Republic of Uzbekistan: 2021 Article IV Consultation—Press Release; and Staff Report
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International Monetary Fund. Middle East and Central Asia Dept.
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Publication Date:
26 Apr 2021
eISBN:
9781513572918
Language:
English
Keywords:
government finance; U.S. dollar; market economy; government deposit; gross investment; COVID-19; Social assistance spending; State-owned banks
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1. Uzbekistan entered the COVID-19 crisis with relatively strong macro-economic fundamentals. The economy was growing at a rate of 5–6 percent in the preceding years, reflecting sound macro-economic policies and the implementation of an ambitious reform program that was launched in 2017. The buffers built in recent years, together with large international support, allowed the authorities to respond quickly and effectively to the pandemic.

Abstract

1. Uzbekistan entered the COVID-19 crisis with relatively strong macro-economic fundamentals. The economy was growing at a rate of 5–6 percent in the preceding years, reflecting sound macro-economic policies and the implementation of an ambitious reform program that was launched in 2017. The buffers built in recent years, together with large international support, allowed the authorities to respond quickly and effectively to the pandemic.

Context

1. Uzbekistan entered the COVID-19 crisis with relatively strong macro-economic fundamentals. The economy was growing at a rate of 5–6 percent in the preceding years, reflecting sound macro-economic policies and the implementation of an ambitious reform program that was launched in 2017. The buffers built in recent years, together with large international support, allowed the authorities to respond quickly and effectively to the pandemic.

2. The humanitarian and economic impact of the pandemic slowed Uzbekistan’s transformation to a modern market economy. After remaining relatively closed until 2016, Uzbekistan changed course dramatically and embarked on a path to open up its economy (see Box 1 with key achievements). With the outbreak of the pandemic, the focus rightly shifted to protecting lives and livelihoods, while safeguarding macro-stability. Although the worst of the pandemic seems to have passed, risks remain large and protecting lives and livelihoods remains the immediate priority, together with setting the stage for a strong recovery.

3. As the crisis abates, Uzbekistan will need to secure strong, sustainable, and inclusive growth to narrow the income gap relative to its peers. Per capita incomes averaged nearly US$1,750 in 2019 (about US$11,250 in PPP terms), below the levels seen in many of its peers. Similarly, the growth rate of the working age population outpaced job creation. Many Uzbeks have sought jobs abroad, with the number of migrants rising to 2½ million in 2019, sending the equivalent of 12½ percent of GDP back home in remittances.

4. Stronger and more sustainable growth will require accelerating structural reforms to attract more private investment. Despite recent progress, Uzbek is tan still lags many of its peers in various structural and governance indicators. Notably, the role of the state in the economy is large. Progress in restructuring and divesting state-owned enterprises (SOEs) and state-owned banks has so far been limited. SOEs account for nearly half of (recorded) output and more than three quarters of tax revenues. Similarly, state-owned banks hold 85 percent of banking system assets. Additionally, there is a need to build strong and independent institutions needed for an efficient market economy.

5. Presidential elections are scheduled for October 2021. President Mirziyoyev is running for a second term after being first elected as President in 2016.

6. Data provision is broadly adequate for surveillance purposes, but shortcomings exist. These are mainly in national accounts, government finance, and external sector statistics. Capturing the informal sector remains a challenge. Uzbekistan participates in the IMF’s Enhanced General Data Dissemination System (e-GDDS) since 2018 and the authorities are working to further improve statistics and data dissemination, with IMF technical assistance, with a view to joining the Special Data Dissemination Standard (SDDS) by end 2022.

Capacity Development, FY20–21

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Key Economic Reforms

Reforms that have been implemented since 2017 focused on economic liberalization and improving macro-economic management. Reforms have been in line with IMF advice and supported by IMF technical assistance. Key achievements include:

  • Trade and foreign exchange liberalization: In 2017, the authorities unified the official and parallel market exchange rates, liberalized access to foreign exchange, and reduced trade tariffs. With this, imports grew rapidly, and the current account moved from a surplus into a deficit.

  • Price liberalization: Prices of most goods and services have been liberalized, including key food items (flour, bread) and fuel. Utility tariffs have been raised but remain regulated and below cost recovery.

  • Tax Reforms: The government adopted a considerable reduction in direct taxes on private enterprises and labor in 2019 and widened the tax base, by lowering thresholds and eliminating exemptions and privileges, thus safeguarding revenues. The State Tax Committee established a Large Taxpayers Office that covers the bulk of tax revenues and developed tools for risk profiling.

  • Public financial management reforms: the finance ministry has incorporated most extrabudgetary funds, externally financed expenditures, and the Fund for Reconstruction and Development (FRD) into the budget. Budget processes and the coverage, quality, and transparency of fiscal reporting have improved, with parliament approving the budget for the first time in 2019. Borrowing limits were included in the annual budget laws and a debt management office was created.

  • Monetary and financial sector reforms: A new central bank law adopted in 2019 enhanced the Central Bank of Uzbekistan’s (CBU) independence, with price and financial stability as its mandate. The CBU is implementing an inflation targeting regime with the goal of reducing inflation to 5 percent by 2023. Interest rates on policy loans were raised from below market levels to the CBU’s policy rate. A new banking law was also adopted in 2019, and a banking sector reform strategy in 2020, to substantially reduce the state’s role in the banking system. Governance at state-owned banks is improving with the appointment of professional and independent supervisory board members.

  • Agricultural reforms: The government reduced the amount of arable land assigned to grow wheat and cotton, allowing more space for higher-earning crops. It also raised farm-gate prices for wheat and cotton to market levels and abolished the system of state orders.

The Impact of the Pandemic

7. Uzbekistan, like most other countries, was hit hard by the pandemic in the first part of 2020, adversely affecting its people and economy. The authorities quickly put in place extensive restrictions on mobility and social distancing requirements to contain the spread of the virus. The number of COVID cases nonetheless increased steadily, reaching a peak of 6,000 new cases per week in early August. Economic activity and trade fell sharply in the second quarter and throughout much of the summer. Some sectors, notably the hospitality sector but also gas exports, came to a near stand-still. As a result of travel restrictions and the decline in activity in other countries, the number of migrants working abroad dropped significantly.

Figure 1.
Figure 1.

Uzbekistan: COVID and Economic Activity

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Figure 2.
Figure 2.

Uzbekistan: External Sector Developments

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

8. To mitigate the impact of the pandemic, the authorities quickly put in place a large and targeted support package. The 2020 budget was amended to provide large additional spending, totaling almost 4 percent of GDP, on healthcare, social assistance, and investment, as well as support for businesses, including through tax relief and financial support. Notably, the number of households receiving social assistance under the main support program was nearly doubled, reaching 1.1 million households by year-end. Much of this additional spending was channeled through the Anti-Crisis Fund, which allowed for greater flexibility in allocating funds to the most pressing needs. The transparency of crisis-related spending was enhanced, with the publication of contract information, including on beneficial ownership, and summary reports. Together with the anticipated loss in revenues, the amended budget envisaged an increase in the overall fiscal deficit (including policy lending) from nearly 4 percent of GDP in 2019 to almost 7½ percent of GDP in 2020. The Central Bank of Uzbekistan (CBU) lowered its policy rate by 200 basis-points to 14 percent, provided additional liquidity to banks, and eased reserve requirements, thus supporting overall liquidity and credit. Banks were encouraged to allow households and affected firms to defer loan payments, providing sizable financial relief.

Uzbekistan: Estimated Stimulus, 2020–2021

(percent of GDP)

article image

Change compared to the original 2020 budget.

Status of Governance, RCF, and RFI Commitments

As of end-March 2021

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

9. The strong policy reaction contributed to a sharp rebound in activity in the second half of the year. New infections fell sharply after the summer, allowing the government to gradually lift restrictions on mobility and gatherings.1 Businesses reopened and production resumed. The construction and agricultural sectors, meanwhile, had shown resilience throughout the year, the latter also reflecting the positive effects of recent reforms.

