## Republic of Uzbekistan — IMF Staff Report (cr18117) ## Source details **Canonical URL:** [Republic of Uzbekistan — IMF Staff Report (cr18117)](https://www.imf.org/-/media/files/publications/cr/2018/cr18117.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18117.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18117.pdf.json) --- ### Executive Board assessment and overarching policy guidance - Directors welcomed initiation of a comprehensive reform program to open and liberalize the economy, stimulate job creation, and promote inclusive growth. - Emphasized need to maintain prudent macroeconomic policies and momentum of structural reforms; underscored tighter fiscal and monetary policies to gradually bring inflation to single digits. - Commended prudent fiscal policies that kept public debt low and supported plans to reduce the overall fiscal deficit in 2018, mainly by reducing on-lending operations by the Fund for Reconstruction and Development (FRD). - Emphasized ensuring that all fiscal operations are brought on budget. - Advised comprehensive tax system reform to foster job creation and insure against the risk of a sharp future decline of tax collections from state enterprises; recommended reform be introduced gradually and be revenue neutral. - Agreed the central bank should use a range of indicators—refinancing rate, bank liquidity, money, and the exchange rate—to gauge monetary policy stance; noted importance of enhancing central bank independence to support adoption of inflation-targeting over the medium term. - Welcomed liberalization of the foreign exchange market, including elimination of exchange restrictions, and authorities’ intention to allow the exchange rate to adjust in line with fundamentals. - Welcomed structural reform priorities: restructuring state enterprises; further trade and price liberalization, especially by raising energy prices to cost-recovery levels; and promoting competition. - Encouraged continued efforts to fight corruption, enhance the rule of law, and improve economic statistics (participation in e-GDDS and move toward SDDS). ### Selected economic indicators and projections (2015–19 and selected medium-term) - Real GDP growth (percent change): 2015: 7.9; 2016: 7.8; 2017 Est: 5.3; 2018 Proj: 5.0; 2019 Proj: 5.0. - GDP per capita (U.S. dollars): 2015: 2,124; 2016: 2,094; 2017 Est: 1,491; 2018 Proj: 1,239; 2019 Proj: 1,449. - Population (millions): 2015: 31.3; 2016: 31.8; 2017 Est: 32.1; 2018 Proj: 32.5; 2019 Proj: 32.9. - Consumer price inflation (end of period): 2015: 8.4; 2016: 7.9; 2017 Est: 18.9; 2018 Proj: 16.9; 2019 Proj: 10.1. - GDP deflator: 2015: 9.2; 2016: 7.4; 2017 Est: 19.0; 2018 Proj: 20.3; 2019 Proj: 13.8. - Current account balance (percent of GDP): 2015: 0.7; 2016: 0.7; 2017 Est: 3.7; 2018 Proj: 0.2; 2019 Proj: -1.0. - External debt (percent of GDP): 2015: 18.5; 2016: 20.3; 2017 Est: 41.3; 2018 Proj: 38.1; 2019 Proj: 35.2. - Exchange rate (sums per U.S. dollar; end of period): 2015: 2,810; 2016: 3,231; 2017 Est: 8,120. - Real effective exchange rate (average, - = depreciation): 2015: -2.4; 2016: -7.0; 2017 Est: -31.8. - Consolidated fiscal balance (percent of GDP): 2015: -1.2; 2016: -0.8; 2017 Est: -0.1; 2018 Proj: -1.3; 2019 Proj: -1.4. - Augmented fiscal balance (incl. FRD) (percent of GDP): 2015: -1.3; 2016: -0.6; 2017 Est: -3.3; 2018 Proj: -1.3; 2019 Proj: -1.4. - Public debt (percent of GDP): 2015: 9.3; 2016: 10.5; 2017 Est: 24.5; 2018 Proj: 20.1; 2019 Proj: 21.0. - Reserve money (percent change): 2015: 20.0; 2016: 22.2; 2017 Est: 84.8; 2018 Proj: 15.4; 2019 Proj: 14.5. - Broad money (percent change): 2015: 24.2; 2016: 23.5; 2017 Est: 40.3; 2018 Proj: 19.0; 2019 Proj: 17.9. - Credit to the economy (percent change): 2015: 23.3; 2016: 28.4; 2017 Est: 103.0; 2018 Proj: 24.5; 2019 Proj: 15.2. ### Outlook, inflation, and external assessment - Growth outlook: GDP projected to expand by about 5 percent in 2018-19; domestic job creation will continue to lag. - Inflation outlook: At about 20 percent in early-2018; expected to decline gradually with tighter fiscal and monetary policies during 2018-19. Staff projects inflation to remain persistent, declining only gradually through 2018-19. - Baseline monetary assumptions: significant tightening of monetary and credit policies implied; staff view that delayed effects of past expansionary policies and pass-through from FX depreciation imply inflation persistence. - Authorities’ inflation projection: CBU projected consumer price inflation will decline by end-2018 to the range of 12-14 percent and decline further into single digits by end-2019. - External assessment: - Preliminary 2017 current account surplus: 3¾ percent of GDP. - IMF EBA implication: a country like Uzbekistan should have a current account deficit of 2 (±1) percent of GDP, implying a gap of 6 (±1) percent of GDP and a real exchange rate undervaluation of 25-30 percent using standard elasticities. - Caveat: preliminary surplus may be biased upward and EBA does not account for the major policy regime shift of September 2017. - Staff projection: regime shift likely to raise investment and imports, significantly reducing external surplus in 2018 and beyond, eliminating the external gap. - FX reserves: accumulated FX reserves are about 20 months of imports; no need to accumulate additional FX reserves. Half of FX reserves represent FX deposits of the Fund for Reconstruction and Development (FRD); some FRD assets may need to be devoted to cleaning up balance sheets of state enterprises. ### Main risks and regional spillovers - Main risks: - Medium-term: backsliding on reforms; weaknesses in banks constraining credit growth; sharp decline in revenues presently collected from state enterprises. - External risk: adverse shocks to exports, including a triple combination lowering exports, commodity prices, and remittances. - Domestic risks related to transition reforms: (i) reform fatigue or reversals; (ii) faster-than-expected deterioration in banks’ asset quality or risky bank behavior; (iii) opening of medium-term funding and capital gaps in banking; (iv) sharp decline in revenue collections from state enterprises as privileges are withdrawn. - Policy room to respond to shocks: fiscal stimulus, allowing exchange rate adjustment, and continuation of transition reforms to diversify exports and absorb labor. - Regional spillovers: a reformist Uzbekistan could catalyze change and raise incomes throughout the region—boost trade, build regional supply chains, promote regional integration, reconnect energy and transportation networks, and help resolve regional water rights disputes. ### Fiscal policy, transparency, and tax reform - 2017 augmented fiscal deficit: 3¼ percent of GDP (noted as 3.3 percent in table). - 2018 policy: reducing on-lending operations should curb the deficit to 1¼ percent of GDP in 2018 (table shows -1.3 percent). - Government has no outstanding domestic debt; external debt is mostly official borrowing, amounting to 24½ percent of GDP at end-2017 following exchange rate depreciation. - FRD balance: 2017 Est: -3.2 percent of GDP; 2018 Proj: 0.0; 2019 Proj: 0.0. - Government plans: bring all fiscal operations on-budget in 2019. - Tax reform: - Current system described as highly complex, full of exemptions, and with segmented regimes that discourage firm growth. - Reform goals: encourage firm expansion and job creation; proceed gradually; be revenue neutral; widen the tax net to preserve revenue as privileges erode; reform tax administration and consider restructuring state enterprises, with or without privatization, to maintain tax base. - Authorities view: tax reform a top priority; agreed reforms should proceed gradually, be realistic in impact projections, and be revenue neutral. - Social and labor measures in 2018 budget: - Social safety net spending projected to increase by about 1 percent of GDP, with targeted support reaching some 1.7 million beneficiaries (up from about 1.4 million in 2017). - Budget envisages about ¼ percent of GDP for active labor market programs. - Government will adjust social safety net spending and public wages for inflation during the first half of 2018. ### Monetary policy, exchange rate, and transition to inflation targeting - Monetary stance: - Recommendation: tighten monetary policy, including increasing nominal refinancing rate to restore a positive real rate and halt FX accumulation. - Interim guidance: CBU to use a range of indicators—refinancing rate, bank liquidity, money, and exchange rate—to gauge stance and inflationary impact. - Introduce regular, pre-announced program of FX sales from CBU’s gold purchases; enhance CBU capacity for open market operations. - Transition to inflation targeting: supported over the medium term; requires strengthening central bank analytical capacity, communication, and a strong transmission mechanism. - FX liberalization