Uzbekistan
Recent Economic Developments

The paper analyzes economic developments and policies over the past couple of years, with emphasis on the period since mid-1998. It assesses consequences for the economy of several external shocks and provides an overview of recent developments. The nature and extent of the external shocks affecting the economy and the internal constraints that characterize the Uzbek economy are detailed. The paper also analyzes the policy responses to these shocks and the results of these policies. A set of tables updates available economic data series.

Abstract

The paper analyzes economic developments and policies over the past couple of years, with emphasis on the period since mid-1998. It assesses consequences for the economy of several external shocks and provides an overview of recent developments. The nature and extent of the external shocks affecting the economy and the internal constraints that characterize the Uzbek economy are detailed. The paper also analyzes the policy responses to these shocks and the results of these policies. A set of tables updates available economic data series.

Uzbekistan: Basic Data, 1994-98

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Sources: Ministry of Macroeconomics and Statistics; Ministry of Finance; Central Bank of Uzbekistan; and Fund staff estimates.

Percentage cumulative change during year relative to broad money at the beginning of the year.

Velocity is calculated using end of period broad money.

I. Introduction

1. This report1 was prepared as background for the 1999 consultation between the International Monetary Fund and Uzbekistan under the provisions of Article IV of the IMF’s Articles of Agreement. The report analyzes economic developments and policies over the past couple of years, with emphasis on the period since mid-1998. In particular, it assesses consequences for the economy of several external shocks. Chapter II provides an overview of recent developments. Chapter III details the nature and extent of the external shocks affecting the economy and the internal constraints that characterize the Uzbek economy. Chapter IV analyses the policy responses to these shocks and the results of these policies. Appendix I analyses the quasi-fiscal operations and welfare effects of the foreign exchange regime during the period 1997-99. Appendix II gives a description of the exchange and trade system, while Appendix III describes in detail the current tax system. A set of tables updates available economic data series.

II. Overview

2. The post-independence experience of Uzbekistan stands in marked contrast to that of most other BRO2 countries. Economic policy has been characterized by a cautious approach to structural reforms and reliance on administrative measures and government control and intervention in economic activity. These policies have aimed at maintaining social stability by containing inflation for basic consumer goods and limiting the negative impact of structural reforms on employment and economic growth. Official statistics indicate that the decline in output in Uzbekistan since 1991 has been the lowest of any of the BRO countries. Growth was restored in 1996 and has continued in subsequent years (Figure 1). The main explanation for this performance is found in the set of initial conditions characterizing the Uzbek economy at independence.3 Not only was Uzbekistan comparatively unburdened by over-industrialization, but its endowment with easily marketable primary commodities (i.e., cotton and gold accounted for 60 percent of exports) allowed it to reorient quickly its exports after the collapse of the Soviet Union.

Figure 1.
Figure 1.

Uzbekistan: Macroeconomic Indicators, 1996–99 1/

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Data provided by the Uzbek authorities; and Fund staff estimates and projections.1/ Historical numbers up to third quarter of 1999.2/ Includes balances in extrabudgetary funds.3/ Domestic credit deflated by GDP deflator.

3. Although economic growth has been maintained, imbalances in the Uzbek economy worsened during the last two years. Official data indicate that real GDP grew by about 4 ½ percent in 1998 and is expected to increase by 4-4 ½ percent in 1999, while within year inflation is estimated at 26 percent and about 30 percent for the same periods, respectively.4 As discussed below, official data tends to underestimate inflation and over-estimate real GDP growth. The external current account balance recorded small deficits during 1998 and 1999. However, the small current account deficit in the aftermath of the Russian crisis was due more to an intensification of administrative import controls than to the ability of the economy to adjust to external shocks. Furthermore, the external imbalances manifested themselves in low inflows of foreign direct investment and evidence of capital flight.

4. The Fund staff and other independent observers have, in the past, raised questions about the reliability of official statistics, especially concerning the measurement of changes in consumer prices and real GDP.5 During the 1999 Article IV consultation mission, additional information was obtained on the methodology used to collect consumer price data. Deficiencies in price collection and recording procedures made it increasingly difficult to record prices accurately as inflation accelerated in 1997 and prices were hiked in 1998-99 for a few key food items due to temporary supply shortages and frequent changes in suppliers. As a consequence, the official CPI for this period tends to understate inflation (Box 1). Because the same price data are used in the computation of the CPI and the GDP deflator, there is also an upward bias in the official estimates of real GDP growth. It is, however, impossible to revise historical CPI data for the deficiencies since they occurred mainly at the price collection stage.

5. Since late 1996, Uzbekistan has followed a strategy of import substitution. Beginning in 1997, a multiple exchange rate regime was explicitly introduced that used an overvalued official exchange rate to tax exporting sectors (largely cotton and gold production) in order to subsidize imports of capital and priority consumer goods. In addition, the administration of the numerous trade restrictions was tightened in order to protect domestic producers from external competition. As a result, the illegal curb market for foreign exchange gained in importance and the spread between the curb market exchange rate and the official rate widened significantly, from about 100 percent in 1997 to more than 400 percent in late 1999.

Assessment of Official Consumer Price and National Accounts Statistics in Uzbekistan

Although there has been a significant improvement in the quality of official macroeconomic data in recent years, statistics on consumer prices and national accounts still suffer from problems that to some extent hamper an accurate assessment of economic developments in Uzbekistan.

The methodology for compiling consumer price data and computing a consumer price index was established with technical assistance from the Fund in 1994. Subsequent problems concerning the methodology for recording and imputing the prices for seasonal goods were corrected in February 1998. Nonetheless, there are problems related to recording and imputing prices of non-seasonal goods for which the source of supply frequently changes or for goods that are temporarily unavailable in the market. Prices for these goods are not properly recorded or imputed, thereby preventing direct price comparisons over time. As a result, the official CPI underestimates the extent of price changes, a problem that is exacerbated by market instabilities. The consequence of this shortcoming in the official statistics can be seen by comparing the official food price index for Tashkent and the price index collected by the IMF resident representative’s office as well as other independent observers in Tashkent. The increase in the former index is consistently lower than the latter (see table below).

