managed floating exchange rate system in 1995, with the exchange rate for the sum depreciating against the U.S. dollar by 42 percent in nominal terms, but appreciating by almost 50 percent in real terms, during the year. The nominal rate has remained fairly stable against the U.S. dollar during the first four months of 1996, resulting in a further appreciation in real terms.

Uzbekistan has followed a cautious policy in the area of structural adjustment since independence, and advances in market reforms remain fragile. In some areas, such as price liberalization and the exchange system, the authorities have made significant progress. As regards price policy, liberalization has been largely completed, with the prices of only a few communal services and monopoly products, together with rents, remaining subject to control. Prices for oil and oil products were increased significantly in 1995 and 1996. Following the latest increase on April 1, 1996, the wholesale price of crude oil was close to the world market level measured on the basis of import parity. Prices of oil products are, in general, above world market prices. In the area of privatization, virtually all housing has been sold or transferred to residents and almost all small-scale enterprises have been privatized. In the agricultural sector, reforms included the transformation of state and livestock farms into collective, cooperative, and leased farms of ownership, as well as the privatization of agricultural support enterprises. Much less progress has been made in the privatization of medium- and large-scale enterprises, demonopolization, and enterprise and financial sector reform. Also, state orders remain in effect for cotton and grain, and trade liberalization is still incomplete with bans and tariffs being imposed on several export products.

The objectives of the Government’s stabilization and reform program for 1996 are to consolidate the gains made in macroeconomic stabilization and to lay the foundation for economic recovery and an improvement in living standards by accelerating market-oriented economic reforms and reducing administrative interventions in the economy. 1/ The macroeconomic targets for 1996 include reducing inflation to 30-34 percent during the year and limiting the decline in GDP to 1 percent in real terms. The external current account deficit is expected to widen to about 4 percent of GDP as a result of a weakening in international prices for cotton, continued imports of capital goods associated with investments, and the liberalization of the foreign exchange and trade systems. The structural reform efforts will be continued, with particular emphasis on further privatization, including through a mass privatization scheme elaborated in cooperation with the World Bank, demonopolization, and trade liberalization.

II. Developments in the Domestic Economy

Since independence in 1991, Uzbekistan has faced major challenges arising from both external and internal imbalances in the economy in the wake of the collapse of the Soviet Union. Inflation accelerated sharply during 1993 and 1994, but in late 1994 the Government shifted the stance of macroeconomic policies from accommodating excess demand to stabilizing prices and the exchange rate. As a result, inflation declined markedly in 1995. Uzbekistan has so far avoided the sharp decline in output experienced elsewhere in the former Soviet Union, and open unemployment has remained low. Although average wages in U.S. dollar terms have almost doubled since the introduction of the sum in mid-1994, external competitiveness appears to remain adequate. Significant progress has been made in privatization of housing and small-scale enterprises and in agricultural sector reform, but enterprise reform, and particularly privatization of medium- and large-scale enterprises and demonopolization, has proceeded slowly.

1. Output, growth and sectoral developments

After declining by 17 1/2 percent during 1992-94, real GDP fell by only about 1 percent in 1995 (Chart 1). 2/ The moderation in the output decline was due in part to a strong performance in the agricultural sector. Agricultural output grew by about 2 percent in 1995, owing to increases in grain production, while activity in the industrial, construction, transport, communications, and trade sectors continued to decline (Table 1). Industrial production in 1995 was broadly unchanged as increases in the chemical and petroleum, machine building and metal working, and timber and wood processing sectors were offset by weak performances in the light industry and other sectors (Table 2).

Chart 1
Chart 1


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Sources: Data provided by the authorities; and staff estimates.
Table 1.

Uzbekistan: Real GDP Growth and Deflators, 1992–96

(In percentage change over the same period of previous year)

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Sources: State Committee for Forecasting and Statistics; and staff estimates.
Table 2.

Uzbekistan: Industrial Production, 1991–95 1/

(In percentage change over the previous year)

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Sources: State Committee for Forecasting and Statistics; and staff estimates.

Industrial production is measured as the value of production at the previous year’s prices.

The agricultural and industrial sectors accounted for about 45 percent of GDP in 1995; the share of these two sectors has been declining since 1991. However, it is difficult to obtain a clear picture of the sectoral shares in nominal GDP, since net taxes, which in the national accounts data are not allocated to individual sectors, have been growing sharply in recent years due to price liberalization (Table 3). 1/

Table 3.

Uzbekistan: Sectoral Shares of Nominal GDP, 1991–95

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Sources: State Committee for Forecasting and Statistics; and staff estimates.

The net tax sector measures the difference between GDP at market prices and Gross Value Added (GVA) at basic prices. It includes VAT, excise taxes plus net import taxes minus subsidies.

a. Agriculture

Agricultural policy has recently focussed on: (i) import substitution of grain, meat and sugar; (ii) development of the cotton sector; and (iii) structural reform, including privatization and creation of market-oriented economic management.

With the aim of attaining self-sufficiency in grain, the Government has been encouraging a shift away from cotton and other products to grain production, in part by guaranteeing the purchase of part of the crop. As a result, the share of the irrigated land used for grain cultivation rose from 29 percent in 1992 to 40 percent in 1995, while production increased from 2.3 million tons in 1992 to 3.2 million tons in 1995 (Statistical Appendix Table 9). In 1995, production accounted for 73 percent of domestic consumption; imports amounted to 1.2 million tons. The Government plans to increase production to 4.5 million tons in 1996, which would make Uzbekistan self-sufficient.

Cotton production stabilized at about 4 million tons in 1994-95, as a decline in the acreage under cultivation from 1.7 million hectares in 1993 to 1.5 million hectares in 1995 was offset by an increase in the crop yield from 25 centner per hectare in 1993 to 26.4 centner per hectare in 1995. Most of the production is exported. A program for developing the cotton sector, which is supported by a World Bank loan, concentrates on four areas: (i) the seed industry (creation of a capacity in the private sector to process and market about 25,000 tons of planting seed per year, and the strengthening of seed quality control agencies); (ii) cotton marketing (the introduction of cotton grading technology and the development of a system for the dissemination of the information generated through the grading system); (iii) integrated pest management (the development of automated insect rearing and dispersal technologies and the development of improved pesticide spraying equipment); and (iv) irrigation (the introduction of irrigation scheduling technology).

In 1992, privatization started in the agricultural sector. All state farms (1,009) and agricultural enterprises have been privatized and transformed into collectives, leased enterprises, cooperatives, joint-stock companies and other types of organization. A number of livestock farms (600) have been sold through auctions. A total of 17,500 individually-owned farms have been created. Additionally, 3,500 farmers also work independently according to contracts with agricultural enterprises. Farmers can leave freely their collectives.

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 cost and output prices have been liberalized. In order to improve incentives for farmers, state orders were abolished for all goods, except cotton and grain, in 1994. State orders for cotton and grain are being gradually reduced and procurement prices increased. State orders amounted to 60 percent and 50 percent, respectively, for the 1995 crops of cotton and grain, while the procurement prices for both crops were 50 percent of world prices. This implicit taxation of agriculture is partly offset by explicit tax exemptions and implicit subsidies. Agriculture is not subject to VAT and the profit tax rate is much lower for agriculture than for other sectors of the economy; 1/ the tariff for electricity paid by farmers is relatively low; communication facilities and environment protection are provided by the state; and no fees are charged for water.

b. Mining and industry

(i) Energy sector

With the aim of achieving self-sufficiency, the authorities have expanded the production of oil significantly since independence. Domestic production of crude oil and condensate increased from 2.8 million tons in 1991 to 7.6 million tons in 1995 (Statistical Appendix Table 10), while imports of crude oil have decreased from 9 million tons in 1990 to 0.15 million tons in 1995. Imports of oil products such as gasoline, diesel and heavy oil (mazut) have also decreased substantially, to negligible levels in 1995. However, the relatively high sulphur content of Uzbek crude oil necessitates additional investments in oil refinery facilities in order to meet domestic demand for lighter oil products. Such investments are now being undertaken with foreign assistance.

Uzbekistan is already self-sufficient in natural gas. Currently, there are five gas exploration facilities in operation. Production is expected to increase from 48 billion cubic meters in 1995 to 50 billion cubic meters in 1996. While gas had been exported to Russia before independence, at present it is exported only to Tajikistan, the Kyrgyz Republic and Southern Kazakstan. Potentially, Uzbekistan could export gas to Europe, but access to pipelines is limited and no improvement is expected in this respect in the near future. Weak demand and insolvency in neighboring countries also limit the possibilities for expanding production. However, the development of new gas fields is continuing with foreign participation.

With regard to privatization of the oil and gas monopoly, Uzbekneftegas, the core business is not scheduled to be privatized in the near future while its affiliated enterprises are in the process of being denationalized and will subsequently be sold to the public. 1/ In 1995, 117 gas stations were sold off and the remaining gas stations (458) are scheduled to be sold by end-1996. Construction, trade, material supply and repair enterprises have already been denationalized and corporatized; this will be followed by denationalizing of drilling companies in 1996, and the science, refinery, and mining sector in 1997 and beyond. However, there are no plans for denationalizing the gas transmission sector. The State Property Committee entrusts Uzbekneftegas with the supervision of all enterprises involved in gas and oil development in proportion to the share of the state ownership. Enterprises are free to leave the system of Uzbekneftegas if the owners so decide.

Uzbekistan is self-sufficient in coal (open type mining). However, production of coal has declined by about 45 percent since independence as natural gas has been substituted for coal in household use of energy. Import substitution by Kazakstan also contributed to the decline of coal production in Uzbekistan.

Currently, 85 percent of electricity is generated by thermal power (gas, mazut and coal), and 15 percent by hydropower. Most of the thermal power is generated by natural gas. Of the eight thermal power stations, seven use mostly natural gas and mazut, while one uses mostly coal. The hydropower stations, which operate at lower costs, work mainly in the summer period when some of the gas-using stations are closed and electricity is imported from the Kyrgyz Republic.

