## 1uzbea2019004 ## Source details **Canonical URL:** [1uzbea2019004](https://www.imf.org/-/media/files/publications/cr/2019/1uzbea2019004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2019/1uzbea2019004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2019/1uzbea2019004.pdf.json) --- ### CONTEXT - Foremost economic challenge: create more and better jobs amid a rapid demographic transition; working-age population as a share of total population has surged since the 1990s. - Labor market outcomes: - Over the last two decades, job creation in the formal sector fell increasingly short of expanding labor supply; some job creation occurred in the informal economy and millions of workers sought jobs abroad. - Legacy of the state-led growth model: - Resources directed to capital-intensive production by large state-owned enterprises (SOEs): mining, energy, chemicals. - Agriculture largely operated in Soviet planning mode. - Policies included accumulating large FX reserves, discouraging mobility of jobless workers, and restricting foreign investments. - Distorting policies: import substitution, FX restrictions, directed credits, micro-managing SOEs and state banks. - Reforms completed since 2016: - FX liberalization: unified official and parallel exchange rates at a heavily depreciated rate; eliminated all FX restrictions subject to IMF jurisdiction. - Tax reform aimed to reduce tax burden on private firms and workers to foster job creation. - Improved availability and quality of economic statistics. - Major Article IV themes: - Prioritize structural reforms to address binding constraints on investment and entrepreneurship. - Avoid a boom-bust credit cycle as credit and investment expand. - Reorient policies toward inclusive growth anchored on the UN’s Sustainable Development Goals (SDGs) and overhaul labor policies. ### OUTLOOK, RISKS, AND REGIONAL SPILLOVERS — Economic Developments - Credit and investment - Nominal credit to the economy expanded by about 50 percent in 2018, financing a massive increase in imports of capital goods and investments in housing and infrastructure. - Government funded and directed a large part of the credit expansion by shifting deposits to banks and through policy-based lending operations. - Growth and employment - Real GDP: 4½ percent in 2017; 5 percent in 2018. - Despite booming investment, growth and job creation picked up only moderately; muted response due to absence of significant cyclical slack and binding intermediate input bottlenecks (energy and water shortages); agriculture affected by bad weather. - Available labor market data suggest little dent in pool of unused labor resources; remittances data indicate number of workers abroad continued to expand. - Inflation - CPI inflation peaked at 20½ percent at the beginning of 2018 and receded to 14½ percent by year end 2018. - Expectations of high inflation remain well entrenched; GDP deflator and tradable goods prices indicate high underlying price pressures. - External sector assessment - Drivers of external position deterioration: - FX and trade liberalization removed previous import-repressing policy props. - Real exchange rate depreciated by about 50 percent, improving external cost competitiveness. - FX reserve accumulation policy switched to broadly neutral stance; CBU allowed some nominal exchange rate flexibility. - Expansionary credit policies increased imports, especially capital goods. - Current account: - Current account deficit increased to 7 percent of GDP in 2018, after a surplus of 2¼ percent of GDP in 2017. - IMF EBA suggests 2018 external deficit norm centered on 4½ percent of GDP, compared with an underlying current account deficit of 5½ percent of GDP. - Conclusion: Uzbekistan’s external position is presently moderately weaker than implied by fundamentals and desirable policies. - External stability: - Risks contained by large FX reserves, a strong international investment position, and external debt levels projected to remain moderate over the medium term. - FX market participants continue to be able to make payments and transfers for current transactions without impediments. - Authorities plan to proceed cautiously with removing strict outflow controls on capital flows. ### OUTLOOK, RISKS, AND REGIONAL SPILLOVERS — Projections, Assumptions, and Risks - Staff projections and key assumptions: - External assumptions: trading partners’ import demand and relevant commodity prices, except