outcomes: - September 2017 unification of official and parallel FX rates led to about 50 percent depreciation of the official exchange rate. - Authorities intend to allow the exchange rate to adjust in line with fundamentals. - Since September 2017, the sum stabilized against the U.S. dollar within a 2 percent band; IMF classifies the de facto arrangement as a stabilized arrangement, effective September 6, 2017. - CBU practices: - Adopted a neutrality principle whereby its purchases of gold would be offset by FX sales. - Tightened monetary policy before FX liberalization (refinancing rate increased from 9 to 14 percent). - Interim monetary framework to rely on multiple indicators given large unobservable FX cash used as money. ### Financial stability, credit market segmentation, and bank sector measures - Credit market structure and risks: - Credits directed via banks to support state enterprises and government programs at concessional rates; FX segment dominated by state enterprises. - Private sector largely confined to domestic currency borrowing; loan dollarization is high with many state enterprises having FX loans while revenues are mainly in domestic currency. - State banks face concentration risk: state enterprises account for about 60 percent of total loans. - Reported financial soundness indicators (selected, end-2017/Q4): - Regulatory capital to risk-weighted assets: close to 19 percent (18.8 percent reported in Q4 data). - Non-performing loan ratio: 1.2 percent. - Return on equity: about 17 percent; Return on Assets: 1.9 percent. - Liquid assets to total assets: 23.6 percent. - Banking concentration: three largest state banks account for more than half of assets. - Policy recommendations to reduce segmentation and strengthen banking: - Put stricter limits on the FRD’s on-lending activities as a first step. - Shift FRD on-lending toward domestic currency to make cost of credit transparent, reduce loan dollarization, and strengthen monetary transmission. - Curb implicit subsidies to state sector by limiting preferential access to credit. - Develop monetary instruments (open market operations), enhance reserve requirements (including reserve averaging), expand emergency liquidity assistance collateral, restart T-bill issuance to aid money market development. - Encourage banks to raise funding and capital through market-based solutions, attract foreign funding, increase household deposits, and improve profitability via better credit operations and administrative cost reductions (e.g., mergers). - Transform state banks toward more commercial, lower-cost models (staff reductions, mergers). - Upgrade supervisory capacity and intervention tools; incorporate stress testing more fully; increase public trust and improve investment climate to attract foreign banking expertise. - Authorities’ recent steps: - Banks no longer required to keep records unrelated to banking on behalf of authorities. - Presidential decree instructed officials to refrain from pressuring banks to provide preferential credit. - CBU divested from two banks and withdrew officials from supervisory boards to address supervisory conflicts. - Macro context linked to financial policy: - Growth expected around 5 percent in 2018-19; domestic employment growth unlikely to exceed one percent short run. - Inflation projected to have peaked at about 20 percent and should gradually decline under tighter fiscal, credit, and monetary policies. - FX reserves at 20 months of imports and 2017 current account sizable surplus. ### Structural reforms, privatization/enterprise restructuring, and competition - Structural priorities: - Immediate: restructure state enterprises early in the transition. - Continue price and trade liberalization while strengthening domestic competition. - Raise energy prices to cost-recovery levels. - Promote diversification into sectors with higher human capital content to support demographic transition. - Continue governance reforms, fight corruption, and enhance rule of law. - SOE governance: - Consulting group recommendations on SOE governance expected ready in July (per text); opportunity to draw up a comprehensive plan to deal with SOE issues. - Expected outcomes from reforms: greater macro-fiscal and financial resilience, new markets, more private sector participation, improved business climate, increased competitiveness, and job creation—especially for youth. - Other structural actions: - Liberalization of visa regime, assessment of banking sector resilience, implementation of financial recovery plans in key SOEs, plans to resume WTO accession, and new legislation to promote competition and public-private partnerships. ### Data, statistics, and transparency - Significant steps taken to improve availability and quality of economic statistics; participation in IMF’s enhanced General Data Dissemination System (e-GDDS) and aim to progress toward Special Data Dissemination Standard (SDDS). - Statistical shortcomings remain (national accounts, price statistics, external sector, government finance statistics); updated CPI methodology introduced in January 2018. - National Summary Data Page (NSDP) planned to be posted beginning in May 2018 using SDMX. - Key statistical notes: - BOP and international reserves compiled but not published as of early 2018; no compilation system for IIP and external debt statistics then. - CBU reports 10 of the 12 core FSIs and 1 of the 13 encouraged FSIs for deposit takers quarterly with one month lag. - A mission in April 2018 planned to help with national accounts compilation priorities. ### Debt sustainability, external debt stance, and policy implications - Risk of external debt distress: Low. - 2017 public and publicly guaranteed external debt: about 25 percent of GDP; private sector debt about 17 percent of GDP. - Total external debt (millions of U.S. dollars; percent of GDP; series): Total External Debt: 15,563; 41.3; 100 (2017). - PPG debt-to-GDP projection: rise from 20 percent in 2018 to 25 percent in 2023 and to 30-32 percent for 2028-38. - PV of PPG debt-to-GDP: rises from 16 percent in 2018 to 24 percent in 2038 (below 40 percent threshold). - PV of PPG debt-to-exports: rises from 40 percent in 2018 to 67 percent in 2028 and 72 percent in 2038 (below 150 percent threshold). - PV of PPG debt-to-revenue: around 70 percent in 2028 and 76 percent in 2038 (below 250 percent threshold). - PPG debt service-to-exports and to-revenue ratios: stay at or below 6 percent (threshold 20 percent). - Stress tests: - One standard deviation shock to export growth or inflation, a nominal depreciation of 30 percent, or combined shocks raise PV debt ratios by 30-45 percent in 2028 relative to baseline but remain below thresholds. - A one standard deviation shock to export growth would raise PV debt-to-exports from 67 percent in 2018 to almost 120 percent in 2028 (still below 150 percent threshold). - Policy implications: - Maintain prudent borrowing practices and ensure additional external PPG borrowing is used wisely to avoid undue future debt burdens. - Monitor exchange rate and valuation risks given nominal depreciation shocks materially increase PV of PPG debt-to-exports ratio. - Preserve macroeconomic stability while implementing reforms to support higher growth, export diversification, and revenue mobilization. ### Lessons from earlier transitions (Box 2 — seven lessons) - Lesson #1: Macroeconomic forecasts, especially for growth, were often too optimistic in early transitions; mitigated in Uzbekistan by earlier reduction in state sector’s employment and output share. - Lesson #2: Early liberalization of FX, prices, and trade is often welcomed; subsequent reforms (SOE restructuring, competition, governance) face more opposition from insiders. - Lesson #3: Reform sequencing and control are often overestimated; do not over-strategize but avoid delaying reforms waiting for a perfect moment. - Lesson #4: Implementation often lags legislation; rules-based systems can be subverted by special arrangements. - Lesson #5: External advice is effective when political leadership is committed to reformist vision. - Lesson #6: Quality of human capital matters for designing and implementing reforms. - Lesson #7: Macroeconomic disruptions occur during transitions but tend to be surprisingly short-lived and can catalyze deeper reforms. *IMF Staff Report for the 2018 Article IV Consultation (Republic of Uzbekistan), April 23, 2018 (cr18117).