(ii) Precious metals

Thirty gold mines have been discovered in Uzbekistan, of which ten are operating. Modern technology, imported in the context of the establishment of a joint venture with foreign participation, is now used in production. In addition, waste from traditional mining is now being processed into gold. The Government has targeted a doubling of gold production over the medium term. Uzbekistan also produces large quantities of silver and copper; 15-20 percent of copper is processed into cables while the rest is exported. An iron ore mine, which is under development, requires significant investment to become operational. Therefore, all iron ore is imported from other CIS countries at present. Other rare metals such as indium, palladium and molybdenum are also produced.

(iii) Machine building

Output of the machine building sector increased by 21 percent in 1995, mainly owing to increased production of agricultural machines, automobiles, aircraft and electrical equipments. Prior to independence, output of this sector was concentrated on machinery for picking and cleaning cotton. In view of the outdated technology and energy intensive plants (about three to five times higher than in industrial countries), the Government is encouraging foreign direct investment to help modernize the sector. Production of automobiles, electronics and grain-harvesters, has been initiated recently with foreign participation.

(iv) Cotton processing and other sectors

Owing to pre-independence trading patterns, the share of cotton fiber processed domestically into fabric was only 15 percent in 1995. The Government intends to increase this share to about 30 percent in the medium term and to establish a textile center in Uzbekistan. Foreign companies have already established manufacturing plants for this type of processing. In line with the Government’s overall policy of export promotion and import substitution, production of 400 new products has started. Efforts are also being made to process fruits and vegetables (including upgrading of packing technology), chemical products, pulp and construction materials.

c. Infrastructure

Although a cellular phone system is available in Uzbekistan, the quality of the existing telephone network is very poor. The Government introduced a program for renovating the telecommunications network in August 1995, which included moving from the existing analogue system to a digital system. One-fourth of the telephone numbers are expected to be digitalized by 1997. This project is being undertaken with foreign direct investments and other foreign assistance. The program also includes the development of a trans-Eurasian fiber optic network as well as an improvement of the rural telephone system in which 20 numbers per 100 persons would be provided by 2010, i.e., double the current service. Postal communication is of poor quality although an international express mail service by a foreign company is available.

Uzbekistan has a well-developed transport system, but it is becoming outmoded for present purposes. Two new domestic railways are under construction. A five-year program to electrify 400 km of railways is to be started in 1996; currently 60 percent of the total railway system operates on electricity. A new railway which can reach Pakistan is under consideration. All regional centers have airports in Uzbekistan, and 20 foreign cities, of which 10 are in Russia, are already connected by airlines. Profitability of the airlines is, however, low due to energy intensive and outdated equipment. While a new type of domestically produced airplanes will be introduced for domestic flights in 1996, for international flights, western equipments will continue to be imported. Uzbekistan has a well developed road system (50,000 km, of which 90 percent is paved).

d. Saving and investment

Capital investment increased by 2 percent in real terms in 1995 compared with a decline of 1 percent in 1994 (Statistical Appendix Table 11). Most of the increase in 1995 reflected foreign direct investment and foreign assistance in fuel and energy, light industry (tobacco, textile), metallurgy (gold) and machinery (automobiles and electronics). As a result, the investment-GDP ratio, excluding change in stocks, rose from 26 percent in 1994 to 33 percent in 1995 (Statistical Appendix Table 12). About 20 percent of investment was accounted for by the Government. Taking into account the decline in stocks, the total investment-GDP ratio increased to almost 30 percent in 1995 from 18 percent in 1994. Most of the increase in investment is estimated to have been financed by government and nongovernment savings while the contribution of foreign savings was only 1/2 percent of GDP in 1995. 1/ Government savings made a positive contribution to the financing of investment in 1995, reflecting the tightening of fiscal policy. The increase in the nongovernment savings contribution occured despite a deterioration in the balance of transfers and savings of households (Statistical Appendix Table 13).

2. Price liberalization and inflation

a. Price reforms

At the time when the liberalization of most consumer prices started in January 1992, the Government established a rationing system for major foodstuffs and consumer goods to alleviate the impact of the price increases on the population. The process of price liberalization resumed in the second half of 1994 following the introduction of the national currency. Only three items--flour, sugar and vegetable oil--remained subject to rationing, all explicit and implicit subsidies for foodstuffs and consumer goods were eliminated, and profit margin regulations were eased. Following the elimination of rationing and of profit margin regulations in early 1995, the process of price liberalization was largely completed. All prices are now adjusted on the basis of full-cost recovery, except for heating, hot water and housing, for which budgetary subsidies by local governments are still provided. Cross subsidization from industrial customers to households for electricity and gas remains. Also, a number of monopoly products remain subject to control.

Prices for oil and oil products were increased significantly in 1995 and again in early 1996--far beyond full-cost recovery--in order to bring them closer to world prices (Chart 2). Following the increase on April 1, 1996, the wholesale price for crude oil, including VAT, is close to world levels, compared with only about 15 percent of the world price at the beginning of 1995. In light of the low cost of crude oil production in Uzbekistan, an excise tax was introduced in order to tax away some part of the windfall gain accruing to the monopoly producer of oil following the large price increase implemented in October 1995. Following the increase in April 1996, the prices for oil products, including VAT and excise tax, are close to or higher than those in the United States, except for mazut. 1/

Chart 2
Chart 2


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Sources: Data provided by the authorities; Orgonizotion for Economic Corporation end Development (OECD); International Energy Agency (IEA); Lundberg survey, Incorporated; and staff estimates.

Natural gas prices were also increased substantially for industrial customers in 1995 and 1996, bringing them closer to world prices. Also in this case, the excess profits accruing to the monopoly producer were taxed away through the imposition of an excise tax from October 1995. Electricity prices for industrial customers was also raised during 1995 and 1996 to bring them closer to the world level. Between January 1995 and April 1996, the increase was 1,676 percent for natural gas and 1,043 percent for electricity (Statistical Appendix Table 14). Household tariffs are much lower than industrial tariffs for electricity and natural gas. However, it is planned to gradually eliminate the spread. As a step in this direction, the differential was reduced by 35 percent for natural gas and by 33 percent for electricity on April 1, 1996. The Government plans to introduce meters for gas and electricity consumption of households to promote efficiency in energy use.

b. Inflation

Uzbekistan achieved rapid disinflation during 1995 through the pursuit of tight monetary and fiscal policies (Chart 3). Measured by the consumer price index (CPI), inflation was reduced from 1,281 percent during 1994 to 117 percent during 1995 (Statistical Appendix Table 15). 2/ Excluding administered prices from the CP1 basket, inflation was reduced from 1,196 percent during 1994 to 82 percent during 1995. 1/ Measured by the wholesale price index (WPI), the rate of inflation fell from 1,422 percent during 1994 to 215 percent during 1995 (Statistical Appendix Table 17).

Chart 3
Chart 3


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Sources: Data provided by the authorities; and staff estimates.1/ Administered prices include heating, electricity, natural gas, rent, transportation, communication, recreation and education.

The average monthly increase in the CPI moderated to about 3 1/2 percent in the first quarter of 1996, compared with 4 1/2 percent in the fourth quarter of 1995. A number of administered prices were adjusted in April 1996, e.g., oil products by 25-65 percent, public transportation by 20 percent, bread prices by 20 percent, and housing and rent payments by 70 percent. As a result, the CPI rose by 10 percent in April 1996. The increase in the CPI over the 12 months to April 1996 was 52 percent.

3. Wages and employment

Of the total population of 22.7 million, 8.2 million participated in the labor force in 1995 (Statistical Appendix Table 18). According to official statistics, the number of registered unemployed is still very low, numbering only 31,000 in 1995, or an unemployment rate of 0.4 percent. Total open unemployment (including those not registered at unemployment offices) increased from 0.9 percent in 1992 to 2.2 percent in 1995. About 50,000-60,000 individuals on forced leave in 1995 received no wage payments. Disguised unemployment in the agricultural sector is estimated to be around 1,000,000 persons; the Government is addressing this problem by creating job opportunities in rural areas.

The number of workers was 8.2 million in 1995, down from 8.3 million in 1992. During this period, large declines in employment took place in industry (12 percent), construction (18 percent) and education (7 percent), while employment increased in trade and services (25 percent), and agriculture (4 percent). Agriculture, education and industry now account for 46 percent, 13 percent and 12 percent of total employment, respectively. In 1995, the nonstate sector accounted for 66 percent of total employment. 2/

Over the year to March 1996, average wages rose by about 18 percent in real terms (Chart 1). Measured in U.S. dollar terms, the increase was even more pronounced, with the average monthly wage reaching US$48 in March 1996. However, average wages are still lower than in most other countries of the former U.S.S.R. (Chart 4). Wages were increased significantly on April 1, 1996 (by about 36 percent).

Chart 4
Chart 4

AVERAGE WAGE, July 1992 – March 1996

(In U.S. dollars, period average)

Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Source: IMF, European II Deportment Common Database.

Wages in budgetary organizations are determined by a grid system, in which wages are set according to multiples of the minimum wage. 1/ The grid system was modified in March 1995 so that the percentage increase in the minimum wage would not be reflected fully in other grades. 2/ The Government has frequently adjusted the minimum wage and wages in budgetary organizations to compensate for price increases (Statistical Appendix Table 19). In April 1996, the grid system was modified again with the aim of paying higher wages to skilled workers; the number of grades was reduced from 28 to 22. 3/

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 and is adjusted for inflation. 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 that from the cultivation of private plots of land. The minimum wage was increased by 50 percent on April 1, 1995, by 67 percent on October 1, 1995 and by 60 percent on April 1, 1996 (to sum 400 or US$11 per month).

Wages vary considerably among sectors (Statistical Appendix Table 20). In 1995, financial sector workers earned the highest wages (1.7 times the average), followed by information and computer service workers (1.6 times the average), construction workers (1.6 times the average), and industrial workers (1.4 times the average). The lowest wages (62 percent of the average) were paid in the health and social service sector.