In order to correct this problem. Fund staff has urged the authorities to enforce the instructions provided earlier to price collectors on recording and imputing prices of missing goods and recommended that the instructions be amended as follows:

In the area of national accounts statistics, the following problems were identified:

Uzbekistan: Alternative Indicators of Inflation

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

Official statistics.

The weight of food in the official CPI is 71 ½ percent.

Data on food prices collected in Tashkent by the IMF Resident Representative’s office.

6. Financing for the import substitution strategy came from a drawdown of international reserves in 1997 and increased external borrowing during 1998 and 1999. The external sources were used mainly to finance imports of capital equipment for modernization of domestic industry. As a result of this policy, the stock of government and government-guaranteed external debt and external debt service have increased significantly over the past two years.

III. External Shocks and Internal Constraints

7. The external shocks faced by Uzbekistan highlighted the weaknesses of the economic strategy followed by the government since 1996. This strategy had already weakened the balance of payments position before 1998. The overvalued official exchange rate in combination with the export surrender requirements reduced production incentives for traditional exports (cotton and gold) and hindered the development of non-traditional exports. The non-convertibility of the local currency and the difficult business climate discouraged foreign direct investment inflows. All these factors in combination with distortions in the banking system (cash withdrawal restrictions and negative real interest rates) encouraged capital flight.

A. External Shocks

8. In 1998 and 1999 the Uzbek economy experienced three shocks—the Russian crisis, a poor cotton harvest, and continuing decline in world cotton and gold prices. As a result, the balance of payments position worsened significantly. Total export earnings in 1998 were 22 percent lower than in 1997. For the first three quarters of 1999, total exports were about 8 percent lower than the same period in 1998. The 1998 cotton harvest was 12 percent lower than the 1997 harvest (Table 4) and the average price for cotton declined by nearly 20 percent. The value of cotton exports from the 1998 harvest was about 44 ½ percent lower than from the 1997 harvest.6 Beginning in early 1998 gold prices began a nearly continuous decline through August 1999 (Figure 2). While gold prices staged a brief recovery during the third and fourth quarters of 1999, by the end of 1999 they had fallen back to close to the level at the beginning of the year. As a result of the price decline, the value of gold exports was 11 percent lower in 1998 than in 1997. In the first 9 months of 1999, a further small loss was recorded due to the continued gold price decline. In spite of the large fall in export prices, the terms of trade declined by only 2 ½ percent between January 1998 and September 1999 because of a significant decline in prices for wheat and imports from CIS countries.

Figure 2.
Figure 2.

Uzbekistan: The Terms of Trade and Basic Commodity Prices, 1994–99

(Index 1995 = 100)

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Ministry of Macroeconomics and Statistics; and Fund staff calculations.

9. Earnings from the export of manufactured goods also declined because of reduced demand from CIS countries and the erosion of price competitiveness. The real effective official sum exchange rate vis-à-vis CIS countries appreciated by 42 percent from June 1998 to September 1999 (Figure 3).7 Consequently, the competitiveness of manufacturing exports such as automobiles produced by Uz-Daewoo, which are sold mostly in Russia, was seriously eroded in the wake of the Russian crisis. Total exports to CIS countries declined by about 50 percent in 1998 and a further decline has been recorded in 1999. In sharp contrast, the real effective exchange rate in the illegal curb market depreciated significantly—about 35 percent—over the same period, but this rate is of limited importance for most exports.

Figure 3.
Figure 3.

Uzbekistan: Real Effective Exchange Rates Vis-à-Vis CIS Countries, 1996–99 1/2/

(Index 1996 Ql = 100)

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Central Bank of Uzbekistan; and Fund staff calculations.1/ Calculated on the basis of the GDP deflator, using trading partners’ exchange rates and CPIs (with INS weights). The indicative exchange rate is calculated as a weighted average of the official rate (30 percent), the commercial bank rate (40 percent), and the curb market rate (30 percent).2/ A decrease in the indices denotes a depreciation of the real effective exchange rate.

B. Internal Constraints

10. Adjustment to the external shocks has been constrained by numerous structural rigidities in the Uzbek economy. Among the internal constraints that hinder a fuller adjustment to the external shocks are the restrictive foreign exchange and trade regime, government control and intervention in economic activity (including centralized resource allocation particularly in agriculture), the slow pace of privatization, and a restrictive business environment (including governance and corruption problems).8

11. Government intervention remains pervasive in the agricultural sector. Most of the former state and collective farms have been converted into joint stock companies or cooperatives. However, this transformation is more notional than real as numerous restrictions still apply to farming operations, particularly those pertaining to cotton and wheat production.9

12. The pricing and marketing arrangements for wheat and cotton are determined by the state order system. Presently the state order system requires farms to sell 30 percent of the “target” for cotton production and 25 percent of the target for wheat production at state determined prices.10 In the case of wheat, an additional 25 percent of targeted output is sold at negotiated prices, which are approximately 40 percent higher than the state order price for wheat.

13. Production targets are determined by the state and, if farms fail to meet their target, they are required to sell their entire cotton or wheat output at the official price. Producers who meet the cotton production target can sell the remaining 70 percent to the state marketing board at somewhat higher prices.11 Wheat producers that meet their target are allowed to sell the balance of the output locally at market-determined prices. Since state production targets are usually ambitious, many producers are unable to meet their target. As a result, state procurement of cotton and wheat is typically higher than the officially determined share. In recent years, about 65-75 percent of the cotton and wheat harvests have been sold at official state order prices.

14. The low producer price for cotton is partially offset through implicit subsidies and preferential credits to producers. Farmers benefit from nearly free irrigation water as the government bears much of the cost of maintenance and operation of the irrigation system. The VAT exemption for the entire sector and the ability to import agricultural inputs at the official exchange rate are other forms of indirect subsidies. Agricultural enterprises also receive loans on preferential terms including subsidized interest rates and frequent rescheduling. Nonetheless, it is estimated that net taxation of agriculture was the equivalent of 4 ½ percent of GDP in 1998.12

15. The government also exercises extensive control over the enterprise sector. In 1998, non-state economic entities accounted for 89 percent of total legal entities, with private enterprises accounting for about 45 percent.13 The dominance of state enterprises has adversely affected the business environment. Although the number of monopolies has decreased in recent years, competition in many sectors remains limited due to the dominance of large state-owned enterprises.