* ### 2017. The authorities are considering additional actions in 2018 including steps to restructure ### 2017. The authorities are considering additional actions in 2018 including steps to restructure state enterprises and reform the tax system. ### Executive Board Assessment - Directors welcomed Uzbekistan’s initiation of a comprehensive reform program to open and liberalize the economy, stimulate job creation, and promote inclusive growth. - Directors noted internal and external risks and encouraged maintaining prudent macroeconomic policies and the momentum of structural reforms. - They underscored the need for tighter fiscal and monetary policies to gradually bring inflation to single digits. - Directors commended prudent fiscal policies that have kept public debt low and supported plans to reduce the overall fiscal deficit in 2018, mainly by reducing on-lending operations by the Fund for Reconstruction and Development. - Directors emphasized ensuring that all fiscal operations are brought on budget. - They underscored that a comprehensive reform of the tax system is essential to foster job creation and to insure against the risk of a sharp future decline of tax collections from state enterprises; advised reform should be introduced gradually and should be revenue neutral to preserve a stability-oriented fiscal policy. - Directors agreed the central bank should use a range of indicators, including the refinancing rate, bank liquidity, money, and the exchange rate, to gauge the appropriate stance of monetary policy. - They noted the importance of enhancing the independence of the central bank to support adoption of inflation-targeting over the medium term. - Directors noted reported financial sector indicators are strong but that concentration of credit in state enterprises is a vulnerability; they welcomed plans to upgrade the central bank’s supervisory capacity and intervention tools. - Directors commended liberalization of the foreign exchange market, including elimination of exchange restrictions, and welcomed the authorities’ intention to allow the exchange rate to adjust in line with fundamentals. - Directors welcomed significant structural reforms underway and emphasized priorities: restructuring state enterprises; further trade and price liberalization, especially by raising energy prices to cost-recovery levels; and promoting competition. - They welcomed recent governance reforms and encouraged continued efforts to fight corruption and enhance the rule of law. - Directors commended steps to improve availability and quality of economic statistics and welcomed Uzbekistan’s participation in the IMF’s enhanced General Data Dissemination System (e-GDDS); they looked forward to further improvements towards subscribing to the Special Data Dissemination Standard (SDDS). ### Selected Economic Indicators (2015-19) - Real GDP growth (percent change): 2015: 7.9; 2016: 7.8; 2017 Est: 5.3; 2018 Proj: 5.0; 2019 Proj: 5.0 - GDP per capita (in U.S. dollars): 2015: 2,124; 2016: 2,094; 2017 Est: 1,491; 2018 Proj: 1,239; 2019 Proj: 1,449 - Population (in millions): 2015: 31.3; 2016: 31.8; 2017 Est: 32.1; 2018 Proj: 32.5; 2019 Proj: 32.9 - Consumer price inflation (end of period): 2015: 8.4; 2016: 7.9; 2017 Est: 18.9; 2018 Proj: 16.9; 2019 Proj: 10.1 - GDP deflator: 2015: 9.2; 2016: 7.4; 2017 Est: 19.0; 2018 Proj: 20.3; 2019 Proj: 13.8 - Current account balance (percent of GDP): 2015: 0.7; 2016: 0.7; 2017 Est: 3.7; 2018 Proj: 0.2; 2019 Proj: -1.0 - External debt (percent of GDP): 2015: 18.5; 2016: 20.3; 2017 Est: 41.3; 2018 Proj: 38.1; 2019 Proj: 35.2 - Exchange rate (in sums per U.S. dollar; end of period): 2015: 2,810; 2016: 3,231; 2017 Est: 8,120 - Real effective exchange rate (average, - = depreciation): 2015: -2.4; 2016: -7.0; 2017 Est: -31.8 - Consolidated fiscal balance (percent of GDP): 2015: -1.2; 2016: -0.8; 2017 Est: -0.1; 2018 Proj: -1.3; 2019 Proj: -1.4 - Fund for Reconstruction & Development (FRD) balance (percent of GDP): 2015: -0.1; 2016: 0.2; 2017 Est: -3.2; 2018 Proj: 0.0; 2019 Proj: 0.0 - Augmented fiscal balance (incl. FRD) (percent of GDP): 2015: -1.3; 2016: -0.6; 2017 Est: -3.3; 2018 Proj: -1.3; 2019 Proj: -1.4 - Augmented revenues & grants (incl. FRD) (percent of GDP): 2015: 34.3; 2016: 32.1; 2017 Est: 31.6; 2018 Proj: 31.7; 2019 Proj: 31.6 - Expenditures & net lending (incl. FRD) (percent of GDP): 2015: 35.6; 2016: 32.7; 2017 Est: 34.9; 2018 Proj: 33.0; 2019 Proj: 32.9 - Public debt (percent of GDP): 2015: 9.3; 2016: 10.5; 2017 Est: 24.5; 2018 Proj: 20.1; 2019 Proj: 21.0 - Reserve money (percent change): 2015: 20.0; 2016: 22.2; 2017 Est: 84.8; 2018 Proj: 15.4; 2019 Proj: 14.5 - Broad money (percent change): 2015: 24.2; 2016: 23.5; 2017 Est: 40.3; 2018 Proj: 19.0; 2019 Proj: 17.9 - Credit to the economy (percent change): 2015: 23.3; 2016: 28.4; 2017 Est: 103.0; 2018 Proj: 24.5; 2019 Proj: 15.2 ### Outlook, Risks, and Regional Spillovers - Growth: GDP projected to expand by about 5 percent in 2018-19; domestic job creation will continue to lag. - Inflation: At about 20 percent in early-2018; expected to decline gradually with tighter fiscal and monetary policies during 2018-19. - External position: Strong in 2017 but projected to shift from surpluses to deficits following the regime change in policies. - Main risks: medium-term risks including backsliding on reforms; weaknesses in banks constraining credit growth; sharp decline in revenues presently collected from state enterprises. - Regional spillovers: Noted, with the expectation that reforms and external adjustments could have regional implications. ### Fiscal Policy - 2017 augmented fiscal deficit: 3¼ percent of GDP (noted as 3.3 percent in table). - Policy in 2018: Reducing on-lending operations should curb the deficit to 1¼ percent of GDP in 2018 (table shows -1.3 percent). - Public debt: Described as low and sustainable. - Transparency: Government plans to bring all its operations on-budget in 2019. - Tax reform: Needed to stimulate job creation; should be revenue-neutral and gradual to preserve stability-oriented fiscal policy. ### Monetary and Exchange Rate Policy - Monetary stance: Tighter monetary stance needed to lower inflation, including raising the refinancing rate and reducing the pace of accumulating official reserves. - Transition: Envisaged medium-term shift to inflation targeting needs to be underpinned by increasing the central bank’s de facto independence. - Interim guidance: Central bank should base assessments on multiple indicators, including interest and exchange rates. - Exchange rate policy: Liberalization in September 2017 led to about 50 percent depreciation of the official exchange rate; authorities intend to allow exchange rate to adjust in line with fundamentals. ### Financial Stability - Reported financial soundness indicators: Described as strong. - Vulnerabilities: Concentration of loans in state enterprises could lead to rapid deterioration in asset quality. - Medium-term concerns: As growth becomes powered by private firms dependent on bank financing, funding and capital gaps could emerge in banks. - Supervisory priorities: Upgrade central bank supervisory capacity and intervention tools; promote a banking system that is inclusive and supports growth. ### Structural Issues and Policy Priorities - Immediate priorities: Restructuring state enterprises early in the transition. - Liberalization: Continue price and trade liberalization while strengthening domestic competition. - Energy pricing: Raise energy prices to cost-recovery levels. - Governance: Continue reforms to fight corruption and enhance the rule of law. - Diversification: Promote economic diversification, especially into sectors with higher human capital content to support demographic transition. ### Statistics and Data - Recent improvements: Significant steps taken to improve availability and quality of economic statistics. - Participation: Uzbekistan participating in the IMF’s enhanced General Data Dissemination System (e-GDDS). - Future aim: Further improvements toward subscribing to the Special Data Dissemination Standard (SDDS). *IMF Staff Report for the 2018 Article IV Consultation (Republic of Uzbekistan), April 23, 2018.