In July 1994, in order to dampen the 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 the wage bill could not exceed 70 percent of the increase in production. The Government also introduced new incomes policy measures for state enterprises from January 1, 1995, based on a forward-looking indexation scheme. Increases in the wage bill over and above the permissible amount have been taxed at steep penalty rates.

4. Systemic changes

Uzbekistan has followed a cautious approach to structural reform since it gained independence in 1991. In some areas, such as price liberalization (described in Section II.2) and the exchange system (described in Section VI) significant progress was made, while more modest results were achieved in dismantling the state order system and in privatization and enterprise reforms.

a. The state order system

In mid-1994, Uzbekistan replaced the system of state orders with the procurement of goods for state needs at market prices, except for cotton and grain. State orders for cotton and grain were reduced from 67 percent of the 1994 crops to 60 percent and 50 percent of the 1995 crops, respectively, and the Government has announced a further reduction in state orders for the 1996 crops for cotton and grain to 40 percent and 25 percent, respectively. The procurement prices for products subject to state orders are determined by the Ministry of Finance taking into account factors such as enterprise profitability and the budget situation. The procurement prices for cotton and grain were raised to 50 percent of world prices for the 1995 crops, and the Government has determined that the procurement prices for the 1996 crops of cotton and grain would be 70 percent and 75 percent of world prices, respectively, 1/ The volume of production not subject to state orders may be sold to domestic customers, including state procurement organizations, at market prices. 2/ The Government intends to eliminate state orders for cotton and grain by 1998 and 1997, respectively.

b. Privatization

As described in more detail in Appendix I, privatization in Uzbekistan has been implemented in stages. In the first phase the Government concentrated on privatization of housing and small-scale enterprises. This phase was implemented successfully, so that by end-1995, almost all housing and about 95 percent of small-scale enterprises had been privatized (Statistical Appendix Table 21).

In the second phase, the Government focussed mainly on corporatization, including the conversion of closed joint-stock companies into open companies, 1/ and the partial privatization of medium- and large-scale enterprises. As envisaged, almost all closed joint-stock companies had been converted into open companies by end-1995. Significant progress was made in reducing the shares of the state in corporatized enterprises, to an average of about 30 percent by end-1995. This policy was implemented by the State Property Committee (SPC) through selling stocks owned by the state through the Republican Stock Exchange and financial investment funds, including the National Investment Fund. Further, the Government has removed all profile restrictions on the type of activity and employment for privatized enterprises. During 1995, more than 1,800 state enterprises were privatized, of which about 300 were medium- and large-scale firms, under the SPC scheme. An additional 6,700 enterprises were privatized outside the SPC program.

A Presidential decree was issued in January 1995 aimed at ensuring a level playing field between the private sector and state-owned enterprises (SOEs), and establishing management autonomy for SOEs. In accordance with this decree, about 64,400 individual and small enterprises were registered during 1995, of which 36,400 were individually owned, about 17,300 were agricultural cooperatives and nearly 10,700 were small-scale enterprises. The State Committee for Forecasting and Statistics estimated that in 1995 67 percent of Net Material Product (NMP) was produced by the nonstate sector (Statistical Appendix Table 22).

During 1995, the authorities also began to elaborate a mass privatization scheme in cooperation with the World Bank. This scheme, which will be implemented through the establishment of Privatization Investment Funds (PIFs), is expected to be initiated during the second half of 1996. Also, the Government has established two programs to support newly privatized enterprises.

In 1994 and 1995, a stock market and a number of supporting institutional arrangements, including the Republican Stock Exchange, the National Investment Fund, and the National Share Depository, were established, with the objective of facilitating the process of issuing shares of the privatized and newly created joint-stock companies. In 1995, stocks with a total value of sum 1.5 billion (1/2 percent of GDP) were sold through the Republican Stock Exchange and other institutions.

c. Competition policy

The current antimonopoly law, which was adopted in 1992, was amended in December 1994, strengthening the sanctions for non-competitive behavior. 1/ In February 1995, an anti-monopoly department was set up in the Ministry of Finance. A new anti-monopoly draft law “On Competition and the Restriction of Monopolistic Activities” is to be submitted to Parliament shortly. The draft law includes a number of new features, including: (i) a change in the definition of monopolies and monopoly products; and (ii) provisions for establishing an independent antimonopoly authority, restricting interference of higher organizations (concerns, associations and corporations), preventing concentration, and imposing heavy fines and penalties.

According to the current legislation, producers or products with a market share of 35 percent or greater are regarded as monopolies, except for the food industry in which those with a market share of 20 percent or greater are regarded as monopolies. By end-1995, the Ministry of Finance had identified 945 monopoly enterprises and 3,096 monopoly products at the national and local level, of which foodstuffs accounted for 216 enterprises and 951 products (Statistical Appendix Table 23). Price increases for goods and services provided by monopoly enterprises are subject to approval by the Ministry of Finance. According to the draft law, the definition of a monopoly will be changed to an enterprise having a market share of 65 percent. This change will result in a significant reduction in the number of monopolies and monopoly products defined as such and therefore lead to further progress in price liberalization.

Demonopolization has so far focussed on the wholesale, warehouse and trade sectors. In February 1995, the Government issued a decree which urged the development of competition in these sectors and established the Intergovernmental Commission on Demonopolization. By mid-1995, the Commission had adopted several decisions including the demonopolization of Uzautotrans (autotransportation), Uzbeksavdo (Association of Trade Enterprises), Uzbekberlyshu (Consumer Cooperative Society of Uzbekistan) and Uzklebproduct (Uzbek Bakery), and the removal of barriers to entry for new businesses. Progress in demonopolization of these four organizations has been limited. In the transportation sector, 84 auctions offering 240 cargo trucks were held in 1995, with 145 trucks being sold. In the system of Uzklebproduct, 108 joint-stock companies, 64 collectives and 43 individual enterprises were established during 1995. Further, local enterprises in Uzklebproduct are now given the right to procure grain in the domestic and foreign markets.

To discourage monopolistic activity of economic entities and unfair competition in the consumer goods market, Parliament in April 1996 passed a law on the protection of consumer rights. Further, to intensify the antimonopoly policy, a Committee on Demonopolization and Promotion of Competition was established under the Ministry of Finance in May 1996. This Committee, jointly with the Ministry of Justice, will review the charters of former branch ministries and, if necessary, amend them so that they do not contradict the antimonopoly legislation. The Government is currently elaborating a draft law on natural monopolies, which is expected to be adopted during 1996.

d. Land policy

Land for individual uses (residential, trade and services) and attached to buildings can be owned by the private sector. Land attached to buildings is now included in the assets of privatized enterprises, and enterprises which had been privatized without land attached are now allowed to buy that land at nominal prices. Otherwise, the state owns the land but long-term leases of 99 years and the right to use the land are permitted. Although land owned by the private sector and lease rights can be used as collateral, neither can be traded freely. The use of land is limited to the original use for which it was sold or leased to the private sector. In January 1996, the Government issued a regulation which permitted the auctioning of land lots with the rights of lifetime ownership and hereditary succession. The SPC plans to establish a new law on land to create a more market-oriented land policy in 1996.

Uzbekistan has about 4.2 million hectares of irrigated agricultural land, of which 400,000 hectares had already been leased to individual farmers free of charge in 1989-91. The rest (3.8 million hectares) was used by state farms (45 percent) and collectives (55 percent). After independence, the state farms were transformed into farmers’ associations (groups of individual farmers) or collective farms. As of end-1995, 86 percent of the 4.2 million hectares of irrigated agricultural land had been leased to collectives, while the remaining 14 percent had been leased to individual farmers free of charge.

Of the land used by collectives, 180,000 hectares (5 percent) were leased internally to individual farmers within the collectives. These individual farmers, however, depend on the collectives to provide them with machines, repair services, chemical products, parts and infrastructure. The Government has sought to avoid leasing land to unprofitable and inexperienced farmers.

Progress has also been made in changing ownership and use of non-agricultural land. In 1995, 2,845 land lots were sold for lifetime ownership with hereditary succession, 1,842 land lots for construction of objects of trade and services, 1,846 land lots for individual housing construction and as personal auxiliary plots, and 880 objects of trade and services together with land lots on which they were located. 1/

III. Public Finance and the Social Safety Net

1. Introduction

Following the loss of transfers from the Soviet Union, the consolidated deficit of the General Government exceeded 18 percent of GDP in 1992. The deficit has fallen steadily since then, to about 4 percent of GDP in 1995 (Table 4 and Chart 5). 2/ After a sharp increase in 1993 to almost 36 percent of GDP, revenues of the state budget have since remained close to 30 percent of GDP, showing little sign of the declining trend observed in other countries of the former U.S.S.R., while the level of government expenditure in relation to GDP has been significantly reduced from a high of over 50 percent in 1993 to about one-third in 1995.

Table 4.

Uzbekistan: Fiscal Operations of the General Government, 1992–96

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

Revenue from excises on fuels is included in “other” in 1994.

Chart 5
Chart 5


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Sources: Data provided by the authorities; and staff estimates.1/ Expenditures of the state budget, plus net lending minus balances of the external budget and extrabudgetary funds.

In light of the stabilization and reform efforts undertaken during the last few years, new measures have been introduced to maintain revenues and the level and composition of expenditures have changed as the Government has attempted to keep the real incomes of the population from falling and to improve the country’s infrastructure. In particular, the base of the value-added tax (VAT)--first introduced in 1992--was extended to include wholesale and retail sales in 1993, 3/ a new land tax and new excises were imposed in 1994, and the rates for existing excises on gasoline were increased from 5 to 65 percent. 4/ Over the course of 1994, all direct subsidies on foodstuffs and public transportation were eliminated, and those on housing maintenance, hot water and heating were reduced (Statistical Appendix Table 24). To help the population cope with the associated price increases, the Government introduced special “compensation payments” in the last quarter of 1994 as part of its social safety net program. Under this scheme, virtually every adult initially received a monthly payment of sum 100, which was increased to sum 150 in November. 1/ In addition, in late 1994, a new system of “allowances” (cash transfers) for low-income families started and allowances for families with children were increased.

