## 1uzbea2019003 ## Source details **Canonical URL:** [1uzbea2019003](https://www.imf.org/-/media/files/publications/cr/2019/1uzbea2019003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1uzbea2019003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1uzbea2019003.pdf.json) --- ### PREFACE AND EXECUTIVE SUMMARY - IMF mission visit to Tashkent: October 22 to November 2, 2018. - Mission team: Amanda Sayegh (head, FAD); Viera Karolova (Statistics Department); John Zohrab (FAD regional advisor); Matt Crooke (FAD expert). - Key meetings with senior Ministry of Finance, Ministry of Economy, Central Bank (CBU), Institute of Fiscal Studies, and others. - FTE (June 2018) finding: Uzbekistan met the basic level of practice, or better, on 16 of 36 principles of the IMF’s Fiscal Transparency Code. - Main FTE-identified gaps: - Expand institutional coverage to include all extra-budgetary funds (EBFs), off-budget accounts (OBAs) of budgetary organizations, and other units that should be in general government per GFSM 2014. - Improve economic and functional classifications to align with international standards. - Improve budget comprehensiveness by bringing OBAs of budgetary organizations on budget and ensuring central government activities are presented per international standards. - Improve disclosure and management of risks to public finances. - Government actions: - Presidential Decree (Resolution of the President of the Republic of Uzbekistan No. 3917 of August 22, 2018) to enhance budget openness, citizen engagement, and parliamentary/public scrutiny. - Draft Cabinet of Ministers (COM) resolution prepared by MoF to implement FTE recommendations. - Improvements in the 2019 Budget Message disclosure. - Report purpose: guidance to implement FTE recommendations; strengthen GFSM application; improve budget classification, presentation, reporting; strengthen fiscal risk disclosure. Annexes contain guidance and templates. ### IMPROVING GOVERNMENT FINANCE STATISTICS (GFS) - Progress to date: - New GFS division in MoF to align budget classification, presentation, and reporting with GFSM 2014; collect public corporation data; expand institutional coverage; compile a general government balance sheet. - Draft COM resolution envisages coordination between MoF, CBU, and Statistical Committee and harmonization with SNA 2008. - Recommendation to formalize arrangements via Memorandum of Understanding and working/thematic expert groups. - Sectorization inventory findings: - About 1,800 units initially assessed using market/non-market test: - 276 markets (bazars) deemed private units — exclude from public sector. - 1,042 corporations assessed as market producers — remain classified as public corporations pending review. - 100 units assessed as non-market producers, with expenditures of around 0.25 percent of GDP — would be included in government sector. - 185 units, with expenses of 6 percent of GDP, are borderline cases — further information needed. - Deposit Insurance Fund and Cumulative Pension Scheme appear non-market and should be classified within general government. - Non-market public corporations, financial overview, 2017 (Percent of GDP): - Transactions - Revenue 0.16 - Expense 0.24 - Investment in non-financial assets n.a. - Operating balance -0.08 - Stocks - Assets 1.35 - Nonfinancial 0.34 - Financial 1.02 - Liabilities 1.35 - Liabilities other than equity 1.04 - Equity Capital 0.31 - Net financial worth 0.71 - Note: Total expenditure could not be calculated due to absence of net investment in non-financial assets data. - Reconciliation issues: - In 2017, state budget expenditures in the budget execution report were around 9 percent of GDP higher than state budget data presented in GFS. - The surplus was 0.1 percent of GDP lower in budget execution than in GFS. - IMF-designed reconciliation templates (Annex III) to assist MoF: (i) reconcile general government balance based on budget execution and GFSM 2014; (ii) reconcile general government balance and change in debt; (iii) reconcile cash budget execution and change in stocks of government deposits. - Key recommendations (as numbered in source): - Recommendation 2.1: Compile a complete inventory of all public units (mid-2019), including legal form, government ownership share, and key financial indicators. - Recommendation 2.2: Complete sector classification by populating missing data and classifying borderline cases (mid-2019). - Recommendation 2.3: Complete coverage of general government sector in GFS reports by consolidating activities of EBFs currently excluded and OBAs of budgetary organizations (from 2019) and activities of non-market units (complete by 2020). - Recommendation 2.4: Establish a GFS working group based on an MoU between MoF, CBU, and Statistical Committee (early 2019). - Recommendation 2.5: In cooperation with CBU, collect missing data and complete reconciliation of cash budget execution and change in stocks of government deposits for 2017; conduct reconciliation regularly. - Recommendation 2.6: Complete initial reconciliation between general government budget execution and GFS reports (end 2018); begin annual reconciliation of general government balance and change in stock of debt. ### ENHANCING BUDGET TRANSPARENCY - Progress to date: - 2019 draft Budget Message (submitted to Parliament but not published) innovations: - For the first time: medium-term macroeconomic and fiscal projections; assessment of main macroeconomic risks and their impacts; specified fiscal objectives including deficit and debt targets. - Four EBFs to be wound down with activities subsumed by ministries and financed from the state budget: The Road Fund; Education and Health Infrastructure Fund; Clean Drinking Water Fund; Improvement of Irrigated Lands Fund. - Pension Fund, Employment Fund, Privatization Fund, Fund for Children’s Sport, Book Fund and Aral Sea Fund will continue to exist. Book Fund, Aral Sea Fund and Fund for Children’s Sport are not reported in the budget as they are not defined as state targeted funds under the Budget Code. - Detailed discussion of outcomes for the current financial year with comparison to the original budget estimate. - Additional initiatives flagged: bring OBAs of budgetary organizations on budget; introduce a medium-term budget framework (MTBF); introduce a parliamentary appropriation system. - Expanding content of the Budget Message (suggested inclusions): - Present consolidated medium-term projections for the state budget and EBFs (including the UFRD) combined; subsequently consolidate OBAs and publicly owned corporations brought within general government. - Appropriately classify and report policy lending activities: distinguish transactions in financial assets from expenses (capital transfers or subsidies) per GFSM 2014; Annex IV guidance. - Present the budget balance both on a GFSM basis (net lending/borrowing) and an “overall balance” (budget balance minus net transactions in financial assets for policy purposes). - Improve revenue presentation to align with GFSM 2014; separately report non-tax revenues and main components. - Present expenditure estimates by economic classification and administrative unit; detailed tables for EBFs and UFRD. - Include information on government financing activities (initially net incurrence of new borrowing). - Expand assessment of fiscal risks beyond macroeconomic risks to include guarantees, public debt FX risks, financial sector exposures, SOE exposures, natural disasters. - Explain changes in fiscal forecasts from prior-year budget estimates and compare macroeconomic and fiscal forecasts to independent forecasters. - Templates and supporting materials developed: - Generalized outline for the main budget document (Annex V). - Templates for main fiscal tables to align with international practice (Annex VII). - Draft fiscal risk statement and expanded templates for future fiscal risk disclosure (Annex VIII and sub-section C). - Further short- to medium-term measures: - Bring remaining off-budget transactions on budget, or report them as annex. - Publish medium-term projections for sub-sectors of the State Budget (Republican and Local). - Publish more comprehensive information on sources of government financing. - Include chapter stating government fiscal objectives and assessment of compliance with fiscal targets. - Disclose more complete information on major public investment projects. ### FISCAL RISK DISCLOSURE — KEY FINDINGS AND RECOMMENDATIONS - Main sources of fiscal risks highlighted by the FTE: - Macroeconomic risks. - Government guarantees on SOE borrowing and SOE sector fiscal exposures. - Risks from public debt denominated in foreign currency. - Exposures associated with the financial sector (large state-owned banking sector and comprehensive deposit guarantees). - Rationale: publishing a comprehensive fiscal risk statement helps policymakers, public, and legislature understand exposures, supports mitigation measures, and underpins credibility. - Status and improvements to the 2019 macro-fiscal risk assessment: - Draft budget included macroeconomic risk analysis covering impacts of deviations in exchange rate, export prices, inflation, and interest rates; mission recommended adding a lower domestic GDP growth scenario and quantitative analysis on debt impacts from alternative exchange rate and interest rate assumptions. - Contingent liabilities and quantification: - Comprehensive statement should discuss and quantify contingent liabilities including guarantees, financial sector exposures, SOEs, natural disasters. - Information needs and inter-agency collaboration: - MoF has data on public debt, guarantees and loans, but lacks aggregate SOE exposure picture. - Formal arrangements needed for regular SOE performance reporting to MoF; Ministry of Economy compiling SOE annual financial position database but coverage must be expanded and data verified. - Annex X summarizes information MoF will need for fiscal risk disclosure. - Monitoring and management frameworks: - MoF plans to develop frameworks for monitoring and managing risks; establishment of a Fiscal Institute under MoF for monitoring budget risks is planned. - Planned PPP Agency should conduct careful risk assessments of PPP contracts prior to approval. - Consider enhancing central oversight of SOEs over the medium-term. - Recommendation 3.2: Assign authority for development of the Fiscal Risk Statement to a division in the Main State Budget Department and begin compiling necessary information (Annex X). ### BUDGET CLASSIFICATION, COA, AND ACCOUNTING REFORM - Budget classification: - Authorities have used a GFSM 2001-based budget classification since 2011 for internal budget execution and reporting but not for presentation and disclosure. - Short-term changes recommended: distinguish loans and equity injections that are financing (transactions in financial assets) versus those that are capital transfers (expenses); change high-level descriptions and ordering to align with GFSM Statement of Sources and Uses of Cash; identify separately lending for policy purposes. - Annex XI presents conceptual differences between budget and GFS classifications, a bridge table, and a template proposing high-level aggregate changes to align with GFSM 2014. - Recommendation 3.4: Amend the budget classification to incorporate changes to high-level descriptions and ordering to better align with GFSM Statement of Sources and Uses of Cash and to identify separate lending for policy purposes. - Chart of Accounts (COA) and accounting reform: - Authorities committed to modified-accrual based financial statements based on IPSASs and, with UNDP assistance, intend to implement 12 new national public sector accounting standards from January 2019 (based on accrual IPSAS except for COA). - New standards to be piloted in all budget organizations, State Targeted Funds (STFs), ministerial funds and OBAs of budgetary organizations in parallel with existing framework. If successful, MoF intends to publish consolidated general government financial statements for 2019 according to new standards. - COA approach: links budget classification codes to COA codes via a bridge table (operators input both codes at budget organization level; MoF software inputs COA codes automatically at MoF level). Assessed as practicable but susceptible to greater error; internal control and audit focus recommended. - Concern: COA does not reflect full GFSM 2014 economic and asset/liability categories; MoF plans to develop a bridge table from COA to GFSM classifications; feasibility is uncertain—COA may require substantial amendment later. - Recommendation 3.5: Review ability of new accounting system to produce reliable accrual flow and stock data according to GFSM 2014 for inclusion in consolidated government financial statements. - Internal audit and internal control: - Current Treasury control division conducts ex ante, current and ex post control rather than internal audit per international standards. - Recommended: modernize internal control and internal audit in the Treasury according to international standards; prepare conceptual framework, operations manual, internal audit manual, and implementation plan. - Authorities intend to develop a plan for introducing internal financial control and audit across the government sector; MoF receiving TA from ADB. - Key COA design choices and risks: - Earlier COA versions (2005, 2011) envisaged dual-entry cash and accrual sections; new approach dispenses with additional cash sections and uses bridge table—simpler but higher operational