10. As a result, Uzbekistan has been among the few countries posting positive overall growth in 2020, at a rate of 1.6 percent. Still, this was about 4 percentage points less than the growth rate projected prior to the pandemic. Similarly, while the current account deficit at 5½ percent of GDP was almost equal in size as in 2019, trade flows were depressed. Non-gold expo r ts —notably energy exports and tourism receipts—were much lower in 2020, although this was offset by high gold prices and lower imports due to the slowdown in domestic activity. Remittances fell less than had been feared. Inflation continued to gradually fall, but higher increases in food prices kept overall inflation in the low double digits, ending the year at just over 11 percent.

11. The overall fiscal deficit remained well below the budget projection, reaching 4½ percent of GDP in 2020. This was partly due to the faster-than-expected turnaround in activity in the second half of the year, but mostly due to the impact of higher gold prices on revenues and delays in investment spending. Multilateral and bilateral creditors provided about US$1.7 billion in budget support, including US$375 million in emergency financing from the IMF. Other financing came from government deposits, FRD resources, and successful international bond placements of US$750 million in November. Together with sizable project financing, public and publicly guaranteed (PPG) debt reached 38 percent of GDP by end-2020, almost double the level of three years earlier.

12. Social indicators worsened during the pandemic and have, so far, only partially recovered, delaying Uzbekistan’s convergence. Unemployment rose sharply through mid-2020 and seasonal migration, mainly to Russia, which peaks in the summer, was largely halted as borders were closed. Remittances fell, although less than expected as migrants already abroad continued to send money home. At the height of the pandemic, 60 percent of households reported no one working. Unemployment started to fall in the second half of the year but remained above pre-crisis levels at the start of 2021. Wages on average continued to grow in real terms in 2020, albeit only marginally, and much less than in preceding years.

Policy Discussions: Policies to Ensure a Strong Recovery and Sustainability

A. Outlook and Risks

13. Growth is expected to pick up in 2021, but uncertainty remains high and the recovery will depend especially on vaccine rollout. With the rollout of vaccines globally, recovery of trading partner growth, and building on the domestic recovery that started in the second half of 2020, the economy is projected to grow by about 5 percent in 2021. Inflation is projected to decline marginally, to just below 10 percent by end-2021 due to food price pressures and government wage increases. The current account deficit is projected to widen slightly, to about 6½ percent of GDP as imports are expected to recover faster than exports.

14. The authorities have started vaccinating the population and expect to complete this by mid-2022. The first shipment of vaccines arrived in mid-March, under the World Health Organization’s COVAX program. Uzbekistan is to receive 2 million doses through the COVAX program in 2021.The authorities are seeking vaccines from other sources as well, including by producing vaccines locally under licensing agreements and partnerships, to secure enough vaccines for the country’s entire population. While infections remain low, there has been a pick-up in new cases more recently.

15. Risks are elevated. The recovery could be delayed by a resurgence of infections, a slower-than-expected rollout of vaccines, or new containment measures, as well as slower growth in Uzbekistan’s main trading partners and fluctuations in commodity prices, notably the price of gold (see the attached Risk Assessment Matrix). With elections planned for later this year, reform progress may slow or give way to populist measures aimed at quick results.

B. Fiscal Policy

16. The recovery will also depend on continued economic policies to protect lives, support growth, and mitigate economic scarring. Support for the nascent recovery will need to come mainly from fiscal policy. Uzbekistan has space to use fiscal policy to respond to s hock s. The role for monetary policy is more limited, as it will need to focus more on reducing inflation further and building credibility, while allowing exchange rate flexibility.

17. The 2021 budget appropriately maintains an accommodative fiscal stance. The approved budget envisages an overall fiscal deficit of 5½ percent of GDP and ensures that healthcare systems and vaccine rollout are adequately resourced, while social assistance is further expanded, and some investment is carried over from 2020. The budget includes wage increases, which had been postponed in 2020, to catch up with inflation and which will also support demand. Financing will be covered mainly by further international support, mainly from the World Bank and the Asian Development Bank, and FRD resources, as well as another bond issuance. The budget includes a conservative estimate of privatization proceeds. As the authorities plan to make a start with privatization this year, additional proceeds could be used for additional capital spending. If downside risks materialize, there is room to further expand fiscal support, by increasing targeted transfers to vulnerable households and to viable firms and by accelerating public investment.

Uzbekistan: Fiscal Developments, 2019–2021

(percent of GDP)

article image

18. The authorities are committed to a gradual fiscal consolidation once the pandemic abates to ensure medium-term sustainability. The authorities aim to reduce the overall fiscal deficit to 2 percent of GDP in the coming years to place PPG debt on a downward path. This can be achieved with a moderate increase in revenues, expenditure restraint, improvements in spending efficiency, and a reduction of policy lending. The authorities continue to improve public financial management and revenue administration, including by preparing a Medium-Term Fiscal Strategy and a Medium-Term Revenue Strategy, with extensive IMF technical assistance.

Figure 3.
Figure 3.

Uzbekistan: Fiscal Developments

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

19. To anchor their fiscal policies, the authorities plan to adopt a set of fiscal rules. The authorities plan to adopt a debt law this year that would cap PPG debt at 60 percent of GDP. This would be followed by amendments to the budget code to introduce limits on the budget deficit and the issuance of guarantees. They aim to stabilize debt well below this ceiling to be able to deal with possible future crises. Given the current fragmented decision-making process for capital projects, the authorities should better manage external borrowing, strengthen selection procedures for capital projects and establish a single pipeline of appraised projects, and better integrate investment planning in the annual and medium-term budget processes. The authorities should also enhance the assessment of fiscal risks, including from SOEs and public-private partnerships.

Capacity Development, FY20–21

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

20. Uzbekistan remains at a low risk of debt distress (see the accompanying Debt Sustainability Analysis). With a gradual fiscal consolidation, PPG debt is projected to peak at 44 percent of GDP in 2022, before gradually declining to around 40 percent of GDP. The DSA suggests that under a stress scenario with lower exports, the debt-service-to-revenue threshold could be temporarily breached in 2024 (due to the repayment of the US$ 500 million 2019 Eurobond). Existing international reserve buffers and low rollover risk—due to the long maturity of debt—mitigate potential risks.

21. There remains a need to further expand the social safety net. Spending on social protection, including pensions, social assistance, and unemployment remains relatively modest, at 7 percent of GDP. While the World Bank, UNDP, and ILO assess social benefit levels to be adequate, coverage of vulnerable households remains poor, despite the doubling of households covered by the main assistance program. Pension coverage is better, with about 80 percent of the elderly receiving pensions, at a level of 55 percent of the average salary. Labor market programs are minimal. Only 2½ percent of the unemployed are registered and receive assistance, and spending on unemployment, public works, and training is only 0.1 percent of GDP. The authorities are working with the World Bank and the UNDP to further improve the social safety net, including by creating a single registry for beneficiaries, and have requested IMF assistance to improve the pension system, to ensure its financial viability and protect against old-age poverty.

22. More broadly, the authorities will need to find additional resources to achieve the Sustainable Development Goals (SDGs). Uzbekistan scores relatively well on the SDGs (see Table 8). Primary and secondary school enrollment and literacy are high, as are access to sanitation and electricity. However, the informal sector is large, estimated at about 40 percent of employment and a third or more of GDP. In 2018, Uzbekistan adopted 125 SDG-related targets focused on improving governance, policy coherence, job opportunities, resilience to climate change, and access to education, health, and social services. Prior to the pandemic, staff estimated that an additional 8 percent of GDP per year would be needed to reach these goals by 2030.2 Spending on healthcare and infrastructure has increased by a combined 2 percentage points in 2020. Further progress will require additional resources, either from higher revenues, improvements in spending efficiency, or financing.

Table 1.

Uzbekistan: Selected Economic Indicators, 2018–2026

article image
Sources: Country authorities; and IMF staff estimates.

FRD: Fund for Reconstruction and Development.