2. Developments in 1995

The first nine months of 1995 saw a tight fiscal stance, and the consolidated deficit was limited to about 1 1/2 percent of GDP, 2/ due in large part to strict cash-flow management aimed at achieving the deficit target of about 4 percent of GDP for the year as a whole. Fiscal policy was relaxed in the last quarter, in particular during December, as the Government used up the margin accumulated earlier in the year. 3/ As a result, the deficit ended up at slightly above 4 percent of GDP. The deficit was financed mainly with external credits and credit from the domestic banking system.

The General Government registered a surplus of slightly more than 1 percent of GDP in the first quarter of 1996 due in part to a strong performance of the extrabudgetary funds (particularly the Social Insurance Fund) and collection of revenues from the VAT and profit tax. This positive outcome allowed the Government to accelerate the clearance of payments arrears to construction companies during the first quarter.

a. Revenues

During 1995, total revenues of the state budget reached about 30 percent of GDP, about one percentage point of GDP more than in 1994. The most important sources of revenue to the budget were the corporate profit tax, personal income tax, the VAT, the cotton excise, and various excise taxes on fuels 4/ (Chart 6 and Statistical Appendix Table 25).

Chart 6
Chart 6


(In percent of total)

Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Sources: Ministry of Finance and staff estimates.

The corporate profit and income tax in 1995 accounted for almost 29 percent of state budget revenues. For joint ventures established before 1995, an 18 percent tax is assessed on the sum of profits and wages. If foreign investment exceeds 30 percent of the capital of the firm, the tax rate falls to 10 percent. This treatment is a holdover from the recent past, when all firms were taxed on income, and has been preserved because joint venture agreements completed before 1995 included a government commitment to maintain the tax regime in effect at the time of the establishment of the joint venture. Starting in 1995, this tax was transformed into a profit tax with the standard tax rate set at 38 percent. However, a rate of 28 percent was applied to firms using more than 50 percent of their profits for investment, and certain industries or sectors were subject to special, lower rates (e.g., agricultural enterprises whose profitability was less than 20 percent were taxed at a rate of 3 percent). Other reductions applied when a firm incurred expenses by providing social and community services. A special exemption from the profit tax was granted to commercial banks in 1995, with the purpose of allowing them to modernize their equipment. The 1996 budget decree lowered the top tax rate on profits to 37 percent.

Collections of excise taxes represented the second largest source of revenue in 1995 (28 percent of total revenues), with revenues from the cotton excise being the main item. The cotton excise is the revenue accruing to the state budget from the commercialization of cotton. It originates in the difference between the selling (export) price of cotton fiber and the cost of procuring, processing and transporting cotton under the state order system. 1/ During most of 1995, cotton excise revenues were the result of the commercialization of the last part of the 1994 harvest; late in 1995, revenues came from the initial shipments of cotton from the 1995 harvest which started in September. For the 1995 harvest, the state order applies to 60 percent of the planned harvest 2/ (67 percent in 1994), while the procurement price was set at 50 percent of the world price. 3/ Revenue from this excise is highly variable, both because of the seasonality of the underlying activity and occasional delays in the receipt of export proceeds. In 1995, this excise yielded almost 15 percent of total budget revenues.

Two new excise taxes were introduced on October 1, 1995: on crude oil, at 24 percent, and on natural gas, at 42.6 percent. The average excise rate on the different types of gasoline was 62.5 percent in 1995; the rates of the excises on diesel and kerosene were 60 percent and 70 percent, respectively. Together, the excise taxes on fuels provided 10 percent of state budget revenue in 1995.

Revenue from the VAT represented 19 percent of total revenue in 1995 up from 17 percent in 1994. The rate of this tax has fallen steadily from its introductory level of 30 percent in 1992 to 17 percent in 1996. As in the majority of countries in the CIS, the VAT in Uzbekistan is applied according to a mixed destination/origin principle. The origin principle is applied to intra-CIS trade, while an imperfect destination principle is applied to other trade. 1/

The personal income tax yielded 9 1/2 percent of total revenues in 1995, slightly more than in 1994. The main change to this tax during 1995 was introduced on September 1, when the standard exemption was no longer fixed as a multiple of the minimum wage, but rather set at a nominal amount. However, the standard exemption can be changed whenever the minimum wage is modified. The various tax brackets continue to be indexed to the minimum wage.

Taxes on property increased significantly in 1995, due to the higher schedule for the land tax introduced in 1995, and the first revaluation of enterprise property since 1992. However, they remain relatively small sources of revenue. Although import tariffs were reintroduced in the second half of 1995, the effect on revenues was slight owing in part to widespread exemptions on trade with CIS countries.

The nominal stock of tax arrears at end-1995 was about 2 1/2 percent of GDP, virtually unchanged from end-1994. The total stock reflected a reduction in arrears associated with the cotton excise (related to delays in the receipt of export revenue from the 1994 crop), as well as an increase in arrears on most other taxes, particularly the corporate profit tax and the VAT. In these two cases, an early buildup of arrears was partially reversed during the last months of the year, when the State Tax Committee made a special effort to collect overdue taxes. In the case of the excise taxes on fuels, it is not possible to distinguish between an increase in arrears and tax credits granted to certain enterprises or industries.

b. Expenditures

Expenditures in the state budget and net lending amounted to about 33 1/2 percent of GDP in 1995, about the same level as in 1994. Some shift in the composition of expenditure was observed in 1995, with increases in cash transfers to the population and in investment expenditures and reductions in socio-cultural projects and other expenditures (Statistical Appendix Table 26). In particular, investment expenditure reached 6 1/4 percent of GDP, up from 3 1/2 percent in 1994, as the Government intensified its efforts to expand the highway and railroad networks of Uzbekistan. Expenditure is subject to a cash management system that resulted at times in sequestration. Expenditure arrears incurred during the course of the year reached sum 2.3 billion, or 0.8 percent of GDP, and represented delays in payment to suppliers of construction materials used in investment projects. The 1996 budget decree contains provisions for clearing all expenditure arrears outstanding at the end of 1995, and over one half of these arrears were cleared during the first quarter of 1996.

The share of the wage bill in total expenditures of the state budget has declined steadily from 22 percent in 1992 to 18 percent in 1995. At the same time, total wage expenditures have declined from 9 1/2 percent of GDP in 1992 to 6 percent of GDP in 1995 (Statistical Appendix Table 27). Wages were increased twice during 1995, in March and September. However, at the time of the March increase, the sum 150 monthly compensation payment was incorporated into the general level of wages in budgetary organizations, eliminating the payment of such compensation to mothers, students and the unemployed from the state budget. 1/

Most direct subsidies to consumption were eliminated in 1994. Two subsidies to the general population remained in 1995: the Government paid 50 percent of the costs of housing maintenance, and 80 percent of heating and hot water costs. Other minor subsidies with virtually no budgetary impact were also paid, such as a 50 percent subsidy on purchases of coal by WWII veterans. Direct subsidies to enterprises have also been reduced or eliminated. Although the 1995 budget contained provisions for granting interest rate subsidies of up to 1/2 percent of GDP to state-owned enterprises, no such payments were made in 1995.

The state budget includes three programs of cash transfers to the population (allowances) described below in the social safety net section.

c. Extrabudgetary funds

The General Government includes seven extrabudgetary funds: the Social Insurance Fund, the Employment Fund, the Fund for the Replenishment of Mineral Resources and Raw Materials, the Fund of the Trade Unions Federation, the Road Fund, the Uzgosfund, and the recently created Business Fund. Specific revenue sources are earmarked to finance the operation of these funds, which may also receive transfers from the state budget.

The largest extrabudgetary fund is the Social Insurance Fund (SIF), with total expenditures of about 6 1/2 percent of GDP in 1995, of which over six percentage points of GDP represent pension payments. Besides being charged with paying old-age, survivor and disability pensions, this fund pays various other benefits such as childbirth and funeral allowances. Its revenues consist of social security contributions of 37 percent of the wage bill to finance old-age pensions. In 1995, the contributions to the SIF increased, reflecting a redirection of payroll taxes away from the state budget (which used to receive 3.5 percent of the national wage bill) to the SIF. Transfers from the state budget to the SIF were made in the first quarter of 1995 when the Fund was responsible for making compensation payments to pensioners. Once these compensation payments were incorporated into the wages, there was no need for further transfers.

The Uzgosfund and the Business Fund are financed with the proceeds from privatization operations. The main objective of these funds is to lend to newly created private firms and to privatized enterprises (see Appendix I).

Most of the extrabudgetary funds are either in balance or in surplus. However, if privatization proceeds are excluded from their revenues, these funds had a deficit of about 0.6 percent of GDP in 1995 (Table 4 shows their balance exclusive of such revenues).

d. External sector budget

Since 1992, most government revenues and expenditures in foreign currencies have been recorded in a separate budget. It consolidated convertible foreign-currency operations registered in the Republican Foreign Exchange Fund and the 14 local foreign exchange funds, as well as operations in Russian rubles. The external sector budget was in balance in 1995, its last year of operation. 1/ The 1996 budget decree abolished the external sector budget, the remaining revenue and expenditure items of which are now included in the state budget.

In 1995, the level of both revenues and expenditures of the external sector budget reached US$674 million. The most important source of revenue for this budget was proceeds from government exports of gold. Prior to mid-1995, the Government procured gold for its own reserves (managed by the Ministry of Finance) at prices substantially below market levels for later export at world prices. In June 1995, the Government ceased procurement of gold, after having raised gold procurement prices to world market levels earlier in the second quarter of the year. The final export of gold by the Government took place in the third quarter of the year, and the remaining stock was sold to the Central Bank of Uzbekistan in late December. 2/ Profits from these operations amounted to over 3 percent of GDP in 1995. On the expenditure side, one of the largest items was the repayment of some foreign credits. Most of these loans had been originally contracted by self-financing enterprises with the guarantee of the Government during the period 1993-95 for the purpose of importing grains and medicines.

