Republic of Uzbekistan: 2006 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Uzbekistan
Author:
International Monetary Fund
Search for other papers by International Monetary Fund in
Current site
Google ScholarClose
Publication Date:
29 Mar 2007
eISBN:
9781451839821
Language:
English
Keywords:
ISCR; CR; consultation; consultation informational annex; authority; policy; balance of payments; Uzbek authorities; FDI inflow; debt-creating flow; net FDI; net int'l; Central Asia
Download PDF (1.2 MB)

The 2006 Article IV Consultation on the Republic of Uzbekistan highlights the economic outlook and policy challenges. The banking system’s ability to fulfill its intermediary role has been constrained by limited credit expansion, given the strong growth in net foreign assets and the need to control the growth of reserve money. Executive Directors commended the Uzbek authorities on the strong performance of the economy, which has been supported by a favorable external environment, improvements in macroeconomic policies, and gradual progress in structural reforms.

Abstract

The 2006 Article IV Consultation on the Republic of Uzbekistan highlights the economic outlook and policy challenges. The banking system’s ability to fulfill its intermediary role has been constrained by limited credit expansion, given the strong growth in net foreign assets and the need to control the growth of reserve money. Executive Directors commended the Uzbek authorities on the strong performance of the economy, which has been supported by a favorable external environment, improvements in macroeconomic policies, and gradual progress in structural reforms.

I. Introduction

1. Uzbekistan has great economic potential that remains to be fully exploited. It is the most populous country in Central Asia, with a strong agricultural base and abundant natural resources, including hydrocarbons, gold, copper, and uranium. Since the early 2000s, Uzbekistan has benefited from a favorable external environment and undertaken significant macroeconomic adjustment. However, government controls have remained pervasive, stunting the development of the private sector. Although per capita income has increased steadily, about one-quarter of the population is still considered poor.

2. The effectiveness of Fund surveillance in Uzbekistan has been mixed. While the authorities have adopted more appropriate fiscal and, to some extent, monetary policies, progress toward establishing a market economy and in addressing banking and data issues has been slow. Advice to liberalize international trade has not yet been taken up.

3. The discussions focused on three main policy issues: reducing inflation, developing the banking sector, and liberalizing foreign trade.

II. Recent Economic Developments

4. During 2005–06, GDP growth and the balance of payments were strong, but inflation remained high (Table 1). According to official statistics, GDP growth of just over 7 percent was driven by agriculture, industry, and transport and communications (Figure 1). On the expenditure side, growth was supported by external demand. The current account registered large surpluses due to favorable commodity prices, growth in non commodity exports, increased remittances, and restricted imports, although the surplus is likely to be overstated given the large negative errors and omissions item (Figure 2, Table 2). Official reserves increased steadily to 12 months of import cover at end-2006. However, inflation, measured by various price indices, picked up in 2005 and remained high in 2006 (Figure 3).

Table 1.

Uzbekistan: Selected Economic and Financial Indicators, 2003–07

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

Based on below-the-line financing data.

Includes operations of the Fund for Reconstruction and Development.

In percent of exports of goods and services.

Table 2.

Uzbekistan: Balance of Payments, 2003–11

(In millions of U.S. dollars, unless otherwise indicated)

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

State-owned enterprises receive the bulk of the publicly-guaranteed debt; these flows are not recorded in the budget (Table 5).

Through 2002 Q2 includes foreign currency deposits with the National Bank for Foreign Economic Activity (NBFEA) that were not immediately available. Thereafter, all deposits were made liquid through a capital injection by the CBU resulting in a downward adjustment in CBU gross official reserves of $201 million.

This debt stock includes technical credits extended by Russia to Uzbekistan during 1992-94, the settlement of which (a total of US$ 464 million) is still in dispute.

Figure 1.
Figure 1.

Uzbekistan: GDP Growth Contribution by Sectors, 2000–06 1/

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities; and Fund staff estimates.1/2006 growth rate is for three quarters.2/ Trade, services, and net taxes.
Figure 2.
Figure 2.