Adjusted fiscal data are budget data adjusted for financing operations of the Fund for Reconstruction and Development (FRD), equity injections, and policy lending.

Table 2.

Uzbekistan: National Accounts, 2018–2026

article image
Sources: Country authorities; and IMF staff estimates.
Table 3a.

Uzbekistan: Balance of Payments, 2018–2026

(millions of U.S. dollars)

article image
Sources: Country authorities; and IMF staff estimates.

Positive values means outflows.

Underlying current account assumes the annual gold production is exported.

Table 3b.

Uzbekistan: Balance of Payments, 2018–2026

(percent of GDP)

article image
Sources: Country authorities; and IMF staff estimates.

Positive values means outflows.

Underlying current account assumes the annual gold production is exported.

Table 4a.

Uzbekistan: General Government, 2018–2026

(billions of Sum)

article image
Sources: Country authorities; and IMF staff estimates.

Adjusted fiscal data are budget data adjusted for financing operations of the Fund for Reconstruction and Development (FRD), equity injections, and policy lending.

Table 4b.

Uzbekistan: General Government, 2018–2026

(percent of GDP)

article image
Sources: Country authorities; and IMF staff estimates.

Adjusted fiscal data are budget data adjusted for financing operations of the Fund for Reconstruction and Development (FRD), equity injections, and policy lending.

Table 5.

Uzbekistan: Central Bank Survey, 2018–2026

(billions of Sum)

article image
Sources: Uzbekistan authorities and IMF staff estimates and projections.
Table 6.

Uzbekistan: Monetary Survey, 2018–2026

(billions of Sum)

article image
Sources: Uzbekistan authorities and IMF staff estimates and projections.

In Nov.2019 commercial banks transfered loans funded by FRD to SOEs to FRD for about Sum 41 trillion. The operation included the transfer of both loans to the SOEs and the corresponding liabilities of the banks to the FRD (financing line provided by the FRD).

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

Table 7.

Uzbekistan: Financial Sector Indicators, 2015–2020

(End of period in percent, unless otherwise indicated)

article image
Sources: Country authorities; and IMF staff estimates.

In December 2019, loans to SOEs valued at Sum 41 trillion were transferred from state banks to the Fund for Reconstruction and Development, improving capital ratios.

Table 8.

Uzbekistan: Sustainable Development Goals, 2000-present

article image
Source: The World Bank

C. Monetary and Exchange Rate Policies

23. The CBU’s monetary policy stance remains appropriate. Monetary policy will continue to focus on further reducing inflation, to build credibility and better anchor inflation expectations. With the current relatively tight monetary stance, inflation is projected to continue to gradually decline, to just under 10 percent by end-2021. The CBU should remain vigilant about possible increases in inflation due to food price increases or the planned government wage increases, but it should also stand ready to respond to downside risks. Achieving the CBU’s 2023 goal of reducing inflation to 5 percent will also depend on the pace of utility tariff adjustments. The CBU should continue to allow exchange rate flexibility, allowing the exchange rate to act as a key shock absorber. The CBU continues its neutral intervention policy, whereby purchases of domestically produced gold are offset by sales of foreign exchange. Uzbekistan’s external position is assessed to be broadly in line with economic fundamentals (See Annex II).

24. The CBU has made considerable improvements in its monetary policy framework and its operations to support its transition to an inflation targeting regime. Supported also by IMF technical assistance, the CBU improved its communications and transparency, its forecasting capabilities, and modernized its monetary and foreign exchange operations, by introducing open market operations and foreign exchange auctions. As a result, the CBU managed to maintain interbank rates within the corridor set by the interest rates on its standing facilities.

Capacity Development, FY20–21

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

25. Monetary policy transmission remains constrained, however. A low level of financial intermediation, notably a low share of private deposits in banks’ funding, and financial market development, a high degree of dollarization, the dominance of state-owned banks, and directed lending limit the effectiveness of monetary policy (see Annex III). Continued sound monetary policies but especially further financial sector reforms, while continuing to safeguard central bank independence, are needed to strengthen confidence in the national currency and the banking system. While interest rates on almost all government lending programs have been raised to the CBU’s policy rate, lending rates should be left to be set freely by banks, with subsidies provided for those critical activities that the authorities wish to support.

26. The CBU has in recent years established itself as a strong and independent institution. Efforts to improve its governance and transparency should continue, building on the considerable progress made so far. This includes a do p ting IFRS9 and publishing financial statements , as required under the IMF’s safeguards assessment policy, and further enhancements in the procedures for appointing the CBU’s management and supervisory boards, in line with international best practices. A safeguards assessment is planned for no later than in 2022.

D . Financial Sector Policies

27. While banks appeared resilient during the pandemic, the full impact on their financial health may not have been observed yet and the CBU should closely monitor banks. Banks entered the crisis with relatively strong capital buffers and the CBU instructed banks to refrain from paying dividends. As loan deferrals are phased out, stress tests and detailed third-party asset quality reviews should be conducted, at least for the largest banks, to determine possible capital needs. Risks also stem from the high credit growth in recent years, which banks financed mainly via wholesale funding, largely in foreign currency. Loan portfolios show high concentration and foreign currency risks, with the largest exposures mainly to SOEs and with some banks heavily exposed to specific sectors. While reported NPLs are low, accounting standards are weak. The quality of loans may prove to be less than reported and solvency problems, including at a systemic level, may surface.

Figure 4.
Figure 4.

Uzbekistan: Prices and Monetary Policy

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Figure 5.
Figure 5.

Uzbekistan: Exchange Rate Developments

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

28. Further efforts are needed to strengthen the CBU’s supervisory capabilities and its ability to detect and respond to financial sector risks. This includes addressing information gaps, including by performing the asset quality reviews and improving accounting standards to IFRS9, as well as deepening the CBU’s capability to assess banks’ capital requirements considering banks’ individual risk profiles. Progress is being made in moving to risk-based supervision and addressing gaps identified in the recent self-assessment against Basel Core Principles on Effective Banking Supervision. These efforts should be complemented by the adoption of a new bank resolution law and amendments to the deposit insurance law, developed with the assistance of the World Bank, and strengthening the emergency liquidity assistance framework. The CBU should also consider macro-prudential tools to curb lending, such as higher risk weights for foreign currency denominated loans, notably to unhedged borrowers, and adjusting prudential liquidity requirements to discourage an over-reliance on wholesale funding. A recent Financial Sector Stability Review (FSSR) also laid out a technical assistance roadmap to support the authorities’ efforts to strengthen the ability to detect risks and vulnerabilities in the financial system and strengthen capacity in financial sector oversight.

29. Meanwhile, broader financial sector reforms are needed to reduce the role of state-owned banks and enhance financial intermediation. The dominance of state-owned banks has contributed to the low level of financial intermediation, constraining access to finance. The authorities have launched an ambitious banking sector reform strategy to reduce the state’s role and increase the share of assets held by private banks to 60 percent by end-2025. This is to be achieved by attracting strategic investors to some state-owned banks and divesting others. The first banks are planned to be sold this year. Meanwhile, the state-owned banks’ governance is being improved with the appointment of independent, professional supervisory board members.

Figure 6.
Figure 6.

Uzbekistan: Banking Sector Indicators

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

E. The Authorities’ Views

30. The authorities agreed with staff’s assessment and policy recommendations. Notably, they largely agreed with staff’s outlook and risk assessment, although they were somewhat more optimistic about the pace of the recovery. They agreed that the level of uncertainty was large and risks were many, with the spread of new variants of the virus and possible delays in the pace of vaccine rollout among the largest risks, but they also saw some upside risks, especially in light of the recovery in some of Uzbekistan’s main trading partners. They noted that much depended on the global policy response, as Uzbekistan’s economy depends to a great deal on developments abroad.

31. The authorities agreed that the near-term priority continued to be to protect lives and livelihoods, while supporting the recovery, and that fiscal policy needed to remain accommodative. They expected a greater rebound in tax revenues, especially VAT, but noted that this could be offset by a possible decline in gold prices. They underscored their commitment to ensuring medium-term fiscal sustainability and reiterated their commitment to place public debt on a downward path again, by adopting a set of fiscal rules and reducing the budget deficit in the coming years. They agreed on the need to increase the coordination and efficiency of public investment projects, including to achieve the SDGs, and noted that they will further expand the social safety net.

