Ongoing structural reforms

During the last few years, the authorities have attained a number of successes in strengthening the macroeconomic framework.

Fiscal policy

For the first time, the State Budget for 2020 was adopted as a law, in accordance with international best practice. The State Budget Law has increased accountability of public bodies at all levels, strengthened transparency of spending, enhanced the role of local authorities in the budgetary processes, and set limits on external government borrowing. In cooperation with the IMF and other IFIs, the Ministry of Finance (MOF) has developed the Strategy f or Further Improvement of Publi c Financial Management System, which has been submitted to the Government for review. The strategy is a comprehensive document for all reforms of the budget system, including improving transparency of public finances, developing a strategic approach to fiscal policy, managing fiscal risks, and strengthening fiscal responsibility and accountability. Since 2018, the MOF has been publishing an annual Budget for Citizens. The publication increases transparency and awareness of public finances and contributes to the dialogue between the general public and policymakers. It provides information on the projected fiscal revenues and expenditures, as well as medium-term targets in an accessible way. The MOF has also launched the Open Budget web site, a data platform that provides information on budget execution and allows citizens to determine the spending purposes for part of local budgets.

In 2019, the authorities initiated a large-scale tax reform to improve tax policy and administration. Over a short period of time, almost all aspects of the tax system were reviewed and improved. The reform reduced the tax burden on firms and labor, substantially expanded the VAT net, and removed many tax and customs exemptions.

In order to improve public debt management, keep sustainable debt levels, and ensure effective use of borrowed funds, the MOF, in cooperation with the World Bank and the IMF, has developed a Medium-Term Public Debt Management Strategy, has been improving the debt management IT system, and has regularly been publishing public debt statistics. As a result of this, the authorities have begun including an external public debt contractual amount limit (at $4 billion in 2020, which will be reviewed in the context of Covid-19) and an external public debt disbursement limit, which will be repaid by the state budget (at $1.5 billion) in the fiscal year 2020. These limits are reviewed and included in the State Budget Law annually, based on updated Medium-Term Public Debt Management Strategy.

Monetary, exchange rate, and financial sector policies

In 2019, four key laws—On Banks and Banking Activities, On Central Bank, On Foreign Exchange Regulation, and On Payments and Payment Systems—were completely revised and promulgated, benefiting from Fund recommendations. The Central Bank of Uzbekistan (CBU) has announced a transition to inflation targeting with the objective of reaching 5 percent y-o-y inflation in 2023. To this end, the CBU has been modernizing the monetary policy operational framework, strengthening analytical and forecasting capacity, and deploying new instruments. Since the beginning of 2020, the CBU has introduced a key policy rate, an interest rate corridor, and several short-term monetary instruments for liquidity management, in accordance with IMF recommendations. The CBU’s key rate has set the floor for rates of concessional loans, which were driving rapid credit growth in previous years. New instruments have allowed the CBU to successfully manage liquidity in the banking system and have improved monetary policy transmission through the interest rate channel. Since the FX market liberalization in 2017, the flexible exchange rate has been serving as a shock absorber. CBU interventions in the FX market are limited to sterilization of domestic gold purchases and smoothing excessive volatility.

The CBU has benefitted extensively from MCM technical assistance (TA) and has requested new TA on development of the FX market, the monetary policy operational framework, capital flow management, and also FSSR.

Compilation and dissemination of economic statistics has improved substantially after joining the IMF’s e-GDDS in 2018 and posting a national summary data page. Over the last three years, with Fund TA, the CBU has made substantial progress in the collection, processing, and dissemination of external sector statistics. In February 2020, Uzbekistan’s country page was added to the IMF International Financial Statistics, which marked an important step towards improving statistics and reducing data gaps for Uzbekistan. The authorities have also started preparation for subscription to SDDS.

To address structural problems that impede development of the banking system, including high state ownership, the authorities have accelerated reforms in this area. On May 12, 2020, the President of Uzbekistan signed the decree that (i) includes the Reform Strategy of the Banking System for 2020–25, developed by the MOF and CBU in cooperation with the World Bank; (ii) sets a number of quantitative targets and benchmarks for the Reform Strategy implementation; (iii) authorizes a gradual privatization and institutional transformation of six state-owned banks in consultation with IFIs, and consolidation of some banks; and (iv) schedules FSAP assessment no later than 2024.

Impact of Covid-19

The first Covid-19 case in Uzbekistan was registered on March 15, 2020. The authorities immediately took swift measures to limit the spread of infections by closing schools and universities, cancelling public gatherings, suspending all international passenger flights, closing road links with bordering countries, and quarantining all people entering the country. In line with WHO guidelines, a country-wide quarantine and self-isolation regime was imposed with enhanced physical distancing and sanitation protocols. Testing was rapidly ramped up, and a number of hospitals and quarantine facilities were quickly constructed across the country. Given the moderation in the rate of new infections in early May, the authorities started to gradually ease lockdown restrictions and introduced three quarantine levels for all regions depending on the epidemiological situation.

