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.
1. My authorities wish to express their appreciation to the mission team for their extremely constructive approach and the productive policy dialogue. They are fully aware and concur with the staff’s assessment that Uzbekistan’s great economic potential remains to be fully exploited. They are committed to a continued implementation of their gradual reform agenda. They will give careful consideration to the staff’s policy advice, and they consent to the publication of the staff report. They highly value, and put to good use, the technical assistance that is currently provided on budget and treasury reforms, and they hope that the Fund will grant their request for assistance to comprehensively address data issues in price indices, national income accounts, and balance of payments.
2. Since the liberalization of the foreign exchange system, which was undertaken in late 2003 upon advice and with assistance of the IMF, Uzbekistan’s macroeconomic performance has been very strong. Supported by prudent macroeconomic policies and gradual progress in structural reforms, annual real GDP growth accelerated to over 7 percent, well above Fund projections, whereby the contribution of capital intensive sectors has been increasing over time. The rapid growth in non-commodity exports, which now account for more than half of Uzbekistan’s total exports, also contributed to high GDP growth and strengthened its sustainability. In combination with the authorities’ prudent fiscal and external borrowing policy, this good performance led to a continuous decline in Uzbekistan’s external debt to the very comfortable level of 24.5 percent of GDP, which will allow Uzbekistan to maintain its very good credit history.
3. My authorities share the staff’s view that economic growth and the balance of payments are likely to remain strong. Building on strong macroeconomic fundamentals and continuous structural reforms to be outlined in the authorities’ Welfare Improvement Strategy (WISP, the equivalent of a PRSP), the authorities attempt to accelerate annual real GDP growth to 8 percent. They are convinced that the policy of gradual reforms has served Uzbekistan well, making it the first country within the CIS to restore positive economic growth and return to the pre-reform level of output, despite one of the most difficult starting positions. The authorities believe that the state’s active role in maintaining stability over the period when key market institutions were just emerging was an important element in this strategy.
Fiscal Policy
4. In 2006, the consolidated budget registered a small surplus, with an overall fiscal surplus of about 3 percent of GDP. The authorities intend to continue their cautious fiscal and borrowing policy in 2007.
5. The authorities have an ambitious reform agenda in the fiscal area. The new Tax Code, which has been submitted to parliament, envisages a further reduction of the tax burden, broadening of the tax base, and streamlining of tax administration. The authorities expect the new Tax Code to contribute to a significant improvement in the business climate, based on their experience with the tax rate reductions in 2005 and 2006, which resulted in an increase in tax revenues.
6. An important part of the authorities’ fiscal reforms is the Public Finance Management project, which is well advanced and will bring significant improvements in terms of efficiency and transparency. The project aims at establishing a Treasury Single Account for the general government sector, including local government budgets and extra-budgetary funds, at establishing a modern Treasury Information System, and at bringing budget classification and accounting in line with international standards (GFS 2001 and IPSAS). Moreover, preparations have been made for introducing a Medium Term Budget Framework. The completion of these reforms will enable the authorities to relieve the banking sector from the remaining non-core functions (i.e., financial oversight and treasury operations).
Monetary Policy
7. The Central Bank of Uzbekistan (CBU) is fully aware of the need to keep inflation under control and it is committed to do so. In response to increasing inflationary pressures, the CBU tightened monetary policy considerably during the course of 2006, and it intends to tighten monetary policy further in 2007 to achieve the desired reduction in inflation. The newly established Fund for Reconstruction and Development (FRD) will support the CBU’s efforts to sterilize excess money supply. The FRD will finance investment projects only through commercial banks and only for imports of investment goods. Exchange rate policy will continue to aim at limiting real appreciation, but the authorities are prepared to consider a more flexible exchange rate policy, if warranted by economic developments.
8. The Uzbek authorities remain fully committed to currency convertibility for current account transactions, in line with their obligations under Article VIII of the Fund’s Articles of Agreement. The comfortable level of official reserves, the considerable increase of the current account surplus, and the tight monetary and fiscal policies obviate the need for any administrative measures on the foreign exchange market. My authorities are aware, however, that some sporadic irregularities in conversion transactions have been reported by market participants. But they would like to highlight that these problems were caused by transitory problems related to the introduction of new anti-money laundering legislation.
Structural Reforms
9. Since the last Article IV consultation, progress in structural reforms and improvements in the environment for the private sector have also continued in other areas than the tax and treasury reforms mentioned above. As noted in the staff report, the restructuring of agricultural enterprises (shirkats) into private farms has been mostly completed. A number of new legislative acts and amendments have been adopted by the Parliament, including laws on mortgage, electronic payments, microfinancing, and collateral.
10. The government has further issued a range of orders aimed at introducing “one-stop” registration procedures based on notification only, drastically reducing licensing requirements, streamlining licensing procedures and eliminating overlap between different agencies and local governments, simplifying and reducing the frequency of reporting requirements for enterprises, and at limiting interferences of regulatory agencies. It has also limited the scope and frequency of inspections by regulatory agencies and local authorities and made most sanctions subject to court decisions. These measures have helped to encourage growth of the SME sector, which in 2006 alone has created 440,000 new jobs and accounts now for about 42 percent of GDP.
11. My authorities recognize the value of the IFC’s “Doing Business” report in supporting member–countries’ reform efforts. However, they would like to point out that this study does not represent a comprehensive assessment of the business or investment climate, but rather assesses specific aspects of the regulatory environment. Moreover, given the shortcomings common for most aggregated indicators and controversies related to the studies’ overall indicator for a range of countries, our authorities believe that the overall rating produced by “Doing Business” should be treated with caution. In this regard, they appreciate the reference in the staff report to the joint World Bank/EBRD survey of enterprises, which ranks favorably Uzbekistan’s business climate on most of the indicators relative to average indicators in the Europe and Central Asia region. Most important, the last survey clearly demonstrates that Uzbekistan has been advancing in all areas covered by the study.
12. The government recently adopted a comprehensive privatization program for 2006-08 that envisages privatization of more than 1500 enterprises, including enterprises in strategic sectors (energy, chemical and transport). Based on this program the authorities privatized in 2006 about 600 enterprises, which led to privatization revenues that were 20 percent higher than in 2005. By the end of 2006 the private sector’s contribution to GDP reached 79.4 percent.
13. My authorities agree with the staff that Uzbekistan needs to advance trade liberalization in order to sustain its economic growth in the long run. To this end, they are completing legal procedures related to joining EurAsEc agreements that will substantially reinforce Uzbekistan’s integration with the neighboring countries, bringing about lower trade barriers and growth of inter-regional trade.
14. Latest household surveys show that the high economic growth translates into better living standards for the population. Preliminary assessments clearly indicate that the share of poor steadily declined over the last years. My authorities plan to present a full version of their Welfare Improvement Strategy (PRSP) in the course of 2007.