32. The CBU considered its monetary stance appropriate to bring down inflation to its goal for end-2021. The CBU highlighted the increases in food prices, and noted it was ready to adjust its policy rate as needed, by a tightening of its policy stance if inflationary pressures emerged, or a further easing if downside risks to growth materialized. The CBU reiterated its commitment to exchange rate flexibility. The CBU acknowledged that monetary policy transmission remained constrained but noted that it had strengthened in the last two years thanks to progress in financial sector reforms. The CBU also acknowledged that vulnerabilities in the banking sector had increased and noted that it is working to address information gaps and further strengthen bank supervision.

33. More broadly, the authorities agreed that continued macro-economic stability is crucial to securing sustained growth. They appreciated the IMF’s advice and technical assistance to help them in their efforts. With Uzbekistan’s limited administrative capacity and being a relative late starter in transforming its economy, the authorities greatly value the support from the international community and the opportunities to learn from international experiences and best practices.

Policies to Support Strong and Inclusive Medium-term Growth and Raise Incomes

A. Improving Incentives, Institutions, and Access to Inputs

34. The authorities not only face the challenge of supporting the recovery, but also continuing Uzbekistan’s transformation to a modern market economy. Uzbekistan has made significant progress in implementing economic reforms. The first phase, as noted above, focused on economic liberalization and improving macro-economic management. The reform agenda remains large, however, and the impact of the pandemic on administrative capacity and investor demand slowed the pace of reforms, although preparatory work continued in many areas. There is a need to accelerate reform implementation, to reduce the state’s role in the economy and create a more dynamic private sector. Many of these reforms will require careful preparation and sequencing, and the authorities are working actively with IFIs and other advisors, also to augment the limited administrative capacity.

35. Improving incentives, institutions, and access to inputs are critical to developing a vibrant private sector. Businesses have identified access to resources, notably to finance, land, energy, and skilled labor, as constraints, as well as administrative bottlenecks and policy uncertainty. To create a business-friendly environment, it is crucial to create strong, professional, and independent institutions—to define the rules of the game, secure property rights, and ensure good governance and fight corruption—and strengthen incentive structures—the perceived benefits or costs of economic agents’ actions. To set priorities, the biggest reform gaps, and biggest potential impact on growth, appear to be in the financial, trade, and governance areas (see Annex IV).

36. The authorities should prioritize further opening markets, increasing competition, and allowing prices to be fully determined by market forces to ensure an efficient allocation of resources. These are areas where progress can be made relatively quickly. This includes removing barriers to market entry and especially eliminating tariff, tax, and other privileges that notably SOEs enjoy. The Antimonopoly Committee should further step up efforts to break up monopolies and remove distortions. An independent energy sector regulator should be established to set and adjust energy tariffs until these can become fully market determined.

37. Reform of the SOE sector can also enhance competition. After years of little progress, it is important to make a start. A recent presidential decree sets an ambitious agenda for the reform and divestiture of nearly 3,000 SOEs, including the largest companies. The authorities have started to divest minority stakes and smaller assets via an online platform and set up a new asset management company to privatize a first set of mid-sized companies this year. It will be imperative that this will be done via open and transparent processes. A new privatization law is being drafted with E BRD assistance, which will improve the legal framework. A state-ownership law, also being drafted, should better define the ownership principles for companies that will remain in state hands. Meanwhile, governance and financial reporting of especially the larger SOEs should be improved. Placing them more at arms’ length from the government and limiting government guarantees is needed to impose greater financial discipline.

Figure 7.
Figure 7.

Uzbekistan: Structural Indicators

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

38. Another priority for attracting investment is creating a stable, level playing field for businesses. There remains a need to further streamline business regulations and enhance their stability, as frequent and ad-hoc changes deter investors. Recent progress includes revisions to investment legislation, to include anti-monopoly and anti-corruption clauses and investment incentives. The authorities also created a “one-stop” shop, business ombudsman, protections for foreign investors, and a multi-tier process to mediate and resolve investment disputes and are planning to streamline licensing procedures. PPP legislation has been improved, clarifying concessions, the role of local authorities, the process for amending and terminating PPPs, and financial obligations. The authorities are revising state aid rules and are developing an anti-monopoly compliance system to help reduce the state’s role in the economy.

39. Important elements of this are strict adherence to the rule of law, effective property rights protection and contract enforcement, and addressing corruption. Uzbekistan has undertaken several key judicial reforms, including the establishment of the Supreme Judicial Council, regular publication of court decisions on the website of the Supreme Court, and increased use of electronic procedures to increase transparency and facilitate access to justice. Further efforts will be needed to strengthen the independence of the Supreme Judicial Council, and the procedures for selecting judges and organizing the courts. A new insolvency law is under preparation. A new anti-corruption agency has been created and is tasked with developing strategies to prevent corruption and reduce the informal sector, as well as to detect and investigate possible cases of corruption, in close cooperation with the prosecutor’s office. The planned asset and income declaration scheme for public officials will help detect corruption but should be kept manageable, by focusing on senior officials, and made effective through increased transparency.

40. Improving the public procurement system will also help fight corruption. Open, competitive, and transparent procurement markets are needed to improve the efficiency of government spending. The authorities are about to adopt a new public procurement law and implement a new online platform for all public procurement this year, developed with assistance from the EBRD. This will increase transparency, including of beneficial ownership of contracting companies, and reduce opportunities for corruption. To maximize the effectiveness of this platform, it will be important to ensure that beneficial ownership information in business registers is accurate and up to date. Additionally, the ongoing digitalization of government services, including tax and customs, will increase efficiency and further reduce opportunities for corruption, and also help reduce the informal sector.

41. Efforts to liberalize trade are gathering steam. The authorities have restarted the WTO accession process, obtained observer status at the Eurasian Economic Union, and joined the Kyoto Customs Convention, the Istanbul Convention on temporary imports, and the SECO-World Customs Union Global Trade Facilitation (TF) program. In late 2020, Uzbekistan was granted trade preferences under the EU’s GSP+ system, allowing exports to the EU at duty free or reduced rates. Along with the TF program, this will help align trade standards and regulations with international best practices.

42. The energy sector needs to be placed on a financially viable footing. The state-owned gas and power companies have been unbundled into separate production, transmission, and distribution companies, to help enhance their efficiency and allow for their eventual (partial) privatization. The authorities have lifted customs duties on liquified natural gas, abolished import permit requirements, and announced plans to allow producers and importers to sell gas and electricity to wholesale consumers on the open market later this year. This will be an important step toward more efficient energy pricing and eliminating the large but poorly targeted implicit subsidies as tariffs are below cost recovery and, even more so, export-parity levels.3 Household energy tariffs should also be raised to market levels, albeit gradually and this should go hand in hand with further expanding the social safety net to protect vulnerable households. Market pricing will also stimulate private sector participation in energy production and distribution.

43. Strengthening land tenure rights and making them tradable are needed to help increase investment and hence productivity in agriculture. While agricultural clusters and cooperatives have been established, with plans to introduce new technologies via knowledge centers, farmers’ inability to use land as collateral limits access to financing. The authorities are planning to start selling non-agricultural land plots, via auctions, and have reorganized the public cadaster, with the agricultural cadaster transferred to the Ministry of Agriculture.

44. While labor markets continue to be plagued by a lack of job opportunities and informality, labor mobility has improved. Uzbekistan is estimated to have on average some 400,000 job opportunities available each year, while labor market entrants total about 600,000. In response to the pandemic, more resources have been allocated to job training, SME development, and job matching. The authorities have relaxed controls on internal migration and increased assistance for workers seeking work abroad. More broadly, they have developed an employment strategy and almost fully eliminated forced labor during cotton harvests, in cooperation with the ILO.