risk. ### SUPPORTING PFM FRAMEWORKS — LEGISLATIVE FRAMEWORK, FISCAL RULES, APPROPRIATION SYSTEM, TSA - Legislative framework: - Implementing reforms will require Budget Code and other legislative amendments; suggested definitions to consider: general government sector, EBFs, SOEs, and budget balance measures. - Recommendation 4.1: Review legislative changes required (2019). - Rules-based fiscal framework: - Government proposal: numerical fiscal targets proposed in draft 2019 Budget Message include: - Limit on public debt of 50 percent of GDP, with a debt brake mechanism applying above 40 percent of GDP. - Limit on general government consolidated budget deficit of 2 percent of GDP. - Preconditions for successful fiscal rules: unified/comprehensive budget; credible macroeconomic and fiscal forecasts; transparent fiscal reporting—these are not yet fully established. - Issues before formalizing rules: budget coverage and classification changes; clear definition of targeted budget deficit; ensure rules flexibility to avoid pro-cyclicality; enforceability mechanisms; integrate rules into budget planning with earlier strategic phase. - Recommendation 4.2: Conduct full analysis of options for rules-based framework and necessary PFM reforms prior to enacting legislative amendments. - Parliamentary appropriation system: - Current practice: Parliament does not appropriate expenditure; it formally approves state budget deficit as a percentage of GDP. - FAD recommendation: introduce parliamentary appropriation system to control expenditure and underpin transparency. - FTE recommended: amend Budget Code to (i) reduce government ability to increase expenditure from surprise revenue windfalls without prior parliamentary approval (by 2020); (ii) expand parliamentary approval over expenditure allocations (by 2021). - Presidential Resolution committed to introducing a parliamentary appropriation system from the 2020 fiscal year requiring state budget and STFs budgets to be approved by law with detailed breakdowns. - Minimum procedures suggested for Budget Code: define parliamentary appropriation; prohibit expenditure except pursuant to parliamentary appropriation; authority for government to approve detailed breakdowns and delegate to MoF; virements rules (e.g., limits between 5-10 percent); procedures for budgetary reserves and in-year revisions. - Recommendation 4.3: Adopt principles governing procedures for parliamentary appropriation as basis for Budget Code amendments. - Treasury Single Account (TSA): - Current coverage: all UZS-denominated transactions of general government processed via Treasury except UFRD and SOEs that are general government units. - Plan: extend TSA coverage to include FX-denominated transactions originated domestically (excluding embassies abroad); establish a second UZS-denominated client account to process FX transactions with automatic conversion at CBU weekly prevailing rate. - Outstanding issues: donor willingness to close commercial bank accounts; whether Treasury will assume or hedge FX risk (logical hedging via forward FX contracts with CBU); frequency of sweeping FX TSA balances (daily sweeps desirable). - Internal audit: - Short-term objective: modernize internal control and internal audit in Treasury per international standards; prepare conceptual framework, operations manual, internal audit manual, and implementation plan. ### ANNEX I — PROGRESS SINCE THE FISCAL TRANSPARENCY EVALUATION (FTE) - Main progress since FTE (June 2018): - New MoF division for improving GFS and transparency established. - Draft 2019 budget submitted to Parliament included medium-term projections for revenues, expenditures, state budget balance, and government debt; analysis of macroeconomic risks; numerical fiscal objectives. - Closure of three state targeted funds and one EBF with activities subsumed within state budget. - Publication of a citizen’s budget based on 2018 documentation; citizen’s budget for 2019 planned. - Presidential Decree (August 2018) to increase openness and transparency. - Key elements of Presidential Decree (August 2018): - Approval of updated budget classification, aligned with GFSM 2014, by July 2019. - Action plan to harmonize budget accounting with IPSAS for 2019–20. - Requirement for state budget and STFs budgets to be approved by law from 2020 with detailed breakdowns. - Mandatory publication of Chamber of Accounts findings on draft budget and end-year execution report. - Launch of an open budget information portal. - From 2019, mechanism for citizen participation in budget allocation requiring at least 10 percent of supplemental district (municipal) budget sources to be channeled to measures formulated based on public opinion. - Draft COM decree additional reforms: - Bring mandatory revenues of OBAs of EBFs within budgetary and accounting system. - Inventory government-owned/controlled units for GFSM 2014 classification. - Bring state-unitary enterprises classified as general government units within TSA and budgetary/accounting system. - Develop a general government balance sheet. - Publish a fiscal risk statement and develop monitoring/management framework. - Report tax expenditures and improve budget classification and program classification. ### ANNEX V–VIII — INTERNATIONAL GUIDELINES, BUDGET DOCUMENT STRUCTURE, TEMPLATES, AND FISCAL RISK STATEMENT - International standards referenced: IMF Fiscal Transparency Code (2014), OECD Guidelines for Budget Transparency, Open Budget Survey. - Key content requirements for Executive Budget Proposal (highlights): - Expenditures by administrative unit, economic classification, functional classification, and by program; revenue by revenue category and individual source. - Multi-year revenue and expenditure estimates for at least two years following the budget year. - Outturns or estimates for at least two prior years. - Estimates related to government borrowing and debt, including net new borrowing and debt composition. - Macroeconomic forecasts and sensitivity of budget forecasts to macro assumptions. - Contingent liabilities disclosure. - How new policy proposals affect expenditures and revenues. - Financial and non-financial assets information and tax expenditures. - Generalized structure of budget documentation (Annex VI) includes: Budget Summary; Budget Execution for Current Year; Medium Term Economic Outlook; Fiscal Strategy and Medium-term Projections; Detailed Budget for Budget Year; State Development Program; Financing and Debt; Fiscal Risk Statement. - Templates and key tables (Annex VII) include: - Table 1: Summary of the Main Fiscal Aggregates (2017–2021). - Table 2: State Budget (Republican; Local; State Budget aggregates) 2017–2021. - Table 3: EBFs (Pension Fund, Employment Fund, Privatization Fund, UFRD, Others) 2017–2021. - Table 4: Consolidated Budget 2017–2021. - Table 5: Financing Requirements 2017–2021. - Table 6: State Budget Estimates for 2019 with detailed revenue and tax line items. - Table 8: General Government Financial Balance Sheet. - Table 9: Reconciliation of Medium-Term Fiscal Projections. - Fiscal risk statement template (Annex VIII) highlights: - Macroeconomic risks scenarios (e.g., Real GDP growth 1 percent lower; Inflation 1 percent higher; Key commodity prices fall by 10 percent; UZS-USD exchange rate depreciates by 10 percent; Number of corporate taxpayers declines by 10 percent). - Sensitivity tables to present impacts in UZS Billion and Percent of GDP. - Disclosure of contingent liabilities, contingent events, SOE performance risks, and deviations in expenditure. ### GOVERNMENT DEBT AND FISCAL RISKS (Chapters 3 and 4) - Government debt overview: - Government debt comprises loans from international financial institutions and other external creditors; all outstanding debt is denominated in foreign currency. - Currency composition of outstanding borrowing (as presented): - Around [57] percent denominated in US dollars. - Around [15] percent denominated in yen. - [6] percent denominated in Euro. - The government does not currently issue domestic securities. - Government has guaranteed certain external borrowings of SOEs. - Exchange rate and interest-rate risks: - Depreciation increases value of government debt and servicing obligations; guaranteed external borrowings of SOEs also increase in value. - Government holds foreign currency deposits which increase in value on depreciation, offsetting some debt value increases. - About half of external borrowing is in variable-rate loans. - Debt portfolio characteristics: - Average maturity of debt portfolio: [20] years. - Short-term borrowing (maturing within one year) comprise a relatively small share at X percent (placeholder as in source). - Government guarantees (contingent liabilities): - Stock of outstanding loan guarantees (external SOE borrowing) as at June-2018: [2.5] billion soms. - Around [300] separate guarantees on external borrowing of various SOEs, [27] of which pay a fee. - Small number of guarantees on domestic borrowing totaled [X] billion soms as at June 2018 (placeholder). - Financial sector exposures: - Deposit guarantee framework: Law No. 360 of 2002 guarantees deposit compensation if CBU revokes a bank license (except for reorganization cases). - 27 banks participate in Deposit Guarantee Fund; all deposits of citizens in these banks are guaranteed without limit. - All deposits at Xalq Bank are government guaranteed. - Total value of deposits guaranteed by Deposit Insurance Fund and Xalq Bank: [58.7] trillion soms or around [24] percent of GDP at end-2017. - If Fund assets insufficient, government will provide a loan to meet compensation with subsequent return to Fund; Fund has not been called upon to provide compensation. - Bank financial soundness indicators (Central Bank): - Regulatory capital to risk weighted assets: 18.8 (2017), 15.8 (2018 Q3). - Non-performing loans net of provisions: 2.95 (2017), 4.6 (2018 Q3). - Return on assets: 1.9 (2017), 1.6 (2018 Q3). - Return on equity: 17.1 (2017), 12.3 (2018 Q3). - Liquid assets to short-term liabilities: 55.65 (2017), 40.1 (2018 Q3). - Government owns 11 public sector banks; government provided equity injections in 2017 equal to [2.5] percent of GDP financed from FRD assets. - SOE footprint and exposures: - Around 2,100 state-owned enterprises: 107 joint stock companies with majority state ownership, 1,500 unitary enterprises, and around 500 limited liability companies. - Inventory underway to classify market vs non-market producers and bring non-market producers into general government. - Loans on-lent to SOEs: at end-June 2017, total outstanding loans to SOEs were UZS [11.4] trillion or [13] percent of GDP. - Direct fiscal support in [2018] and dividends data contain placeholders in source and must be sourced from original tables for exact values. - Quasi-fiscal activities: - Non-commercial activities by SOEs to fulfill public policy objectives can erode profitability and raise fiscal support needs. - Government steps to collect information on quasi-fiscal activities and reduce them through tariff reforms and price liberalization. - Natural disasters: - Since 1955, Uzbekistan experienced 11 earthquakes above six in magnitude. - Estimated average annual economic loss from natural disasters: around 0.5 percent of GDP (UNISDR estimate). - Annex material (selected requirements for fiscal transparency and fiscal risk statement): - Require public corporations to submit quarterly financial reports to MoF and annual audited financial statements. - Prioritize a financial balance sheet for the state budget (including off-budget accounts) and EBFs before expanding to non-financial assets and full public sector balance sheet. - Amend Budget Code to require annual statement of fiscal risks and develop framework for monitoring risks related to public corporations. - Annex X lists specific information needs for fiscal risk statement (e.g., guarantees, loans, SOE balance sheets, PPPs, natural disaster history). ### ANNEX XI — BUDGET CLASSIFICATION: BRIDGE TABLE, PROPOSED AGGREGATES, AND FISCAL INDICATORS - Key mapping points (preserve source terminology and guidance): - Distinguish revenue vs inflows from financing operations: - Revenue (tax and non-tax) recorded as revenue in GFSM 2014. - Receipts from repaid loans, privatization receipts, and receipts from borrowing treated as financing in GFSM 2014. - Distinguish expenditure vs outflows from financing operations: - Expenditure other than financing recorded as expenditure in GFSM 2014. - Repayment of government debt, loans granted, equity injections, and purchase of debt securities are financing transactions in GFSM 2014 when government acquires recoverable claims or expects reasonable returns; otherwise treated as expense (capital transfer). - Bridge table mapping examples (budget line codes preserved as in source): - TOTAL CASH INFLOWS (1+2) — 00ВСЕГО Доходы - Revenue: Taxes — 3100Налоги; Social contributions — 2 200ВЗНОСЫ/ОТЧИСЛЕНИЯ НА СОЦИАЛЬНЫЕ НУЖДЫ; Grants — 3 300ГРАНТЫ; Other current revenue — 3400ДРУГИЕ ДОХОДЫ; Receipts from sale of non-financial assets — 35110Поступления по нефинансовым активам. - Inflows from financing operations — 35120Поступления по транзакциям в финансовые активы; 35200Поступления по транзакциям в обязательства. - TOTAL CASH OUTFLOWS (1+2) — 000ВСЕГО РАСХОДОВ - Expenditure: Compensation of employees — 41100Заработная плата; Purchases of goods and services — 4200РАСХОДЫ ПО ТОВАРАМ И УСЛУГАМ; Interest — 4400ПРОЦЕНТЫ; Subsidies — 4500СУБСИДИИ; Purchase of non-financial assets — 4300РАСХОДЫ ПО ОСНОВНЫМ СРЕДСТВАМ. - Outflows from financing operations — 4900РАСХОДЫ ПО ФИНАНСОВЫМ АКТИВАМ И ОБЯЗАТЕЛЬСТВАМ; Acquisition of financial assets — 49100Финансовый актив; Operations in liabilities — 49200По обязательствам. - Presentation note: Inflows and outflows from financing operations (transactions in financial assets and liabilities) should not be included in revenue and expenditure. - Proposed high-level aggregates: - A. TOTAL CASH INFLOWS (1+2): A.1 Revenue; A.2 Inflows from financing operations (a. Disposal of financial assets; b. Incurrence of liabilities). - B. TOTAL CASH OUTFLOWS (1+2): B.1 Expenditure; B.2 Outflows from financing operations (a. Acquisition of financial assets; b. Repayment of liabilities). - C. NET CASH BALANCE (A – B). - D. CASH DEFICIT (–) / SURPLUS (+) (A.1 – B.1) — GFS definition of net lending/borrowing. - E. Net Cash Flows from Transactions in Financial Assets for Policy Purposes (B.2.a – A.2.a). - F. OVERALL CASH DEFICIT (-) / SURPLUS (+) after adjusting for policy lending (D – E). - Fiscal indicators and consolidated financial statements guidance (GFSM 2014 framework and selected indicators): - Statement of Financial Performance indicators: Operating result - total; Net lending/borrowing; Overall fiscal balance – total (adjusted for policy lending). - Statement of Cash Flows indicators: GFS cash surplus/deficit; Overall cash surplus/deficit (adjusted for policy lending). - Statement of Financial Position indicators: Sovereign Debt; Gross debt; Net sovereign debt; Net Financial Worth; Net Worth. - Illustrative consolidated statements structures and key lines provided for Revenue, Expenses, Net operating balance, Net lending/borrowing, Overall fiscal balance, Assets (financial and non-financial), Liabilities, Net worth, and Cash flows. *Source: 1uzbea2019003 (selected chapters, annexes and templates in the provided PDF).