3. Social safety net

The Government maintains an extensive social safety net which consists of various benefits, transfers, and allowances. With the dismantling of all remaining subsidies on food and nonfood items during 1994, most of the implicit social safety net arrangements have disappeared. The authorities have replaced the subsidies with allowances for low-income families. 1/

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 and allowances for low-income families are all paid from the state budget.

In 1995, there were about 2 1/2 million pensioners in Uzbekistan, including those who received pensions while working. A large share of total pensioners receive the monthly minimum pension, which rose to sum 645 (US$18) as of January 1, 1996 from sum 135 (US$5) as of January 1, 1995. Some recipients are eligible for additional benefits based on length of service records, earnings while employed, and other criteria such as whether the individual is a war veteran or was employed in a hazardous industry.

Unemployment benefits paid by the Employment Fund are financed by a 2 1/2 percent payroll tax. In 1995, benefits paid remained very low, as the number of officially registered unemployed persons receiving unemployment benefits at end-1995 was only about 30,000.

The Government provided three main types of allowances from the state budget in 1995. Under the first, called material assistance to families with low income, as many as half a million families were entitled to receive up to three minimum wages per month in 1995. The identification of needy families was assigned to the local (rayon) governments, which also determined the extent of need. The average allowance under this program reached two minimum wages. The second type of allowance targeted families with children under 16 years of age. It was also based on the minimum wage. Families with one child were entitled to 20 percent of one minimum wage, those with two children to 40 percent, those with three or four children to 80 percent, and those with five or more children to one full minimum wage. The average family in Uzbekistan has slightly over three children. The third type of allowance is aid for mothers of children under two years of age. Under this program, 376,000 women were considered eligible to receive monthly payments indexed to the minimum wage. By mid-year, the allowance was equivalent to about one and a half minimum wages. However, few women seem to have availed themselves of this benefit.

In addition to these transfers, the social safety net includes provisions for a number of special benefits to be administered by the Ministry of Social Maintenance, such as free public transportation and medicines for the disabled. For budgetary reasons, a large proportion of those eligible for these benefits did not receive them in 1995.

4. Statistical issues

Data on the revenues and expenditures of the state budget, the extrabudgetary funds, and the external sector budget are collected by the Ministry of Finance on a monthly basis, and are available with a lag of about three weeks.

The monthly state budget figures continue to classify expenditure on a functional basis. An economic classification of expenditure is available on an annual basis (Statistical Appendix Table 27), and estimated quarterly figures can be obtained with a delay of one quarter. During 1995 the revenues and expenditures of the external sector budget were not consolidated with those of the state budget. However, the 1996 budget decree abolished the external sector budget.

IV. Monetary Developments

The banking system in Uzbekistan is comprised of the Central Bank of Uzbekistan (CBU) and its 14 branches, two state-owned banks, (the National Bank for Foreign Economic Activity (NBFEA) and the People’s Bank 1/), 24 commercial banks in which the state maintains some participation, and two private commercial banks with foreign participation. The functions of a monetary authority are performed by several institutions. The CBU has the exclusive right to issue bank notes and coins and to regulate the use of foreign currency within the territory of Uzbekistan. The CBU issues cash, provides deposit and transfer services to the Government, and extends credit to the Government. The management of international foreign exchange reserves is shared by the CBU and the NBFEA, while, until end-1995, gold reserves were held at the CBU and with the Precious Metal Depository Institution. In early 1995 the CBU started to purchase gold at market prices from the mining companies, and by mid-1995 it was purchasing all gold produced in Uzbekistan. In December 1995, the Ministry of Finance sold its remaining stock of gold and short-term foreign currency deposits to the CBU. In addition, the Ministry of Finance has decided that the management of its foreign currency deposits held as time deposits abroad will be transferred from the NBFEA to the CBU as and when they mature during 1996. The share of Uzbekistan’s international reserves held at the CBU has risen from about one-third at end-1994 to almost three-quarters by end-1995.

Banking legislation enacted in 1992 allows for cooperative and private banks, but requires that new commercial banks be established only as joint-stock companies. During 1994-95, thirteen commercial banks were registered. The lending activity of the banking system remains dominated by the activities of the People’s Bank, Promstroibank, and Agroprombank. Although commercial banks are authorized to accept saving deposits from households, the majority of these deposits are concentrated with the People’s Bank. In early 1994 the restriction limiting commercial banks’ (except for the People’s 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 People’s Bank are guaranteed by the state, while other banks are required to establish their own deposit insurance funds. In December 1995, the Cabinet of Ministers issued a decree allowing for the indexation of household deposit accounts and certain long-term insurance accounts held in the People’s Bank as of January 1, 1992 and which remained active as of January 1, 1996. 1/ The volume of accounts covered by this plan is still to be determined; the payment of the amounts to be reimbursed will be included in the government budget and will be effected over 10 years. 2/

Also in December 1995, Parliament approved a new Central Bank law which grants a high degree of independence to the CBU (see Appendix II for a more detailed description). In addition, in April 1996; Parliament approved a new law on banks and banking. This legislation addresses the issues of bank organization and licensing, prudential regulations, reporting requirements, inspection and audit procedures, and remedial measures in the case of banking difficulties.

1. Monetary policy

In 1993, widespread shortages of goods 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 partly reflected operations to monetize interenterprise arrears, as well as loans from the CBU to the Ministry of Finance which were onlent to enterprises as working capital. In 1994, the stance of monetary policy was geared toward bringing down inflation and stabilizing the exchange rate for the new currency, the sum, which was introduced on July 1, 1994. Thus, the CBU raised its rediscount rate from 40 percent to 50 percent at the beginning of the year, to 150 percent on May 1, and further to 225 percent on October 1, 1994. In addition, the CBU started organizing interbank credit auctions. Total CBU domestic credit declined by 70 percent in real terms, reflecting both the tighter credit policy with regard to banks and the more restrictive fiscal stance of the Government. Owing to a large inflow of convertible foreign exchange (reflecting the strong balance of payments performance) in 1994, reserve money increased by 420 percent in nominal terms, but declined by 62 percent in real terms (Table 5). Broad money increased significantly more than reserve money in 1994, as the money multiplier increased (Table 6 and Chart 7).

Table 5.

Uzbekistan: Reserve Money and Net Domestic Assets of the Monetary Authorities, 1992–96

(In millions of sum, end–of–period stocks)

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 from December 1992–August 1995 and at US$375 per ounce from September 1995 onwards.

Includes sum 4,000 million in deposits arising from the sale of gold to the CBU by the Ministry of Finance in 1994.

Includes sum 7,017 million in deposits arising from the sale of gold to the CBU by the Ministry of Finance in December 1995.

Chart 7
Chart 7


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

Source: Data provided by the authorities.1/ Annualized quarterly GDP/end–of–period broad money stock.2/ Broad money/reserve money.
Table 6.

Uzbekistan: Broad Money and Net Domestic Assets of the Banking System, 1992–96

(in millions of sum, end–of–period stocks)

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 from December 1992–August 1995 and at US$375 per ounce from September 1995 onwards.

Includes sum 4,000 million of deposits arising from the sale of gold to the CBU by the Ministry of Finance in 1994.

Includes sum 7,017 million sum of deposits arising from the sale of gold to the CBU by the Ministry of Finance in December 1995.

In 1995, monetary policy continued to be aimed at reducing inflation. To counter the impact of a large increase in credit to banks in the last quarter of 1994, the CBU raised its rediscount rate to 250 percent as of February 1, and further to 300 percent as of March 1, 1995. Starting in early 1995, all refinancing credits from the CBU were extended through the interbank credit auctions, which are now held daily. 1/ As the rate of inflation started to decline during 1995, the CBU lowered its refinance rate to 10 percent per month as of July 1, and further to 7 percent per month as of August 1. 2/ In an attempt to soak up excess liquidity from the banking system, in early 1995 the CBU started to issue certificates of deposits to banks, and to purchase credits from the interbank credit auctions. These new instruments have allowed the CBU to conduct a more flexible monetary policy.

Central bank lending to commercial banks has been restricted, declining by 37 percent in real terms even though some banks experienced difficulties in repaying credits to the CBU in the first part of 1995. Although these overdue credits were rolled over, penalty interest charges were levied on the banks, no new credits to these banks were extended, and their participation in the credit auctions was disallowed until the loans were repaid. Notwithstanding a decline in real terms of 25 percent in CBU net domestic credit, 3/ reserve money rose by 225 percent during 1995, or by almost 50 percent in real terms. The increase in reserve money was mainly the result of capital inflows which contributed to an increase in net official international reserves of over US$400 million in 1995. Broad money increased at a much lower rate than reserve money during 1995 as the money multiplier declined.

The CBU maintained a tight policy stance during the first quarter of 1996 as reserve money increased by only 1 percent (a decline of 9 percent in real terms) during the quarter. The CBU became more active in the financial markets during the quarter, issuing almost sum 3 billion in certificates of deposit and purchasing sum 1.4 billion in credits from banks in the interbank market. In addition, the Government issued Treasury bills in the amount of sum 720 million. 1/ Broad money increased by 15 percent during the first quarter (4 percent in real terms), reflecting in large part bank financing of cotton trade organizations. 2/ Previously, the financing of cotton exports had not come from the banking system, which had resulted in a temporary increase in interenterprise arrears. To counter the problem of interenterprise arrears, in January 1996 a Presidential decree was issued covering ministries, departments, corporations, associations and organizations regardless of the form of ownership, mandating a 15 percent minimum prepayment before goods could be shipped.