Uzbekistan: External Sector Developments, 2000-06

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities, WEO, and Fund staff estimates.1/ Other exports exclude main commodity exports (gold, cotton, and energy).2/ In percent of exports of goods and services.
Figure 3.
Figure 3.

Uzbekistan: Inflation, 2000-06

(Percentage points)

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities; and Fund staff estimates.

5. Monetary policy was accommodative in 2005, but tightened in 2006 (Figure 4, Tables 3 and 4). In 2005, the sharp accumulation of NFA by the CBU was only partially sterilized by a decline in NDA, resulting in surging reserve and broad money. In 2006, reserve accumulation accelerated, even though the CBU slowed the rate of nominal depreciation. Nevertheless, the authorities tightened monetary policy significantly via increased deposits from banks, the resumption of the issuance of central bank paper, and the accumulation of government deposits, including through the newly created Fund for Reconstruction and Development (FRD).1 As a result, growth of monetary aggregates decelerated considerably.

Figure 4.
Figure 4.

Uzbekistan: Monetary Developments

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities; and Fund staff estimates.
Table 3.

Uzbekistan: Summary Accounts of the Central Bank, 2003-07

(In billions of sum, unless otherwise indicated)

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

As of 2004, government accounts no longer exclude revaluation changes for exchange rate.

CBU certificates of deposit and special deposits held by commercial banks.

Table 4.

Uzbekistan: Monetary Survey, 2003–07

(In billions of sum, unless otherwise indicated)

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

Including net proceeds from sale of treasury bills to banks. Negative number implies a decline in net credit.

Velocity is calculated using end of period nominal GDP over end of period money supply.

6. The sum was de facto pegged to the dollar during the second half of 2006. The sum has been stable against the U.S. dollar within a two percent band since mid-2006 while the CBU’s one-sided interventions resulted in steady reserve accumulation (Figure 5).

Figure 5.
Figure 5.

Uzbekistan: Exchange Rate and Intervention, December 2004-November 2006

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Source: Uzbek authorities; and Fund staff estimates.1/ Intervention is measured as the value of changes in reserves, net of valuation changes. The exchange rate is shown with bands of ±1 percent around a regression line from December 1, 2004, through April 25, 2006, and as horizontal bands of ±1 percent around the median thereafter.

7. Fiscal policy continued to outperform budget projections (Figure 6, Table 5 and 6). Budget financing shows a surplus of 1.3 percent of GDP in 2005, while the authorities reported a small deficit compared to a budgeted deficit of over 3 percent of GDP. The implied statistical discrepancy of over 1½ percent of GDP mainly reflects increased deposits in off-budgetary accounts. In 2006, the fiscal accounts continued to overperform and government deposits increased further. Two consecutive 20 percent rises in public sector wages and pensions, and an additional 30 percent wage increase in the health and education sectors were mainly compensated by lower capital expenditures. The 2006 consolidated balance is estimated o have registered a small surplus, compared to the budgeted deficit of 3 percent of GDP. The overall fiscal surplus, including the FRD, is estimated at 3.1 percent of GDP.

Figure 6.
Figure 6.

Uzbekistan: Government Finances

(In percent of GDP)

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities; and Fund staff estimates.1/ Based on below- the-line data. FRD is not included.
Table 5.

Uzbekistan: General Government Consolidated Budget, 2003–07

(In billions of sum)

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

Based on below-the-line data.

Includes consolidated government and Fund for Reconstruction and Development.

Adjusted for valuation changes.

Table 6.

Uzbekistan: General Government Consolidated Budget, 2003–07

(In percent of GDP)

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

Based on below-the-line data.

Includes consolidated government and Fund for Reconstruction and Development.

Adjusted for valuation changes.

Table 7.

Uzbekistan: External Debt Sustainability Framework, Baseline Scenario, 2003-111/

(in percent of GDP, unless otherwise indicated)

article image
Sources: Uzbek authorities; and Fund staff projections and simulations.

Includes both public and private sector external debt.