* ### PREFACE _________________________________________________________________________________________ 6 ### 1uzbea2019003 - PREFACE _________________________________________________________________________________________ 6 ### PREFACE - IMF mission visit to Tashkent: October 22 to November 2, 2018. - Mission team: Amanda Sayegh (head, FAD), Viera Karolova (Statistics Department), John Zohrab (FAD regional advisor), Matt Crooke (FAD expert). - Key meetings: First Deputy Minister of Finance Mr. Akhadbek Khaydarov; Deputy Minister of Finance Mr. Dilshod Sultanov; First Deputy Head of the Main State Budget Department Mr. Jamshid Abruev; First Deputy Head of the Treasury Mr. Dilshod Pulatov; Deputy Head of the Main State Budget Department Mr. Ismonjon Mamadjanov; Head of the Consolidated Budget and Fiscal Policy Division Mr. Botir Kholmuradov; Head of the Government Finance Statistics Division Mr. Sherzod Mukhamedov; Deputy Head Ms. Aleksandra Khvan; officials from the Ministry of Finance. - Other meetings: First Deputy Minister of Economy Mr. Mubin Mirzaev and senior Ministry of Economy officials; Mr. Jahongir Negniatov, Director of the Institute of Fiscal Studies; Central Bank of the Republic of Uzbekistan (CBU) senior officials. - Acknowledgements: Mr. Sanjar Sultanov (facilitating meetings); Ms. Galina Kostina (IMF local office); interpreters Mr. Sherzod Adbinabiev, Mr. Andrei Lagoiski, Ms. Margarita Larshina, Mr. Kirill Eltsov. ### EXECUTIVE SUMMARY - Uzbekistan is implementing a comprehensive reform program to strengthen public financial management and fiscal transparency. - A Fiscal Transparency Evaluation (FTE) in June 2018 found Uzbekistan met the basic level of practice, or better, on 16 of 36 principles of the IMF’s Fiscal Transparency Code. - Key FTE-identified gaps: - Expanding institutional coverage to include all extra-budgetary funds (EBFs), off-budget accounts (OBAs) of budgetary organizations, and activities of other institutional units that should be classified as part of the general government sector per GFSM 2014. - Improving economic and functional classifications to align with international standards. - Improving budget comprehensiveness by bringing OBAs of budgetary organizations on budget and ensuring central government activities are presented and reported per international standards. - Improving disclosure and management of risks to public finances. - Government actions: - Presidential Decree approved in August 2018 to enhance budget openness, citizen engagement, and parliamentary/public scrutiny (Resolution of the President of the Republic of Uzbekistan No. 3917 of August 22, 2018). - Draft Cabinet of Ministers (COM) resolution prepared by the Ministry of Finance detailing actions to improve fiscal transparency in line with FTE recommendations. - Improvements in the 2019 Budget Message disclosure. - Report purpose: provide guidance to implement FTE recommendations; strengthen GFSM application; improve budget classification, presentation, reporting; strengthen fiscal risk disclosure. Annexes contain guidance and templates. ### IMPROVING GOVERNMENT FINANCE STATISTICS A. Progress to Date - Presidential Resolution and draft COM resolution provide basis to improve GFSM standards application. - A new GFS division established in the MoF to: align budget classification, presentation and reporting with GFSM 2014; collect data for public corporations; expand institutional coverage of GFS; compile a general government balance sheet; improve fiscal reporting integrity. - Draft COM resolution envisages coordination between MoF, CBU, and Statistical Committee and harmonization of GFS with SNA 2008. - Recommendation to formalize arrangements via Memorandum of Understanding and establish working/thematic expert groups. B. Sectorization - FTE gaps: three EBFs (Book Fund, Children Fund, Aral Sea Fund) and OBAs of budgetary organizations excluded from GFS reports; some >2,000 government-controlled corporations may be non-market and thus part of general government per GFSM 2014. - Initial inventory assessed ~1,800 units using market/non-market test; summary of assessments: - 276 markets (bazars) deemed private units — exclude from public sector. - 1,042 corporations assessed as market producers — pending further review, remain classified as public corporations. - 100 units assessed as non-market producers, with expenditures of around 0.25 percent of GDP — would be included in government sector. - 185 units, with expenses of 6 percent of GDP, are borderline cases — further information needed. - Deposit Insurance Fund and Cumulative Pension Scheme appear to be non-market units and should be classified within general government. - Table 1. Uzbekistan: Non-Market Pubic Corporations, Financial Overview, 2017 (Percent of GDP) - Transactions - Revenue 0.16 - Expense 0.24 - Investment in non-financial assets n.a. - Operating balance -0.08 - Stocks - Assets 1.35 - Nonfinancial 0.34 - Financial 1.02 - Liabilities 1.35 - Liabilities other than equity 1.04 - Equity Capital 0.31 - Net financial worth 0.71 - Source: Ministry of Economy, IMF staff estimates. - Note: Total expenditure could not be calculated due to the absence of data on net investment in non-financial assets. - Further actions needed: - Compile and maintain a complete registry of public units with comprehensive financial information. - Verify robustness of financial information for certain enterprises (e.g., Tashkent Metro, Railways, Airways, local public utility and transport companies). - Apply quantitative market/non-market test plus qualitative criteria (autonomy of SUEs and government corporations). - Clarify whether reported depreciation in company financial statements is a suitable proxy for consumption of fixed capital. - Inclusion in GFS reports: - Entities assessed as government units should be included in GFS reports. - Draft COM decree intends to bring non-market SUEs within the treasury and accounting framework; these entities would then produce financial reports based on budget classifications. - For JSCs, mapping from financial reports to GFS categories is necessary to avoid dual reporting requirements. - Current SOE reporting generally satisfies basic requirements for GFS compilation, though concerns remain about data quality and lack of audits. - IMF team completed a bridge table between SOE financial reports and GFS economic categories and conducted a pilot GFS compilation for one corporation. C. Reconciliation - Large differences exist between budget execution and GFS reports: - In 2017, state budget expenditures in the budget execution report were around 9 percent of GDP higher than state budget data presented in GFS. - The surplus was 0.1 percent of GDP lower in budget execution than in GFS. - Differences partly explained by treatment of financing operations; reconciling and explaining differences in published documents is important. - Reconciliation templates designed by IMF team (Annex III) to assist MoF: - (i) reconcile general government balance based on budget execution and GFSM 2014; - (ii) reconcile general government balance and change in debt; - (iii) reconcile cash budget execution and change in stocks of government deposits. - Further work required to understand and value foreign currency flows and quantify differences (e.g., on-lending flows). D. Recommendations (numbered as in source) - Recommendation 2.1: Compile a complete inventory of all public units (mid-2019), including legal form, government ownership share, and key financial indicators required to determine sector classification and manage fiscal risks (see Chapter II). - Recommendation 2.2: Complete sector classification by populating missing data and obtaining necessary information to appropriately classify borderline cases and discuss results with the State Statistics Committee (mid-2019). - Recommendation 2.3: Complete coverage of general government sector in GFS reports by consolidating activities of EBFs currently excluded and OBAs of budgetary organizations (from 2019) as well as activities of non-market units (complete by 2020). - Recommendation 2.4: Establish a GFS working group based on a Memorandum of Understanding between MoF, CBU, and Statistical Committee to ensure data exchange, harmonized sectorization, and consistent macro-economic statistics (early 2019). - Recommendation 2.5: In cooperation with the CBU, collect missing data and complete reconciliation of cash budget execution and change in stocks of government deposits for 2017; conduct the reconciliation on a regular basis. - Recommendation 2.6: Complete an initial reconciliation between general government budget execution and GFS reports (end 2018); and begin annually reconciling the general government balance and changes in the stock of debt. ### ENHANCING BUDGET TRANSPARENCY A. Progress to Date - 2019 draft Budget Message (submitted to Parliament but not published) introduced innovations: - For the first time: medium-term macroeconomic and fiscal projections; assessment of main macroeconomic risks and their impacts; specified fiscal objectives including deficit and debt targets. - Four EBFs to be wound down with activities subsumed by ministries and financed from the state budget. The four funds include: The Road Fund, Education and Health Infrastructure Fund, Clean Drinking Water Fund, and Improvement of Irrigated Lands Fund. - Pension Fund, Employment Fund, Privatization Fund, Fund for Children’s Sport, Book Fund and Aral Sea Fund will continue to exist. The latter three are not reported in the budget, as they are not defined as state targeted funds under the Budget Code. - Detailed discussion of outcomes for the current financial year with comparison to the original budget estimate. - Additional initiatives flagged for subsequent years (to be sequenced appropriately): - Bringing OBAs of budgetary organizations on budget. - Introducing a medium-term budget framework (MTBF). - Introducing a parliamentary appropriation system. ### SUPPORTING PFM FRAMEWORKS - Several supporting PFM reforms required to enhance transparency and fiscal policymaking. - Many planned reforms necessitate changes to the legislative framework; a full review of changes required to the Budget Code and other legislation should be undertaken to ensure systematic implementation. - Before fiscal rules are formalized in legislation, careful calibration is required, taking into account planned improvements to budget coverage and presentation. - To support implementation of an annual budget law and parliamentary appropriation system, the Budget Code will need to define clear rules around budgetary virements, budgetary reserves, and budgetary revisions during the year. *Source: https://www.imf.org/-/media/files/publications/cr/2019/1uzbea2019003.pdf* ### Chapter III sub-section C); and reviewing the classification of non-market SOEs. Given the ### Chapter III — Sub-section C); and reviewing the classification of non-market SOEs. Given the ### Sequencing and priority of reforms - High priority: improving the comprehensiveness, quality, and presentation of the budget and fiscal information. - Introduce an MTBF and program information to enhance budget planning and expenditure allocation, but: - Establish the MTBF framework before advancing expenditure ceilings at a detailed level (such as by program). - Align MTBF introduction with improvements to the underlying budget process to achieve increased budget discipline (international experience suggests this alignment is necessary). ### B. Expanding the Content of the Budget Message — 2019 Budget Message: suggested inclusions - Provide a more complete presentation of general government activities: - Present