Republic of Uzbekistan: 2021 Article IV Consultation—Press Release; and Staff Report

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)

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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)

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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

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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

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

Uzbekistan: Balance of Payments, 2018–2026

(millions of U.S. dollars)

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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)

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Sources: Country authorities; and IMF staff estimates.

Positive values means outflows.

Underlying current account assumes the annual gold production is exported.