B. The Authorities’ Views

45. The authorities reiterated their commitment to continue with structural reforms to ensure strong and sustainable growth and improve people’s living standards. They noted that reform implementation had slowed due the pandemic, but that preparations had continued in many areas. The authorities welcomed the discussion on reform priorities and acknowledged that many of the second-generation reforms, such as privatization and tariff reforms, will require careful preparation and communication, especially given their social impact. They will continue to work closely with Uzbekistan’s international partners on these reforms.

46. The authorities agreed that as the crisis abates, the pace of reforms should accelerate. This had also been highlighted in the President’s year-end address to parliament, in which he stressed that reforms would need to focus on reducing the role of the state in the economy and creating a vibrant and resilient private sector. The authorities noted that beyond the more pressing need to expand the social safety net, reform priorities had not shifted much due to the pandemic. They pointed to the many new laws and other initiatives that are under preparation, and that they aim to sell several SOEs and state-owned banks this year. They further acknowledged the importance of strong institutions and transparency, and the need to reduce opportunities for corruption.

Staff Appraisal

47. Mitigated by the authorities’ timely and strong policy response, the COVID-19 pandemic has, so far, had a relatively short-lived adverse impact on Uzbekistan’s population and economy. Although the pandemic hit the economy hard in the first half of 2020 and inflicted considerable hardship, strong and timely containment and support measures moderated the recession. These included a forceful public health response and the deployment of a comprehensive set of fiscal, monetary, and financial measures, made possible by substantial buffers owing to prudent macro-economic policies in preceding years and to sizable international support. As a result, activity rebounded in the second half of 2020 and Uzbekistan was among the few countries posting positive growth in 2020.

48. Uncertainty remains high, however, and continued near-term support is needed. The recovery will depend especially on the vaccine rollout, while new variants of the virus and surges in infections are key risks. Much will depend also on developments in Uzbekistan’s main trading partners. The authorities rightly continue to focus on protecting lives and livelihoods and securing enough vaccines for the population. The 2021 budget maintains an appropriate accommodative stance and ensures that the healthcare system and vaccine rollout are sufficiently resourced. If downside risks materialize, the authorities could use fiscal buffers to provide additional, targeted support to households and businesses.

49. Beyond the near-term, maintaining strong economic fundamentals will require tackling vulnerabilities that have increased due to the pandemic, and restarting income convergence, which temporarily stalled. Public debt, while still at a relatively low level, has almost doubled in a few years’ time. Banks’ loan portfolios may be affected with a lag. And importantly, incomes remain relatively low compared to other emerging economies, while the social safety net still leaves out many vulnerable households.

50. The authorities’ commitment to continued sound macro-economic policies is welcome, but the withdrawal of fiscal stimulus should be gradual as the pandemic subsides. The authorities are committed to ensure fiscal sustainability, by adopting a set of fiscal rules and reducing the budget deficit in the coming years to place public debt on a downward path. With this, the risk of public debt distress is assessed to remain low. At the same time, the government should create room—by further improving revenue administration and spending efficiency—to allow for a further expansion of the social safety net and additional investment in healthcare and education. Monetary policy remains appropriately focused on lowering inflation, and the CBU should continue to allow exchange rate flexibility. Further improvements are needed in the CBU’s supervisory capabilities to better monitor banks and effectively respond to possible banking sector difficulties. Adherence to sound policy frameworks and close coordination among policymakers are essential to maintain macro-financial stability.

51. As the crisis abates, it will be particularly important to pick up the pace of structural reforms to achieve strong, sustainable, and inclusive economic growth. After years of relative isolation and strict state control, Uzbekistan has come a long way in modernizing its economy. The reform agenda is still large, however, and the economy does not create enough jobs for its growing population. There is a need to reduce the still large role of the state in the economy and to create an environment conducive to strong private sector growth. Of particular importance is the creation of strong and independent institutions necessary for a well-functioning and fair market economy and enhance policy stability and predictability. As many of the reforms in these areas are just starting, Uzbekistan can benefit from other countries’ experiences and avoid the pitfalls of poor governance, by ensuring strict adherence to the rule of law and government transparency, facilitated also by increased digitalization.

Table 9.

Uzbekistan: Recommendations of the 2019 Article IV Consultation

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Annex I. Risk Assessment Matrix 1

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Annex II. External Sector Assessment

The external sector assessment indicates that Uzbekistan’s external position is broadly in line with economic fundamentals and desirable policies. The country’s external risks are increasing, but external stability risks are mitigated by the large FX reserves and the long maturity of external debt.

A. Current Account (CA)

1. Background. Key structural reforms—including FX market liberalization, the removal of trade restrictions, especially on regional border trade—and increased investment turned the CA surplus of 2½ percent of GDP in 2017 into a CA deficit of 6V2 percent of GDP in 2018–19. This shift to relatively high CA deficits has been a typical feature of transitions from planned to marked-based economies. Therefore, prior to the pandemic, Uzbekistan was already expected to have sizable CA deficits for several years. The pandemic adversely affected energy exports as regional natural gas demand collapsed, and remittances also fell as borders were closed and activity declined in source-countries. These effects were offset by higher gold exports and lower imports, as domestic demand fell and capital projects were put on hold. The CA deficit reached 5½ percent of GDP in 2020, slightly below the 2019 level.

Current Account Balance

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: Country authorities; and IMF staff estimates.

2. The EBA-lite CA approach suggests that Uzbekistan’s economic fundamentals are consistent with running sizable current account deficits. Staffs estimate of the 2020 CA norm— i.e., the CA consistent with Uzbekistan’s economic fundamentals as well as desirable policies—is in the -3 to -5 percent of GDP range (text table). That CA norm points to a sizable deficit that is largely explained by Uzbekistan’s productivity gap relative to the rest of the world and the country’s favorable demographics. To close the productivity gap, more capital per worker will be needed, and investment will need to exceed domestic savings. At the same time, a relatively young population and the expectation of higher incomes in the future means that increasing savings to prepare for an aging population is not yet an issue in the case of Uzbekistan. The CA norm assumes policies are set at their desirable levels, which includes the following benchmarks: (i) an overall fiscal deficit of 2 percent of GDP; (ii) credit growth broadly in line with nominal GDP growth; and (iii), broadly unchanged levels of FX reserves.

Uzbekistan: Results from EBA-lite models, 2020

(in percent of GDP, unless otherwise indicated)

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* These adjustments include: 1) deviations of gold exported from the production (+0.4 percent of GDP); 2) correction for lower energy exports (-2.3 percent of GDP), lower remittances (-0.3 percent of GDP), and tourism (+0.1 percent of GDP) due to the pandemic.

3. The CA gap implies a small real effective exchange rate (REER) gap. The difference between the adjusted CA (see Box 1) and the CA norm suggests a CA gap of 0.8 percent, which should be cautiously interpreted given the current high level of uncertainty as a result of the pandemic.1 Using standard trade elasticities, the REER gap would be only 3¾ percent, implying the REER is not far from its equilibrium. Other cost competitiveness indicators, such as Uzbekistan’s wages in U.S. dollars relative to regional peers (see text chart) or Uzbekistan’s real exchange rate measured as the ratio of the nominal exchange rate (vs U.S. dollar) to the PPP-exchange rate, are consistent with an assessment of no significant deviations.

Manufacturing Wages and GDP per capita, 2020

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: IMF staff estimates

Real Exchange Rate 2020 (Ratio FX-to-PPPFX), 2020

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

* E.g. Real exchange = 4 means Nominal FX vs USD is 4 times the PPP-FXSources: IMF staff estimates.

4. Short-Term CA Outlook. The CA deficit is expected to widen as investment projects catch up, after several investment plans were delayed in 2020, and incomes recover, increasing demand for imported consumer goods. For 2021, the CA deficit is projected to increase to 6½ percent of GDP, a projection conditional on the policies assumed in the baseline, especially more moderate credit growth. Under the baseline policies, the risk of a sharp deterioration of the CA deficit will depend on the speed of the recovery from the pandemic in Uzbekistan and remittance source-countries, as well a s medium-term fiscal policies, and reform progress.