gold, are projected to temporarily soften in 2019; assumptions subject to significant downside risks. - Monetary policy assumptions: CBU maintains neutral FX reserve accumulation policy (sterilizes domestic purchases of gold with matching FX sales), allows nominal exchange rate to move with fundamentals, and adjusts refinancing rate in response to prospective inflation pressures. - Credit policy assumption: credit growth in 2019 is assumed to be brought back in line with nominal GDP growth in the 25-30 percent range, mainly by scaling back directed and preferential lending. A large upward deviation from this credit growth benchmark is a key short-term stabilization risk. - Fiscal policy assumption: overall fiscal stance remains broadly unchanged in 2019 and beyond; low risk of significant deviations from official budget targets, but risk that fiscal policy could behave pro-cyclically and that policy-based lending and off-budget operations could be scaled up. - Structural reforms: government maintains reform momentum across a wide range of policies; slowing reform momentum is a key medium-term domestic policy risk. - Staff projections (2019-2020): - Growth: 5½ percent in 2019; 6 percent in 2020. - Job creation: formal sector employment projected to pick up to about 1½ percent. - External position: expected to stay in deficits of about 6 percent of GDP during 2019-20; external debt levels will remain moderate and decline over the medium term. - Inflation: CPI inflation projected to decline only gradually to low double-digits by end-2020 due to persistence and pressures from price liberalization and relative wage adjustments. - Regional spillovers: - Uzbekistan has led improvements in regional cooperation since reforms, reconnecting regional energy and transportation networks and defusing disputes about water rights, boosting regional trade and integration. ### POLICY DISCUSSIONS — Maintaining a Prudent Fiscal Policy - Fiscal stance in 2018: - Official budget reported a surplus of ½ percent of GDP, an over-performance of ¾ percent of GDP relative to the budget. - Additional revenue from FX liberalization, favorable commodity prices, and improved tax collections was partly saved to provide counter-cyclical support. - Staff’s preferred fiscal gauge: - Overall fiscal balance adjusts reported revenue and expenditure for off-budget transactions and includes an estimate of policy-based lending operations. - In 2018, with policy-based lending the main deficit driver, the overall fiscal deficit amounted to 2 percent of GDP, the same as in 2017. - Fiscal transparency and tax reform: - Recommendation: fiscal transparency should be a priority; authorities committed to bring all fiscal operations on-budget starting in 2019. - Tax reform implemented in 2018: - Reform significantly reduced tax rates on private corporations, SMEs, and labor income. - Number of firms registered under the standard tax regime and VAT regime rose from 7,000 in 2018 to 35,000 in 2019. - Government reforming tax administration, including by setting up a large taxpayer office. - Assessment: 2018 tax reform is a major step to improve incentives for private businesses and workers while expanding the tax base; too early to determine impact on revenues. ### BOX 1 — Selected Risks and Policy Advice (Risk Assessment Matrix; selected items) - Weaker-than-Expected Global Growth - Likelihood/Timeframe: Medium, Short to Medium-Term. - Possible Impact: Weaker exports, reduced remittances, weaker confidence and investment, slowing growth and job creation. - Policy Advice: - Near term: counter-cyclical stimulus through additional fiscal spending while allowing nominal exchange rate to adjust. - Medium term: foster resilience via structural reforms, reduce barriers to trade (especially customs costs), and better enforce competition in product markets. - Large Swings in Energy Prices - Likelihood/Timeframe: Medium, Short to Medium-Term. - Possible Impact: Net energy exports ~4 percent of GDP in 2018; lower energy prices could worsen trade balance and fiscal revenue and increase investment uncertainty; higher energy prices could improve trade balance and fiscal revenue. - Policy Advice: - Allow nominal exchange rate to adjust to persistent external price shocks. - Allow automatic fiscal stabilizers in short term; correct fiscal position over medium term if shocks persist. - Continue structural reforms to diversify exports. - Intensification of