consolidated medium-term projections for the state budget and EBFs (including the UFRD) combined. - In subsequent years, consolidate OBAs of budgetary organizations and publicly owned corporations brought within the general government sector. - This is consistent with the FTE recommendations. - Appropriately classify and report policy lending activities: - Capital injections for policy purposes (transactions in loans and equity injections) are currently reported as cash expenses and revenues. - In line with FTE recommendations and GFSM 2014 standards, separately report these investments as either transactions in financial assets or expenses (capital transfers or subsidies). - Annex IV provides guidance on classifying these transactions. Where a financial asset of equal value is expected in exchange, recoverable, and a sufficient rate of return is reasonably expected, classify as transactions in financial assets and report via an additional item in the budget tables. Where these conditions do not hold, classify as expenses. - Present the budget balance both on a GFSM basis and on an “overall balance” basis: - Main budget tables should present net lending/borrowing (GFSM 2014) and separately an overall balance. - Overall balance defined as the budget balance minus net transactions in financial assets for policy purposes.5 - Present both aggregates for the state budget, the EBFs (including UFRD), and for the consolidated state budget and EBFs (including UFRD) combined. - Box 1 summarizes these main fiscal aggregates. - Present more detailed breakdowns of fiscal information: - Improve revenue presentation to align with GFSM 2014; separately report non-tax revenues and main components. - Present expenditure estimates for the budget year by economic classification and administrative unit. - Present detailed tables for the EBFs and the UFRD, with breakdowns of revenue sources, expenditures, and financing activities where appropriate. - Include information on government financing activities: - Initially focus on net incurrence of new borrowing; over time expand to all changes in financing. - Detailed breakdowns assist reconciliation of overall balance with estimated new financing requirements and illustrate sources (drawdown of cash balances, asset sales, new borrowing). - Expand the assessment of fiscal risks: - Build on the macroeconomic risk analysis included in the draft 2019 budget; expand to include other fiscal risks (see sub-Section C). - Enhance explanation of changes in fiscal forecasts from prior-year budget estimates: - Explain deviations in revised estimates from those presented in the 2018 Budget Message. - Provide comparison of the revised estimate for the budget deficit to that in the 2018 Budget. - In subsequent years, explain changes in medium-term projections from the previous year’s budget, aided by a table showing previous and current fiscal projections with discussion and quantification of policy versus non-policy drivers. - Compare macroeconomic and fiscal forecasts to independent forecasters: - Include a comparison of independent macroeconomic forecasts to those in the budget. - Subsequent budgets should include comparison of fiscal forecasts once budget coverage is expanded. ### Box 1 — Definitions of Fiscal Aggregates (as presented) - State budget: - According to the Budget Code, the State budget consist of central government budgetary organizations (Republican Budget) and subnational budgetary organizations (including for the Republic of Karakalpakstan, local budgets of regions and the city of Tashkent). - Currently excluded are several EBFs and OBAs of budgetary organizations. - Recommendation: consolidate OBAs and most EBFs into State budget aggregates. - Consolidated budget: - Budget Code: State budget, State Targeted Funds (six specific EBFs), and the UFRD. - This report: consolidated budget comprises activities of all general government sector units as defined under GFSM 2014, including EBFs not defined as state targeted funds and OBAs of budgetary organizations. - Budget balance: - Refers to GFSM 2014 concept of net lending/borrowing (revenues less expenditures and net transactions in non-financial assets). - Existing budget presentation extends policy lending as expenditure and repayment of policy lending as revenues. - Overall budget balance: - Comprises the GFSM 2014 budget balance adjusted for net transactions in financial assets for policy purposes.1/ - Excludes net transactions in financial assets for liquidity purposes. - Transactions in financial assets for policy purposes include loans and equity injections. - Non-recoverable policy lending and equity injections which will not bring sufficient rate of return should be treated as an expense (see Annex IV). When calculating the overall balance, only the recoverable part of policy lending will be added. 1/ Note: definition here deviates from GFSM 2014 Table 4A.1 as it includes inflows from repayments of policy lending but does not exclude inflows from privatization of non-financial assets. ### Templates and supporting materials developed - Generalized outline for the main budget document developed as a guide for the MoF (Annex V). - Templates for main fiscal tables developed to improve transparency and align with international practice (Annex VII). - Some tables (e.g., detailed financing and financial balance sheet presentation) intended for inclusion in subsequent budgets. - Draft fiscal risk statement tailored to existing information prepared with the MoF for possible inclusion in the revised 2019 Budget Message; expanded templates for future fiscal risk disclosure provided (Annex VIII and sub-section C). ### Further measures to improve fiscal transparency (short- to medium-term) - Bring remaining off-budget transactions on budget, or at minimum report their revenues, expenditures and cash balances as an annex to the budget. - Publish medium term projections for sub-sectors of the State Budget (Republican and Local government sectors). - Publish more comprehensive information on sources of government financing. - Include a chapter in the budget message stating government fiscal objectives, including assessment of compliance with fiscal targets or justification for deviations, to guide medium-term planning and rules-based fiscal framework development (see Chapter III sub-section B). - Disclose more complete information on major public investment projects. - Note: Many measures are planned under the draft COM resolution; some elements need clarification and timing reconsideration. Detailed comments provided to the MoF (Annex IX). ### C. Fiscal Risk Disclosure — key findings and recommendations - Main sources of fiscal risks highlighted by the FTE: - Macroeconomic risks. - Government guarantees of borrowing of SOEs and other fiscal exposures from the SOE sector. - Risks from public debt denominated in foreign currency. - Exposures associated with the financial sector, given the large state-owned banking sector and comprehensive guarantees on bank deposits. - Rationale for publishing a comprehensive fiscal risk statement: - Helps policymakers, public, and legislature understand exposures and potential impacts on public finances. - Supports development of mitigating measures and underpins credibility and market confidence. - Status and improvements to the 2019 macro-fiscal risk assessment: - The draft budget included an analysis of macroeconomic risks (a good start).6 - Macro-fiscal analysis details impacts on fiscal balance of deviations in exchange rate, export prices, inflation, and interest rates. - Strengthening recommendations: - Add a scenario for a reduction in domestic GDP growth (e.g., lower external demand). - Include discussion on main risks to public debt and, in subsequent assessments, provide quantitative analysis of how alternative assumptions for exchange rate and interest rate on external borrowing impact government debt value and debt servicing. 6 The mission did not verify the sensitivity analysis but provided support to the structure and presentation of the macro-fiscal analysis. - Contingent liabilities and quantification: - A comprehensive statement should discuss and quantify contingent liabilities (obligations that may give rise to fiscal costs if uncertain events occur), including government guarantees, financial sector exposures, SOEs, and natural disasters. - Information needs and inter-agency collaboration: - MoF currently has access to public debt, government guarantees, and loans data, but lacks an aggregate picture of SOE exposures. - Formal arrangements needed to ensure regular and timely SOE performance reporting to the MoF (e.g., require SOEs to submit regular financial reports). - Ministry of Economy has started compiling an SOE annual financial position database but coverage must be expanded and data verified. - Annex X summarizes information MoF will need to collect for fiscal risk disclosure. - MoF should consult with CBU and Ministry of Economy on financial sector and macroeconomic risks, and with shareholding ministries, Ministry of Economy, or individual SOEs for SOE-related risks. - Strengthening monitoring and management frameworks: - MoF plans to develop robust frameworks for monitoring and managing risks.7 - Establishment of a new Fiscal Institute under MoF with responsibilities for monitoring budget risks. - Planned creation of a PPP Agency; the agency should conduct careful risk assessments of PPP contracts prior to approval to avoid excessive government risk. - Over the medium-term, consider enhancing central oversight of SOEs. 7 The draft COM resolution on fiscal transparency envisages establishing a fiscal risk assessment mechanism. ### D. Budget Classification — priorities and short-term changes - Importance: Align budget presentation and disclosure with GFSM 2014 to improve fiscal transparency. - Current practice: - Authorities have used a GFSM 2001-based8 budget classification since 2011 for internal budget execution and reporting, but not for budget presentation and disclosure.9 - Rationale: familiarity of parliament with existing format. - Short-term transparency-enhancing changes recommended: - Additions and clarifications to distinguish loans and equity injections that are financing (transactions in financial assets) versus those that are (in whole or in part) capital transfers (expenses) because unlikely to be repaid or earn market returns. Achieve via breakdowns of the capital transfer expenditure item and expanding descriptions requiring realistic returns. - Change high-level descriptions and ordering of the classification to align with the GFSM Statement of Sources and Uses of Cash and to identify separate lending for policy purposes. - Further work: - More detailed analysis required to fully align classification with international standards. - Annex XI presents conceptual differences between budget and GFS economic classifications, a bridge table between current budget classification and GFS cash flow categories, and a template proposing high-level aggregate changes to align with GFSM 2014. 8 Following SNA 2008, GFSM 2001 has been replaced by GFSM 2014. GFSM 2014 provides supplementary details and more in-depth guidance. 9 The GFSM 2014-based classification was used for commencing disclosure of fiscal data in the GFS Yearbook. ### E. Chart of Accounts (COA) and accounting reform - Authorities committed to modified-accrual based financial statements based on IPSASs. - With UNDP assistance, developed a concept note and from January 2019 intend to implement 12 new national public sector accounting standards: - These are based on accrual IPSAS, except for the COA standard (IPSAS do not include COA guidance). - Apart from COA, the new Uzbekistan standards are close to those reviewed by FAD in 2014.11 - Implementation approach: - New standards to be implemented on a pilot basis in all budget organizations, State Targeted Funds (STFs), ministerial funds and OBAs of budgetary organizations, in parallel with existing framework. - If successful, MoF intends to publish consolidated general government sector financial statements for 2019 according to the new standards. - Operational arrangements and systems: - Separate budget organization financial statements prepared using UzAsbo accounting software; these will be imported into the GFMIS for consolidation. - GFMIS developer has not yet developed consolidation software but has track record providing automation solutions to the Treasury. - Publication of consolidated general government sector financial statements for 2019 would support fiscal transparency and balance-sheet approach to fiscal policy. - COA discussions and scope: - Mission’s discussions with MoF on COA were preliminary due to limited time; comments are preliminary. - Advice on reporting formats and fiscal indicators provided at Annex XII. - MoF intends treasury balances and transactions, government debt, and tax and customs revenues to be reflected in separate financial statements (MoF, Tax Committee, Customs Committee) and consolidated appropriately. - The COA is unified across the general government sector but will not initially apply to the UFRD and SOEs (including SUEs) that are general government units; inclusion depends on completion of the GFS institutional classification exercise. 11 J. Zohrab and I. Grigoryan, Uzbekistan. Review of Draft Accounting Standards, October 2014. *Source: Chapter III — sub-section C); and reviewing the classification of non-market SOEs. Given the (1uzbea2019003).