Derived as [r - g - r(1+g)]/(1+g+r+gr) times previous period debt ratio, with r = nominal interest rate; g = real GDP growth rate, and r = growth rate of GDP deflator in U.S. dollar terms.

Includes exceptional financing (i.e., changes in arrears and debt relief); changes in gross foreign assets; and valuation adjustments. For projections also includes contribution from price and exchange rate changes.

Assumes that NPV of private sector debt is equivalent to its face value.

Current-year interest payments devided by previous period debt stock.

Historical averages and standard deviations are generally derived over the past 6 years, subject to data availability.

8. Structural reforms continued at a gradual pace. Tax reforms continued to improve collections and ease the tax burden, and treasury reforms accelerated to enhance fiscal management. Licensing, inspections, and reporting were streamlined and the restructuring of agricultural enterprises (shirkats) into private farms has been mostly completed. Furthermore, restrictions on banks’ access to their correspondent accounts at the CBU and cash withdrawals from bank deposits were eased, and a real time gross settlement system was introduced. However, privatization has stalled, a poor investment climate has resulted in low FDI inflows, and the banking system remains underdeveloped.

III. Economic Outlook

9. Economic growth and the balance of payments are likely to remain strong in the short term. The authorities project GDP growth to exceed 7½ percent in 2007, supported by strong external demand and driven by industrial production of petrochemicals, machinery, and textiles. The current account surplus is projected to remain very large and official reserves are expected to continue to increase. The authorities target a decline in inflation in 2007 and, to this end, intend to further tighten monetary policy and continue to pursue cautious fiscal policy.

10. The authorities have ambitious growth objectives over the medium-term. Their Welfare Improvement Strategy Paper (WISP)2 envisages annual growth of 8–8½ percent by the end of this decade, with the private sector share in the economy increasing to 55 percent of GDP by 2010, from about 40 percent in 2006, and the poverty level declining 50 percent by 2015. The authorities expect strong external demand to support growth in the short run, while investment will play an increasing role over the medium term. Staff believes that these ambitious growth objectives would materialize only if trade is substantially liberalized, credit to the private sector picks up, confidence in the banking system is enhanced, and the difficult business environment improves. In the absence of a change of gear in these areas, staff projects GDP growth to remain at about 7 percent, supported by external demand.3 Import growth is projected to remain at about current levels, while export growth is expected to moderate refecting terms of trade and external demand forecasts. Debt sustainability analysis indicates that both external and public debt should remain manageable, even under standard stress tests (Tables 7–10).

Table 8.

Uzbekistan: Sensitivity Analyses for Key Indicators of Public and Publicly Guaranteed External Debt, 2006–11

(In percent)

article image
Sources: Uzbek authorities; and Fund staff projections and simulations.

Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), non-interest current account in percent of GDP, and non-debt creating flows.

Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline., while grace and maturity periods are the same as in the baselin

Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).

Includes official and private transfers and FDI.

Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.

Applies to all stress scenarios except for A2 (less favorable financing) in which the terms on all new financing are as specified in footnote 2.

Table 9.

Uzbekistan: Public Sector Debt Sustainability Framework, Baseline Scenario, 2003-11

(In percent of GDP, unless otherwise indicated)

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

General government gross debt is used.

Gross financing need is defined as the primary deficit plus debt service plus the stock of short-term debt at the end of the last period.

Revenues including grants.

Debt service is defined as the sum of interest and amortization of medium and long-term debt.

Historical averages and standard deviations are derived over the past 6 years, subject to data availability.

Table 10.

Uzbekistan: Sensitivity Analysis for Key Indicators of Public Debt, 2006–11

article image
Sources: Uzbek authorities; and Fund staff estimates and projections.

Assumes that real GDP growth is at baseline minus one standard deviation divided by the square root of 6 (i.e., the length of the projection period).

Revenues are defined inclusive of grants.