The increase in the money multiplier in both 1994 and 1995 from the level at end-1993 was largely due to substantial reductions in the reserve/deposit ratio in each year. 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 People’s Bank place 70 percent of its deposits at the CBU. 3/ In 1995 the reserve/deposit ratio increased, largely reflecting high excess reserves held by commercial banks notwithstanding reduced CBU lending to them. The high level of excess reserves suggests difficulties in the payments system, 1/ and the effect of lending rates being positive in real terms, as well as the preference of banks’ clients to deal in cash. In mid-1995 the CBU moved to improve the payments system by allowing qualified banks to issue promissory notes. As of December 1995, a total of about sum 1 billion of these promissory notes had been issued by 11 banks, which facilitated the settlement of about sum 6.9 billion of payments. The currency/deposit ratio increased significantly in 1994 and 1995. The increased demand for currency partially reflected the freeing up of deposits that had been frozen in 1993 and the elimination of restrictions on cash withdrawals introduced in July 1994, as well as a lack of confidence in the banking system.

2. Credit, deposit, and interest rate developments

Although banking system credit to the nongovernment sector increased by over 380 percent in 1994 (a decline in real terms of 65 percent) and by 72 percent in 1995 (a decline in real terms of about 21 percent), most credit was extended at maturities of 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 during most of 1994-95 (interest rates only became positive in real terms around mid-1995). An exception has been the portfolio of the People’s Bank, the vast majority of which is still granted for housing mortgages of 20 years. To deal with the lack of low-cost financing for the construction of housing, in early 1996 the Cabinet of Ministers authorized the establishment of a Housing and Mortgage Bank, which would extend loans at below market interest rates. The subsidy element of this lending would be financed from the budget. A large share of commercial bank credit to enterprises was refinanced by the CBU, mainly for Agroprombank and Promstroibank (Statistical Appendix Table 28). However, the ratio of CBU refinance credits to total commercial bank credit to the nongovernment sector fell from about 40 percent at end-1994 to 33 percent at end-1995; as of end-March 1996, this ratio was 30 percent.

There are indications of financial disintermediation in Uzbekistan. Notwithstanding removal in 1994 of the requirement that the People’s 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 throughout 1995. While this apparent lack of demand may in part reflect higher interest rates, it also reflects interbank lending outside of the auction. In order to improve its control over liquidity in the banking system, the CBU issued a decree in October 1995 requiring all interbank lending by branches of banks to go through the credit auctions.

Enterprise and household deposits held at commercial banks declined by almost 50 percent in real terms during 1994, reflecting the 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. During 1995 enterprise and household deposits grew by almost 150 percent (14 percent in real terms) as inflation subsided and interest rates paid on deposits became less negative in real terms. Additionally, the People’s Bank became more aggressive in attracting deposits. In October 1994, the People’s Bank 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/ In February 1995, the People’s Bank introduced two new types of deposits, capital and capital plus, which paid 9 percent interest per month. 2/ The share of foreign currency deposits in the total fell from over 30 percent at the end of 1994 to 23 percent at end-1995, reflecting in part the stabilization of the exchange rate for the sum.

Nominal interest rates on bank deposits and credits rose during 1995. The adjustment to lending rates reflected in part the increase in the CBU’s refinance rate, as well as the interventions by the CBU in the interbank credit auctions. Interest rates on deposits, which were sharply negative in real terms during 1994, increased during 1995 and became positive in real terms, reflecting in large part actions by the People’s Bank. In October 1994, the People’s Bank increased its minimum deposit rate. In September 1995, it raised the interest rate paid on demand deposits from 30 percent to 40 percent, and the rate paid on capital and capital plus accounts to 10 percent per month. In line with the decline in inflation, the People’s Bank lowered the interest rate paid on deposits, e.g. on capital and capital plus accounts to 5 percent a month, as of February 1, 1996. 3/ The lifting of the restriction on commercial banks’ ability to attract deposits, combined with the CBU restraining the extension of refinance credits, has resulted in an increased competition for household deposits. Some banks now pay substantially higher rates than the People’s Bank. The spread between lending and deposit rates remains high reflecting, inter alia, the high reserve requirement, 1/ inefficiencies of the payments system, and a risk premium for lending to enterprises.

V. Balance of Payments 2/

1. Overall developments

After registering large deficits in 1992-93, Uzbekistan’s current account recorded a surplus in 1994, equivalent to 2 percent of GDP, owing largely to a sharp fall in imports. The lower imports reflected in part uncertainties in the domestic financial market related to the introduction of the sum in mid-1994, as well as some extraordinary transactions in 1993, such as a buy-lease arrangement for two airplanes by Uzbekistan airlines, which were not repeated in 1994. In 1995 the current account registered a deficit equivalent to 1/2 percent of GDP as the balance on services deteriorated sharply, reflecting higher transportation and shipment costs (Table 7). The current account deficit in 1995 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 over six months of imports by end-1995.

Table 7.

Uzbekistan: Balance of Payments, 1992–96

(In millions of U.S. dollars)

article image
Sources: Ministry of Finance; State Committee for Forcasting and Statistics; and staff estimates.

The current account registered a deficit of nearly US$300 million during the first quarter of 1996 owing mainly to an increase in imports reflecting higher world grain prices. The current account deficit was more than offset by capital inflows, particularly to commercial banks reflecting letters of credit to finance grain imports. Gross official international reserves increased by US$50 million during the first quarter of 1996.

2. Merchandise trade

A trade surplus equivalent to 3.6 percent of GDP was recorded in 1994; surpluses were registered with both traditional (2.3 percent of GDP) and nontraditional (1.3 percent of GDP) trading partners (Table 8). Exports of cotton fiber accounted for 51 percent of the total export earnings, while imports of food and energy were about 56 percent of total imports. In 1995, the trade surplus is estimated to have been equivalent to about 2 percent of GDP, equally distributed between traditional and nontraditional trading partners. The share of cotton fiber in total exports declined slightly to a little less than half of total exports (with a much larger share of total cotton exports directed to nontraditional trading partners) as exports of energy, raw materials and processed products picked up sharply. Gold exports almost doubled, reflecting largely an increase in volume. 1/ Consistent with the ongoing restructuring in the economy and the liberalization of the exchange and trade regimes, the structure of imports shifted away from food and energy, with imports of consumer, capital and intermediate goods picking up sharply.

Table 8.

Uzbekistan: Trade in Goods and Services, 1993–95

(In millions of U.S. dollars)

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Sources: Ministry of Finance; State Committee for Forcasing and Statistics; and staff estimates.

Traditional trading partners include the Baltic countries, Russia and other countries of the former U.S.S.R.

The decline in imports of food and energy reflects the Government’s policy of attaining self sufficiency in these areas. Thus, imports of energy and foodstuff declined in 1995, notwithstanding an increase in the world prices for such goods (especially wheat prices) and a larger share of trade being conducted at world prices. The decline in energy imports was particularly sharp, falling to US$60 million in 1995 from US$675 million in 1994, reflecting lower imports of both oil and oil products. In fact, Uzbekistan switched from being a net importer of oil and oil products in 1994 (2,651 thousand tons) to a net exporter (172 thousand tons) in 1995 (Statistical Appendix Table 29).

a. Developments in trade with traditional partners

Reflecting decades of close production and trade links with its traditional trading partners in the former Soviet Union, more than 50 percent of Uzbekistan’s total trade in 1993 and 1994 was conducted with such countries. In 1995 there was a significant shift in trade away from these countries, as their share of total trade declined to about 40 percent. Russia continued to be Uzbekistan’s main trading partner, accounting for over one half, while the Central Asian countries accounted for about a third of this trade (Statistical Appendix Table 30).

Uzbekistan’s main exports to such trading partner countries in 1994-95 were cotton, energy products, and products of light industry, machine building and metal working industry, metallurgy, and chemical and petrochemical industries (Statistical Appendix Table 31). In 1995, energy related exports declined, reflecting in part larger internal use. Cotton exports fell by over 45 percent in volume terms, to 230 thousand tons in 1995, as Uzbekistan continued to redirect its trade toward nontraditional markets.

The structure of Uzbekistan’s imports from its traditional partners has been more varied, and in 1995 the structure of imports shifted sharply away from oil and other energy related products. Electric power, oil and gas, and other fuel represented less than 3 percent of total imports from traditional partners in 1995, down from almost 40 percent in 1994. The sharp decline in the volume of energy imports in 1995 reflected increased domestic production, substitution of domestically produced gas for imported oil and more efficient use of available supplies (Statistical Appendix Table 32). At the same time, there was a sharp rise in imports of products in metallurgy, machine building, and the chemical and petroleum industry, reflecting the increase in investment in the economy. In 1995, imports of these goods were more than 50 percent of total imports from traditional trading partners relative to 17 percent in 1994.

b. Developments in trade with nontraditional partners

Uzbekistan’s trade surplus with its nontraditional trading partners in 1995 reflected entirely an increase in exports of gold (2.4 percent of GDP). However, even excluding exports of gold, both exports and imports increased by over 65 percent in 1995. Cotton exports increased due to higher prices and volumes, while higher gold exports reflected larger volumes. Trade with European countries represented the largest share of Uzbekistan’s trade with such trading partners (Statistical Appendix Table 33). In terms of the composition of exports, raw materials and processed industrial products (including cotton fiber) constituted close to 90 percent of total exports to these countries (Statistical Appendix Table 34).

As in earlier years, the composition of imports continued to be more varied. Imports of machinery, raw material and industrial consumer goods more than doubled in 1995, while imports of food declined in nominal terms despite the increase in world prices.

3. Other current transactions

The coverage of other current transactions in the balance of payments continues to be limited. Information is available only on services related to trade, activities of Uzbekistan Airlines, payments for business trips and partially on tourism in Uzbekistan, embassy payments and expenditures, and interest payments on external debt.

In 1995, the deficit on the net services account rose sharply as transportation costs more than doubled, reflecting higher rates charged by traditional trading partners as well as the sharp increase in the share of export shipments outside the CIS. The effect of this increase on the service account was in part dampened by a payment from Turkmenistan for the shipping of natural gas through Uzbekistan. Tourism inflows continued to be small, while payments of US$63 million by non-CIS countries for shipments of goods were offset by payments made abroad for services rendered to Uzbekistan Airlines. Increases in other service related payments, such as insurance and consulting fees, also contributed to the increase in the deficit.