* ### Chapter I. This institutional unification of the COA is welcome. In the 2005 and 2011 versions of ### Chapter I ### Chart of Accounts (COA): Institutional Unification and Design Choices - Institutional unification of the COA is welcome; previous 2005 and 2011 COA versions envisaged unification, but recent MoF consideration of separate COAs for different institution types is not advisable. - The COA should support cash budget execution reporting, implying unification between the budget classification and the COA. - 2005 and 2011 COA approach: additional COA sections for cash budget accounting so each cash-flow transaction produced two sets of double entries (cash budget accounting and accrual financial accounting) — consistent with Kyrgyz Republic and Armenia COAs. - Pros: purer implementation of double-entry accounting and inherent consistency checks. - Cons: potentially more complex and difficult to implement from an IT perspective. - New Uzbekistan COA approach: - Dispenses with additional sections for cash budget accounting. - Links budget classification codes to COA codes: at the budget organization level operators input both codes; at the MoF level software inputs COA codes automatically via a bridge table once budget classification codes are input by operators. - Assessed as practicable but susceptible to greater error due to additional manual entry and the need to maintain the bridge table’s accuracy. - The mission did not review the bridge table. - Recommendation on implementation risk: potential errors from the bridge-table approach are not sufficiently serious to delay implementation, but should be a focus of internal control and audit and considered in the review of the first consolidated financial statements. ### COA Account Types and GFSM 2014 Alignment - Current COA accounts are a mixture of high-level economic, institution, and budget/source-of-funds types. - 2005 and 2011 COAs were predominantly economic type, reflecting the GFSM 2001 economic classification. - Inclusion of institution and budget/source-of-funds types in the COA is an efficiency/style issue; administrative and budget/source-of-funds classifications should separate data to avoid embedding them in the COA. - Only high levels of administrative and budget/source-of-funds classifications are embedded in the COA. - This issue is not sufficient to delay implementation. - Concern: COA does not reflect the full set of GFSM 2014 economic and asset/liability classification categories. - Budget classification enables cash-basis reports according to GFSM 2014 economic classification. - For reliable consolidated government financial statements used in fiscal policy, there will be demand for accrual flow and stock data according to GFSM 2014. - MoF plans to develop a bridge table from the COA to the GFSM economic and asset/liability classifications. - It is unclear whether such a bridge table will be feasible; if not, the COA could require substantial amendment in due course. ### Recommendations (Chapter-specific) - Recommendation 3.1: Present in the 2019 Budget Message the additional information set out in Section B of this Chapter and its related annexes. Information that was not able to be included, should be included from the 2020 budget. - Recommendation 3.2: Assign authority for the development of the Fiscal Risk Statement to a division in the Main State Budget Department and begin compiling the information necessary to expand fiscal risk analysis as set out in Annex X. - Recommendation 3.3: Amend the draft COM resolution in line with the detailed comments provided to the MoF and which are summarized in Annex IX. - Recommendation 3.4: Amend the budget classification to incorporate changes to high-level descriptions and ordering of the classification to bring it into more line with GFSM Statement of Sources and Uses of Cash and to identify separate lending for policy purposes as outlined in Annex XI. - Recommendation 3.5: Review the ability of the new accounting system to produce reliable accrual flow and stock data according to GFSM 2014 for incorporation in the consolidated government financial statements. ### Supporting PFM Frameworks — A. Legislative Framework - Implementing announced and planned reforms will likely require legislative amendments. - Suggested Budget Code definitions to consider: general government sector, extra-budgetary funds, SOEs, and different measures of the budget balance required to be reported. - Budget Code amendments needed to provide a platform for the introduction of the MTBF once design elements have been agreed and pilot phases completed. - Formalizing Parliament’s role alongside revised rules for supplementary budgets would be appropriate in due course. - Consider establishing a legal mandate for the MoF to prudently manage risks to public finances, including reporting and monitoring of SOEs if no separate SOE Law is envisaged. - Recommendation: conduct a comprehensive assessment of legislative amendments needed to support reforms. ### Supporting PFM Frameworks — B. Development of a Rules-Based Fiscal Framework - Government proposal: put in place a rules-based fiscal framework; draft 2019 Budget Message included medium-term fiscal targets. - Fiscal targets proposed by the authorities include: - Setting a limit on public debt of 50 percent of GDP, with a debt brake mechanism applying above 40 percent of GDP; and - Setting a limit on general government consolidated budget deficit of 2 percent of GDP. The consolidated budget is defined in the budget code as the state (central and local) budget plus the state targeted funds (and excludes the UFRD). - Preconditions for successful fiscal rules: unified and comprehensive budget; credible macroeconomic and fiscal forecasts; transparent fiscal reporting. - Current status: in Uzbekistan these pre-conditions are not yet fully established; parallel actions to address gaps required for effective rules-based framework. - Issues to resolve before formalizing fiscal rules and entrenching numerical targets in the Budget Code: - Budget coverage and classification: numerical limits should account for proposed changes to budget classifications, coverage and presentation; bringing EBFs, OBAs of budgetary organizations and non-market SUEs into the budgetary and accounting system will impact reported fiscal aggregates and fiscal rules. - Definition of the targeted budget deficit: government must clearly specify the measure to target; general principle is to target the broadest measure government can control effectively (overall fiscal balance based on broad institutional coverage). - Ensuring suitable flexibility: fiscal rules should have sufficient flexibility and avoid being pro-cyclical. Uzbekistan’s fiscal policy role, higher than average revenue volatility, and UFRD integration must be considered. Options to avoid pro-cyclicality include focusing on controlling expenditure, allowing targets to be achieved on average over several years, or well-developed escape clauses that temporarily suspend the rule during a major shock. - Mechanisms to enhance enforceability: corrective mechanisms (automatic/detailed or procedural requiring corrective plans) need capacity for implementation by the MoF. - Integrating fiscal rules into budget planning: the budget process needs an earlier strategic phase so fiscal objectives translate into operational guidance for budget preparation. - FTE suggestion: conduct a detailed analysis before formalizing numerical fiscal rules. ### Supporting PFM Frameworks — C. Appropriation System - Current practice: Uzbekistan’s Parliament currently does not appropriate expenditure; Parliament only formally approves the state budget deficit as a percentage of GDP. - Article 98 of the Budget Code implies a slightly broader role: approving the forecast of main macroeconomic indicators; main parameters of income and expenditures of the State Budget, the budget deficit and sources of financing; and key parameters of state trust funds. - FAD recommendations: introduce a parliamentary appropriation system to help control expenditure, demonstrate accountability, and underpin fiscal transparency; envisaged in MoF’s PFM Reform Strategy 2007–18 but not implemented. - FTE recommended: amend the Budget Code to (i) reduce government ability to increase expenditure from surprise revenue windfalls without prior parliamentary approval (by 2020); and (ii) following review, expand parliamentary approval over expenditure allocations (by 2021). - Presidential Resolution: committed to introducing a parliamentary appropriation system from the 2020 fiscal year; requires state budget and budgets of STFs to be approved by law with detailed breakdowns. (Resolution of the President of the Republic of Uzbekistan No. 3917 of August 22, 2018.) - Implementation challenges: major endeavor requiring consultation with budget organizations and Parliament; amendments to the Budget Code including within-year changes and supplementary budget rules; changes may not be feasible in time for the 2020 budget. - Under a parliamentary appropriation system: appropriations generally approved by the first level of administrative classification and first level of economic classification. - Given Presidential Resolution and government intention to reflect programs approved by the President, appropriations by first level administrative units should be sub-divided into STFs and programs. - Premature to include breakdown by full source of funds classification or full program classification (development would take considerable time). - Recommendation: include an appropriation to budgetary reserves for unanticipated expenditures (e.g., natural disasters) with clear drawdown criteria. - Minimum procedures to include in the Budget Code: - Definition of a parliamentary appropriation as an authority, but not a requirement, to incur expenditure on a cash basis up to a certain limit; - Prohibition of any expenditure except pursuant to a parliamentary appropriation; - Authority for government to approve detailed breakdowns of parliamentary appropriations and to delegate this authority to the MoF as it sees fit; - Authority for government to approve virements between first level administrative unit appropriations in limited cases such as transfer of functions, between sub-divisions of these appropriations, and between economic category appropriations except between capital and current expenditures, up to a limit of between 5-10 percent, and for it to delegate this authority to the MoF; - Procedures for expenditures pursuant to budgetary reserves; and - Procedures for a revision to the annual budget law during the year if both the government and parliament agree. ### Supporting PFM Frameworks — D. Treasury Single Account (TSA) - Comprehensive general government coverage by the Treasury is important for fiscal transparency; TSA coverage is central. - Current coverage: all UZS-denominated transactions of the general government sector are processed via the Treasury, except those of the UFRD and SOEs (including SUEs) that are general government units. - Authorities plan to extend TSA coverage to include foreign exchange-denominated transactions originated domestically (excluding those originated by embassies abroad). - Current TSA structure: - One UZS-denominated bank account in the name of the Treasury at the CBU used to process UZS-denominated transactions. - It is a client account rather than a correspondent account. - Plans: establish a second UZS-denominated client account to process foreign exchange-denominated transactions; inflows/outflows will be converted automatically into/from UZS at the CBU’s prevailing rate, which is currently fixed weekly. - The Treasury’s accounting system will contain the breakdown of the foreign exchange-denominated accounts by currency and counterparty. - Outstanding issues to resolve: - Conditions under which donors (credits and grants) will close commercial bank accounts and open Treasury accounts; donors likely unwilling to bear foreign exchange risk, which would transfer to the Treasury. - Whether the Treasury will assume or hedge its foreign exchange risk; logical hedging approach would be forward foreign exchange contracts with the CBU. - Frequency of sweeping foreign exchange TSA balances into the UZS TSA to optimize cash resources; daily sweeps would be desirable. - Note on client vs correspondent accounts: client accounts generate full bank statements; correspondent account statements show total net flow for the day in a single line. Treasuries in many countries are members of interbank settlements systems (correspondent accounts) — transaction cost advantages but greater pressure on Treasury internal control. ### Supporting PFM Frameworks — E. Internal Audit - Internal control systems, including internal audit, assure reliability of financial statements and compliance with accounting standards and policies. - Credible financial statements should include a statement of responsibility for the internal control system and that it was operating effectively during the relevant period; external audit relies on internal control. - For future consolidated government financial statements, international good practice suggests the Minister of Finance will make the statement of responsibility. - Design and implementation of internal control system is an important fiscal transparency issue. - FAD previous recommendation: include an internal audit function in the Treasury operating according to international internal audit standards. - Current Treasury control division conducts ex ante, current and ex post