Security Risks - Likelihood / Timeframe: High / Short to Medium-Term - Possible Impact: Low — Regional conflict or security risks outside Uzbekistan could disrupt regional trade, tourism, or foreign investment. - Policy Advice: Maintain consistent policies and commitment to reforms. Provide fiscal stimulus, if needed. - Domestic Risks — Continued Credit Boom - Likelihood / Timeframe: Medium / Short to Medium Term - Possible Impact: High — Could lead to a boom-bust credit cycle with adverse implications for growth and stability. - Policy Advice: Bring credit growth in 2019 and beyond in line with external and internal stability requirements. - Domestic Risks — Slowing of Reform Momentum - Likelihood / Timeframe: Medium / Medium Term - Possible Impact: High — Improvements in the investment climate and regional cooperation could slow or reverse. - Policy Advice: Prioritize reforms to remove the most binding constraints on private investment and job creation. - Domestic Risks — Bank Credit Constrained by Funding Gaps Over the Medium Term - Likelihood / Timeframe: Medium / Medium Term - Possible Impact: High — Banks would be limited in their ability to intermediate the economy’s savings to fund investment projects and support more inclusive growth. - Policy Advice: Foster macroeconomic stability, especially low and stable inflation. Improve public and bank governance. ### ANNEX I — Simulating a Boom-Bust Credit Cycle (summary) - Credit growth in 2018: - 2018 Article IV projection for credit growth: 25 percent in 2018. - Actual credit growth in 2018: 51 percent. - Sectoral contributions (abs chg., contr. percent, chg. Yoy percent): Total: 54.6 (abs chg.), 50.8 (Contr.), 50.8 (chg. Yoy); Corporations: 44.1 / 41.1 / 46.9; Individuals (households): 10.4 / 9.7 / 79.0; Housing and community serv.: 2.2 / 2.0 / 479.7; Agriculture: 5.3 / 5.0 / 104.9; Trade and public catering: 4.5 / 4.2 / 98.0; Logistics supply and sales: 2.4 / 2.2 / 71.1; Construction: 4.5 / 4.2 / 28.6; Transport and commun.: 3.8 / 3.6 / 19.1; Other sectors: 0.8 / 0.7 / 82.2. - Credit at preferential terms explained more than half of the credit growth in 2018. - Across banks, state-owned banks contributed 45 percentage points to the 51 percent overall growth. - Demand-side drivers: larger government investment plan; preferential credit programs for agriculture and SMEs; underestimation of impact of price and FX liberalization. - Supply-side driver: larger-than-anticipated government funding for credit (capitalizations, loans, government placement of deposits at commercial banks). - Structure of the credit market: - Segments: Directed credit; Other preferential credit; Market credit. - Interest rates (December 2018): Average interest rate on market loans: 21.8 percent; Average interest rate on preferential loans: 8.4 percent. - Government intervention: concessional funding via FRD loans, treasury loans, deposits at commercial banks, recapitalizations. - Loan-to-deposits ratios: state-owned banks average 2.4; private banks average 0.8. - Credit and investment: - Government investment plan accounts for about half of gross fixed capital formation. - Fixed investment (Percent of GDP): 2015 19.4; 2016 19.8; 2017 22.6; 2018 26.3. - Centralized investment (Percent of GDP): 2015 3.6; 2016 4.3; 2017 5.3; 2018 8.5. - Non-centralized investment (Percent of GDP): 2015 15.8; 2016 15.5; 2017 17.3; 2018 17.9. - Boom-bust simulation assumptions: - Credit boom phase continues during 2019-20 and credit growth halts in 2021. - Credit growth in boom-bust scenario: 50 percent in 2019 and 40 percent in 2020 (compared with baseline 25 and 20 percent, respectively). - Additional credit growth relative to baseline funded by government, approximately half via external borrowing and half via FX reserves of the FRD. - Additional government funding for credit about US$ 4-5 billion per year during 2019-20. - Other assumptions: economy at full capacity so additional domestic demand mainly raises imports and inflation; credit growth slows after inflation reaches 20 percent and current account deficit reaches 15 percent; nominal exchange rate remains at baseline during boom, and depreciates at bust to restore real exchange rate to baseline. - Simulation outcomes (selected): - International FX reserves would decline significantly by 2024, reaching about 5 months of imports (compared with 10 months under the baseline scenario). - External debt would reach 40 percent of