16. In line with the gradual approach to structural reform, the pace of privatization in Uzbekistan has thus far been rather slow. Privatization has taken place in three stages. The first stage concentrated on housing units and small enterprises mainly in the service sector and was largely completed by 1995, with 90 percent of small enterprises being privatized (Table 17). The second stage, which involves the creation of privatization investment funds, began in late 1996 and is still being implemented. These privately owned funds purchase shares in selected medium-and large-scale enterprises. In turn, the public is able to purchase shares in the funds. As of September 1999, 86 investment funds were licensed, of which 68 were actively purchasing enterprise shares. The third stage, case-by-case privatization of large enterprises, began in 1998 with support from the World Bank, but with limited results.

17. The business environment is adversely affected by an excessively bureaucratic process for registering and licensing enterprises. Numerous documents must be submitted to different ministries for consideration and approval. As a result, the registration process can take 4 to 6 months. Delays in import contract registration and customs clearances also contribute to the increased cost of business operations. The uncertain legal framework and complicated bureaucratic procedures give rise to serious governance and corruption problems.14

IV. Policy Responses and Economic Results

18. The policy responses to the external shocks experienced in 1998 and 1999 were dictated in large measure by the continued inward-oriented strategy pursued by the authorities. In general, there has been a reluctance to expose enterprises to competition from abroad for fear that they are still not sufficiently prepared for such a competitive challenge, and the trade and foreign exchange regime was used extensively to curtail imports15. At the same time, agriculture continued to be taxed through the foreign exchange system to support modernization in the industrial sector. While fiscal policy (excluding quasi-fiscal activities) was fairly tight, monetary policy sought to cushion the impact of the external shocks by continuing to expand credit to industrial and agricultural enterprises. A large portion of the expansion of domestic credit by the banking system came in the form of on-lending of government-guaranteed foreign borrowing. Following the Russian crisis, the availability of foreign exchange through official channels decreased and the gap between the official and curb market exchange rates increased significantly.

A. Exchange Rate Policy

19. The authorities have continued to resist major adjustments to either the official or the commercial bank exchange rates in response to the external shocks. The official exchange rate and the commercial bank exchange rate were allowed to depreciate (against the U.S. dollar) by slightly more than inflation during 1998 (Figure 4). In contrast, the curb market rate depreciated sharply in the wake of the Russian crisis in August 1998. During the first 9 months of 1999, the depreciation of the official rate continued to outpace inflation slightly, while the commercial bank rate was allowed to depreciate by approximately double the official rate. The spread between the curb market rate and the officially controlled rates widened further during this period. While the real effective official exchange rate has appreciated significantly since the middle of 1998, the real effective indicative rate has depreciated by about 33 percent between the second quarter of 1998 and the third quarter of 1999.16

Figure 4.
Figure 4.

Uzbekistan: Nominal and Real Exchange Rates, 1996–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Central Bank of Uzbekistan; and Fund staff calculations.1/ Calculated on the basis of the GDP deflator, using trading partners’ exchange rates and CPIs (with INS weights). The indicative exchange rate is calculated as a weighted average of the official rate (30 percent), the commercial bank rate (40 percent), and the curb market rate (30 percent).2/ A decrease in the indices denotes a depreciation of the real effective exchange rate.

20. The present foreign exchange regime allows the authorities to manage foreign exchange flows by controlling the supply, demand and price in the official and commercial bank markets. Beginning in mid-1998, in response to the increasing balance of payments pressures, the CBU began reducing access to foreign exchange by limiting its sales to commercial banks (Figure 5). At the same time, sales of foreign exchange to commercial banks (via the surrender requirement of non-centralized exports) were curtailed (Figure 6). This contributed to the decision by the authorities to increase the mandatory surrender requirement for non-centralized exports from 30 percent to 50 percent as of January 1999. Nonetheless, sales of foreign exchange by the banking system have decreased since the third quarter of 1998, with the decline in sales by commercial banks becoming especially pronounced during 1999. During this period many enterprises experienced increased delays in obtaining approval of their applications for foreign exchange. In this way, the authorities were able to forestall a decline in gross international reserves between end-1997 and end-1998. By mid-1999, however, the authorities had to draw down reserves to repay cotton advances from 1998 that could not be met due to the poor harvest and to cover other external obligations. Additionally, the authorities borrowed US$150 million on commercial terms during the second quarter of 1999 to help meet external obligations.

Figure 5.
Figure 5.

Uzbekistan: Foreign Exchange Outflows from the Central Bank of Uzbekistan and the Banking System, 1998–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Central Bank of Uzbekistan; and Fund staff estimates.
Figure 6.
Figure 6.

Uzbekistan: Foreign Exchange Inflows to Commercial Banks and Net International Reserves of the Central Bank of Uzbekistan, 1998–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Central Bank of Uzbekistan; and Fund staff estimates.

B. Monetary Policy

21. Monetary policy has mainly aimed at supporting the inward-oriented development strategy, which has limited the ability of the CBU to follow independent policies aimed at promoting macroeconomic stability. With a large part of bank lending being government guaranteed (and explicitly or implicitly government directed), the CBU has had limited possibilities for conducting an independent monetary policy. Also, according to the approved budgets, the CBU is required to provide financing for the government in an amount equivalent to 1 percent of GDP. Furthermore, the CBU has a limited arsenal of monetary policy instruments at its disposal. The obligatory reserve requirements, the refinance facility, the sale of certificates of deposit and credit auctions have not been used very actively. The most potent instrument in liquidity management has been the sale of foreign exchange by the CBU, but its ability to use this instrument in any significant way in the past two years has been limited by the targets for the level of gross international reserves established by the government.