control rather than internal audit according to international standards. - February 2016 FAD mission report discussed the division’s activities, relationship with MoF’s CRU, and Treasury reform plans. - Recommended short-term objective: modernize internal control and internal audit in the Treasury according to international standards, retain modernization in government sector as medium-term objective. - Recommended MoF prepare and approve: - A conceptual framework for modernized internal control and internal audit in the Treasury; - An operations manual for the Treasury to codify internal control system according to the conceptual framework; - An internal audit manual to codify modernized internal audit in the Treasury; - An implementation plan along lines set out in paragraph 49 of the mission’s report. - As of October 2018, these recommendations had not yet been implemented. - Current mission actions: presentation to the Treasury on international models of internal financial control and audit with emphasis on significance for credible financial statements. - Authorities intend to develop a plan for introducing internal financial control and audit according to international standards across the government sector, in line ministries and budget organizations as well as in the Treasury, and to seek FAD’s advice. - MoF has begun to receive TA in this area from the Asia Development Bank. ### Supporting PFM Frameworks — F. Recommendations - Recommendation 4.1: Undertake a review of the legislative changes required to the Budget Code, other legislation and supporting regulations, required to facilitate the implementation of planned reforms (2019). - Recommendation 4.2: With support from international institutions, undertake a full analysis of the options for a rules-based fiscal framework and necessary reforms to the PFM system required to support its effective implementation prior to enacting legislative amendments. - Recommendation 4.3: Adopt the principles set out in sub-Section C (paragraph 40) governing procedures for parliamentary appropriation, as the basis for amendments to the Budget Code. *Source: Chapter I, 1uzbea2019003* ### Annex I. Progress Since the Fiscal Transparency Evaluation ### Annex I. Progress Since the Fiscal Transparency Evaluation ### Main progress since the FTE (conducted in June 2018) - Establishment of a new division in the Ministry of Finance tasked with improving GFS and ensuring transparency. - Inclusion in the draft 2019 budget submitted to Parliament of: - medium-term projections for revenues, expenditures, state budget balance, and government debt; - analysis of macroeconomic risks and the impact of alternative assumptions on the budget balance; - numerical fiscal objectives. - Closure of three state targeted funds and one EBF, with their activities subsumed within the state budget. - Publication of a citizen’s budget based on the 2018 budget documentation (a citizen’s budget for 2019 is planned to be published alongside the budget this year). - Approval of a Presidential Decree in August 2018 to further increase openness and transparency in budget data and strengthen parliamentary and public monitoring of public finances. ### Key elements of the Presidential Decree (August 2018) - Approval of updated budget classification, in accordance with GFSM 2014, by July 2019. - Development of an action plan to harmonize budget accounting procedures with IPSAS for 2019–20. - Requirement for the state budget and budgets of state targeted funds to be approved by law, from 2020, with a detailed information breakdown in line with international best practices. - Mandatory publication of the findings of the Chamber of Accounts on the draft budget and end-year budget execution report. - Launch of an open budget information portal. - Establishing, from 2019, a mechanism for citizen participation in the allocation of budget funds, providing that at least 10 percent of supplemental sources of district (municipal) budgets be channeled to funding measures formulated on the basis of public opinion. ### Draft COM decree and additional reforms to strengthen transparency - Bringing mandatory revenues of off-budget accounts of extra-budgetary funds within the budgetary and accounting system. - Undertaking an inventory of government owned or controlled units to assess which should be classified as general government units in accordance with GFSM 2014. - Bringing state-unitary enterprises that would be classified as general government units within the treasury single account and budgetary and accounting system. - Developing a balance sheet for the general government sector. - Publishing a statement on fiscal risks and developing a framework for fiscal risk monitoring and management. - Reporting on tax expenditures. - Improving budget classification and developing program classification. ### Additional proposals in the draft 2019 Budget Message (to be implemented in subsequent years) - The introduction of more sophisticated fiscal targets which potentially address revenue shocks and windfalls, and which help to contain expenditure growth in certain target areas, such as public sector wages. - Introduction of medium-term expenditure ceilings by Ministry from 2020 and a program budgeting framework from 2021. - Publication of a tax expenditures statement in 2019. - Reviewing arrangements for the Parliament’s approval of the budget, including the level of detail at which budget expenditure is approved, for implementation in 2020. - Including in the budget, comparison of forecasts of the State budget parameters with the forecasts of independent institutions for implementation in 2019. *Source: Annex I. Progress Since the Fiscal Transparency Evaluation (from provided content).* ### Annex V. International Guidelines for Budget Disclosure ### Annex V. International Guidelines for Budget Disclosure ### International standards and guidance - The IMF’s Fiscal Transparency Code, the OECD’s Guidelines for Budget Transparency, and the Open Budget Survey Questionnaire provide guidance on good international practices for disclosure of information in budget documents. - The IMF’s 2014 Fiscal Transparency Code presents basic, good, and advanced practices for disclosure of budget information including: macroeconomic forecasts; fiscal projections; information on changes in macro-fiscal projections between successive budgets; fiscal objectives; performance information on the major policy areas; and fiscal risks (macroeconomic and contingent liabilities). - The 2017 OBS included 53 separate questions on the content of the Executive Budget Proposal, and a further 44 questions on the content of other budget documents, including the pre-budget statement, mid-year review, and year-end execution report. ### Key content requirements for the Executive Budget Proposal (highlights) - Expenditures for the budget year, presented by administrative unit, economic classification, functional classification, and by program, and revenue by revenue category (tax and non-tax) and individual source (e.g., income tax, value added tax etc.). - Multi-year revenue and expenditure estimates for at least the two years following the budget year, and their details by revenue category and expenditure by the various different classifications as above. - Detail of expenditure and revenue outturns or estimates for at least the two years prior to the budget year. - Estimates related to government borrowing and debt, including details such as the amount of net new borrowing required during the budget year; total debt outstanding at the end of the budget year; interest payments on the debt for the budget year, as well as the composition of debt (such as maturity profile, domestic or external). - Information on the macroeconomic forecasts, including discussion of the outlook and forecasts for the key economic parameters and assumptions (such as nominal GDP level, real GDP growth, inflation and interest rates). - The impact of different macroeconomic assumptions on the budget forecasts (including the impact of a changes in GDP, interest rates, or other macro-relevant variables). - Information on contingent liabilities, such as government loan guarantees or insurance programs. - Information on how new policy proposals, as distinct from existing policies, affect expenditures and revenue, at least for the budget year; a narrative discussion of the impact of these new policies; and how the budget is linked to policy goals. - Information on financial assets and non-financial held by the government and estimates of their value for the budget year. - Information on tax expenditures, including estimates of revenues forgone, their policy purpose, and intended beneficiaries. - Other specific disclosures such as details of any expenditure arrears, long-term fiscal projections (over ten years) showing the sustainability of public finances; earmarked revenues; and transfers to public corporations. ### External oversight and public engagement - The Open Budget Index additionally reviews: - The role and effectiveness of external oversight institutions in the budget process, including the role of the legislature, supreme audit institution, and independent fiscal institutions (where they exist). - Public engagement in the budget process. ### Generalized structure of budget documentation (Annex VI) - Budget Summary - Short explanation of the main fiscal aggregates, government priorities, and major new policy initiatives. - Table 1: Summary the Main Fiscal Aggregates. - Budget Execution for Current Year - Description of recent economic developments in the domestic and global economy. - Discussion of revised estimates for macroeconomic parameters for the current year and comparison to original Budget forecast. - Discussion of fiscal developments and revised estimates for the current year and comparison to original Budget forecast. - Medium Term Economic Outlook - Discussion of the forecast of macroeconomic variables relevant for government finances. - Table 2: Medium-term economic projections and underlying assumptions (include outcome for the previous year, revised estimate for the current year, budget year, and two forward years). - Discussion of main components of GDP forecasts and their drivers. - Table comparing forecasts to independent forecasters (e.g., IMF, World Bank, Consensus). - Fiscal Strategy and Medium-term Fiscal Projections - Discussion of the government’s fiscal objectives and projections of the main fiscal aggregates for State Budget, EBFs and Consolidated Budget. - Tables 3, 4, 5 and 6: Medium-Term fiscal projections for State Budget, EBFs, Consolidated Budget and Financing (include outcomes for the previous year, revised estimate for the current year, budget year, and two forward years). - Detailed Budget for Budget Year - Description of any new revenue and expenditure measures and their contribution or impact on the budget. - Table 7: Budget year Revenue forecast presented by main revenue category. - Table 7: Budget year expenditure allocations presented by functional classification. - Annexes: Budget year revenues and expenditures for each of the STFs and UFRD (table for each) accompanied by short explanations. - State Development Program - Description of new major projects, their objectives, total costs, and financing. - Table showing minimum information on major investment projects (project, total approved project cost, expenditure to date, source and type of financing). - Financing and Debt - Explanation of how the budget is being financed, with details of domestic and external financing. - Table 8: Detailed Financing Requirements for the budget year. - Government debt projections for the budget year and medium term, and discussion of main drivers. - Detailed information on composition of public debt, including source and currency composition. - Discussion of debt management and plans to develop domestic bond market where appropriate. - Fiscal Risk Statement - Discussion of the main macro-fiscal risks and impact of alternative outcomes for key macroeconomic parameters on the main budget aggregates. - Disclosure of explicit contingent liabilities (e.g., guarantees), contingent events (e.g., natural disasters) and other specific risks (e.g., state-owned enterprises). ### Budget reporting templates and key tables (Annex VII highlights) - Template tables cover: - Table 1. Summary of the Main Fiscal Aggregates (2017–2021; Outcome, Original, Revised, Budget, Projections). - Table 2. State Budget (Republican Budget; Local Government Budget; State Budget aggregates) for 2017–2021. - Table 3. Extra-budgetary Funds (EBFs) with Pension Fund, Employment Fund, Privatization Fund, UFRD, Others for 2017–2021. - Table 4. Consolidated Budget for 2017–2021. - Table 5. Financing Requirements (Incurrence and Repayment of Borrowing; External and Domestic) for 2017–2021. - Table 6. State Budget Estimates for 2019 with detailed revenue and tax line items. - Tables for UFRD and other EBFs, Detailed Financing Requirements (Table 7), General Government Financial Balance Sheet (Table 8), and Reconciliation of Medium-Term Fiscal Projections (Table 9). - Table 9 example figures (simplified template): - 2019 Consolidated Budget - Overall Balance -200 -100 50 150 - - Change in Revenue 30 60 90 120 - Change in Expenditure -20 -40 -60 -80 - Change in Net lending -5 -15 -25 -35 - 2020 Consolidated Budget - Overall Balance -195 -95 55 155 250 ### Template and content for Annual Fiscal Risk Statement (Annex VIII) - Purpose: guide for comprehensive overview of main risks