5. Medium-Term CA Outlook. The CA is projected to gradually converge to a deficit of about 5 percent of GDP, which is within the range of the estimated current account norm of about -3 to -5 percent of GDP. This is in line with the expectations for a transition economy with Uzbekistan’s characteristics:

  • a) Following a dip in 2020, trading-partner import demand is projected to recover after 2021, with import growth in China and Russia expanding at about 4 percent.

  • b) The price of gold is assumed to decline marginally in 2021 and then remain relatively stable, while prices of cotton, natural gas, and copper will recover gradually.

  • c) Imports of goods are projected to increase in 2021–23 as investment increases, but then gradually decline to 36 percent of GDP. The import-to-GDP ratio is projected to decline marginally, a pattern also observed in other early transition economies2.

  • d) Remittances are expected to recover gradually in 2021–22 as international travel resumes and activity in source countries recovers. They will remain an important and stable source of external income, but gradually decline in terms of GDP as Uzbekistan’s GDP is forecasted to grow faster than remittance source countries.

6. Assessment. Subject to the considerable uncertainties related to the pandemic, Uzbekistan’s current account position in 2020 is assessed to be broadly consistent with fundamentals and desired policies. The narrow implied REER gap and the apparent lack of a cost competitiveness problem suggest no misalignment issues. The CA deficits in 2020 and the near term can be mainly attributed to the first round of transition and a still relatively high level of capital imports. In the medium term, the pace of domestic demand growth needs to be contained through a gradual fiscal consolidation, a balanced credit policy, and a rational SOE-investment policy to avoid the emergence of excessive CA deficits.

B. Financial Account

7. Background. Financial flows are increasing to cover the higher current account deficits. Since 2018, the government and SOEs—including state-owned banks—have expanded external borrowing, most of which is long term. The main inflows represent FDI, loans, and international bond issuances. On average during 2019–20, net FDI inflows accounted for about 3¼ percent of GDP, net loans about 9¾ percent of GDP and portfolio flows (bonds) about 2½ percent of GDP. While official borrowing at concessional rates dominates external borrowing, recently borrowing at market terms has been increasing. The government and state-owned banks have placed Eurobonds in 2019 and 2020 that were heavily oversubscribed. In addition, state-owned banks have increased borrowing from international commercial banks, official development banks, and IFIs, which increased banking sector external debt from 2 to 11 percent of GDP between 2018 and 2020.

8. Assessment. In the near term, FDI inflows are expected to remain modest and official external borrowing will likely expand further. The government plans to continue tapping the sovereign bond market and multilateral institutions remain keen to provide additional loans to the government for investment projects. However, external borrowing has been increasing fast—notably in the banking sector—and more robust debt management is needed to keep risks low.

C. International Investment Position (IIP)

9. Background. Uzbekistan’s IIP is stronger than most of its regional peers (see text chart). The strong IIP position is the result of past FX reserve accumulation and the desire of the private sector to accumulate large FX cash holdings. In the last few years, the IIP has weakened somewhat, as external borrowing has expanded to finance investment projects.

Regional Peers: International Investment Position

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: IMF, BOP statistics; and IMF staff estimates.

Uzbekistan: International Investment Position

Billions of U.S. dollars

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Sources: Country authorities; and IMF staff estimates.

10. The external balance sheet is partially insulated from global financial market volatility. Foreign assets mainly represent FX reserves and private FX cash holdings. On the other hand, liabilities are largely multilateral and bilateral loans at concessional rates and long maturities. Thus, both assets and liabilities are relatively insulated from global financial volatility and rollover risks.

11. Assessment. The external balance sheet provides substantial buffers to shelter Uzbekistan from external shocks. Assets and liabilities are largely insulated from global financial market volatility, and liabilities have low rollover risk in the near term, while assets are mainly held in safe assets. But the fast expansion of external borrowing on market-terms by the government, SOEs and state banks is raising medium-term risks.

D. FX Reserve Adequacy

12. Background. Uzbekistan’s FX reserves are large by all metrics. At US$35 billion at end-2020, they were equivalent to about 61 percent of GDP or 16 months of imports of goods and services. FX reserves were considerably above the IMF’s reserve adequacy metric for emerging markets or developing countries. 3 As a commodity exporter, Uzbekistan is at risk of shocks arising from declines in its main exports. These risks are partially mitigated by the price of gold which tends to provide a hedge against declines in other commodity prices. This effect is magnified, as about half of the FX reserves are in gold. As gold prices increase during global recessions, FX-reserve revaluation provides additional capacity to face shocks.

13. FX reserves are high providing sizable external buffers. About one third of FX reserves represent deposits of the Fund for Reconstruction for Development (FRD). However, even if FRD deposits are excluded, Uzbekistan’s reserves remain significantly above standard reserve metrics. To efficiently manage these sizable resources, the CBU joined the World Bank’s Reserve Advisory and Management Partnership (RAMP) in 2020, to enhance its reserve management and governance framework, and to build the capacity. This would also help optimizing the level of reserve holdings over time.

Panel A. FX-Reserve Adequacy Indicators, 2020

(Months of next year imports)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Source: IMF staff estimates.

Panel B. Uzbekistan: FX-Reserves

(Billions of U.S. dollars)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: Country authorities; and IMF staff estimates.

14. CBU intervention has predominantly been limited to adherence to the neutrality principle, indicating that demand and supply largely determine the exchange rate trends. Reserves, after removing the revaluation of gold, have been almost flat over the last few years (See figure 2 Staff report) as the CBU has limited intervention to sterilize the funds it injects when purchasing gold from the domestic producers (the so-called neutrality principle).

15. Assessment. FX reserves help to ensure Uzbekistan has access to needed imports and insure against shocks. They are also needed for operational purposes, including smoothing volatility in the FX market, while allowing the exchange rate to adjust in line with market forces. Staff assesses Uzbekistan’s FX reserves are adequate for precautionary and operational purposes.

E. Real Exchange Rate

16. Background. On September 5, 2017, Uzbekistan unified its official and parallel exchange rates and liberalized access to foreign exchange. The official nominal exchange rate depreciated from 4,250 to 8,100 sum per U.S. dollar. Since then, the nominal exchange rate has shown limited daily volatility and step depreciations in response to shocks that also affected regional trading partners’ currencies. The average annual nominal depreciation reached about 10 percent during 2019–20, while the real effective exchange rate has been relatively stable since late 2018. The dejure exchange arrangement is floating, while Uzbekistan’s de facto exchange rate regime is classified by the IMF as crawl-like, given that the nominal exchange rate path seems highly predictable and that the nominal exchange rate shows limited day-to-day volatility.

Exchange Rate

(Sum per USD)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: IMF staff estimates.

Uzbekistan: Real Effective Exchange Rate1

(2010=100)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

1 REER based on CPI (as in INS methodology).Source: IMF staff estimates.

17. The EBA-lite exchange rate approach (EBA-IREER) is not informative for Uzbekistan due to the large structural break since 2017. The EBA-IREER depends on the historical trend of the real exchange rate, but the sharp structural breaks complicate the assessment. The EBA-IREER approach suggests that the real exchange rate is strongly weaker than implied by fundamentals and desired policies. Such result seems unfeasible for Uzbekistan’s economy, which is running a CA deficit above 5 percent of GDP.4

18. Outlook. In the near term, staff assesses that the real exchange rate will remain broadly stable in the near term, but in the medium term will appreciate as relative price adjustments continue in Uzbekistan and productivity increases. In the medium term, the REER is expected to gradually appreciate by about 2 percent per year, consistent with experiences in other transition economies and assuming productivity gains of 2–3 percent per year.

19. Assessment. Subject to the already mentioned data uncertainties, staff assesses that the 2020 average REER was broadly consistent with fundamentals and desired policies based on the EBA-current account approach.

