Economic Developments and Outlook

In February 2017, the new government initiated a comprehensive reform program with the adoption of the National Development Strategy for 2017–21. This strategy reiterated the authorities’ commitment to ensuring macroeconomic stability, improving the quality of life of households, and achieving inclusive growth, especially in rural and remote areas of the country. The Strategy includes five priority areas: improving public administration and state- building; ensuring the rule of law and judiciary reform; maintaining economic growth and liberalizing the economy; enhancing social safety nets; and ensuring security and implementing a constructive foreign policy.

Under this development strategy, robust growth and job creation are expected to continue. Economic growth slowed from 7.8 percent in 2016 to 5.3 percent in 2017 due to FX adjustments, but strong investment has remained a key driver of growth. During 2018–19, the authorities expect economic growth to be around 6 percent, supported by favorable external demand and commodity prices, a pickup in agriculture due to reform measures and the normalization of harvests, and a buoyant construction sector building houses and public infrastructure. The authorities intend to conduct tighter fiscal and monetary policy to help control inflation, which is expected to remain elevated as newly-liberalized prices continue to adjust.

Exchange Rate Policy

A key economic reform was the liberalization of foreign exchange regulations in September 2017. The authorities unified the official and parallel market FX rates, depreciating the official exchange rate by 50 percent. As a result, individuals and entities can freely buy and sell foreign currency, and the requirements for compulsory sale of foreign currency by exporters have been removed. The exchange rate is now determined by the market.

Monetary Policy

The Central Bank of Uzbekistan (CBU) has taken considerable steps to improve its monetary and exchange rate policies. Monetary policy was tightened before the start of the FX market reforms and the CBU has been able to effectively manage anti-inflationary policies and ensure the stable functioning of the banking system during this period of liberalization. Starting in 2018, the CBU has been implementing a new strategy based on the principle of foreign reserves neutrality. This aims to sterilize additional liquidity from the CBU’s direct purchase of gold by supplying the appropriate amount of FX into the market.

The CBU has also continued to take active steps in employing interest rate instruments. Use of these monetary policies has resulted in a deceleration of money supply growth, a stabilization of interest rates in the interbank money market, an increased propensity of households to save in national currency, and a stabilized exchange rate. The CBU has declared its intention to switch to inflation targeting in the medium term, as staff recommend. Technical assistance from the Fund has been particularly valuable in improving the CBU’s capacity in areas such as monetary policy operations and interbank market development, designing the interim monetary policy regime, compiling balance of payments data, and stress testing.

Fiscal Policy

Despite the challenges of reform, the authorities have continued their efforts to maintain a prudent fiscal policy, and tax reform is a top priority. The authorities will conduct a tighter fiscal policy by reducing on-lending operations. They will also focus budget spending on mitigating the impact of the exchange rate adjustment on the vulnerable, supporting critical public enterprises to gradually converge toward greater sustainability and cost recovery, and sustaining the public investment program. The authorities have made significant efforts to consolidate on- and off-budget transactions in the fiscal data. They have recently launched tax reforms to improve the tax system and tax administration. This process envisages reducing the difference in tax burden between small and large business entities, rationalizing of the VAT rate, unifying and cancelling a number of taxes and mandatory payments, and improving tax administration procedures. The authorities have also begun efforts to transform the customs and pension systems.

Structural Reforms

The authorities remain committed to their goal of achieving upper-middle-income status by 2030, by increasing the economy’s competitiveness, improving the business environment, and developing the infrastructure to support rapid job creation. Broad structural reforms began in 2017. These included the FX market reforms, liberalization of the visa regime, more independence for the CBU, an assessment of banking sector resilience, the implementation of financial recovery plans in key SOEs, plans to resume the accession process to the WTO, and new legislation to promote competition and public-private partnerships. The recommendations of the consulting group on SOE governance will be ready in July, providing an opportunity to draw up a comprehensive plan to deal with SOE issues. The authorities expect the suite of reforms to result in greater macro-fiscal and financial resilience, new markets and more private sector participation. They will help improve the business climate and increase the competitiveness of the economy in order to create new jobs for a rapidly increasing population, especially among youth. The authorities are also working on creating greater economic data transparency, including by joining the General Data Dissemination Standard.