to public finances; expanded version developed with the Ministry of Finance for inclusion in the 2019 budget. - Introduction: macroeconomic and fiscal projections incorporate known information; a range of risks could cause outcomes to differ from forecasts, most significantly unanticipated macroeconomic developments and contingent liabilities (e.g., guarantees, SOE performance). - Macroeconomic Risks (examples and channels) - Risks include slower-than-anticipated domestic economic growth; weakening global growth leading to lower export prices (particularly commodities); exchange rate volatility; deviations in inflation; increases in the shadow economy; variations in pace of structural reforms. - Table 1. Sensitivity of fiscal position to changes in various economic parameters (presented in UZS Billion and Per cent of GDP) includes scenarios: - Real GDP growth is 1 percent lower than forecast. - Inflation is 1 percent higher than forecast. - Prices for key commodities fall by 10 percent. - UZS-USD exchange rate depreciates by 10 percent. - Number of corporate taxpayers declines by 10 percent. - Illustrative channels described: - Lower GDP growth reduces VAT and corporate income tax revenues and tends to lower inflation, further reducing revenues. - A fall in export prices (natural gas, copper, cotton, metals) reduces state budget revenues and FRD receipts. - A 10 percent depreciation (appreciation) of the UZS will lead to an increase (decrease) in state budget revenues of [X], and an increase of state budget expenditures of [Y]. - If inflation were 1 percentage point higher than forecast, state budget revenues would increase by [X], and expenditures would increase by [y]. - Shadow economy measures: the 2019 budget includes a suite of new tax measures expected to improve formalization; the budget includes estimates of additional revenue of around UZS [4.2] trillion from these measures, but their impact is uncertain and the budget assumes conservative realization. - Other fiscal risks to be disclosed: contingent liabilities (government guarantees), contingent events (natural disasters), performance of state-owned enterprises, and deviations in expenditure from planned. *Source: Annex V–VIII, "Annex V. International Guidelines for Budget Disclosure" (selected content).* ### 3. Government Debt ### 3. Government Debt ### Overview - Government debt comprises loans from international financial institutions and other external creditors; all outstanding debt is denominated in foreign currency. - Currency composition of outstanding borrowing: - Around [57] percent denominated in US dollars. - Around [15] percent denominated in yen. - [6] percent denominated in Euro. - The government does not currently issue domestic securities. - The government has guaranteed certain external borrowings of state-owned enterprises (SOEs). ### Exchange rate and interest-rate risks - Exchange rate risk: - A depreciation in the exchange rate will increase the value of government debt and debt servicing obligations because debt is foreign-currency denominated. - Guaranteed external borrowings of SOEs would also increase in value with exchange rate depreciation. - The government holds foreign currency deposits; a depreciation will increase the value of those assets, offsetting adverse implications on the value of public debt. - Interest-rate risk: - About half of external borrowing is in variable-rate loans. - An increase in interest rates on existing variable-rate debt would increase debt servicing costs relative to budget forecasts. ### Debt portfolio characteristics - Average maturity: - The debt portfolio has an average maturity of [20] years, reflecting borrowing for infrastructure projects. - Short-term borrowing: - Short-term borrowing (loans maturing within one year) comprise a relatively small share of the overall portfolio at X percent. - Public Debt Portfolio Risk Indicators (as described in source; specific table entries omitted where not provided): - Risk categories referenced: Foreign Exchange, Interest rate, Refinancing. - Indicators referenced: Borrowing denominated in FX (share of total); USD/Euro/Yen denominated borrowing (share of total); Guaranteed borrowing denominated in FX (share of total); Variable rate borrowing (share of total); Debt maturing in one year (share of total); Average time to maturity (years). ### 4. Specific Fiscal Risks — Overview - Contingent liabilities can be explicit (firm government commitment or legal obligation) or implicit (public expectation not established in law). - The chapter provides an overview of main contingent liability exposures including government guarantees, financial sector exposures, SOE-related risks, quasi-fiscal activities, and natural disasters. ### 4.1 Government Guarantees - Stock of outstanding loan guarantees (external SOE borrowing) as at June-2018: [2.5] billion soms. - Nature of guarantees: - Majority on external borrowing of SOEs from bilateral lenders and commercial banks. - Around [300] separate guarantees provided on external borrowing of various SOEs, [27] of which pay a fee. - Small number of guarantees on domestic borrowing totaled [X] billion soms as at June 2018. - Table 3 referenced: Stock of Outstanding Guarantees to Enterprises (UZS Billion) by beneficiary, maturity and outstanding value (detailed entries not provided). - If applicable: fiscal costs associated with servicing guaranteed debts was [x] billion soms or [x] percent of GDP during the previous year (placeholder as in source). ### 4.2 Financial Sector Exposures - Deposit Insurance Fund and deposit guarantees: - Law No. 360 of 2002 guarantees payment of compensations for deposits of citizens in banks if the Central Bank revokes a bank license (except for revocation related to reorganization). - 27 banks participate in the Deposit Guarantee Fund; all deposits of citizens placed in these banks are guaranteed, without limit. - All deposits placed at the Xalq (People’s) Bank are guaranteed by the government. - Total value of deposits guaranteed by the Deposit Insurance Fund and Xalq Bank: [58.7] trillion soms or around [24] percent of GDP at end-2017. - If the Fund’s assets are insufficient, the government will provide a loan to meet compensation requirements, with subsequent return from proceeds to the Fund. The Fund has not yet been called upon to provide compensation. - Bank financial soundness indicators (Table 4; source: Central Bank of Uzbekistan): - Regulatory capital to risk weighted assets: 18.8 (2017), 15.8 (2018 Q3). - Non-performing loans net of provisions: 2.95 (2017), 4.6 (2018 Q3). - Return on assets: 1.9 (2017), 1.6 (2018 Q3). - Return on equity: 17.1 (2017), 12.3 (2018 Q3). - Liquid assets to short-term liabilities: 55.65 (2017), 40.1 (2018 Q3). - Government ownership and support: - Government owns 11 public sector banks; financial performance varies. - Government provided periodic equity injections to state-owned banks; in 2017 equity investment of [2.5] percent of GDP were provided, financed from assets of the FRD. ### 4.3 Non-Financial State-Owned Enterprises (SOEs) - SOE footprint: - Around 2,100 state-owned enterprises: 107 joint stock companies with majority state ownership, 1,500 unitary enterprises, and around 500 limited liability companies. - Government undertaking an inventory of all SOEs to assess market vs non-market producers and bring non-market producers into the budgetary and accounting framework of the general government sector in line with international standards. - Financial position and performance (placeholders preserved as in source): - Total assets of the [X] state-owned enterprises were around UZS [X] trillion (X percent of GDP) at [end-2018]. - Total liabilities (guaranteed and unguaranteed) around UZS 530 trillion (X percent of GDP). - Sector revenues: UZE [x] trillion (X percent of GDP) in [2018], [which is an improvement/deterioration] from the previous year. - Tables referenced (Table 5, Table 6) for balance sheet, income statement and performance indicators (profitability, leverage, liquidity) — specific numeric entries not provided in source text. - Government actions: - Plans to restructure certain enterprises and strengthen governance (details to be discussed in reform plans). ### Financial relations, loans and equity injections to SOEs - Direct fiscal transactions: - In [2018] the state budget provided direct support as grants and subsidies totaling UZS [X] million or [X] percent of GDP to SOEs (detailed recipients and purposes not provided). - Dividends from SOEs for [2018] totaled UZS [X] billion or [X] percent of GDP (major sources not specified). - Loans on-lent to SOEs: - Borrowings on-lent from IFI-sourced government borrowings are recorded as part of government gross debt. - At end-June 2017, total outstanding value of loans to SOEs was UZS [11.4] trillion or [13] percent of GDP. - Fiscal risk: if SOEs cannot meet repayment obligations, the government must service the loans from the state budget. - Equity injections: - [Equity injections of USZ [X] billion were provided in the previous year.] (placeholder preserved). - Average annual equity injections of [X] billion over [2015 to 2018] (placeholders preserved). ### Quasi-fiscal activities - Definition: non-commercial activities by SOEs to fulfill public policy objectives, which can erode profitability if not compensated. - Risks: reduced dividends, need for subsidies or recapitalization, or increased likelihood of fiscal support. - Identified actions: - Significant quasi-fiscal activities include [list material known quasi-fiscal activities.] (placeholder). - Government steps to collect information on quasi-fiscal activities and reduce such activities in the energy and other sectors through tariff reforms and price liberalization (details to be provided). ### Natural disasters - Impact: Earthquakes and droughts can cause revenue losses and require additional government expenditures for support and reconstruction. - Historical events: Since 1955, Uzbekistan has experienced 11 earthquakes above six in magnitude. - Estimated average annual economic loss from natural disasters: around 0.5 percent of GDP (UNISDR estimate). ### Annex material — Fiscal transparency and fiscal risk statement requirements (selected points) - Inventory and classification: - Assess all public corporations to determine market vs non-market producers in line with GFSM 2014; include general government units in budgetary and treasury system if non-market producers. - Require public corporations to submit quarterly financial reports to the Ministry and annual audited financial statements. - Coverage and sequencing of balance-sheet reporting: - Prioritize a financial balance sheet for the state budget (including off-budget accounts) and extra-budgetary funds before expanding to non-financial assets and a full public sector balance sheet. - Clarify these are statistical reports and statements of financial assets and liabilities, not full financial statements until accounting reforms align standards. - Suggested transparency enhancements: - Improve budget reporting to present economic and functional classifications in line with international standards; delay program classification. - Amend the Budget Code to require publication of an annual statement of fiscal risks and develop a framework for monitoring risks related to public corporations. - Information requirements for preparing a Fiscal Risk Statement (Annex X): - List of government guarantees on SOE borrowing: outstanding amounts, beneficiaries, currency denomination, history of called guarantees and amounts paid. - List of government loans to other entities: amounts outstanding, beneficiaries, arrears status. - List of entities outside the budget owned/controlled by government, with for each: - Assets and Liabilities (short- and long-term breakdowns ideally), cash and cash equivalents, debt and other borrowing. - Income and expenses: operating revenues and expenses, net profits, interest, net profit before/after taxes. - Transactions with government: dividends, subsidies, equity injections. - Overdue debts or payments to external creditors, government, other SOEs, third parties. - Contingent liabilities (guarantees, indemnities, letters of comfort). - Quasi-fiscal activities (below-commercial pricing, universal service obligations). - Information on key financial indicators for banks and other financial institutions, and the deposit insurance fund (assets and total deposits guaranteed). - Information on government debt and financial assets (including those held by UFRD): maturity structure, floating vs fixed rate, currency composition. - List of PPPs and contractual obligations (direct or indirect obligations of the government). - Historical effects of natural disasters and industrial accidents on the budget. *Source: 1uzbea2019003 - 3. Government Debt (PDF).