* ### 9. Staff projects inflation to remain persistent, declining only gradually through 2018-19. ### 9. Staff projects inflation to remain persistent, declining only gradually through 2018-19. ### Inflation outlook and baseline scenario - Baseline includes a significant tightening of the stance of monetary and credit policies. - Staff view: delayed effects of past expansionary policies, continued pass-through from FX depreciation, and the need to keep adjusting relative prices—especially for energy—imply inflation will be more persistent than past behavior suggests. - Delayed adjustment of non-tradable prices following the recent upsurge in tradable prices could further add to inflation persistence. - Authorities’ view: Central Bank of Uzbekistan (CBU) projected consumer price inflation will decline by end-2018 to the range of 12-14 percent and decline further into single digits by end-2019. ### External assessment and external position - Preliminary 2017 current account surplus: 3¾ percent of GDP. - IMF EBA implication: a country like Uzbekistan should have a current account deficit of 2 (±1) percent of GDP, implying a gap of 6 (±1) percent of GDP. - Using standard elasticities, this would correspond to a real exchange rate undervaluation of 25-30 percent. - Caveats: - The preliminary estimate of the 2017 current account surplus may be biased upward. - The EBA approach does not account for the major policy regime shift of September 2017. - Staff projection: given the regime shift and its likely positive impact on investment and imports, the external balance will decline significantly in 2018 and beyond, eliminating the external gap. - FX reserves: accumulated FX reserves are about 20 months of imports and are high with significant opportunity costs. - No need to accumulate additional FX reserves. - Half of FX reserves represent FX deposits of the Fund for Reconstruction and Development (FRD). - Some FRD assets may need to be devoted to cleaning up balance sheets of state enterprises. - Capital flow policy: authorities plan to proceed cautiously on lifting present restrictions because reforms may create uncertainties that could lead to FX market volatility. - Article VIII obligations: past exchange restrictions and an MCP were eliminated following exchange rate unification in September 2017 and liberalizing FX regulations; market participants report being able to make payments and transfers for current transactions without impediment. Staff will continue to monitor implementation of the new liberalized FX regime for consistency with Article VIII obligations. - Authorities’ view: Uzbekistan would normally be expected to run external deficits; they doubted the EBA’s current account norm fully captures fundamentals of a country dependent on exhaustible commodity exports. They acknowledged FX reserves appear high by standard metrics but noted such metrics generally assume reserves are only used to insure against temporary shocks. ### Risks to the outlook - Main external risk: adverse shocks to exports. - Vulnerability to a triple combination of shocks lowering exports, commodity prices, and remittances. - Policy response if such shocks occur: room to use fiscal stimulus, allow exchange rate to move to maintain competitiveness and facilitate expenditure switching. - Medium-term: transition reforms should help diversify exports and absorb labor that would otherwise migrate out. - Domestic risks related to transition reforms: - (i) Reform fatigue or reversals if setbacks occur or benefits take longer than expected. - (ii) Faster-than-expected deterioration in banks’ asset quality or risky behavior by banks to compensate for losses. - (iii) Opening of medium-term funding and capital gaps in the banking system. - (iv) Sharp decline in revenue collections from state enterprises as their privileges are withdrawn. - These risks can be mitigated or managed through appropriate policies. - Authorities’ view on risks: - Agreed with external risk characterization. - Considered domestic risks unavoidable during major reforms; committed to the President’s development strategy. - Confident in ability to ensure banking stability and noted sufficient public resources to support banks if needed. - Ministry of Finance emphasized need for reforms of taxes and their administration to forestall the risk of declining tax collections from state enterprises. ### Regional spillovers - A reformist Uzbekistan could catalyze change and raise incomes throughout the region. - As the most populous country in Central Asia and an historical economic hub, successful reforms could have a strong demonstration effect. - Potential benefits: boost trade, build regional supply chains, promote regional integration, reconnect energy and transportation networks, and help resolve regional water rights disputes. ### Policy discussions — Fiscal policy, transparency, and tax reform - Fiscal position and on-lending: - Government has no outstanding domestic debt; external debt is mostly official borrowing, which amounted to 24½ percent of GDP at end-2017 following the recent exchange rate depreciation. - Government undertook significant on-lending operations to channel credit to state enterprises. - Augmented fiscal deficit developments: - Consolidated fiscal position was close to balance in 2017 as foreseen in the 2017 budget. - Higher-than-projected revenues of about 1½ percent of GDP (mainly due to revaluation effect of FX liberalization) compensated for an increase in net lending operations of 1½ percent of GDP, which were not included in the 2017 budget. - FRD registered an unexpectedly large deficit of 3¼ percent of GDP due to on-lending and bank recapitalization spending exceeding projections. - Augmented fiscal deficit expanded from a deficit of ½ percent of GDP to 3¼ percent of GDP in 2017. - 2018 fiscal plans and staff support: - Authorities plan to tighten fiscal policy in 2018 to reduce inflation; tightening mainly reflects a cut in lending operations that fuel credit growth, with the FRD balancing its budget from 2018 onwards. - Government envisages saving about half of the expected additional revenues in 2018 from higher-than-projected commodity prices and improved tax administration. - Social safety net spending projected to increase by about 1 percent of GDP, with targeted support reaching some 1.7 million beneficiaries (up from about 1.4 million beneficiaries in 2017). - Budget envisages about ¼ percent of GDP for active labor market programs. - Government will adjust social safety net spending and public wages for inflation during the first half of 2018. - Staff projects these measures, if implemented as planned, will reduce the augmented fiscal deficit to 1¼ percent of GDP. - Over the medium term, continued restraint in on-lending operations is expected; a medium-term fiscal deficit of 2 percent of GDP would stabilize the public debt to GDP ratio at about 25 percent. - Fiscal transparency: - Improving fiscal transparency is a priority. - Authorities have made progress consolidating on- and off-budget transactions in reported fiscal data. - Authorities committed to bring all fiscal operations on-budget starting in 2019. - Tax reform: - Comprehensive tax reform is needed to foster job creation, should be revenue neutral, and introduced gradually. - Current tax system: highly complex, full of exemptions, and applies different regimes—standard and simplified—based on number of employees, creating segmentation that discourages firm growth. - Consequences: firms exceed employee threshold face excessive tax burden; small firms have incentives to stay small, downsize, or split to avoid migration to standard regime; job creation concentrated in small businesses. - Tax reform goals: - Encourage firm expansion and job creation. - Proceed gradually to allow tax administration capacity improvements and taxpayers to meet higher accounting standards. - Be revenue neutral to preserve a stability-oriented fiscal policy. - Tax reform also needed to forestall risk of sharp decline in future revenue collections from state enterprises as privileges erode. - Reforms should widen the tax net and preserve revenue as the economy shifts toward market-based principles. - Need to reform tax policies and tax administration and consider restructuring state enterprises, with or without privatization, to maintain the tax base. - Authorities’ view: tax reform is a top priority; agreed reforms should proceed gradually, be realistic in impact projections, and be revenue neutral. ### Policy discussions — Monetary policy, inflation targeting, and credit market segmentation - Monetary developments in 2017: - CBU loosened monetary policy in early 2017 and tightened in the second half. - As of August 2017, reserve money and credit to the economy had grown by more than 50 percent compared to a year earlier. - Monetary policy was tightened prior to FX liberalization in September, including increasing the refinancing rate from 9 to 14 percent. - After FX liberalization, the CBU maintained stable nominal exchange and refinancing rates. - Staff recommendations to contain inflation over next two years: - Adopt a tighter monetary stance, including increasing the nominal refinancing rate to bring it back to a positive real rate and halting FX accumulation. - Introduce a regular, pre-announced program of FX sales from the CBU’s gold purchases. - Enhance CBU capacity for open market operations; planned government issuance of treasury bills could help. - Transition to inflation targeting: - Staff supported authorities’ plan to move to inflation targeting over the medium term. - Interim guidance: CBU should use a range of indicators—refinancing rate, bank liquidity, money, and the exchange rate—to gauge monetary stance and its inflationary impact. - Preconditions and supporting actions for successful inflation targeting: - Allow initial price liberalization shocks to pass through. - Strengthen central bank analytical capacity and communication. - Ensure a strong transmission mechanism for monetary policy. - Credit market segmentation: - Tightening fiscal stance and reducing on-lending operations should help reduce credit segmentation driven by public-sector funding channels. *Republic of Uzbekistan — IMF staff report, chapter titled "9. Staff projects inflation to remain persistent, declining only gradually through 2018-19."