22. In line with the general development policy objectives, and partly in response to the Russian crisis, monetary policy became increasingly expansionary during 1998 and remained loose in 1999. Although there were signs that broad money velocity was increasing in the wake of the Russian crisis (Figure 7), the CBU expanded credit rapidly during the second half of 1998. At the same time, it restricted its sale of foreign exchange in order to meet the government’s target of rebuilding reserves, which had declined significantly earlier in the year. As a result reserve money grew rapidly (Box 2). However, the money multiplier declined, mainly owing to an increase in the currency to deposit ratio, and broad money expansion was more moderate than the increase in reserve money. The increase in monetary aggregates slowed down somewhat during the first three quarters of 1999 as the authorities offset part of the credit expansion through foreign exchange sales. Nevertheless, monetary conditions remained fairly easy, as evidenced by the continued negative real interest rates (Figure 8) and the large depreciation of the curb market exchange rate (by more than 100 percent against the U.S. dollar during 1999).

Figure 7.
Figure 7.

Uzbekistan: Monetary Indicators, 1997–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Data provided by the Central Bank of Uzbekistan; and Fund staff calculations.1/ Calculated as annualized quarterly GDP divided by end-period broad money.2/ Calculated as end-period broad money divided by end-period reserve money.
Figure 8.
Figure 8.

Uzbekistan: Treasury Bill Rate and Consumer Price Inflation, 1997–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Source: Central Bank of Uzbekistan.1/ Annualized average simple monthly rate on six-month treasury bills.

Uzbekistan: Monetary Developments in 1998 and 1999

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Sources: Central Bank of Uzbekistan; and Fund staff calculations.

Adjusted for valuation changes.

23. Credit to the economy from the banking system has increased significantly in real terms over the past two years. While the counterpart to the credit expansion had been a drawdown of official international reserves in 1997, on-lending of government-guaranteed loans accounted for about half of the credit expansion in 1998 and 1999. The authorities sought to avoid a further reduction of international reserves (apart from fluctuations within the calendar year), because the import coverage of gross international reserves had declined to less than 4 months by the end of 1997, considered by the authorities to be the acceptable minimum. As a result of this policy, more than half of the outstanding credits to the economy from the banking system were denominated in foreign currency at the end of the third quarter of 1999. About 93 percent of such credits were government guaranteed. More than one-third of the credits in domestic currency were also extended with a government guarantee.

24. The growth of net credit to the government from the CBU was slightly less than the one percent of GDP planned for 1998. The banking system as a whole provided an even smaller share of GDP in net credit to government in 1998 because of an accumulation of deposits in commercial banks by budgetary organizations. Similar results were recorded for the first three quarters of 1999, with the CBU providing the equivalent of 0.8 percent of GDP and the banking system as a whole 0.6 percent of GDP.

25. One consequence of increased import compression and delays in the approval of applications for foreign exchange has been an involuntary accumulation of sum liquidity by enterprises, which they have partly used to purchase short-term treasury bills. As a result, the treasury bill auctions (Box 3) have been characterized by declining and negative real interest rates since early 1998 (Figure 8 and Table 26).17 Interest rates on deposits at commercial banks (Table 27) have generally been negative in real terms during 1998 and 1999, while rates on commercial bank loans have been positive in real terms during the same period (Table 28). Interest rates on directed credits do not necessarily reflect market conditions; instead these rates are set in accordance with the priority of the project.

Uzbekistan: Operation of the Treasury Bill Market

Treasury bill (GKOs) auctions are coordinated by the CBU and held on Wednesdays. Occasionally, there may not be an auction during the last week of the month if the MoF does not need additional funds. The secondary market in GKOs is also coordinated by the CBU and is held on Monday, Tuesday, Thursday and Friday.

About 10 days before a scheduled auction, the MoF notifies the CBU of the amount and maturity of GKOs that will be available. The CBU publishes this information seven days in advance of the auction. There are 22 dealers (21 of which are commercial banks) that are authorized to participate in the auctions either in their own right or as agents. On the day of the auction, bids are accepted between 10:00-10:30 a.m. Each dealer must submit separate applications for their own purchases and those on behalf of the customers they represent. The CBU aggregates the bids by price and forwards the list to the MoF no later than 2:00 p.m. By 4:00 p.m., the MoF indicates the minimum price that it will accept. Up to 20 percent of the total bids that are submitted can be non-competitive, i.e, no price is specified. Applications for non-competitive purchases must pay the weighted average of the day’s prices.

C. Fiscal Policy

26. In response to the shocks during 1998 and 1999, the government maintained a fairly tight fiscal policy stance (excluding quasi-fiscal activities). Policies aimed at maintaining revenues and keeping priority expenditures intact, while compressing other expenditures. According to official data, the fiscal stance has been fairly tight in 1998 and 1999, with deficits of 1-2 percent of GDP (Tables 31 and 32). However, the official presentation of the budget excludes several quasi-fiscal activities, including directed lending, and the implicit taxation of exports and subsidization of imports through the foreign exchange regime.18 In addition, the official presentation of the budget does not conform to internationally accepted definitions because interest expenditures on treasury bills and expenditures financed by foreign borrowing are excluded, while amortization of external debt is included above the line as an expenditure item. Adjusting for these factors, the deficits for 1998 and 1999 were significantly larger than indicated by the official data (Box 4).

27. Tax policy in 1998 and 1999 sought to maintain revenue collection while easing the tax burden on enterprises. In line with the latter objective, the government reduced the profit tax rate from 36 percent to 35 percent in 1998 and further to 33 percent in 1999.19 As world cotton prices declined, the authorities eliminated the cotton excise tax from 1998. To compensate for the impact on tax revenues of these changes, excise tax rates (in particular on energy products) and VAT rates were increased in 1998 and 1999.20 A 5 percent tax on the purchase of foreign exchange was introduced in January 1999. The combination of these measures and a relatively loose credit policy that provided enterprises with liquidity to meet their tax obligations, contributed to increasing tax revenues slightly compared with 1997, to about 32 ½ percent of GDP in 1998. Total VAT collections were higher than in 1997 because of the increase in the VAT rate, but this was offset by lower profit tax collections due to the reduction in the profit tax rate and the worse economic conditions for many enterprises in the wake of the Russian crisis. Total excise tax revenues were unchanged compared with 1997 since the loss of revenues due to the elimination of the excise tax on cotton was offset by increased revenues from excise taxes on oil products.

Uzbekistan: Alternative Measures of the Fiscal Balance

(In percent of GDP)
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Source: Ministry of Finance; and Fund staff estimates.