IV. Policy Challenges

A. Policies to Reduce Inflation

11. The authorities are convinced of the need to reduce inflation. The rapid reserve accumulation and the consequent monetary expansion, combined with an almost doubling of public sector wages and pensions in the past two years, heightened inflationary pressures. Administered price increases—of 35 percent during the past two years—also contributed to, and were considered by the authorities as the main factor behind, inflationary pressures. The authorities intend to limit reserve money growth to about 30 percent in 2007 by sterilizing excess liquidity using indirect monetary instruments and accumulating deposits in the FRD. Coupled with a continuation of declining velocity, this should be consistent with a further reduction in inflation in 2007. Given the strong balance of payments outlook and assuming a stable cash-to-deposit ratio, such a policy stance would allow a small increase in credit to the private sector. The CBU expects the fiscal outturn to be better-than-projected and the cash-to-deposit ratio to decline, creating more room for credit to the economy. The authorities intend to keep the refinance rate at its current level of 14 percent.4

12. Combining proactive use of monetary policy instruments with a flexible exchange rate policy will help combat inflation. The authorities explained that their current policy aims for small depreciations of the real effective exchange rate (REER), by targeting nominal depreciation of the sum, to maintain competitiveness. This had resulted in rapid monetary expansion and high inflation, and failed to achieve a real depreciation. Staff argued that allowing nominal appreciation by reducing official intervention to build reserves would take some pressure off indirect monetary policy instruments, while creating room for further credit growth to the economy.5 Moreover, external sector developments suggest the sum could be significantly undervalued and that efforts to resist real appreciation would therefore likely continue to be unsuccessful and inflationary, and would not be desirable (Box 1). Although the authorities are currently targeting a small nominal depreciation during 2007, they would be prepared to consider a more flexible exchange rate policy, if warranted by economic developments, in particular regarding inflation and the balance of payments.

Uzbekistan: An Assessment of the Exchange Rate Level

Uzbekistan’s current account surplus (at nearly 20 percent of GDP) is expected to be among the largest in the CIS region in 2006. Uzbekistan has benefited from a surge in remittances and one of the strongest TOT improvement in the CIS countries since 2002 (Figure 1). In 2006, non-commodity exports growth (43 percent) outpaced commodity export growth (11 percent). The strong current account performance has resulted in major accumulation of net foreign assets.

Figure 1.
Figure 1.

Terms of Trade for Selected CIS Countries, 2000-06.

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities, WEO, and Fund staff estimates.

Despite the strong balance of payments, the REER and the nominal effective exchange rate (NEER) have remained relatively stable since the substantial depreciation during 2001–03 (Figure 2). The moderate appreciation of the REER since 2005, reflecting higher inflation, has not adversely affected export performance.

Figure 2.
Figure 2.

Uzbekistan: Competitiveness Indicators, 2000-06

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: Uzbek authorities, WEO, and Fund staff estimates.

Analysis of the equilibrium real exchange rate suggests that the real effective exchange rate is undervalued.

  • According to the purchasing power parity approach, the real effective exchange rate is undervalued by about 30 percent compared with its predicted level taking into account Uzbekistan’s relative income (Figure 3).

  • The structural current account balance is estimated at a surplus of about 4 percent of GDP, much lower than the surpluses registered in recent years.1

Figure 3.
Figure 3.

Exchange Rates and Relative GDP for Selected Countries, 2005 1/

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: IMF, WEO; and Fund staff calculations.1/ Line derived from a regression of PPP exchange rates (domestic prices relative to US prices) and real GDP per capita, in PPP terms, for 179 countries, based on 2005 data.
1/ For details on the estimated model, see Chinn, M. and Ito, H. (2005), NBER Working Paper No.11761.

13. The authorities feel that fiscal policy should support the anti-inflation effort. Accordingly, the overall government budget (including the FRD) is projected to register a surplus of 2.9 percent of GDP in 2007, despite a reduction in taxes to promote private sector activity. This would imply fiscal loosening of 0.7 percent of GDP, but this estimate may not fully reflect prospects for continued significant over-performance relative to the budget. Given the low level of public debt, lower inflation would provide room over the medium term for small fiscal deficits, implying scope for moderate fiscal loosening to finance higher social and infrastructure expenditures. Meanwhile, the authorities do not favor shifting toward more capital expenditure by refraining from large increases in public sector salaries and pensions. They argued that further income growth is needed to help offset the impact of bringing administered prices closer to market levels. They intend to continue their tax reforms, strengthen fiscal management, and consolidate the FRD’s operations into the fiscal reporting in 2007.