GDP (compared with 30 percent in the baseline scenario). - Economy would become more volatile, adversely affecting the investment climate. - Selected indicator series (baseline versus boom-bust; values preserved exactly as presented): - Credit growth — Baseline: 2018 50.8; 2019 25.0; 2020 20.1; 2021 18.8; 2022 17.3; 2023 16.3; 2024 15.4. Boom-bust: 2018 50.8; 2019 50.0; 2020 40.5; 2021 13.2; 2022 12.5; 2023 14.8; 2024 14.6. - NPLs-to-gross loans — Baseline: 2018 2.8; 2019 4.9; 2020 4.4; 2021 4.0; 2022 4.1; 2023 4.3; 2024 4.6. Boom-bust: 2018 2.8; 2019 6.0; 2020 9.8; 2021 12.2; 2022 9.6; 2023 8.6; 2024 7.6. - Current account-to-GDP — Baseline: 2018 -7.1; 2019 -6.5; 2020 -5.6; 2021 -4.8; 2022 -4.4; 2023 -4.4; 2024 -4.2. Boom-bust: 2018 -7.1; 2019 -11.2; 2020 -15.1; 2021 -11.2; 2022 -8.2; 2023 -6.9; 2024 -4.9. - Reserves (Months of imports) — Baseline: 2018 13.6; 2019 12.9; 2020 12.6; 2021 11.6; 2022 10.6; 2023 9.9; 2024 9.2. Boom-bust: 2018 12.2; 2019 9.7; 2020 8.3; 2021 6.8; 2022 5.6; 2023 4.8; 2024 4.6. - Overall fiscal balance-to-GDP — Baseline: 2018 -2.1; 2019 -1.6; 2020 -1.8; 2021 -1.8; 2022 -1.8; 2023 -1.8; 2024 -1.7. Boom-bust: 2018 -2.1; 2019 -7.3; 2020 -7.6; 2021 -3.2; 2022 -2.9; 2023 -1.9; 2024 -1.8. - Policy lending-to-GDP — Baseline: 2018 -4.3; 2019 -2.2; 2020 -2.2; 2021 -2.1; 2022 -2.0; 2023 -1.9; 2024 -1.8. Boom-bust: 2018 -4.3; 2019 -7.7; 2020 -7.7; 2021 -3.1; 2022 -2.9; 2023 -2.3; 2024 -2.2. - Simulation conclusion: continued fast credit growth funded substantially by the government and FRD reserves risks triggering a boom-bust cycle that would raise inflation, widen current account deficits, erode reserves, increase external debt, raise NPLs, and create macroeconomic and financial volatility. ### INTERNATIONAL INVESTMENT POSITION, FX RESERVES, AND EXCHANGE RATE - IIP assessment: - Uzbekistan’s IIP appears strong relative to regional peers, reflecting FX reserve accumulation, private sector FX cash holdings, and restraint on external borrowing. - External liabilities largely multilateral and bilateral loans at concessional rates and long maturities (almost 90 percent of external debt is at maturities exceeding 10 years). - Risk: excessive expansion of market-based borrowing by the government or SOEs could build up balance sheet risks over the medium term. - Selected IIP figures (Assets / Liabilities / IIP): - Assets: 36.4, 41.7, 43.1 (2016, 2017, 2018). - Reserve assets (assets): 26.4, 28.1, 27.1 (2016, 2017, 2018). - Other investment: Deposits and FX cash (assets): 7.3, 10.5, 13.6 (2016, 2017, 2018). - Liabilities: 23.9, 27.5, 31.0 (2016, 2017, 2018). - IIP: 12.6, 14.2, 12.0 (2016, 2017, 2018). - FX reserves: - At $27 billion at end-2018, FX reserves were equivalent to about 54 percent of GDP or 13 months of imports of goods and services. - About half of FX reserves represent deposits by the Fund for Reconstruction for Development (FRD). - Opportunity cost: assuming an alternative return of 7 percent, the opportunity cost of FX reserves (including FRD deposits) would be about $ 1.5 billion annually or 3 percent of GDP; staff estimates Uzbekistan receives about a one percent return on its FX reserves. - Assessment: FX reserves are broadly adequate for precautionary or operational purposes, notwithstanding significant opportunity cost. - Exchange rate liberalization and REER: - On September 5, 2017, Uzbekistan unified official and parallel exchange rates and liberalized access to foreign exchange. - Official nominal exchange rate depreciated from 4,250 to 8,100 sum per dollar. - Fund EBA suggests the real exchange rate is heavily undervalued; the real exchange rate is estimated to be about 45 percent weaker than implied by fundamentals and desired policies (REER gap: -45.3). ### SDG SPENDING NEEDS AND POLICY IMPLICATIONS - National context: - Presidential resolution (October 2018) sets 16 of the 17 SDGs as national goals to attain by 2030, with 127 related targets. - Uzbekistan’s global SDG ranking: 51 out of 156 countries. - Current per capita income: around $1,500. - Aggregate spending needs: - Total additional spending to reach the SDGs in social and infrastructure sectors is estimated at about 8.7 percent of GDP in 2030. - Comparison: low-income countries estimated need 17 percent of GDP; emerging economies estimated need 4 percent of GDP. - Sectoral estimates and key figures: - Health: - Current spending: 6.2 percent of GDP. - Additional spending needed: 2.3 percent of GDP