* ### 29. Steps should be taken to reduce the segmentation of Uzbekistan’s credit market. ### 29. Steps should be taken to reduce the segmentation of Uzbekistan’s credit market. ### Credit market structure and challenges - Credits are directed via banks to support state enterprises and government programs at concessional rates. - The FX segment of the credit market is dominated by state enterprises, which receive FX credit either directly from state banks or through on-lending operations by government entities, primarily the FRD. - The private sector is largely confined to domestic currency borrowing. - Loan dollarization is high; many state enterprises with FX loans have revenues primarily in domestic currency. - State banks face significant loan concentration risk, with state enterprises accounting for a high proportion of total loans—about 60 percent. - Reported financial soundness indicators: - The banking system is highly concentrated (the three largest state banks account for more than half of assets). - Regulatory capital to risk-weighted assets—close to 19 percent as of end-2017. - Non-performing loan ratio—1.2 percent. - Return on equity—about 17 percent. ### Policy recommendations to reduce segmentation and improve monetary transmission - Put stricter limits on the FRD’s on-lending activities as a first step. - Shift FRD on-lending activities toward domestic currency as a second step to: - Make the cost of credit more transparent. - Reduce loan dollarization. - Strengthen the transmission channel of monetary policy. - Curb implicit subsidies to the state sector by limiting state enterprises’ preferential access to credit. - Develop other monetary instruments, such as open market operations, and continue tightening monetary policy to ensure inflation declines to single digits over the next two years. - Over the medium term, shift to inflation targeting. ### Measures to safeguard financial stability and promote a growth-supporting banking system - Enhance reserve requirements to include reserve averaging to allow banks to more efficiently manage liquidity and promote interbank market development. - Enhance the framework for emergency liquidity assistance, including by expanding the range of acceptable collateral. - Restarting issuance of T-bills could aid money market development. - Encourage banks to raise additional funding and capital through market-based solutions, including attracting foreign funding and more deposits from households. - Raise bank profitability by better managing credit operations and reducing administrative costs, for example via mergers that consolidate costly branch networks. - Transform state banks’ business models to operate on a more commercially oriented basis and lower cost, including through cutting staff and mergers. - Upgrade supervisory capacity and intervention tools, including incorporating stress testing more fully in the supervisory process. - Increase public trust in the banking system and improve the country’s investment climate to attract foreign banking expertise. ### Authorities’ views and recent steps - The CBU agreed the interim monetary framework will need to rely on multiple indicators; relying solely on monetary targets was considered unpractical given an unobservable, but likely large, amount of FX cash is being used as money. - The authorities noted the refinancing rate had been hiked significantly in 2017 and that its current level may be appropriate if inflation declined rapidly during 2018. - The CBU adopted a neutrality principle whereby its purchases of gold would be offset by FX sales, effectively tightening monetary policy. - The CBU is examining ways to improve monetary policy operations, including via open market operations and changes to reserve requirements. - Recent reforms implemented by the authorities: - Banks are no longer required to keep records unrelated to banking on behalf of the authorities, reducing administrative costs. - A presidential decree instructed officials to refrain from pressuring banks to provide credit at preferential terms to selected borrowers. - The CBU has divested from two banks and withdrawn its officials from supervisory boards of banks to address potential supervisory conflicts. ### Macroeconomic context and related indicators - Growth is expected to remain around 5 percent in 2018-19. - Domestic employment growth is unlikely to exceed one percent in the short run. - Inflation is projected to have peaked at about 20 percent and should gradually decline over the next two years under tighter fiscal, credit, and monetary policies. - Uzbekistan starts from a strong external position, with FX reserves at 20 months of imports and a sizable current account surplus in 2017. - Fiscal indicators: - In 2017, the fiscal deficit rose to 3¼ percent of GDP, driven by lending operations—mainly through the FRD—that expanded credit to state enterprises. - The government plans to reduce the deficit to 1¼ percent in 2018 by cutting back on-lending activities and to bring all fiscal operations on-budget beginning in 2019. *IMF staff report: Republic of Uzbekistan (selected section).* ### 54. Uzbekistan has initiated significant structural reforms; but additional steps are needed. ### 54. Uzbekistan has initiated significant structural reforms; but additional steps are needed. ### Reform progress and immediate priorities - In 2017, Uzbekistan liberalized many prices, unified exchange rates, and eliminated measures inconsistent with Uzbekistan’s Article VIII obligations. - Next steps recommended: - Additional price liberalization—especially by bringing energy prices closer to cost-recovery levels. - Promoting competition. - Further liberalizing trade. - The next Article IV consultation is recommended to be held on the standard 12-month cycle. ### Data and statistical transparency - Authorities have made strong efforts to improve statistics after non-transparent official statistics previously hampered surveillance and policy making. - Uzbekistan decided to join the Fund’s enhanced General Data Dissemination Standard; a reform road map is needed to cement and extend progress achieved so far. ### Key macroeconomic indicators (selected) - Nominal GDP (in trillions of sum): 2015: 172; 2016: 199; 2017: 249; 2018: 315; 2019: 376. - Population (in millions): 2015: 31.3; 2016: 31.8; 2017: 32.1; 2018: 32.5; 2019: 32.9. - GDP per capita (in US dollars): 2015: 2,124; 2016: 2,094; 2017: 1,491; 2018: 1,239; 2019: 1,449. - Real GDP growth (GDP at constant prices, annual percent change): 2015: 7.9; 2016: 7.8; 2017: 5.3; 2018: 5.0; 2019: 5.0. - CPI (end-of-period): 2015: 8.4 percent; 2016: 7.9 percent; 2017: 18.9 percent; 2018: 16.9 percent; 2019: 10.1 percent. - Gross official reserves (in billions of US dollars): 2015: 24.3; 2016: 26.5; 2017: 28.1; 2018: 28.9; 2019: 28.9. - Current account balance (in percent of GDP): 2015: 0.7; 2016: 0.7; 2017: 3.7; 2018: 0.2; 2019: -1.0. ### External sector and trade - Exports of goods and services (in millions of U.S. dollars): 2015: 9,997; 2016: 9,491; 2017: 10,388; 2018: 11,701; 2019: 12,080. - Major export components (2019): Cotton fiber: 110; Energy: 2,305; Gold: 3,647; Food Products: 1,140; Other exports of goods: 4,879. - Imports of goods and services (in millions of U.S. dollars): 2015: 10,794; 2016: 10,501; 2017: 10,832; 2018: 13,508; 2019: 14,404. - Major import components (2019): Food Products: 1,378; Energy products: 1,029; Machinery and intermediate goods: 5,956; Other imports of goods: 6,041. - Merchandise trade balance (in millions of U.S. dollars): 2015: -797; 2016: -1,011; 2017: -444; 2018: -1,807; 2019: -2,324. ### Fiscal position (selected) - Consolidated revenue and grants (percent of GDP): 2015: 33.0; 2016: 30.5; 2017: 30.1; 2018: 30.1; 2019: 30.0. - Consolidated expenditure and net lending (percent of GDP): 2015: 34.1; 2016: 31.3; 2017: 30.1; 2018: 31.3; 2019: 31.4. - Consolidated primary budget balance (percent of GDP): 2015: -1.2; 2016: -0.8; 2017: -0.1; 2018: -1.3; 2019: -1.4. - Augmented fiscal balance (percent of GDP): 2015: -1.3; 2016: -0.6; 2017: -3.3; 2018: -1.3; 2019: -1.4. - Public debt (percent of GDP): 2015: 9.3; 2016: 10.5; 2017: 24.5; 2018: 20.1; 2019: 21.0. ### Monetary and financial sector (selected) - Reserve money growth (annual percent change): 2015: 20.0; 2016: 22.2; 2017: 84.8; 2018: 15.4; 2019: 14.5. - Broad money growth (annual percent change): 2015: 24.2; 2016: 23.5; 2017: 40.3; 2018: 19.0; 2019: 17.9. - Credit to the economy (annual percent change): 2015: 23.3; 2016: 28.4; 2017: 103.0; 2018: 24.5; 2019: 15.2. - Financial soundness indicators (2017 Q4): - Regulatory Capital to Risk-Weighted Assets: 18.8 percent. - Non-Performing Loans to Total Gross Loans: 1.2 percent. - Return on Assets: 1.9 percent. - Liquid Assets to Total Assets: 23.6 percent. ### Medium-term outlook (selected projections) - Nominal GDP (in trillions of sum): 2020: 437; 2021: 507; 2022: 584; 2023: 670. - Real GDP at constant prices (annual percent change): 2020: 5.5; 2021: 6.0; 2022: 6.0; 2023: 6.0. - Consumer price index (average, percent): 2020: 9.1; 2021: 7.9; 2022: 7.5; 2023: 7.3. - Current account balance (percent of GDP): 2020: -2.7; 2021: -2.7; 2022: -2.7; 2023: -2.6. - Gross official reserves (in billions of US dollars): 2020: 28.9; 2021: 28.4; 2022: 28.1; 2023: 28.1. - Public debt (percent of GDP): 2020: 21.9; 2021: 22.8; 2022: 23.8; 2023: 24.7. ### Sustainable development and social indicators (selected) - Individuals using the Internet (% of population): 2000: 0; 2005: 3; 2010: 16; 2015: 43; Latest: 47. - Access to electricity (% of population): 2000: 100; 2005: 100; 2010: 100. - Prevalence of undernourishment (% of population): 2000: 16; 2005: 15; 2010: 9; 2015: 6. *Source: cr18117 - 54. Uzbekistan has initiated significant structural reforms; but additional steps are needed.