Adjusting the Current Account for Temporary Factors

The adjusted CA deficit in 2020—which corrects the CA for temporary and cyclical factors— is estimated at -3.2 percent of GDP. In addition to the standard cyclical correction for terms of trade and output gap, two additional adjustments are needed. First adjusting for the CBU’s decision on how much of its annual purchase of gold it exports during the year. Second adjusting for additional one-off temporary effects due to the pandemic on energy, remittances, and tourism.

  • Adjusting for CBU gold exports deviation from the gold purchases: The reason for correcting for gold purchases is that the CBU’s gold purchases from domestic producers add immediately to FX reserves but do not affect the rest of the BOP. If all gold purchased is exported, the export is registered as a CA credit that fully matches the FX reserve buildup. But if exports of gold exceed the purchases during the year, the CA deficit is underestimated. In 2020 exports of gold exceeded CBU purchases of gold by 0.4 percent of GDP so after correcting for this effect the CA deficits is 0.4 percent of GDP higher. 1/

  • Adjusting for the temporary effect of the pandemic on energy balances, remittances, and tourism: Standard cyclical adjustments are insufficient to account for the exceptionally sharp contractions in the volume of energy, remittances, and tourism in 2020. The temporary component for a flow “X” is estimated with the formula below. For example, the change in the energy balance in 2020 is estimated by comparing the change in the projected energy balance for 2020 and 2025 in the baseline scenario with the projected energy balance for 2020 and 2025 in the January 2020 WEO (before the COVID-19 shock). The temporary component is defined as the part of the revision that is expected to fade by 2025 2/ 3/ 4/ .

  • temporary effect on X = elasticityXCA((X2020Forecast−X2020WEO Jan2020)−(X2025Forecast−X2025WEO Jan2020))
1/ In 2020, purchases of domestically produced gold amounted to 9.7 percent of GDP, while gold exports reached 10.1 percent of GDP. The observed current account deficit was therefore corrected (increased) by 0.4 percent of GDP. 2/ The difference in the projected energy balance for 2020 compared with the projection in the January 2020 WEO is about -3.2 percent of GDP. The change in the projected energy balance for 2025 due to the pandemic is zero percent of GDP. The difference between the two changes (-3.2 percent of GDP) measures the transitory shock in 2020. The current account adjustor is -2.3 percent of GDP (0.7 × -3.2), where 0.7 is an estimated elasticity. 3/ The difference in the projected remittances in 2020 compared with the projection in the January 2020 WEO is about -0.9 percent of GDP. The change in the forecasted remittances for 2025 due to the pandemic is zero percent. The difference between the two changes (-0.9 percent of GDP) is used to measure the transitory shock in 2020. The CA adjustor is -0.3 percent of GDP (0.35 × -0.9), where 0.35 is an assumed elasticity. 4/ The change in projected tourism in 2020 compared with the projection in the January 2020 WEO is about 0.1 percent of GDP. The change in the forecasted tourism for 2025 due to the pandemic is zero percent. The difference between the two changes (0.1 percent of GDP) is used to measure the transitory shock in 2020. The CA adjustor is 0.1 percent of GDP (0.75 × 0.1), where 0.75 is an estimated elasticity.

Annex III. Monetary Policy Transmission and Inflation Targeting1

1. In late 2019, the CBU announced it was moving to an inflation targeting (IT) regime by 2023. The new central bank law clearly sets price stability as the CBU’s main mandate. In addition, an IT strategy, approved by the President2, guides the transition to an IT framework to reach an inflation target of 10 percent by 2021 and 5 percent by 2023. This strategy also establishes an agreement between the CBU and the government to address any barriers preventing the transition to IT. In this context, the CBU has started transitioning to IT by successfully implementing the strategy in areas within its control. These include the formulation of a financial sector reform strategy, the approval of new laws on FX regulation, payment system, and banking, and the modernization of its monetary framework and operations, including its communication.

2. Despite the substantial progress made in improving the CBU’s monetary policy framework and its operations, monetary policy transmission can still be enhanced. Multiple factors, including the lack of developed financial markets, a high degree of dollarization, and the large footprint of the government in the financial system make monetary policy less effective.

3. Undeveloped financial markets tend to weaken monetary transmission. Progress was made in 2020 in the development of the interbank market, with interbank rates being kept successfully within the policy rate corridor. Further efforts will need to focus on reducing market segmentation, as some banks consistently are the borrowers and lenders in the market. The government securities market also remains shallow with a low level of domestic public debt in 2020, compared to Uzbekistan’s regional peers.

Domestic Public Debt

(In percent of GOP).

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: World Economic Outlook, Output, and IMF Staff Calculations.

Money Market Interest Rate

(Percent)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: CBU; and IMF staff estimates.

4. The exchange rate largely moves in line with economic fundamentals, but the market is also not very deep. Transactions are dominated by the government and SOEs, while the CBU supplies a steady supply of FX as part of its intervention policy, meeting most of the market’s demand. This appears to have contributed to a relatively low level of daily FX volatility. Uzbekistan’s daily FX volatility is below that seen in Uzbekistan’s inflation targeting peers, although it has increased since 2017. This low volatility is likely to contribute to increased dollarization.

FX Daily Volatility and Turnover, 2018–20

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: IMF, staff estimates.

Dollarization (at constant FX)

(Percent of total deposits/credit at constant FX)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Sources: Authorties and IMF staff calculaitons

5. A high degree of dollarization also hampers effective transmission. In 2020, the level of dollarization with respect to deposits and credit was about 43 and 50 percent, respectively. The degree of dollarization rose following the depreciation in 2017, but also reflects banks relying on foreign borrowing to meet domestic credit demand and, more broadly, a lack of confidence in the domestic currency and the banking system. In general, the higher the degree of dollarization, the lower the base of credit and deposits that is affected by changes in the CBU’s policy rate.

6. The large footprint of the state-owned banks impairs the transmission channel as well. State-owned banks account for 85 percent of total banking system assets. As these banks do not yet operate fully on market principles, the transmission of the CBU policy rate to state banks’ lending and deposit rates is limited. Similarly, state-owned enterprises have easy access to government funding and policy loans undermining the effectiveness of monetary policy, and also may be less sensitive to increases in lending rates if they are not subject to strict financial discipline.

7. Estimates of the transmission of the policy rate to retail interest rates suggest that transmission is still developing. The elasticity of retail rates to monetary policy rates was estimated based on an OLS method with monthly data for2010:M1 to 2020:M12. The estimation results (Text Table) indicate some improvement in the estimated coefficients for the sample after the start of reforms in 2017, but these coefficients remain statistically insignificant due to the limited number of observations. The estimated coefficients for the whole sample are below those seen in other emerging economies.

Elasticity of Interest Rate to Monetary Policy Rates

(Percentage Points)

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Note: Based on OLS regression: Alnterest rate “xt” = α + β∆Monetary Policy Ratet + εt Stars represent significant levels: ***, **, * represent 1%, 5% and 10% respectively.

includes Poland, Hungary, and Romania.

Source: IMF Staff estimates.

8. Strengthening monetary transmission requires further reform progress. This includes fostering financial market development, including the government securities market, the FX market, and more broadly, moving ahead with the reform of the state-owned banks, while safeguarding financial stability. Combined with continued sound monetary policies aimed at achieving low inflation, this will help to improve confidence in the banking system and the national currency.

Annex IV. Impact of Structural Reforms

This annex builds on IMF research examining the link between structural reforms and performance indicators to estimate the impact of different types of structural reforms on growth and job creation in Uzbekistan. It finds that governance reforms are most likely to raise growth in the near-term, while reforms to domestic finance, trade openness, and governance would have the biggest impact over the medium-term. It is estimated that significant reforms in all areas could raise the level of GDP by as much as 10–15 percent.

Why Do Structural Reforms Matter?