4. Direct investment, external debt and credits

Notwithstanding reports of joint ventures and interest from foreign investors in Uzbekistan, only small direct investment flows have been recorded to date. In 1995 gross investment flows into Uzbekistan were lower than in 1994 and, on a net basis, direct investment was negative in 1995 due to a US$76 million investment abroad in Uzbek Investment International, a new joint venture registered in the United Kingdom.

The outstanding stock of external debt at end-1995 is estimated at US$1,525 million (13 percent of GDP) up from US$1,100 million at end-1994. Debt service payments in relation to exports were about 11 percent in 1994 and 16 percent in 1995.

There was a shift in the structure of external debt in 1995 from bilateral to multilateral debt and from short-term to longer-term debt, owing in large part to the Government’s strategy of focusing its borrowing on investment credits and project financing. At the end of 1995, about 27 percent of the outstanding debt was owed to multilaterals compared to about 1 percent at end-1994, while suppliers credits represented less than 8 percent of total debt, down from 15 percent at end-1994. The share of bilateral credits in the stock of outstanding debt was about 55 percent at end-1995, of which 34 percent was owed to Russia. Most of the debt to Russia represents credits extended through correspondent accounts which were converted into state credits. The share of credit from commercial banks declined to about 11 percent at end-1995 from 16 percent at end-1994. Although data on the terms of Uzbekistan’s external borrowing is limited, the available information suggests that the maturity structure has lengthened in recent years as a larger share of borrowing has been for project financing. As a result of these developments and the large repayments of commodity credits in 1995, long-term credits represented over 70 percent of the outstanding total debt at end-1995 compared with 50 percent at end-1994.

At end-1995, Uzbekistan had outstanding claims on Tajikistan and the Kyrgyz Republic arising in previous years which have now been formalized into state credits. The latest intergovernmental agreement signed on January 19, 1996 with Tajikistan rescheduled its outstanding debt (about US$200 million), with repayments scheduled for the period 1997-2003. The small debt outstanding from the Kyrgyz Republic (US$16 million) is expected to be repaid by end-1998.

VI. Exchange and Trade System 1/

1. Institutional background 2/

The role of the Ministry of Foreign Economic Relations (MFER) in negotiating trade agreements was changed at end-1994. Until then, the Ministry was responsible for centralized exports and imports and for trade policy through the issuance of licenses. With the reduction in the number of licensed goods, the focus of the Ministry has shifted to the development of trade strategies and the trade regime for Uzbekistan, drafting trade regulations, monitoring export prices and undertaking preparatory and coordination work with WTO and other international organizations. The monitoring of export prices is to ensure that commodities are not exported at below world prices.

In April 1994, the Government started to use the Republican Foreign Currency Exchange to conduct weekly interbank foreign exchange auctions to determine the official exchange rate of the national currency. In April 1995 the frequency of the auctions was increased to twice a week. Since October 16, 1995, the official exchange rate between auctions is determined as a weighted average of the interbank market rates. Authorized banks (18 of which have a general license) and the CBU participate in the auctions. The banks can participate on their own account and on behalf of their customers which place bids with them; there are no limits on either type of transaction. Banks are free to set their own foreign exchange rates as the limit on the maximum spread on the quoted buying and selling cash rates was removed in late 1995.

2. Trade and payments system

A significant share of trade in Uzbekistan continues to be carried out through government channels, although the share is declining sharply given the changing structure of trade. For example, centralized trade with traditional trading partners is estimated to have been reduced sharply in 1995 relative to earlier years, in part due to much lower imports of energy and food and also reflecting a larger share of cotton being exported to nontraditional trading partners.

In January 1994 a decree was issued making 26 goods subject to export licensing. This list was reduced to 11 goods in November 1994 and again in July 1995 to 4 items (cotton, oil, ferrous, and nonferrous metals) effective October 1, 1995. 1/ The January 1994 decree also suspended all import tariffs until July 1995.

A Presidential decree “On Further Liberalization and Improvements of Foreign Economic Activity” issued on July 25, 1995 reintroduced the system of import duties and modified the system of export tariffs. These were meant as temporary measures designed to solve the transitional problems of switching from a trade system based on controls, licenses and quotas to a tariff-based one. The new import tariff schedule, effective October 1, 1995, imposed rates ranging from 5 percent to 100 percent on 61 product groups. Ten different tariff bands were employed, with four of the bands used exclusively for motor vehicles (the rate of 100 percent is only for used motor vehicles, while rates of 40-60 percent are imposed on new motor vehicles with the rates depending on the engine size). Most items (49) were in the 5 percent, 10 percent and 20 percent bands. The average unweighted rate (on items subject to tariff) was 18 percent (13 percent excluding the motor vehicles). In April 1996 the import tariff regime was simplified. The rates on motor vehicles were maintained, but excluding this category there are now only four tariff bands of 5, 10, 20, and 30 percent with very few items in the top range of 30 percent. The average rate (unweighted and excluding motor vehicles) declined slightly to 11 percent following the April revision.

The export tariff schedule announced in the July 1995 decree imposed rates ranging from 5 percent to 100 percent on 102 products or product groups, with most items (70) at the rates of 10 percent, 20 percent or 50 percent. There were ten different bands and the average rate (unweighted and calculated on items subject to tariff) was about 32 percent. This regime was simplified and liberalized in April 1996, and further measures are scheduled to be implemented on July 1, 1996. Including the July changes, exports tariffs will be imposed on 72 commodity groups and the rates will range from 1 percent to 100 percent. 2/ The number of tariff bands will be lowered to eight, with a maximum rate (excluding antiques at 100 percent and honey and some paper products at 50 percent) of 40 percent. Most items will be clustered at the lower rates between 5 percent and 30 percent, with an unweighted average rate of 26 percent, following the changes effective July 1, 1996.

The July 1995 decree increased from 9 to 13 the number of goods subject to export bans. These items included antiques, venomous snakes, agricultural and meat products (grains, bread, flour, sugar, dry milk, tea, meat and poultry), various ores and raw leather. The bans reflected the concerns of the authorities about potential food shortages and a desire to provide temporary support to the domestic processing industry. Five products (raw leather, ores and metal concentrates, ethyl alcohol, milk powder and venomous snakes) are to be removed from this list effective July 1, 1996. 1/

At present, Uzbekistan has bilateral barter type trade agreements with several CIS countries, arising from protocols signed in past years. The Government does not intend to sign any new intergovernmental trade agreements for the direct exchange of goods. As of end-1995, about US$190 million dollars were owed to Uzbekistan, mainly from Central Asian countries, under these agreements. The amounts are expected to be repaid in the form of goods (or cash) in 1996.

Several new trade agreements were signed in 1995 and early 1996. These were broad agreements to foster trade and investment. Among non-CIS countries, agreements were signed with Malaysia and Vietnam. Others were being negotiated with various countries including with Tunisia, Italy, Romania, Canada and India. With countries of the former U.S.S.R., negotiations were ongoing with Latvia, Kazakstan, Tajikistan, the Kyrgyz Republic and Turkmenistan. A recent agreement with Russia eliminates barter trade between governments and allows for direct agreements between the contracting parties, either enterprises or individuals.

Different surrender requirements to the auction apply to three different kinds of exports. Centralized exports are subject to a 100 percent surrender, exports to non-CIS countries to a 30 percent surrender, and exports to CIS countries to a 15 percent surrender. An exporter must sell foreign exchange proceeds subject to a surrender requirement within 10 days of receiving its proceeds. The rate at which the foreign exchange proceeds is sold is the official auction-determined rate, and the corresponding sum amount is transferred to the exporter’s sum account.

A new resolution to improve the monitoring of the use of foreign exchange for trade transactions was introduced on April 1, 1996. Under the provisions of this resolution, access to foreign exchange at the auction for payments of import contracts is conditioned upon the submission of expert findings from consulting companies or of competitive bids. These arrangements are intended to establish the optimal character of the contracts’ terms and conditions. This requirement was not made a condition for the validity of the underlying import transaction, but was required to obtain foreign exchange to make the corresponding payments. Accordingly, this requirement restricted the availability of foreign exchange for the payment of otherwise valid import transactions and thus gave rise to an exchange restriction. The authorities plan to amend the resolution so that the restrictions are removed. In this connection, the authorities have clarified that the new regulations are mainly intended to monitor state procurement import contracts entered into by various ministries, other budgetary agencies, or enterprises and organizations transacting on their behalf for the purpose of meeting the Government’s current needs. However, in general the validity of import contracts by state or public enterprises will also be subject to a similar positive expert finding from consulting firms, but once the validity of the contract is established, access to foreign exchange will be automatically granted.

3. Exchange system 1/

The official foreign exchange markets in Uzbekistan comprise: (i) an auction market or the Uzbek Republican Currency Exchange (URCE) market; (ii) an interbank market; and (iii) a foreign exchange offices market. 2/

a. Foreign exchange regulations

All residents and nonresident enterprises (irrespective of their form of ownership) and individuals are allowed to purchase and sell foreign exchange at the auction through authorized banks. The types of transactions for which applications are accepted include those which are backed by a patent; 3/ payments for imports of machinery, equipment, and parts; the repatriation of profits; payments of dividends or interests; payment of loans; and all bona fide current transactions entered into by enterprises and individuals. As of October 1995, the reviewing of applications for foreign exchange on a priority basis was revoked.

As agents of the exchange authorities, authorized banks assume the responsibility to verify the bona fide nature of the transaction. There are two requirements to be met: (i) the customer must present a copy of the underlying contracts for which the particular payment is requested; and (ii) the customer must have the equivalent amount of sum in his account. For the repatriation of profits and dividends, an additional requirement is the presentation of a tax certificate showing that: (i) taxes (both the withholding tax and the underlying corporate tax) have been paid (and therefore that the foreign exchange is being purchased to make payment of net profits or dividends distributed out of net income); and (ii) the enterprise has no arrears to its suppliers (under the existing legislation, profits or dividends cannot be distributed if the company is insolvent or in arrears).