* ### Box 2. Seven Lessons from Earlier Transitions ### Box 2. Seven Lessons from Earlier Transitions ### Context - Uzbekistan is a relative late-comer to the transition from a state-led to a more market-oriented economic system. - This box summarizes a few reform lessons relevant for Uzbekistan: ### Seven Lessons - Lesson #1: Macroeconomic forecasts, especially for growth, were often too optimistic in the early phase of transition reforms. However, in the case of Uzbekistan this risk is mitigated by the fact that the state sector’s share of employment and output has already been reduced by earlier reforms. - Lesson #2: Reforms liberalizing FX markets, prices, and trade were introduced first and generally welcomed by the public. After these reforms, other reforms—such as restructuring state enterprises, strengthening competition, and improving governance—faced more opposition, especially if the oligarchs and insiders that had benefited from early reforms stood to gain from stopping or slowing reforms. - Lesson #3: Economists and reformers overestimated their ability to sequence reforms, fine tune tactics, and control outcomes. The lesson from this seems to be that reformers should not over-strategize reforms, but also not delay reforms because the perfect moment has not arrived yet. - Lesson #4: Transition countries were often effective at improving legislation, rules, and institutions on paper, but implementation was haphazard or policy makers later even subverted earlier reforms. For example, some countries adopted modern, rules-based tax system, but then governments made deals with powerful, individual taxpayers. - Lesson #5: External advice was most effective when the political leadership was committed to a reformist vision. External advice can be helpful in advancing the reform agenda, but it cannot substitute for consistent, patient leadership and clear communication. - Lesson #6: The quality of human capital driving reforms was important for transition success, both at the firm and policy making levels. Generally, designing and implementing transition reforms worked better when new people open to transition ideas were in charge. - Lesson #7: Macroeconomic disruptions do happen during transitions, but they tended to be surprisingly short-lived, and, in some countries, even helped catalyze deeper reforms. ### Source notes - This summary reflects inter alia lessons drawn in: World Bank (2002) Transition: The First Ten Years; Aslund (2007) How Capitalism was Built; Shleifer (2012) Seven Things I Learned about Transition from Communism; and IMF (2014) 25 Years of Transition: Post-Communist Europe and the IMF. *Source: cr18117 - Box 2. Seven Lessons from Earlier Transitions* ### Annex II. ### Annex II. ### Fund recommendations, authorities’ views, developments since 2015, and assessment — Major policy areas - Fiscal Policy - Fund recommendation: Near-term fiscal policy should be adjusted, as required, to manage external shocks. - Authorities’ views in 2015: Considering a moderate fiscal loosening in line with the approved budget. - Developments since 2015: - The augmented fiscal balance was loosened from +2¼ percent of GDP in 2014 to –½ percent of GDP in 2016 and –3¼ percent in 2017, primarily via net lending. - Domestic currency prices of electricity, natural gas, and petroleum were raised by 17-43 percent in 2017-18. - Assessment: - Given a decline in external demand from 2014 to 2016, some fiscal loosening was warranted, but the increase in net lending, particularly in 2017, was excessive. - A credible medium-term fiscal framework is needed; all government expenditures should be brought on budget and steps taken to strengthen the medium-term fiscal framework. - Steps are needed to reduce energy subsidies while building adequate safety nets. Further raising prices to cost recovery levels would strengthen the fiscal position of state energy firms and promote more efficient resource allocation. - Public investment management should be strengthened; reforms are needed to improve the quality & pace of development spending. - Monetary Policy - Fund recommendation: Monetary policy should be tightened, to consolidate the reduction in inflation and to anchor expectations. - Authorities’ views in 2015: Monetary policy stance did not fuel inflation, but supported growth. - Developments since 2015: - Reserve money grew around 20 percent annually in 2015-17. - Inflation fell in 2015-16, before rising in 2017. - The monetary framework shifted in 2017 to a new approach; prior reliance on monetary aggregates changed. - Assessment: - The advice to tighten monetary policy remains relevant; tighter monetary policy will be needed to reduce inflation over the next two years. - The CBU should now use a range of indicators to gauge its policy stance and manage excess liquidity via sterilization and positive real interest rates. - Foreign Exchange & Exchange Rate Policies - Fund recommendation: Accelerating nominal exchange rate depreciation would help reverse excessive real exchange rate appreciation; liberalize the foreign exchange market by easing surrender requirements and discontinuing moral suasion. - Authorities’ views in 2015: Agreed accelerated depreciation, taking account of partners’ exchange rates, would facilitate external adjustment; argued the unofficial parallel FX market remained small and illegal. - Developments since 2015: - With unification in September 2017, the nominal exchange rate depreciated around 50 percent. - The authorities liberalized access to foreign exchange and unified the official and parallel exchange rates in September 2017, abolishing the FX surrender requirement. - Since September 2017, the sum has stabilized against the U.S. dollar within a 2 percent band; IMF classifies the de facto exchange rate as a stabilized arrangement, effective September 6, 2017. - Assessment: - Actions were in line with Fund advice. Authorities should now allow the exchange rate to adjust in line with fundamentals. - Financial Sector Policies - Fund recommendation: Market-based credit intermediation should replace directed lending to support banks and promote financial deepening & inclusion. - Authorities’ views in 2015: Argued lending for public investment posed minor risks to banks; would gradually relieve banks of non-core functions & directed lending. - Developments since 2015: - The credit market remains segmented with significant concessional lending operations to state enterprises by the government and FRD. - Assessment: - The advice remains relevant. - Structural Policies - Fund recommendation: Bolder action needed on reforms to labor & product markets, natural resource allocation, the power sector, and investment climate. - Authorities’ views in 2015: Broad agreement on need for structural reforms; advocated a state-led model with gradual reforms. - Developments since 2015: - Authorities took steps to improve the business environment; in 2017 they liberalized prices, including for energy. - Assessment: - Advice remains relevant. - Other Recommendations - Fund recommendation: The government should improve data quality & dissemination of macroeconomic statistics. - Developments since 2015: - A new CPI has been introduced and Uzbekistan will join the eGDDS in 2018. - Assessment: - Authorities took action in line with Fund advice. ### Fund relations and institutional data (as of March 31, 2018) - I.Membership Status - Date of membership: September 21, 1992 - Status: Article VIII - II.General Resources Account - Quota: 551.20 SDR Million; Percent Quota: 