28. Revenue collection during the first 9 months of 1999 was comparable to 1998, and better than expected. The reasons for the better-than-expected performance were higher than anticipated inflation21, improved tax collection efforts,22 and the impact of the increase in several excise tax rates. The improved collection effort has been reflected in a reduction of arrears on profit taxes (Figure 9), and a significant increase in income tax revenue from the self-employed. In August 1999, the government increased excise tax rates and prices on gasoline and diesel, which boosted excise tax revenues. However, revenues from profit taxes, VAT, and customs duties were lower than the year before, in the case of profit tax revenue mainly because of the lower tax rate. Collection of VAT revenues declined mainly because VAT credits on inputs are now issued in one instead of several installments. The lower revenues from customs duties reflected the decline in recorded imports.23 For the year as a whole, revenues are expected to be about 31 ½ percent of GDP, lower than in 1998, but higher than in 1997.

Figure 9.
Figure 9.

Uzbekistan: Tax Arrears, 1997–99 1/

(In billions of sums)

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Source: Ministry of Finance.1/ Beginning of period.

29. Expenditure developments in 1998 and 1999 reflected the authorities’ efforts to protect priority expenditures. During 1998 and 1999 wages increased significantly (by 40 percent and 68 percent, respectively), as did expenditures for social safety net benefits.24 In total expenditures amounted to about 36 percent of GDP, significantly higher than in 1997 (Tables 31 and 32), mostly because of the increase in expenditures for wages and the social safety net, while centralized investments declined slightly. For the first 9 months of 1999 expenditures fell to about 34 percent of GDP. For the year as a whole, expenditures are expected to be 2 percent of GDP lower than in 1998. The level of spending on nonpriority items is expected to decline by about 15 percent in real terms compared with 1998.

30. In August 1999, parliament approved a preliminary budget for 2000. The budget includes provisions to further reduce the tax burden on the enterprise sector, and reflects the authorities’ longer term policy aim of reducing the role of government in the economy. The revenue and expenditure measures included in the budget are specified in Box 5.

Uzbekistan: Revenue and Expenditure Measures in the Budget for 2000

Compared with the 1999 budget, the 2000 budget aims at 2 lower deficit (2.8 percent versus 3 percent of GDP) and lower revenues and expenditures in relations to GDP according to the government’s definitions.

On the revenue side, several tax policy changes are planned with the overall goal of reducing the tax burden (total revenues in relation to GDP are budgeted at about 29 percent compared with 31 percent in the original 1999 budget). The major changes are:

On the expenditure side, lower expenditures in relation to GDP (32 percent) are planned compared with the original 1999 budget (34 percent). The main changes are:

The budget assumes 5 percent real GDP growth, 1.4 percent average monthly inflation, and nominal GDP of sum 2,225 billion. The budget does not take into account the possible introduction of current account convertibility in 2000.

Source: Ministry of Finance.1/ Rates are levied per hectare.2/ Currently the environment tax is assessed for all enterprises at 1 percent of production costs.

D. Social Protection Policies

31. The government put a premium on protecting the population from the negative effects of exogenous shocks, in particular against unemployment, devaluation and inflation. An important instrument of social policy is the use of administered consumer prices and marketing restrictions. Generous wage increases, including in the minimum wage, have also played an important role. In addition, several explicit social protection policies are implemented through the budget and through other means.

32. Expenditures on the social safety net in 1998 and 1999 increased slightly compared with 1997. However, expenditures on children’s allowances and allowances for low-income families decreased slightly. While the level of benefits has increased in line with minimum wages, this was offset by a decline in the number of families receiving benefits, due to improved targeting and declining birth rates (Box 6 and Table 33). The most important change in the administration of the social safety net has been the increased reliance on the Mahalla (traditional neighborhood) network for screening and distributing many benefits (Box 7). The government also provides benefits through budget subsidies for housing maintenance (about 10 percent of costs in 1999) and public utilities (currently only for heating and hot water). In 1998 and 1999, expenditures on these subsidies increased mainly because of higher energy prices. The government intends to reach full cost recovery for housing maintenance in 2000 and for heating and hot water in 2004.

E. Balance of Payments and Foreign Borrowing Policies

33. During 1998 and 1999, balance of payments policies have relied mainly on administrative measures, especially for controlling imports. In response to declining export receipts in recent years, the authorities have instituted a number of foreign exchange and trade restrictions and non-tariff barriers to compress imports.25 As a result, recorded imports have declined dramatically in 1998 and 1999, and the current account deficits have been relatively modest during this period (Table 34). The capital account has been characterized by low direct investment inflows and evidence of capital flight.26 Foreign borrowing by the government directly or through the commercial banks with a government guarantee was significant during this period, and gross official international reserves have remained fairly stable. With the compression of imports, the import coverage of reserves increased significantly to more than 5 months in 1998 and 1999.

Uzbekistan: Extrabudgetary Funds and Social Protection

Extrabudgetary Funds

Extrabudgetary funds included in the consolidated budget are the Pension Fund, the Employment Fund, the Privatization Fund, and the Road Fund. Revenues are earmarked to finance the operation of each fund. Except for the transfer of privatization proceeds to finance the central budget, these funds usually keep their resources independent of the central budget.

The Pension Fund is the largest of the four with total expenditures of 10.5 percent of GDP. Currently, the Pension Fund is funded by a payroll tax of 37.3 percent paid by employers, 2 percent by the employees, and 0.5 percent of enterprises’ gross revenues.

The Employment Fund is a small fund that finances unemployment benefits and job creation programs. It is funded mainly by a 1.5 percent payroll tax paid by employers.

The Privatization Fund is financed with proceeds from privatization operations, and it transfers a major part of its proceeds to the central budget, and some to off-budget funds of ministries and local governments.

The Road Fund is charged with maintaining the national road network and partly the financing of construction of new state roads. It is funded by earmarked revenues which include deductions from enterprises and other organizations, vehicle registration fees, part of the proceeds from sales of gasoline and lubricants, and transit fees for foreign transportation vehicles, etc. In 1999, its projected expenditure is close to 1.5 percent of GDP.

Social Protection

Uzbekistan’s social protection system includes pensions, unemployment benefits, allowances for low income families, benefits for families with children under sixteen years of age, benefits for mothers with children under two years of age, and special benefits for veterans and the disabled.