B. Reform of the Banking System

14. The banking sector is undergoing structural changes and the prudential ratios exceed minimum standards (Tables 11 and 12). Spurred by legal reforms, banks are developing their business in consumer lending, real estate, and SME financing. Consequently, there has been some move to more local currency and longer-term lending to private sector. Banks have also been active in channeling remittances into Uzbekistan. According to official data, banks’ risk-weighted capital adequacy ratios are well above the minimum requirement and non-performing loans are declining. Solvency ratios seem robust to exchange rate shocks and a rise in non-performing loans.6 However, the strength of banks’ balance sheets partly reflects the large proportion of government-guaranteed loans, which carry a zero risk weight. With the government no longer issuing guarantees for loans and foreign funding, the banking system will need to manage its balance sheets more conventionally in the future. In this context, the authorities recently increased the minimum capital requirements.

Table 11.

Uzbekistan: Financial Soundness Indicators for Banking Sector, 2002–06

(In percent unless otherwise indicated)

article image
Source: Uzbek authorities.

The sharp increase in 2006 reflects the full channeling of loans to farmers through the banking system.

Table 12.

Uzbekistan: Selected Vulnerability Indicators, 2002–06

article image
Sources: Uzbek authorities; and Fund staff estimates.

Estimates (GDP, CPI inflation, CA, FDI, export growth, overall, primary, debt-stabilizing primary, gross public sector financing requirement) or actual data for period in next column.

Public Sector refers to general government

Includes operations of the Fund for Reconstruction and Development.

15. Financial intermediation, however, remains subdued (Figure 7). Monetization remains low. Growth in cash-in-circulation is faster than that of deposits. Credit growth is low and the credit-to-GDP ratio continues to decline. The banking system’s inability to fulfill successfully its intermediation role is due to two main factors:

Figure 7.
Figure 7.

Selected CIS Country Banking Data

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Sources: WEO; Uzbek authorities; and Fund staff estimates.

  • Strong growth in net foreign assets has limited the room for credit expansion given the tight monetary framework designed to control the growth of reserve money; and

  • The low level of confidence in banks discourages deposits, limiting banks’ ability to grow.

16. Market participants associated the low level of confidence in the banking sector mainly with the role of banks in financial oversight and implementing government treasury operations, including through expenditure and tax collection. They also identified the following constraints to banking sector development: the existence of restrictions on cash withdrawals from banks; the obligation for enterprises to make daily deposits of cash receipts; and the interference by local authorities in the activities of the banking system.

17. The authorities believe that banks’ role in the economy should be enhanced through incentives rather than administrative measures. They indicated that problems with cash withdrawals from banks no longer existed, but suggested that the adoption of the anti-money laundering legislation, which brought large transactions under inspection, could be discouraging deposits. They intend to relieve banks from non-core activities following the completion of government treasury reforms, expected by end-2007.

C. Trade Liberalization

18. Uzbekistan’s trade regime is protective and complex. The authorities maintain barriers to trade to shelter domestic production. Import tariffs are among the highest in the region (Text Table 1). In addition, direct and indirect taxes are levied on imported goods and an implicit tax on imports originates from the differentiated application of excise taxes to imported and domestically produced goods. Moreover, the import process is complex and time-consuming.

Text Table 1.

Measures of Tariff Dispersion in Selected Countries in 2005

article image
Source: WTO database, IMF TPIDB, Uzbek authorities.

In percent.

For the latest year available.

19. Current trade policies distort resource allocation, reduce competition, contribute to the difficult business environment (Box 2), create opportunities for corruption, and encourage smuggling. The authorities indicated that the new customs code, to be submitted to the Cabinet of Ministers in early 2007, would consolidate regulations and bring them in compliance with international standards, but would not include measures to liberalize trade. The authorities noted that multilateral trade liberalization would be considered in the context of WTO accession.