in 2030. - If public-private mix unchanged: public spending would need to increase by 1.4 percent of GDP and private spending by 0.9 percent of GDP. - SDG3 index: Uzbekistan score 76. - Education: - Total spending on education exceeds 7 percent of GDP (largely public). - Additional spending required by 2030: 0.3 percent of GDP. - Tertiary enrollment: 9 percent. - Infrastructure (annual additional investment until 2030): - Water and sanitation: 1 percent of GDP. - Electricity: 0.8 percent of GDP. - Roads: additional capital spending of 2.8 percent of GDP each year until 2030 plus increased maintenance costs adding 1.5 percent of GDP. - Financing and policy implications: - Phasing-out of policy-based lending (currently about 2 percent of GDP) could open significant fiscal space. - Concessional debt financing could be available for public infrastructure. - Scope to mobilize additional revenues: Uzbekistan’s revenue-to-GDP ratio at 25 percent is significantly lower than the average for CIS countries at 34 percent of GDP. - At 8.7 percent of GDP, some spending needs will need to be met by the private sector. - Reforms to encourage private participation: liberalization of energy prices; improvement of investment climate by combating corruption, promoting competition, enforcing rule of law; development of legal framework for PPPs. - Caveats: - Estimates for health and education spending are based on SDG scores affected by data gaps. - Infrastructure spending estimates do not include cost of upgrading or replacing dated infrastructure. - Estimates based on an average efficiency scenario; improving governance can increase returns to spending. ### ANNEX IV — Prioritizing Structural Reforms: Investor Survey (summary) - Purpose: IMF staff survey of investors in Uzbekistan to help prioritize structural reform agenda. - Methodology: - Questionnaire covered about 30 potential constraints across three reform areas; asked impact of reforms so far (score range -2 to +2) and urgency of reforms (score range -2 to +2). - Sample: survey sent to about 100 domestic and foreign investors; response rate about 30 percent. - Key survey findings (selected average scores preserved exactly): - Availability of economic resources (Impact / Urgency): - Credit: -0.3 / -1.1 - Energy: 0.0 / -1.2 - Land tenure rights: -0.6 / -1.3 - Skilled labor: -0.4 / -1.4 - Immigration services (visas): 0.7 / -1.1 - Cost of doing business (Impact / Urgency): - Costliness of export procedures: 0.4 / -1.0 - Costliness of import procedures: -0.2 / -1.1 - Level of tax rates: -0.3 / -1.4 - Cost of paying taxes: -0.3 / -1.2 - Effectiveness of free economic zones: -0.6 / -1.1 - Quality of governance (Impact / Urgency): - Ease of repatriation of investments: 0.9 / -0.9 - Effectiveness of tax administration: -0.5 / -1.4 - Predictability of economic policies: -0.8 / -1.5 - Reducing corruption: -0.3 / -1.4 - Survey-based conclusions: - Reforms under “cost of doing business” showed positive impacts to date; “availability of resources” and “quality of public governance” showed more limited positive impacts. - Notable positive reform perceptions: easing repatriation of investments (0.9); export procedures (0.4); immigration visas (0.7). - Binding constraints identified: availability of skilled labor, land, energy, and a well-functioning financial system; taxes/incentives and customs procedures; quality of public governance across many areas. - Policy implications: - Prioritize reforms removing most binding constraints: skilled labor, land tenure, energy reliability, financial system functioning. - Advance tax/incentive measures and customs/trade facilitation. - Use structured diagnostics (growth diagnostics) to sequence and focus reforms. - Target governance reforms where implementation is feasible while recognizing longer horizon for rule-of-law improvements. - Recommendation: repeat the investor survey in one or two years to assess whether perceptions improved. ### ANNEX VI — Recommendations of the 2018 Article IV Consultation (selected) - Fiscal policy and transparency: - Staff supported tightening fiscal policy in 2018 to reduce inflation. - Authorities committed to bring all fiscal operations on-budget starting in 2019. - 2018 consolidated fiscal balance was -2.2 percent of GDP vs. staff’s projection of -1.9 percent of GDP. - Bank recapitalization and policy lending were 1.5 percent of GDP higher than projected, resulting in overall fiscal balance