The Ministry of Social Protection is responsible for the Pension Fund which pays pensions to pensioners (including working pensioners). Most pensioners receive the minimum monthly pension. Some pensioners are eligible for additional benefits based on length of service and earnings while employed. Veterans and those who worked in hazardous industries are also eligible for additional benefits. In addition, the Pension Fund pays other benefits such as survivor and disability pensions, childbirth and funeral allowances.

The Ministry of Labor is responsible for administering the Employment Fund, which pays unemployment allowances (up to 6 months of previous wages). The Employment Fund also helps with job training and job search.

Currently three types of social allowances are provided by the state budget: (i) assistance to low income families; (ii) assistance to families with children under 16; and (iii) assistance to mothers of children under two years of age. Benefits for the first two are linked to the minimum wage, whereas benefits paid to low income families are determined by the Mahalla system using a number of criteria (Box 7). Currently, the allowance is 50 percent of the minimum wage to families with one child; 100 percent of the minimum wage to families with 2 children; 140 percent of the minimum wage to families with three children; and 175 percent of the minimum wage for families with four or more children; and 150 percent of the minimum wage to mothers with children under two. In 1998, allowances for mothers with children under two years of age were administered through the budget, but now they are administered through the Mahalla system as are the two other types of benefits. In addition to these transfers, the social safety net includes provisions for a number of special benefits such as free public transportation and medicines for the disabled.

Uzbekistan: The Mahalla System

The distinguishing feature of Uzbekistan’s system of social assistance is the use of mahalla (neighborhood) committees in both the targeted social assistance program and the administration and targeting of child allowance benefits. Mahalla committees are a pre-Soviet institution that has been revived with strong government support since independence. They perform a wide range of functions, including administering social assistance. There are about 7,000 local mahallas in the country, ranging in size from 150-1,500 households. Mahalla chairmen and secretaries are generally paid from local budgets.

The mahalla targeted social assistance scheme combines fixed rules and discretionary allocations. In order to qualify for benefits, a committee of respected citizens and representatives of certain state bodies visits the family, assesses its overall needs and decides if it qualifies for benefits and, if so, for what level of benefits. This visitation committee reports to the plenary session of the mahalla committee and an open vote is taken on whether the household qualifies. Households must then reapply every 3 months, with benefits set between 1.5 and 3 times the minimum wage.

The child allowance scheme is also administered by the mahallas. These benefits were universal until 1997, when they also became targeted, and the administration and means testing of them were transferred to mahalla committees. The major difference in criteria used compared with the targeted social assistance scheme is that eligibility is determined more narrowly on the basis of average monthly per capita household income during the 12 months preceding the application.

The most recent in-depth assessment of the targeted social transfer scheme was done in 1995 using household survey data. The main findings of the study were that: (i) 20 percent of households had received help; (ii) knowledge of the program was widespread, with over 80 percent of households knowledgeable of the scheme, and apparently little social stigma attached to applying for the benefit; (iii) the probability of receiving benefits was positively affected by household size, and by the household head being a pensioner or a woman, and was negatively affected by the proportion of working members in the family, higher educational status and ownership of durable assets; and (iv) targeting was performed according to a wider vector of welfare indicators than would be done by simple income-based means testing.

Source: Coudouel, Aline, Sheila Mamie, and John Micklewright, 1998, “Targeting Social Assistance in a Transition Economy: The Mahallas in Uzbekistan”, Innocenti Occasional Papers, Economic and Social Policy Series, No. 63. Florence, UNICEF International Child Development Center.

34. Since independence, Uzbekistan has followed a policy of diversifying its pattern of external trade. By 1995 about half of imports and exports were with nontraditional partners (Tables 35-38). This pattern has continued for imports and was, until 1998, largely unaffected by the external shocks. It reflects the effects of increased domestic food production and a policy of modernizing local industry. For exports, however, the pattern is less clear. In 1996 the share of exports to traditional partners reached a low of 34 percent. For 1997–98, the average share rose to 40 percent. The majority of exports (about 75 percent in 1998) to non-traditional partners consisted of cotton, whereas trade with traditional partners has been less concentrated.

35. The combination of pressure on the balance of payments and the desire to support selected enterprises in the context of the government’s development strategy has forced the government to rely increasingly on foreign borrowing during 1998 and 1999. Between end-1997 and end-September 1999, the stock of government-guaranteed external debt increased by US$1.2 billion to about US$3.8 billion. Of the total debt stock, US$1.7 billion (44 percent) was channeled through commercial banks (primarily the National Bank for Foreign Economic Activity). Of the foreign loans onlent by the National Bank for Foreign Economic Activity during 1998 and the first 9 months of 1999, about 60 percent were made to the manufacturing sector; 16 percent for transport; 9 percent to agriculture; and 3 percent for the construction sector. Although a small share of the loans was for the purchase of consumables (e.g., wheat imports) the majority of the loans was for imports of capital goods (e.g., farming equipment, aircraft, vehicles, and manufacturing equipment).

36. The external borrowing policy followed over the past two years has led to a significant increase in aggregate debt indicators. The debt service ratio was only 9 percent in 1997 but increased to about 18 percent in the first three quarters of 1999 (Table 34). External debt as a share of GDP (calculated at the official exchange rate) increased from percent at the end of 1997 to about 25 percent at the end of September 1999 (Table 39).

F. Structural Policies

37. Against the background of the external shocks and recent political constraints in the context of terrorist activity within Uzbekistan and political instability in neighboring countries, the authorities have not found it feasible to pursue a comprehensive program of structural reform. Instead, they have chosen to deal with emerging problems in an ad hoc manner.

Privatization policies

38. The authorities launched an ambitious privatization program in 1998/99 in an attempt to attract foreign direct investment, but the results have been disappointing. In late 1998, the authorities announced that foreign investors would be allowed to own 100 percent of some enterprises and majority shares in others.27 Despite this increased openness to foreign participation, direct investment from abroad has been slow to materialize because of concerns about the business environment in Uzbekistan. Also, for most of 1998 and 1999, international market conditions have not been favorable for the privatization of certain large enterprises, especially in the natural resource or raw materials sectors.28 By the end of 1998, 23 percent of large enterprises had been transformed into joint stock companies (Table 17).29 During the first three quarters of 1999, 293 enterprises were privatized, mainly in construction, industry, and trade30.