Commercial banks are permitted to purchase and sell non-cash foreign exchange among each other and their clients between auctions in the interbank market. Currently, the volume of exchange transactions conducted at the interbank market is relatively small as the development of a deeper market may have been hampered by risk factors as well as limitations of the payments system.

Most foreign exchange offices currently belong to commercial banks and are directly supplied by them and their customers. 1/ These offices or bureaus conduct only cash transactions with both residents and nonresidents. Commercial banks are free to set their buying and selling rates. Currently, no restrictions are imposed on the availability of cash foreign exchange at bureaus for either residents or nonresidents. While no documentation of any kind is required for the sale of foreign exchange, the presentation of a passport or an identification document is required for the purchase of foreign exchange.

Residents and nonresidents can import any amount of foreign currency banknotes and coins, provided that they are declared upon entry into the territory of Uzbekistan. Residents can freely export up to the equivalent of US$500 in foreign currency notes, while the export of any amount between US$500 and US$5,000 requires a special permit issued by the authorized banks. In all other cases, residents must resort to debit cards or transfers through the banking system (i.e., through foreign currency accounts). Nonresidents are permitted to export any amount of banknotes in foreign currency which have been legally imported into the country or earned in Uzbekistan and withdrawn from foreign currency accounts at authorized banks. In each case, the nonresident has to provide sufficient evidence to the customs authorities as to the origin of the foreign exchange to be exported (e.g., through presentation of a customs declaration of entry or through presentation of a bank permit establishing the legal origin of the foreign currency earned in the country).

Both residents and nonresidents can open sum and foreign currency accounts at commercial banks in Uzbekistan. However, residents cannot open foreign currency accounts abroad, unless they have a permit issued by the CBU. 2/ Residents’ sum and foreign currency accounts may be credited with any sum or foreign currency amounts, and both types of accounts are convertible. Balances on sum accounts can be converted at the auction or at foreign exchange offices. Balances can be transferred abroad on the basis of an application in the case of individuals and upon presentation of a valid contract establishing the bona fide nature of the current transaction (for which the transfer is requested) in the case of legal entities.

Nonresidents’ sum accounts may be credited with any amount brought into, or legally transferred or acquired in, Uzbekistan. Balances in those accounts may be transferred to other sum accounts in Uzbekistan, withdrawn for sum banknotes, or transferred abroad upon presentation of documents showing the bona fide character of the proceeds. Foreign currency accounts may also be opened by nonresidents, on the presentation of an identification document and a customs declaration showing the amount of foreign currency imported into Uzbekistan.

b. Exchange rate policy and exchange market developments

The authorities have followed a managed floating exchange rate system since the introduction of the sum in July 1994. 1/ The sum replaced the transitional sum coupon issued in late-1993, at a conversion rate of 1,000 sum coupons to 1 sum and an initial auction-based official exchange rate of sum 7 per U.S. dollar. The official exchange rate is set according to the result of the auctions of U.S. dollars. Official exchange rates for 30 other currencies and the SDR are set through U.S. dollar cross rates and are applied to official transactions, including foreign exchange surrendered to the CBU for sale at the auction. A second, “commercial” rate was introduced by the CBU on August 1, 1994 and established on a weekly basis for conversion of cash balances of resident and nonresident private individuals. The initial commercial rate was set on the basis of the rate prevailing on the informal market, approximately sum 20 per U.S. dollar, as compared with an official rate of sum 11 per U.S. dollar at that time. In September 1994, the authorities undertook to bring the official and commercial rates together; on October 10, the two rates were unified at sum 22 per U.S. dollar. This unified rate depreciated to sum 33.5 per U.S. dollar by the end of September 1995. In mid-October 1995, a spread between the cash exchange rates charged by exchange bureaus and the official auction-determined exchange rate began to emerge as a result of an effort by commercial banks to eliminate the illegal parallel market, but this spread was virtually eliminated during April 1996 (see below).

The auction-determined exchange rate for the sum against the U.S. dollar depreciated by 42 percent in nominal terms, but appreciated by about 50 percent in real terms, during 1995 (Chart 8). The exchange rate fluctuated within a narrow band of sum 35.5-37.5 per U.S. dollar during the first four months of 1996, but continued to appreciate in real terms against the dollar. After having appreciated significantly in real terms against the Russian ruble in early 1995, the exchange rate for the sum has since depreciated and the real rate was at the end of April 1996 lower than at the end of 1994.

Chart 8
Chart 8


Citation: IMF Staff Country Reports 1996, 073; 10.5089/9781451839760.002.A001

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

The cash exchange rate for the sum against the U.S. dollar charged by exchange bureaus has tended to be more depreciated than the auction-determined exchange rate. In mid-October 1995, the spread between the auction-determined rate and the cash rate widened to almost 40 percent, while the spread between the buying and selling rates at the bureaus was eliminated. In December 1995, the CBU reemphasized to commercial banks that (i) they were free to buy and sell at the foreign exchange auction any amount of foreign currency needed to operate their bureaus, and (ii) they were free to determine the buying and selling cash rates. However, in an attempt to decrease the abnormally high spread imposed by the commercial banks, the CBU at the same time imposed as a temporary measure a maximum spread of 20 percent between the auction-determined rate and the cash rates (either buying or selling). Since mid-April 1996, the spread between the cash rates and the auction-determined rate has narrowed (with the cash rate being 1-3 percent more depreciated than the official rate and with banks establishing a small spread between their buying and selling rates) as the CBU has used its influence on banks to eliminate the practices that had limited competition among banks and it has at the same time increased the volume of foreign exchange offered at the auctions.

APPENDIX I: The Evolution of the Privatization Process in Uzbekistan

Before independence, virtually all economic sectors were owned by the state and managed by branch ministries. Only agriculture had a different set-up, with a large part of the sector being organized as collectives. As an initial step in the reorganization of this structure, branch ministries were abolished and replaced by holding companies, associations, and national corporations. For example, the Ministry of Light Industry was transformed into Uzbeklegprom association, the Ministry of Trade into Uzbeksavdo association, and the Ministry of Oil and Gas into Uzbekneftegas national corporation. Although these entities were separated from the existing ministries and agencies, and in some cases legally established as voluntary amalgamations of enterprises, in many respects they continued to behave like branch ministries in relation to the individual member enterprises. However, a few sectors, including communications, electricity, and communal services (natural gas supply) have remained directly managed by ministries.

Steady progress has been made since the privatization process was initiated in late 1992. The first step in privatization has been to establish enterprises as financially and managerially autonomous entities, a process referred to as denationalization. Denationalization has been implemented through different means, including outright sale of enterprises to the general public and the creation of new legal entities, i.e., joint-stock companies, collective companies, and leased enterprises. Many enterprises were initially set up as closed joint-stock companies (i.e., the shares were reserved for the state, management or employees). The next step in the privatization process has been the conversion of such companies into open joint-stock companies, followed by the sale of stocks owned by the state to the general public. To facilitate this process, a stock market has been established. Another avenue for privatization has been the withdrawal of economic units from the established legal entities.

1. The first stage of privatization

In the first stage (late 1992 through February 1994), the Government’s program concentrated on the privatization of housing and small-scale enterprises. Housing privatization was carried out by the local authorities and has been virtually completed. In addition, the Government in 1994 adopted new regulations to clarify and strengthen the property rights of owners of privatized and individual dwellings, including the right to freely sell or lease dwellings, or to use dwellings as collateral.

About 34,600 mainly small-scale enterprises were privatized in 1993 (54 percent of the total), with 48 percent of these enterprises being privatized through outright sale, 49 percent through the establishment of collectives and joint-stock companies, and the rest through leasing arrangements. Of the total, about 33,600 were small-scale (65 percent of all such enterprises), while about 1,000 of the privatized enterprises were medium- and large-scale (15 percent of such enterprises). All the medium- and large-scale enterprises were privatized by incorporating them as closed joint-stock companies. Out of the total number of enterprises, 35 percent belonged to Uzbytsoyuz (the Association of Everyday Services Enterprises) and 20 percent to Uzbeksavdo (the Association of Trade Enterprises). Nearly all (97 percent) of the enterprises in Uzbytsoyuz and 65 percent of the enterprises in Uzbeksavdo were privatized.

2. The second stage of privatization

The second stage of the privatization process was initiated with the adoption in March 1994 of a program to deepen the processes of denationalization and privatization of state property. This program envisaged: (i) wide involvement of the general public in the process of economic reform through the development of a securities market and the establishment of joint-stock companies with a simultaneous reduction in the state’s shares in such companies; (ii) the establishment of a real estate market; (iii) privatization of wholesale trade enterprises and the development of a system of commodity and raw material exchanges; (iv) demonopolization of existing industrial and management structures; (v) attraction of foreign investment; and (vi) state support for the post privatization activity of enterprises.

Progress in implementing this program was limited in 1994, except for the conversion of closed joint-stock companies into open companies; an additional 980 medium- and large-scale enterprises and 8,800 small-scale enterprises were privatized. The share of open companies in total joint-stock companies increased from 6 percent at end-1993 to 93 percent at end-1994. However, a majority of the shares continued to be held by insiders (the state, management, and workers). Also, during 1994 and 1995 a stock market was established, with a number of supporting institutional arrangements, including the Republican Stock Exchange, the National Investment Fund, and the National Share Depository. The objective of these arrangements was to facilitate the process of issuing shares of the privatized and newly created joint-stock companies. However, there is a substantial excess supply of stocks, which is a major concern for the Government and has led to the centralized regulation of the security market by the State Property Committee (SPC). Since July 1995, the Government has taken several measures to promote stock holding and trading, including exempting dividends and capital gains from taxation