100.00 - IMF Holdings of Currency: 551.20 SDR Million; Percent Quota: 100.00 - Reserve Tranche Position: 0.01 SDR Million; Percent Quota: 0.00 - III.SDR Department - Net Cumulative Allocation: 262.79 SDR Million; Percent Quota: 100.00 - Holdings: 266.09 SDR Million; Percent Quota: 101.25 - IV.Outstanding Purchases and Loans: None - V.Latest Financial Arrangements - Type: Stand-By - Approval Date: December 18, 1995 - Expiration Date: March 17, 1997 - Amount Approved (SDR Million): 124.70 - Amount Drawn (SDR Million): 65.45 - VI.Projected Obligations to the Fund: None - VII.Implementation of HIPC Initiative: Not Applicable - VIII. Implementation of MDRI: Not Applicable - IX. Implementation of CCR: Not Applicable ### Exchange rate arrangements, FX market, and CBU practices - Uzbekistan accepted obligations of Article VIII Sections 2(a), 3, and 4 effective October 15, 2003; maintains an exchange system free of restrictions on payments and transfers for current international transactions. - Pre-2017 exchange restrictions and multiple currency practice that were subject to IMF jurisdiction have been eliminated: undue delays, direct rationing, and MCP related to blocked accounts ceased. - Authorities state the de jure exchange arrangement is floating; the CBU intervenes to smooth undue short-term volatility and buys/sells FX related to monetary gold operations. - Since September 2017, the sum stabilized against the U.S. dollar within a 2 percent band; IMF classifies the de facto arrangement as stabilized (effective September 6, 2017). Previously classified as crawl-like. ### Technical assistance (September 2015 to March 2018) - IMF technical assistance provided (department — type — date): - Fiscal Affairs — Budget and Treasury Reforms — February 2016 - Fiscal Affairs — Implementation of the Government Financial Management Information System — February 2016 - Monetary & Capital Markets — Supervisory Stress Testing — April 2016 - Statistics — Balance of Payments Statistics — December 2017 - Monetary & Capital Markets — Monetary and Foreign Exchange Operations — December 2017 - Monetary & Capital Markets — Monetary Policy Framework — February 2018 - Monetary & Capital Markets — Bank Stress Testing — February 2018 - Fiscal Affairs — Review of the Tax System — February 2018 - Statistics — Enhanced General Data Dissemination System — March 2018 ### Relations with selected international financial institutions (as of March/April 2018) - Asian Development Bank (ADB) - Uzbekistan a member since 1995. - As of December 2017, Uzbekistan received 67 loans totaling $6.8 billion—including two private sector loans totaling $225 million, $6 million in equity investment, $218 million in guarantees, and $82 million in technical assistance grants. - Cumulative allocation by sector: ~30 percent energy; 25 percent transportation; 20 percent finance; 10 percent water, urban infrastructure and services; 15 percent other sectors. - European Bank for Reconstruction and Development (EBRD) - Uzbekistan joined EBRD in 1992. - As of March 2018: Cumulative no. of projects: 60; Cumulative investment: € 853 million; Cumulative disbursement: € 591 million; Active projects: 11; Current portfolio: € 71 million. - World Bank (including IBRD/IDA/IFC/MIGA) - CPF for 2016-2020 with indicative financing envelope about US$3 billion. - As of April 2018: 16 IBRD/IDA investment projects under implementation, worth US$2.74 billion (IBRD: $1.17 billion; IDA: $1.53 billion). - As of April 2018, IFC committed portfolio in Uzbekistan: US$52.7 million in nine projects. - MIGA had issued a political risk insurance guarantee for US$119.5 million (terminated in FY2017); no new guarantees since then. ### Statistical issues (as of March 31, 2018) - Overall: Data have shortcomings that significantly hamper surveillance; most serious in national accounts, price statistics, external sector, and government finance statistics. - National Accounts: - Methodology for annual GDP estimates needs improvement; discrete quarterly GDP estimates are not compiled. - Primary source data collection relies on the old Soviet-type system; restructuring of data collection should start as soon as possible. - A mission in April 2018 planned to help identify priorities and develop a detailed plan for national accounts compilation. - Price Statistics: - An updated CPI methodology was introduced in January 2018. - Government Finance Statistics: - Detailed consolidated government budget revenue and expenditure compiled monthly and available after ~four weeks. - Extrabudgetary funds data available quarterly for four largest funds (pension, road, education, employment). - A persisting statistical discrepancy between above-the-line and below-the-line budget financing points to coverage and classification issues. - Authorities started reporting GFSM2001-compliant fiscal data in 2013 and publishing fiscal data in the GFS Yearbook in 2014. - Monetary and Financial Statistics: - CBU has started preliminary work on publication of MFS in the e-GDDS and introduction of a country page in International Financial Statistics; an MFS mission is planned in FY19. - Financial Soundness Indicators: - CBU reports 10 of the 12 core FSIs and 1 of the 13 encouraged FSIs for deposit takers quarterly with a lag of one month for posting on IMF’s FSI website. - External Sector Statistics: - Confidentiality regime lifted effective January 2018; BOP and international reserves compiled but not published. - No compilation system existed for IIP and external debt statistics at that time. - Key data gaps include incomplete direct investment coverage, shuttle trade estimates not based on surveys, income transactions recorded on a cash basis lacking detail and timeliness, and inadequate coverage/classification of external debt transactions. - e-GDDS participation: - Uzbekistan plans to participate in the Enhanced General Data Dissemination System (e-GDDS). Beginning in May 2018, a National Summary Data Page (NSDP) will be posted using SDMX. ### Table of common indicators required for surveillance (as of March 31, 2018) — Selected entries - Exchange Rates: Latest observation Mar 27, 2018; Date received Mar 27, 2018; Frequency: D; Reporting: W; Publication: W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest observation Feb 2018; Date received Mar 2018; Frequency: M; Reporting: M; Publication: M - Reserve/Base Money: Feb 2018; Mar 2018; M/M/M - Broad Money: Feb 2018; Mar 2018; M/M/M - Central Bank Balance Sheet: Feb 2018; Mar 2018; M/M/M - Consolidated Balance Sheet of the Banking System: Feb 2018; Mar 2018; M/M/M - Interest Rates: Feb 2018; Mar 2018; M/M - Consumer Price Index: Feb 2018; Mar 2018; M/M/M - Revenue, Expenditure, Balance, and Composition of Financing—General Government: 2017; Mar 2018; Q/Q/Q - Stocks of Central Government and Central Government Guaranteed Debt: 2017; Mar 2018; Q/Q/NA - External Current Account Balance: 2017 Q3; Mar 2018; Q/Q/NA - Exports and Imports of Goods and Services: Feb 2018; Mar 2018; M/M/M - GDP: 2017 Q4; Mar 2018; Q/Q/Q - Gross External Debt: NA - International Investment Position: NA ### Debt Sustainability Analysis (Joint Bank-Fund LIC-DSA) — Key findings (April 19, 2018) - Risk of external debt distress: Low - Augmented by significant risks stemming from domestic public and/or private debt? No - Background and stock positions: - In 2017, public and publicly guaranteed external debt measured about 25 percent of GDP; private sector debt measured about 17 percent of GDP. - Text Table 1. Uzbekistan: External Public and Private Debt, 2017 (Millions of U.S. dollars; Percent of GDP; Percent of External Debt) - Total External Debt: 15,563; 41.3; 100 - Public and Publicly Guaranteed Debt: 7,529; 24.5; 41 - Public Debt: 5,243; 11.7; 28 - Guaranteed Debt: 2,286; 5.1; 12 - Private Debt: 8,035; 16.8; 59 - Macroeconomic assumptions and comparisons with 2015 DSA (selected indicators) - Real GDP growth (percent) - Current DSA: 2016 7.8; 2017 5.3; 2018 5.0; 2019 5.0; 2020 5.5 - 2015 DSA: 2016 7.0; 2017 6.7; 2018 6.5; 2019 6.5; 2020 6.5 - Fiscal Deficit (percent of GDP) 1/ - Current DSA: 2016 -0.6; 2017 -3.3; 2018 -1.3; 2019 -1.4; 2020 -1.4 - 2015 DSA: 2016 -0.1; 2017 0.0; 2018 0.2; 2019 0.3; 2020 0.6 - Current Account (percent of GDP) - Current DSA: 2016 0.7; 2017 3.7; 2018 0.2; 2019 -1.0; 2020 -2.7 - 2015 DSA: 2016 0.0; 2017 0.2; 2018 0.3; 2019 0.4; 2020 0.8 - 1/ The fiscal deficit includes revenues and expenditures of the Fund for Reconstruction and Development. - External and public DSA projections and vulnerabilities - All public debt is foreign currency denominated external debt as of 2016. - PPG debt projections: - PPG debt-to-GDP projected to rise from 20 percent in 2018 to 25 percent in 2023 and to 30-32 percent for 2028-38. - PV of PPG debt-to-GDP rises from 16 percent in 2018 to 24 percent in 2038 (below 40 percent threshold). - PV of PPG