The pandemic has been taking a heavy toll on the economy. Growth is projected to slow down to 1.5–2.0 percent in 2020, after 5.6 percent in 2019. Weaker external and domestic economic activity is depressing exports, fiscal revenues, and remittances. The current account deficit will widen to 9.5–9.8 percent of GDP in 2020 as a result of weaker external demand and lower commodity prices. To accommodate additional spending on healthcare, social support and financial assistance to affected firms and households, the consolidated budget deficit will expand to 3.5 percent of GDP. Since March 2020, against the background of currency depreciations in the main trading partners and lower commodity prices, FX inflows both from exports and remittances have decreased significantly. The sum depreciated in nominal terms against the US dollar by about 6.7 percent since the beginning of the year.

Policy response

To mitigate the negative impact of the pandemic, the authorities established a high-level Republican Anti-Crisis Commission and a UZS 10 trillion (about $1 billion) Anti-Crisis Fund under the Ministry of Finance. Anti-Crisis Fund resources are allocated for containment measures, the expansion of social protection, support to businesses and key sectors of the economy. The authorities have increased compensation for health workers on the frontline, extended support to low-income families, initiated public works to support employment, and introduced measures to support the most affected firms. Total fiscal expenditure for addressing the Covid-19 crisis is estimated to amount to UZS 15 trillion (about $1.5 billion, or 2.5 percent of GDP).

Social support

The authorities have automatically extended for 6 months benefits for families with children, childcare benefits and financial assistance, which were due to expire in March–June, 2020. Overall, the number of low-income families receiving financial assistance has increased from 596,000 to 789,000. A daily pay bonus in the amount of 6 percent of monthly salaries has been introduced for health workers involved in the fight against the coronavirus. Also, frontline health workers who are engaged in Covid-related facilities are being granted higher compensation. Employees of public educational, sports and cultural institutions that have suspended their activities have been receiving salaries in a timely manner. To prevent a rapid increase in consumer prices, customs duties and excise rates on imports of essential food and hygiene products were lowered to zero. Food delivery has been provided to needy families, single elderly people, people with disabilities and other parts of the vulnerable population.

Support to businesses

The social tax rate for small businesses and farms has been reduced from 12 percent to 1 percent from May through July, 2020. Small businesses and individual entrepreneurs have been exempted from paying land and property taxes over the next three months. Companies in the tourism and hospitality sectors have been exempted from paying land and property taxes and have become subject to the reduced social tax rate of 1 percent through end-2020. Local authorities have been empowered to grant a 6-month grace period on the payment of taxes on property and land, and on water tariffs for businesses. The water tariff for irrigation of farmland has been reduced by 50 percent in 2020. The VAT payers with monthly turnover less than UZS 1 billion (about $100 thousand) have been allowed to pay the tax on a quarterly basis. Until October 1, 2020, commercial banks have given deferrals on loan repayments to companies, individual entrepreneurs and households that experience financial difficulties. The authorities have been providing interest subsidies on investment loans.

Supporting financial and price stability

The CBU has taken comprehensive measures to ensure financial stability and maintain adequate liquidity of commercial banks. To that end, it has been providing short-term liquidity through repo and swap operations of up to UZS 1 trillion (about $100 million) on a monthly basis, provided additional liquidity to banks in the amount of UZS 2.6 trillion (about $260 million) through easing reserve requirements, and introduced a special facility to provide liquidity to banks for up to 3 years in the amount of up to UZS 2 trillion (about $200 million).

Given weaker demand, the CBU has revised downward its end-2020 inflation forecast from 12– 13.5 percent to 11–12,5 percent. Taking into account lower projected inflation, on April 15, 2020, the CBU reduced the key rate by 100 basis points to 15 percent. The CBU remains committed to its price stability mandate and will continue to take a data-dependent approach to interest rate decisions.

Conclusion

Over the last years, Uzbekistan has initiated wide-ranging reforms to create conditions for strong private sector-led growth, job creation, and poverty alleviation. The pandemic has shifted the authorities’ focus to softening the blow on people and the economy. While the authorities are currently directing all their efforts to the fight against Covid-19, they reiterate their commitment to maintain macroeconomic stability and persevere with economic reforms. As stated in the LOI, the authorities are committed to ensure transparent and effective use of Covid-related emergency financing. The authorities of Uzbekistan value the strong relations with the Fund and they look forward to continued policy dialogue.