* ### Annex XI. Budget Classification ### Annex XI. Budget Classification ### Differences between the Budget Execution and GFS Economic Classification - Current Budget Classification vs GFSM 2014 recording — tabular mapping in source highlights treatment of: - Revenue (a+b) - a. Tax and non-tax revenue (other than financing) — recorded as revenue in GFSM 2014 (tick indicated in source). - b. Revenue related to financial assets and liabilities (financing): - i) receipts from repaid loans — treated as financing; in GFSM 2014 recorded as (-) fin. assets/loans. - ii) privatization receipts — treated as financing; recorded as (-) fin. assets/equities. - iii) receipts from borrowing — treated as financing; recorded as (+) debt liabilities. - Expenditure (a+b) - a. Expenditure other than financing — recorded as expenditure in GFSM 2014 (tick indicated). - b. Expenditure related to financial assets and liabilities (financing): - i) repayment of government debt — recorded as (-) debt liabilities. - ii) loans granted* — recorded as (+) fin. assets/loans. - iii) equity injections* — recorded as (+) fin. assets/debt securities. - iv) purchase of debt securities* — recorded as (+) fin. assets/equities. - Note on financing classification: - "* Only those operations should be treated as financing, when government acquires a recoverable claim, and in case of shares/equities government will receive a reasonable return (e.g. dividends). Otherwise the transaction should be treated as expense (capital transfer)." ### Bridge table between GFS and main items of the current Budget Classification - GFS based classification mapped to budget line items (as in source): - A. TOTAL CASH INFLOWS (1+2) — 00ВСЕГО Доходы - 1. Revenue - Taxes — 3100Налоги - Social contributions — 2 200ВЗНОСЫ/ОТЧИСЛЕНИЯ НА СОЦИАЛЬНЫЕ НУЖДЫ - Grants — 3 300ГРАНТЫ - Other current revenue — 3400ДРУГИЕ ДОХОДЫ - Receipts from sale of non-financial assets — 35110Поступления по нефинансовым активам - 2. Inflows from financing operations (a+b)* - a. Operations in financial assets — 35120Поступления по транзакциям в финансовые активы - b. Operations in liabilities (if relevant) — 35200Поступления по транзакциям в обязательства - B. TOTAL CASH OUTFLOWS (1+2) — 000ВСЕГО РАСХОДОВ - 1. Expenditure - Compensation of employees — 41100Заработная плата - Social contributions — 41200Взносы / отчисления на социальные нужды - Purchases of goods and services — 4200РАСХОДЫ ПО ТОВАРАМ И УСЛУГАМ - Interest — 4400ПРОЦЕНТЫ - Subsidies — 4500СУБСИДИИ - Grants — 4600ГРАНТЫ - Intergovernmental payments — 4921300Расчеты и платежи между бюджетами - Social benefits (various codes) — 47110, 4711400, 4821400, 4700 - Other current expense — 4800ДРУГИЕ РАСХОДЫ - Purchase of non-financial assets — 4300РАСХОДЫ ПО ОСНОВНЫМ СРЕДСТВАМ - 2. Outflows from financing operations (a+b)* — 4900РАСХОДЫ ПО ФИНАНСОВЫМ АКТИВАМ И ОБЯЗАТЕЛЬСТВАМ - a. Acquisition of financial assets — 49100Финансовый актив - b. Operations in liabilities — 49200По обязательствам - Presentation note from source: - "* Inflows and outflows from financing operations (transactions in financial assets and liabilities) should not be included in revenue and expenditure" ### Proposed High-Level Aggregates of the Budget Classification - A. TOTAL CASH INFLOWS (1+2) - A.1. Revenue - Taxes - Social contributions - Grants - Other current revenue - Receipts from sale of non-financial assets - A.2. Inflows from financing operations (a+b) - a. Disposal and other reductions in financial assets - Loans (e.g. receipts from repaid loans) - Shares and equities (e.g. privatization receipts) - Other financial assets (e.g. sale of debt securities) - b. Incurrence of liabilities - Debt instruments (receipts from borrowing) - B. TOTAL CASH OUTFLOWS (1+2) - B.1. Expenditure - Compensation of employees - Purchases of goods and services - Interest - Subsidies - Grants - Social benefits - Other current expense - Purchase of non-financial assets - B.2. Outflows from financing operations (a+b) - a. Acquisition of financial assets - Loans (granted) - Shares and equities (e.g. equity injections) - Other financial assets (e.g. purchase of debt securities) - b. Repayment of liabilities - Debt instruments (repayment of loans, debt securities) - C. NET CASH BALANCE (+/-) (A – B) - D. CASH DEFICIT (–) / SURPLUS (+) (A.1 – B.1)* — "*GFS definition of net lending/borrowing." - E. Net Cash Flows from Transactions in Financial Assets for Policy Purposes (B.2.a (Loans and Shares and Equities)– A.2.a (only Loans)) - F. OVERALL CASH DEFICIT (-) / SURPLUS (+) after adjusting for policy lending (D – E) ### Fiscal Indicators and Formats for Consolidated Financial Statements - Rationale and objectives (as stated in source): - Fiscal indicators assess impact on macroeconomic stability, resilience, and sustainability. - Accrual accounting (GFSM 2014) provides an integrated framework and a wide range of indicators — GFSM 2014 presents 39 fiscal indicators. - Desirability for Uzbekistan’s choice of indicators: - Measuring impact of government activities on rest of economy — overall balance could be best. - Maintaining continuity with cash-based measures — GFSM 2014 cash surplus/deficit or an addition to it. - Assessing government’s balance sheet strength. - Selected fiscal indicators (to be displayed on face of primary ex post financial statements where practicable): - Fiscal Indicators in the Statement of Financial Performance - Operating result - total: - Definition: Revenues minus expenses minus selected other economic flows. - Note: A key accounting concept; difference from GFSM 2014 net operating balance relates to other economic flows included. - Net lending/borrowing: - Definition: Revenues minus expenses minus net investment in nonfinancial assets; equal to total financing. - Note: GFSM 2014 indicator of impact on government net financial worth; net lending increases government’s financial resources; net borrowing financed by debt. - Overall fiscal balance – total: - Definition: Net lending/net borrowing adjusted through rearrangement of transactions in financial assets for policy purposes (policy lending). Net policy lending and equity injections are added to expense. Privatization proceeds and repayments on policy lending are kept as financial transactions in calculating overall fiscal balance. - Note specific to Uzbekistan: includes policy lending of the UFRD; non-recoverable part of policy lending and equity injections that will not bring a return should be treated as expense when calculating net lending/borrowing. - Fiscal Indicators in the Statement of Cash Flows - GFS cash surplus/deficit: - Definition: Net cash inflow from operating activities minus net cash outflow from investment in nonfinancial assets; equal to total cash flows from financing transactions. - Note: Cash equivalent of net lending/borrowing; important to track for consistent long time series. - Overall cash surplus/deficit: - Definition: GFS cash surplus/deficit adjusted through rearrangement of transactions in financial assets and liabilities for policy purposes (policy lending/borrowing). - Note: Should be tracked for time series consistency and external communication. - Fiscal Indicators in the Statement of Financial Position - Sovereign Debt: - Definition: Debt securities and loans; corresponds to "government debt" target definition. - Gross debt: - Definition: Stock of liabilities that require payment(s) of interest and/or principal in future; includes all liabilities held in debt instruments (total liabilities excluding equity and investment fund shares and financial derivatives and employee stock options). - Note: Useful to add to track PPP liabilities. - Net sovereign debt: - Definition: Sovereign debt minus financial assets held in most liquid financial instruments (primarily currency and deposits). - Note: For Uzbekistan with large foreign exchange deposits, net debt gives more comprehensive position. - Net Financial Worth: - Definition: Stock position in financial assets minus stock position in liabilities. - Note: Important due to large government sector lending (notably by the UFRD). - Net Worth: - Definition: Stock position in assets minus stock position in liabilities; takes account of non-financial assets and subsoil assets significant in Uzbekistan. - Disclosure and narrative: - Ex post financial statements should include a note disclosing these indicators. - Narrative accompanying financial statements to parliament and public will highlight and explain figures. ### Illustrative Consolidated Financial Statements (structure and key lines) - Consolidated Statement of Financial Performance (UZS billion) — illustrative columns for 2018 and 2019 include: - Revenues: Taxation; Sale of Goods & Services; Interest Income; Dividend Income; Others; Total Revenues. - Expenses: Wages & salaries; Employee pensions; Depreciation & amortization; Goods & services; Interest expenses; Current grants; Subsidy expenses; Personal benefits; Capital transfers; Mutually agreed write-downs; Other capital grants; Total expenses. - Net operating balance; Other economic flows included in operating result (detailed list in source, e.g., Net write-downs of assets, Assets recognized for the first time, Net gain/(loss) from the sale of assets, Net foreign exchange gains/(losses), Other gains/(losses), Net result from associates and joint ventures); Operating result. - Net acquisition of non-financial assets (Purchases less sale less Depreciation plus Changes in inventories plus Other movements); Net lending/borrowing; Net cash flows from transactions in financial assets for policy purposes; Overall fiscal balance. - Consolidated Statement of Financial Position (UZS billion) — illustrative columns for 2018 and 2019 include: - Assets: Financial assets (Cash and deposits; Advances paid; Investments, loans and placements; Other receivables; Equity Investments; Investments in other public sector entities; Equity accounted investments; Investments – shares; Total financial assets); Non-financial assets (Land; Buildings; Plant, equipment and infrastructure; Inventories; Intangible assets; Investment properties; Biological assets; Heritage and culture assets; Assets held for sale; Other non-financial assets; Total non-financial assets); Total assets. - Liabilities: Interest-bearing liabilities (Deposits held; Government securities; Loans (including PPP concession projects); Other borrowing; Total Interest-bearing liabilities); Provisions and payables (Pension liabilities; Other employee liabilities; Supplier payables; Personal benefits; Subsidies; Grants; Other provisions and payables; Total provisions and payables); Total liabilities. - Net worth. - Debt indicators: Gross debt; Net debt; Net financial wealth. - Consolidated Statement of Cash Flows (UZS) — illustrative columns for 2018 and 2019 include: - OPERATING ACTIVITIES: Receipts from operating activities (Taxes received; Receipts from sale of goods and services; Interest receipts; Dividends and income tax equivalents; Other receipts); Payments for operating activities (Payments for employees; Payments for goods and services; Grants and subsidies paid; Interest paid; Personal benefit payments; Other payments); Net cash flows from operating activities. - INVESTING ACTIVITIES: Investments in nonfinancial assets; Proceeds on disposal of nonfinancial assets; Net Investments in nonfinancial assets; Net cash flows from transactions in financial assets for policy purposes; Net cash flows from transactions in financial assets for liquidity purposes; Net cash flows from investing activities. - FINANCING ACTIVITIES: Receipts (Borrowing; Other financing); Payments (Repayment of Debt; Other Financing); Net cash flows from financing activities. - Net increase/decrease in cash held; Cash at the beginning of the year; Cash at the end of the year. - Key fiscal indicators shown: Net cash flows from operating activities & transactions in non-financial assets = GFS cash surplus(+)/deficit(-); Net cash flows from transactions in financial assets for policy purposes; Overall cash surplus(+)/deficit(-). ### Parliamentary Appropriation System Envisaged by the PFM Reform Strategy 2007–18 - PFM Reform Strategy 2007-2018 envisages amendments to budget code to establish parliamentary appropriation with features: - Application of appropriation only to expenditures and not to revenues. - Appropriation on a cash basis. - Separation between release of cash and release of budgetary authority derived from parliamentary appropriation. - Unused appropriations lapsing at year-end. - Definition of appropriation according to organizational, economic, fund, and program (or functional) classifications via an annual budget law. - Application of the appropriation system to republican, oblast, and rayon/city budgets (including Republic of Karakalpakstan and Tashkent City) and progressively to budgets of STFs and OBAs of budget organizations (general government sector). - Permission for government entities to under-spend appropriations, but not to over-spend except as specifically authorized by the BSL. - Permission for the government to reduce parliamentary appropriations of expenditure (other than of OBAs) up to a certain limit (possibly 10 percent) in aggregate if revenue shortfalls threaten expenditure arrears. - Permission for the government to transfer up to a certain limit (possibly 10 percent) of one parliamentary appropriation item to another. ### Illustrative Appropriation Format - Appropriations of Expenditure on the Ministry of X for 2020 — consolidated (UZS billion) lines to be included: - Wages and Salaries - Social Contributions - Use of Goods and Services - Interest - Subsidies - Grants - Social Benefits - Capital Transfers to SOEs - Other Current Expenditures - Acquisition of Fixed Assets - Acquisition of Other Nonfinancial Assets - Loans Provided for Policy Purposes - Equity Provided for Policy Purposes - Similar structure proposed for: - Consolidated Development Funds of Budget Organizations under the Ministry of X - Fund A under the Ministry of X - Presidential Program B under the Ministry of X *Fiscal Affairs Department, International Monetary Fund — content as provided in the source PDF.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1uzbea2019003.pdf_