1. A traditional approach to explaining growth is to decompose it into contributions from capital, labor, and a residual. The residual incorporates the contributions of all other factors and is often interpreted as measuring productivity growth and called total factor productivity (TFP). When this approach is used to examine growth in the Caucuses and Central Asia (CCA), about half of recent growth it estimated to come from increases in physical capital, a small share from increases in the labor force, and the rest from TFP. This is generally true for Uzbekistan as well, though the contribution of growth in labor is higher reflecting demographic changes, the entry of young people into the labor force. A large literature looks at determinants of TFP. Structural and institutional factors appear to have a significant impact, and appear to increase growth by raising total factor productivity.

CCA: Contribution to Growth, 2010–2018

(In percent)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

How Does Uzbekistan Compare on Structural Measures?

2. As is true for many countries, Uzbekistan’s scores on structural measures vary widely depending on the measure used. In general, Uzbekistan tends to do relatively well on measures related to fiscal and monetary management, trade, goods and labor markets, and political stability (see Figure 7 in the main text). Uzbekistan tends to score relatively less well on measures related to access to finance, investment attractiveness, innovation, and governance. When asked what the biggest obstacles to business are, firms in Uzbekistan cite tax rates as do firms in other European and Central Asian countries. But firms in Uzbekistan are more likely to cite informality, transportation, electricity, and land than firms in other countries, while education and political stability are cited less. Corruption and financing are cited at about the same rates in other countries.

What Impact Do Structural Reforms Have on Growth?

3. It is difficult to quantify the impact of structural reforms on growth and job creation. Doing so requires examining the impact of such reforms across a large sample of countries. The IMF has done so in several major studies. A 2015 policy paper on Structural Reforms and Macroeconomic Performance examined 75 emerging and developing countries over the period 1970–2011. It found that for developing countries, the biggest impacts occurred with reforms in agriculture, banking, business regulations, infrastructure, labor markets, and governance and institutions.

Productivity Gains from Different Structural Reforms

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Note: Comparisons across reforms within each country group. Darker shades imply larger gains from reforms Source: IMF staff estimates

4. Another study, for the IMF’s October 2019 World Economic Outlook (WEO), looked at 61 emerging and developing countries from 1973–2014. It examined six types of reforms: domestic finance, external finance, trade, product markets, labor markets, and governance. It found that structural reforms take time to raise output, but the effect can be very significant. For example, a major reform (a two standard deviation improvement in all structural indicators) is estimated to raise output by a total of 7½ percent after six years. Governance reforms have the greatest impact on output after one year, while domestic finance and governance reforms have the greatest impact after six years. The estimates assume that reforms have independent impacts and are the same across countries. In fact, reforms are likely to be complementary. For example, the study found that better governance (in the top quartile) increases output an additional one percentage point for financial reforms and three percentage points for product market reforms after six years. Moreover, countries that start with larger informal sectors are likely to gain more.

Average Effects of Reform

(two standard deviation improvement in indicator)

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How Would Structural Reforms Impact Uzbekistan?

5. Before reforms started in 2016, Uzbek is tan scored relatively high o n the pr o duct and lab or market indicators compared to other CIS countries. It scored close to average on the trade measure and relatively low on the domestic and external finance indicators. Over the previous ten years, there had been some improvement in measures of trade while most other measures remained stable. The table below shows Uzbekistan’s scores on these indicators as of 2014 and estimated gaps compared to the CIS average and countries on the frontier. The last two columns show estimates of increases in Uzbekistan’s GDP after six years if Uzbekistan’s scores rose to the CIS average or closed half the gap with the best practice frontier. It suggests that structural reforms to domestic finance, trade, and governance that close half the gap with the frontier could each raise Uzbekistan’s GDP by 3–4 percentage points over six years. The increase in output due to a major reform in all categories could increase Uzbekistan’s GDP by almost 11 percentage points. The benefits of reforms are likely even higher once one accounts for complementarities among structural reforms and likely reductions in the informal sector.

Uzbekistan: Estimated Impact of Structural Reforms on GDP

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6. Recent indicators suggest Uzbekistan has already made progress in these reform areas. Trade foreign exchange liberalization took place in 2017 and the authorities have gradually improved domestic finance by raising interest rates on and removing policy loans from banks’ balance sheets. At the same time, a surge in external financing has boosted investment. Thus, measures of domestic and external finance and trade have improved significantly. Similarly, the World Bank’s Country Policy and Institutional Assessment (CPIA) indicators improved by six percent from 2016 to 2019. The subindex for structural measures rose even more, by almost 20 percent, during this period.

Uzbekistan: World Bank Country Policy & Institutional Assessment, 2009–2019

(Scores out of 6)

Citation: IMF Staff Country Reports 2021, 085; 10.5089/9781513572918.002.A002

Conclusion

7. In summary, studies show that structural reforms can significantly raise GDP but take many years to show their full effect. If structural reforms—especially in domestic finance, trade, and governance—are able to close half of Uzbekistan’s gap with the frontier, it is estimated the level of Uzbekistan’s GDP could rise by an additional 10–15 percent over the medium-term. Reforms to trade in 2017 and domestic finance in 2019 would not be expected to have their full impact until 2023 and beyond. Given steps already taken in these areas, governance reforms would be expected to have the biggest impact and could raise GDP over a shorter time period.
1

The number of reported deaths due to COVID has been relatively low (over 600), but the total number of deaths in 2020 was some 20,000 higher than in preceding years.

2

See IMF Country Report No. 19/129.

3

Below cost recovery pricing of natural gas implies a subsidy to end users of about 2¼ percent of GDP and of about 5 percent of GDP when compared to export-parity levels.

1

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within one year and three years, respectively.

1

Policy gaps for Uzbekistan indicate that policies narrowed the 2020 current account deficit as the fiscal deficit was lower than in the rest of the world. Nonetheless, there is an unexplained residual of -2¼ percent of GDP.

2

As market institutions develop transition economies produce more varieties of goods which tends to slow imports.

3

Actual reserves are about 1,700 percent of the IMF’s reserve adequacy metric (above the 100–150 percent recommended) or about 1,200 percent excluding FX deposits of the FRD.

4

This estimation assumes the REERwas in equilibrium on average during 2011–2019.

1

This annex is based on ongoing research assessing IT transmission in Uzbekistan by E. Cabezon and M. Al Rasasi.

2

Presidential Decree 5877, November 19, 2019.

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Cover IMF Staff Country Reports
Republic of Uzbekistan: 2021 Article IV Consultation-Press Release; and Staff Report
Author:
International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2021: Issue 085
Publisher:
International Monetary Fund
ISBN:
9781513572918
ISSN:
1934-7685
Pages:
84
DOI:
https://doi.org/10.5089/9781513572918.002

Capacity Development, FY20–21
Figure 1.

Uzbekistan: COVID and Economic Activity
Figure 2.

Uzbekistan: External Sector Developments

Status of Governance, RCF, and RFI Commitments

As of end-March 2021
Figure 3.

Uzbekistan: Fiscal Developments

Capacity Development, FY20–21

Capacity Development, FY20–21
Figure 4.

Uzbekistan: Prices and Monetary Policy
Figure 5.

Uzbekistan: Exchange Rate Developments
Figure 6.

Uzbekistan: Banking Sector Indicators
Figure 7.

Uzbekistan: Structural Indicators

Current Account Balance

(Percent of GDP)

Manufacturing Wages and GDP per capita, 2020

Real Exchange Rate 2020 (Ratio FX-to-PPPFX), 2020

Regional Peers: International Investment Position

(Percent of GDP)

Panel A. FX-Reserve Adequacy Indicators, 2020

(Months of next year imports)

Panel B. Uzbekistan: FX-Reserves

(Billions of U.S. dollars)

Exchange Rate

(Sum per USD)

Uzbekistan: Real Effective Exchange Rate1

(2010=100)

Domestic Public Debt

(In percent of GOP).

Money Market Interest Rate

(Percent)

FX Daily Volatility and Turnover, 2018–20

Dollarization (at constant FX)

(Percent of total deposits/credit at constant FX)

CCA: Contribution to Growth, 2010–2018

(In percent)

Uzbekistan: World Bank Country Policy & Institutional Assessment, 2009–2019

(Scores out of 6)