39. Efforts to privatize commercial banks have also encountered delays. In October 1998, a presidential decree required that government ownership in commercial banks be reduced to no more than 50 percent in any bank – except for the National Bank for Foreign Economic Activity, where the ceiling was set at 60 percent – by July 1, 1999. However, no state bank was able to meet this deadline. In June 1999, the government and the EBRD signed a memorandum of understanding with the aim of encouraging the privatization of commercial banks. According to this memorandum, the EBRD intends to support pre-privatization activities and to seek out strategic investors.

40. Revenues from privatization have been modest so far. While detailed time-series data on privatization revenues are not available, it is estimated that the privatization of 451 enterprises in 1998 yielded sum 8.8 billion (about 0.6 percent of GDP). For the first 9 months of 1999, privatization revenues totaled sum 4.4 billion (0.3 percent of GDP). Privatization proceeds were split between the state budget (Ministry of Finance), municipal authorities, the Business Fund, the State Property Fund (GKI) and privatized enterprises.31 During the first 9 months of 1999, the state budget received about one third of total privatization revenues, the municipal authorities 13 percent and the Business Fund 15 percent of total proceeds. About 20 percent of the proceeds were re-invested in the privatized enterprises. The balance was used by the GKI to cover the expenses associated with privatization.

Enterprise restructuring and competition policies

41. Although some progress with privatization has been achieved, traditional economic structures have been maintained and enterprise restructuring has been delayed in an attempt to avoid social disruptions. Some progress has been achieved in second generation or post-privatization reforms. Such measures have included a strengthening of the role of the bankruptcy process in facilitating the exit of loss-making enterprises and strengthening of anti-monopoly policies to ensure that non-competitive behavior of enterprises is minimized.

42. Data on bankruptcy proceedings indicate that the exit mechanism is used sparsely. Despite a more active use of bankruptcy procedures, there is evidence to suggest that the bankruptcy law is used principally to enhance tax collection from small private enterprises. Between end-1997 and the fourth quarter of 1999 about 1,357 enterprises were declared bankrupt (Table 18). However, only about 8 percent of these enterprises were state-owned. During the same period, about 50 enterprises that were either fully or partially state-owned were liquidated, i.e., about 5 percent of state-owned enterprise. The role of the bankruptcy process in large and medium enterprise restructuring has been very limited (the average number of workers was only 11 in liquidated enterprises).

43. Progress has been made in competition and antimonopoly policies, but an inadequate legal and regulatory framework hampers the effective implementation of such policies. The main instruments of the Anti-Monopoly Committee (AMC) are price controls. The definition of monopoly products and geographical market boundaries often does not have economically meaningful measures of market share and dominance but rather relies on a strict quantitative formula.32 According to the official classification, there were 716 enterprises and 1,924 products listed in the AMC’s Monopoly Register as of October 1, 1999 (a significant decline compared with previous years), of which the vast majority was registered at the local level (Table 16). In general, the absence of a strong independent regulatory authority (the current Anti-Monopoly Committee is part of the Ministry of Finance) prevents the efficient implementation and enforcement of competition and regulatory policies.

44. While direct enterprise subsidies from the budget have declined, indirect support for enterprises has been extensive. Such measures include price controls (e.g. on energy products), subsidized and directed credits, and subsidized access to foreign exchange.

Energy pricing policies

45. The state still owns the major enterprises in the energy sector and controls all energy prices. Originally, the justification for maintaining subsidized energy prices was to stimulate domestic industry and to enhance social protection. Present policies aim at ensuring that domestic energy prices are close to world prices, albeit at the highly overvalued official exchange rate. The price for gasoline, which was increased by about 60 percent in 1998, and by an additional 50 percent during the first 9 months of 1999, now exceeds the international price when valued at the official exchange rate (Table 13). However, valued at the curb market rate, prices are much lower than world market levels, leading to increased incentives for illegal exports. Wholesale prices for crude oil and natural gas have not been adjusted since July 1998. In September 1999, the domestic price for crude oil was about 52 percent of the world market price, if calculated at the official exchange rate, and 13 percent, if calculated at the curb market exchange rate (Figure 10).

Figure 10.
Figure 10.

Uzbekistan: Crude Oil and Natural Gas Prices, 1994–99

Citation: IMF Staff Country Reports 2000, 036; 10.5089/9781451839791.002.A001

Sources: Ministry of Finance; and Fund staff calculations.

Agricultural policies

46. The government’s strategy in agriculture is to move away from an agriculture-based toward an industrialized economy. Although the agricultural sector is expected to become more productive, its real contribution is to maintain rural employment and to provide resources (through taxation of cotton exports) for investment in other sectors of the economy. Several steps have been taken to reform the agricultural sector, but so far the authorities have not addressed the state order system for cotton and wheat production which is the main disincentive to increase yields for these products (in particular cotton). The growing differential between the official exchange rate and the curb market rate also increased the incentive for illegal exports (see Box 8).

Uzbekistan: Trends in Cotton Production and Yields

Since 1991 cotton yields have decreased by 13 percent and total output by about 22 percent. One reason for the decline in reported yields and output is the apparent increase in side marketing, i.e., illegal exports. The price differential for cotton is substantial between Uzbekistan and Kazakhstan, giving Uzbek farms located near the border with Kazakhstan an incentive to sell their crops in Kazakhstan. Data on cotton yields by oblasts show that yields in Jizzak and Syrdarya, which border Kazakhstan, are significantly lower than other areas of Uzbekistan despite similar growing conditions.

Cotton Yields in Uzbekistan, 1990–98

(Metric tons per hectare)

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Source: Uzbek authorities.

47. Since 1991, a number of changes have been made to the structure and organization of agricultural enterprises in an effort to create a stronger sense of ownership on the part of the work force. The former state farms have been reorganized into various forms of non-state collective enterprises. In practice, however, most collective farms operate much as they did during the late Soviet period.