V. Other Issues

20. There are reports by some market participants of restrictions on currency convertibility in the second half of 2006. Foreign exchange sales for imports of consumer goods have remained relatively constant at a low level since mid-2006, and a small premium appeared in the curb foreign exchange market. The authorities denied the existence of restrictions and argued that given the strong balance of payments and considerable reserves buildup there was no reason for their introduction. They attributed the delays in foreign exchange availability to the implementation of the Anti-Money Laundering Law in mid- 2006, which imposed additional reporting requirements on transactions above a certain limit. They indicated that such delays would be eliminated by early 2007, when an automated information exchange system is expected to be in place. The authorities reiterated their commitment to unrestricted convertibility for current account transactions.

Uzbekistan: Business and Trade Environment

Recent surveys point to mixed progress in the business and trade environment areas.

The EBRD Transition Report (2006) characterizes Uzbekistan as a slow reformer, lagging behind in banking sector reforms, trade and foreign exchange liberalization, and privatization (Figure 1).

Figure 1.
Figure 1.

Reform Progress, 2006 1/

Citation: IMF Staff Country Reports 2007, 133; 10.5089/9781451839821.002.A001

Source: EBRD Transition Report 2006.1/Minimum score is 1 and maximum score is “4+”.2/ According to the EBRD, the share of administered prices in the CPI is over 50 percent, while official data indicate a share of one third.

The World Bank’s Doing Business 2007 survey ranks Uzbekistan 147 among 175 countries, with unfavorable scores in trading across borders and getting credit (Table 1). In trade, import contract implementation takes the longest amount of time in Uzbekistan.

Table 1.

Ease of Doing Business

(Ranking among 175 countries, “1” is the highest rank)

article image
Source: World Bank, Doing Business in 2007.

A joint EBRD-World Bank Business Environment and Enterprise Performance Survey (2006) ranks Uzbekistan favorably compared to other CIS countries in most areas. In addition, it indicates a declining number of firms reporting problems in doing business in 2005 compared to 2002. However, a relatively high and increasing percentage of firms report problems regarding unofficial payments when dealing with taxes, business licensing, and accessing public services.

21. The authorities recognized the need to enhance the quality of official statistics. Despite improvements in data availability, weaknesses in economic data significantly hamper surveillance. Large differences among various inflation indicators (CPI, PPI, and GDP deflator) hinder the evaluation of inflationary pressures in the economy. National income accounts, which employ inadequate valuation methods, are inconsistent with the external sector and public finance data. Large errors and omissions in the balance of payments and fiscal accounts point to inadequate coverage and classification issues. To resolve data deficiencies in various sectors, the authorities have requested Fund technical assistance, preferably in the form of a resident advisor.

VI. Staff Appraisal

22. Macroeconomic performance has been generally strong over the past two years. Real GDP growth was high, the external current account surplus was large, and official reserves continued to rise. These developments have been supported by a favorable external environment, cautious fiscal policy, and gradual progress in structural reforms. With the tightening of monetary policy in 2006, inflation has recently started coming down, but remains high.

23. The main macroeconomic challenge in 2007 is to reduce inflation further. To this end, the staff welcomes the authorities’ intention to further tighten monetary policy and continue to maintain a cautious fiscal stance. Given the strength of the balance of payments, the staff recommends a flexible exchange rate policy so as to help take some pressure off indirect policy instruments in slowing money growth and curbing inflation, while creating room for adequate credit expansion to the private sector. Allowing a nominal appreciation of the exchange rate would also be compatible with indications that the sum is undervalued.

24. The authorities’ fiscal stance is appropriate, given their intention to tighten monetary policy and consider exchange rate flexibility to reduce inflation. Over the medium term, adequate monetary tightening and lower inflation would provide more room to finance social and infrastructure expenditures without compromising fiscal sustainability. The staff commends the authorities for the impressive progress in tax and treasury reforms and encourages them to shift toward more capital expenditure by moderating increases in public sector salaries and pensions, introduce a multi-year budgetary framework, and consolidate the FRD’s operations under treasury control.