debt-to-exports rises from 40 percent in 2018 to 67 percent in 2028 and 72 percent in 2038 (below 150 percent threshold). - PV of PPG debt-to-revenue rises to around 70 percent in 2028 and 76 percent in 2038 (below 250 percent threshold). - PPG debt service-to-exports and to-revenue ratios stay at or below 6 percent (threshold 20 percent). - Overall debt service-to-exports falls from 16 percent in 2018 to 12 percent in 2038. - Stress test and shock analysis: - A one standard deviation shock to export growth or inflation, a nominal depreciation of 30 percent, or a combination of one-half standard deviation shocks each raise the PV of debt-to-GDP and PV of debt-to-revenue ratios by 30-45 percent in 2028 relative to baseline but remain below thresholds. - A one standard deviation shock to export growth would raise the PV of debt-to-exports ratio from 67 percent in 2018 to almost 120 percent in 2028 (still below 150 percent threshold). - Shocks have very limited impact on flow indicators; debt service-to-exports and to-revenue ratios remain at or below 5 percent in 2028 under alternative scenarios. - Total external debt projection: - Under baseline, total external debt declines from 38 percent of GDP in 2018 to 34 percent of GDP in 2023, before rising to around 40 percent in 2038. - Private external debt projected to decline from 18 percent of GDP in 2018 to 9 percent of GDP in 2023, then remain around 9 percent thereafter. *Source: cr18117 - Annex II.* ### CONCLUSION ### CONCLUSION ### Debt sustainability assessment — main findings - Uzbekistan’s risk of debt distress continues to be low. - All solvency and liquidity indicators are projected to remain well below their respective thresholds under both the baseline and stress scenarios. - All scenarios have only a modest impact on most debt ratios. - A nominal depreciation shock would raise the PV of PPG debt-to-exports ratio significantly (but still below the indicative threshold). ### Risks, assumptions, and scenarios - The analysis assumes the increase in external borrowing is modest: after an initial boost as reforms get underway, external PPG borrowing remains around 3 percent of GDP. - Debt sustainability ratios could worsen if external borrowing is significantly higher than projected. - Additional external borrowing could result in higher growth, exports, and revenues, but could impose an additional burden if not used wisely. - The sensitivity and bound tests considered include shocks such as: real GDP growth at historical average minus one standard deviation; export value growth at historical average minus one standard deviation; US dollar GDP deflator shock; net non-debt creating flows shock; combination shocks; and a one-time 30 percent nominal depreciation relative to the baseline. ### Key statistics and projections (selected) - External debt (nominal): 18.5; 20.3; 41.3; 38.1; 35.2; 34.3; 33.7; 33.6; 33.7; 38.4; 40.4 (series as presented). - of which: public and publicly guaranteed (PPG) external debt: 9.3; 10.5; 24.5; 20.1; 21.0; 21.9; 22.8; 23.8; 24.7; 29.5; 31.5 (series as presented). - PV of external debt (percent of GDP): ......; 36.0; 33.6; 30.2; 29.0; 28.1; 27.7; 27.6; 31.3; 32.9 (series as presented). - PV of PPG external debt (in percent of exports): ......; 66.3; 40.2; 47.0; 48.4; 50.9; 53.3; 55.6; 67.0; 71.8 (series as presented). - PV of PPG external debt (in percent of government revenues): ......; 60.8; 49.2; 51.1; 51.9; 54.1; 56.5; 58.7; 70.7; 75.8 (series as presented). - Debt service-to-exports ratio (in percent): 4.7; 5.2; 13.6; 15.6; 13.9; 13.2; 12.2; 11.5; 10.9; 9.8; 12.0 (series as presented). - PPG debt service-to-exports ratio (in percent): 3.0; 3.3; 3.4; 3.6; 3.6; 3.5; 3.5; 3.5; 3.5; 3.1; 5.3 (series as presented). - PPG debt service-to-revenue ratio (in percent): 1.7; 2.0; 3.1; 4.4; 3.9; 3.8; 3.7; 3.7; 3.7; 3.3; 5.6 (series as presented). - Total gross financing need (Billions of U.S. dollars): 0.6; 0.4; 0.2; 3.2; 3.8; 3.9; 3.9; 3.8; 3.8; 4.8; 10.2 (series as presented). - Key macro assumptions (selected): Real GDP growth (in percent) 7.9; 7.8; 5.3; 7.9; 1.0; 5.0; 5.0; 5.5; 6.0; 6.0; 6.0 (series as presented). ### Policy implications and recommendations (from analysis) - Maintain prudent borrowing practices and ensure that any additional external PPG borrowing is used wisely to avoid creating undue future debt burdens. - Monitor exchange rate and valuation risks, given that a nominal depreciation shock materially increases the PV of PPG debt-to-exports ratio. - Preserve macroeconomic stability while implementing reforms that support higher growth, export diversification, and revenue mobilization, to help absorb higher borrowing if needed. *Source: CONCLUSION (cr18117).* ### 2017. The authorities unified the official and parallel market FX rates, depreciating the official ### 2017. The authorities unified the official and parallel market FX rates, depreciating the official exchange rate by 50 percent. ### FX Market Reform and Key Outcomes - In 2017 the authorities unified the official and parallel market FX rates, depreciating the official exchange rate by 50 percent. - As a result: - Individuals and entities can freely buy and sell foreign currency. - Requirements for compulsory sale of foreign currency by exporters have been removed. - The exchange rate is now determined by the market. ### Monetary Policy - The Central Bank of Uzbekistan (CBU) actions and strategy: - Took considerable steps to improve monetary and exchange rate policies. - Tightened monetary policy before the start of the FX market reforms. - Effectively managed anti-inflationary policies and ensured stable functioning of the banking system during liberalization. - Starting in 2018, implementing a new strategy based on the principle of foreign reserves neutrality to sterilize additional liquidity from the CBU’s direct purchase of gold by supplying the appropriate amount of FX into the market. - Continued active use of interest rate instruments. - Observed results from these policies: - Deceleration of money supply growth. - Stabilization of interest rates in the interbank money market. - Increased propensity of households to save in national currency. - Stabilized exchange rate. - Institutional direction and support: - CBU declared intention to switch to inflation targeting in the medium term. - Fund technical assistance improved CBU capacity in monetary policy operations, interbank market development, designing the interim monetary policy regime, compiling balance of payments data, and stress testing. ### Fiscal Policy - Authorities’ fiscal stance and priorities: - Continued efforts to maintain a prudent fiscal policy despite reform challenges. - Tax reform is a top priority. - Will conduct a tighter fiscal policy by reducing on-lending operations. - Will focus budget spending on: - Mitigating the impact of the exchange rate adjustment on the vulnerable. - Supporting critical public enterprises to gradually converge toward greater sustainability and cost recovery. - Sustaining the public investment program. - Fiscal data and reform actions: - Significant efforts to consolidate on- and off-budget transactions in fiscal data. - Launched tax reforms to improve the tax system and tax administration, envisaging: - Reducing the difference in tax burden between small and large business entities. - Rationalizing of the VAT rate. - Unifying and cancelling a number of taxes and mandatory payments. - Improving tax administration procedures. - Begun efforts to transform the customs and pension systems. ### Structural Reforms - Objective and timeline: - Authorities committed to achieving upper-middle-income status by 2030 by increasing competitiveness, improving the business environment, and developing infrastructure to support rapid job creation. - Reforms initiated beginning in 2017: - FX market reforms. - Liberalization of the visa regime. - Greater independence for the CBU. - Assessment of banking sector resilience. - Implementation of financial recovery plans in key SOEs. - Plans to resume the accession process to the WTO. - New legislation to promote competition and public-private partnerships. - SOE governance and expected outcomes: - Recommendations of the consulting group on SOE governance will be ready in July, providing an opportunity to draw up a comprehensive plan to deal with SOE issues. - Expected results: greater macro-fiscal and financial resilience, new markets, more private sector participation, improved business climate, increased competitiveness, and job creation—especially for youth. - Data transparency: - Authorities working on creating greater economic data transparency, including by joining the General Data Dissemination Standard. *Source: cr18117 - 2017. The authorities unified the official and parallel market FX rates, depreciating the official* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18117.pdf_