48. The traditional household plots managed independently by rural families in all types of agricultural enterprises have been enlarged. They now comprise about 3 million holdings and cover about 10 percent of arable land. As a result of enlargement of the household plots and reorganization of state farms as non-state agricultural enterprises, the formal state sector produces only approximately 2 percent of agricultural output. The remainder comes from various forms of reorganized collective enterprises and from the household plots of rural residents, The household sector dominates in production of meat and milk, while the enterprise and household sectors each produce about half of fruits and vegetables. The enterprise sector produces virtually all cotton, and 90 percent of wheat. Since these two crops comprise three quarters of the planted area, official policy with regard to cotton and wheat limits the autonomy of agricultural enterprises that have undergone restructuring.

49. A new Land Code was passed in 1998. Although the Code has clarified land tenure rights in certain respects, it does not support changes in farm structure and land tenure consistent with more productive farming units. Among the outstanding issues are that land tenure rights recognized in the Land Code are not tradable and the rights of enterprises are more secure than those of the constituent households of the enterprises, even if the households are allocated a parcel of land under a family contract. Both of these features reduce incentives for households to invest in order to improve productivity, or to shift toward production of higher valued crops and products. Because the tenure rights are not tradable, land mortgage as an instrument of finance is not likely to develop, since a commercial lender would not be able to sell the land in case of default on the loan.

Banking sector policies

50. The authorities have begun, with assistance from USAID, to strengthen the bank supervision capacity of the CBU. However, there has not yet been a thorough assessment of the quality of commercial bank loan portfolios nor an analysis of the likely impact of introducing current account convertibility on the ability of enterprises to service external debt. Hence, there is little information on the likelihood that loan guarantees will be called, and the probable impact of this on the budget. According to official data, the health of the banking system appears to be fairly sound. However, this is because commercial banks rely heavily on government guarantees for loans. In total, about two-thirds of the loans currently extended by commercial banks are guaranteed by the government. Because government-guaranteed loans are automatically classified as being of good quality, official statistics indicate that over 95 percent of commercial bank loans are rated as either of “good” or “standard” quality (Box 9). Therefore, on this basis, there is little apparent evidence that the credit portfolio of the commercial banking sector is vulnerable to default on poor quality loans.

Classification of Commercial Bank Assets in Uzbekistan

(In percent of total assets)

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Source: Central Bank of Uzbekistan.

51. Many of the government guarantees may have to be called if the sum is devalued in connection with the possible introduction of current account convertibility in 2000. Data that are available on enterprises with a relatively large stock of external debt are not detailed, but they provide some insight into the circumstances facing these enterprises. Major enterprises account for about US$1.6 billion (49 percent) of the total stock of Uzbekistan’s external debt at the end of 1998 and about 86 percent of the onlending by commercial banks (Table 40). An analysis of the stock of external debt of these enterprises and their exports, imports and estimated annual debt service, provides a rough indication of their vulnerability to exchange rate depreciation.33 This analysis suggests that enterprises in the industrial, transport, construction and agricultural marketing sectors will face a significant increase in the sum value of debt service costs relative to their apparent overall capacity to earn foreign exchange. By contrast, enterprises in the trade and agricultural sectors (the latter is included in the category “other” in Table 40) would seemingly benefit from currency depreciation. For all sectors, the estimated debt service amounts to approximately 45 percent of net exports for these enterprises.

Table 1.

Uzbekistan: Nominal GDP and Real GDP Growth, 1993-99

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Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.

Fund staff estimates.

Includes the government sector.

Table 2.

Uzbekistan: Sectoral Composition of Nominal GDP at Current Market Prices, 1993-99

(In percent of GDP)

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Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.

Estimates for 1999 provided by the authorities.

Includes the government sector.

Table 3.

Uzbekistan: Output of Selected Industrial Products, 1993-99

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Source: Ministry of Macroeconomics and Statistics.

Figures are for the first six months of 1999.

Table 4.

Uzbekistan: Output of Selected Agricultural Products, 1993-99

(In thousand tons, unless otherwise indicated)

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Source: Ministry of Macroeconomics and Statistics.

Estimates for 1999 provided by the authorities.

Table 5.

Uzbekistan: Cotton and Wheat Production Indicators, 1993-99

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Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.

Estimates for 1999 provided by the authorities.

Figures for 1999 are for the first six months.

Converted at the official exchange rate.

Table 6.

Uzbekistan: Cotton and Wheat Producer Prices, 1994-99

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Sources: Ministry of Macroeconomics and Statistics; Ministry of Agriculture and Water Resources; and Fund staff estimates.

Authorities’ estimates for 1999, except for exchange rates which are actual values for the year.

Average price for the fourth quarter (Liverpool Price Index).

F.O.B Uzbek border (world cotton price adjusted for transportation costs and quality).

The cotton fiber price is calculated using the state order price for raw cotton multiplied by a coefficient of 3.186.

At the average official exchange rate for the fourth quarter.

At the commercial bank exchange rate for the fourth quarter.

At the average curb market exchange rate for the fourth quarter.

Average price for the fourth quarter (US No. 1 Hard Red Winter Wheat).

Table 7.

Uzbekistan: Saving and Investment Balances, 1995-98

(In percent of GDP, unless otherwise indicated)

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Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.

General government expenditure and net lending minus investments.

Centralized investments plus net lending.

Government revenue minus current expenditure.

Current account deficit valued at official exchange rate.

Table 8.

Uzbekistan: Sectoral Shares of Investment, 1995-98

(In percent, unless otherwise indicated)

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Source: Ministry of Macroeconomics and Statistics.
Table 9.

Uzbekistan: GDP and Sectoral Deflators, 1993-99

(In percent change over same period of previous year)

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Sources: Ministry of Macroeconomics and Statistics; and Fund staff estimates.

Figures are for the first six months of 1999.

Includes the government sector.

Table 10.

Uzbekistan: Consumer Prices, 1998–99

(Percent change over the previous period)

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Source: Ministry of Macroeconomics and Statistics.

End-period.

Table 11.

Uzbekistan: Producer Prices, 1998-99 1/

(Percent change over previous month)

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Source: Ministry of Macroeconomics and Statistics.

Prices are recorded on an accounting basis and do not reflect actual transaction prices.