25. The authorities’ medium-term growth objectives are very ambitious. These objectives and the underlying higher investments would materialize only if inflation is contained, credit to the private sector picks up, confidence in the banking system is enhanced, and the difficult business environment improves, including through substantial trade liberalization. The favorable external environment provides an excellent opportunity to accelerate reforms in these areas.

26. Financial deepening is essential to strengthen the monetary transmission mechanism and enhance the banks’ role in economic development. The staff supports the authorities’ efforts to strengthen the banking sector. To enhance confidence in the banking sector, the staff recommends that all remaining restrictions on cash withdrawals from banks be completely removed; the role of banks in financial oversight and implementing non-core activities be discontinued; and undue interference in the activities of the banking system be eliminated. The staff also recommends that the authorities request an FSAP to help prioritize banking sector reforms.

27. Trade liberalization is needed to enhance the business climate and medium-term growth prospects. A comprehensive move toward trade liberalization will improve productivity and allow Uzbekistan to realize its external trade potential. To these ends, the staff advises the authorities to lower and unify tariffs, eliminate differences in excise taxes on imported and domestic goods, reduce costs related to international trade, streamline customs procedures, and accelerate WTO accession. The staff also urges the authorities to fully adhere to their obligations under Article VIII of the Fund’s Articles of Agreement and welcomes the authorities’ reiteration of their full commitment to unrestricted currency convertibility for current account transactions.

28. There is an urgent need to enhance the quality of statistics. Weaknesses in economic data hamper surveillance significantly. The staff welcomes and strongly supports the authorities’ request for technical assistance to address data weaknesses in price indices, national income accounts, and the balance of payments. The staff also urges the authorities to participate in the GDDS and publish economic data.

29. It is proposed that the next Article IV consultation with Uzbekistan takes place on the standard 12-month cycle.

1

The FRD was created to finance major investment projects with funding from higher-than-budgeted taxes, foreign exchange reserves, and privatization revenues.

2

Expected to be submitted to the World Bank in mid-2007.

3

During 2007–11, Uzbekistan’s terms of trade (TOT) will improve by 20 percent, outpacing other CIS countries’ TOT. A 10 percent decline in the prices of gold and cotton during the same period will narrow the annual current account surplus by about 1¼ percent of GDP on average.

4

The refinance rate is not an effective policy instrument given the weak transmission mechanism.

5

According to the authorities, the first-round pass-through of nominal appreciation to inflation is about 15 percent, but exchange rate pass-through to inflation is difficult to assess, mainly because of import restrictions.

6

A 55 percent appreciation of the sum against the dollar and a doubling of non-performing loans would bring the capital adequacy ratio close to the minimum level of 10 percent.

Same Series

Other IMF Content

Other Publishers

  • Collapse
  • Expand
Cover IMF Staff Country Reports
Republic of Uzbekistan: 2006 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Uzbekistan
Author:
International Monetary Fund
Volume/Issue:
Volume 2007: Issue 133
Publisher:
International Monetary Fund
ISBN:
9781451839821
ISSN:
1934-7685
Pages:
50
DOI:
https://doi.org/10.5089/9781451839821.002
Figure 1.

Uzbekistan: GDP Growth Contribution by Sectors, 2000–06 1/
Figure 2.

Uzbekistan: External Sector Developments, 2000-06
Figure 3.

Uzbekistan: Inflation, 2000-06

(Percentage points)
Figure 4.

Uzbekistan: Monetary Developments
Figure 5.

Uzbekistan: Exchange Rate and Intervention, December 2004-November 2006
Figure 6.

Uzbekistan: Government Finances

(In percent of GDP)
Figure 1.

Terms of Trade for Selected CIS Countries, 2000-06.
Figure 2.

Uzbekistan: Competitiveness Indicators, 2000-06
Figure 3.

Exchange Rates and Relative GDP for Selected Countries, 2005 1/
Figure 7.

Selected CIS Country Banking Data
Figure 1.

Reform Progress, 2006 1/