of -2.1 percent of GDP vs. projection of -0.9 percent of GDP. - Monetary policy and financial sector: - Staff recommended tighter monetary stance to contain inflation (increase refinancing rate, halt FX accumulation). - CBU increased refinancing rate from 14 to 16 percent in September 2018; prime lending rate increased 2½ percent in 2018. - Overall credit increased more than 50 percent in 2018 compared to staff forecast of 25 percent, driven by policy lending. - Recommendations: move to inflation targeting over the medium-term; reduce credit market segmentation and stricter limits on FRD lending. - Financial stability: - Recommendations: enhance emergency liquidity framework; issue treasury securities to expand available collateral. - Developments: December 2018 issuance of UZS 600 billion in treasury bills and bonds; progress on stress testing with IMF technical assistance. - Structural reform and SOE restructuring: - Recommendation: address balance sheet strains and restructure state enterprises. - Developments: classification of state enterprises into public and commercial service providers; development of roadmaps to restructure power and banking sectors; creation of new anti-monopoly agency. - Trade liberalization and WTO accession: - Recommendation: further liberalize trade, including acceding to the WTO. - Developments: exports and imports rose 18 and 38 percent, respectively, in US dollars in 2018 after depreciation and tariff cuts; inter-agency commission on joining the WTO began meeting in March 2019. - Statistics: - Recommendation: continue to improve quality and dissemination of economic statistics. - Developments: May 2018 join IMF’s enhanced GDDS; revisions to national accounts in February 2019. ### PUBLIC DEBT COVERAGE, DSA, AND CONCLUSION - Public debt coverage and limitations: - Public debt covers general government and SOE debt guaranteed by the government. - Data limitations: amount of non-guaranteed SOE debt currently not known; joint IMF/World Bank mission (April 2019) worked to improve debt data and develop a medium-term debt management strategy. - Contingency stress test parameters: 2 percent of GDP shock to SOE debt; 5 percent of GDP shock for financial market default. - Debt-carrying capacity (Composite Indicator, CI): - Present CI score: 3.06 (just above the 3.05 lower bound for strong debt carrying capacity). - CI rating: Strong. - CI components (selected contributions preserved exactly): CPIA contribution 44.0 percent; Import coverage of reserves contribution 76.6 percent; CI Score: 3.06. - Macroeconomic assumptions (summary): - Projected real GDP growth: marginally upgraded for 2019-20; medium-term growth projected at 6 percent. - Overall fiscal deficit projected to stabilize at 1¾ percent of GDP over the medium term. - Current account deficit larger than previously projected due to opening and modernization and surge of capital goods imports in 2018. - PPG debt projections and assumptions: - Disbursements of new debt assumed to average around 5 percent of GDP per year. - PPG debt-to-GDP projected to rise from 20½ percent of GDP in 2018 to 26 percent of GDP in 2039. - PV of public debt-to-GDP increases marginally from 16 percent in 2018 to about 20 percent in 2029. - Under baseline, all PPG external debt indicators remain below indicative thresholds. - Stress testing and risks: - Debt ratios robust to a range of adverse shocks; a one standard deviation shock to other external flows raises PV of external debt-to-GDP to 29 percent in 2024 then decline to 24 percent in 2039 (compared to 19 percent under baseline); ratios remain below benchmark thresholds. - Overall assessment: Uzbekistan’s risk of external debt distress remains low; external debt projected to decrease to about 31 percent of GDP by 2029; overall public debt including guaranteed debt projected to reach about 25 percent of GDP. - Conclusion: - Based on the DSA, Uzbekistan’s risk of public debt and external debt distress is low. - Key assumed external PPG borrowing after initial boost: around 4-5 percent of GDP. - Selected key indicators and projections (selected values preserved exactly): - PV of PPG external debt-to-GDP (selected projection values): 15.6; 17.7; 19.2; 19.1; 19.2; 19.2; 19.3; 19.5; 20.5. - Gross external financing need (Million of U.S. dollars, selected): 6,002; 5,424; 5,381; 4,965; 4,887; 5,010; 5,385; 8,379; 17,449. - Real GDP growth (selected projections, in percent): 5.1; 5.5; 6.0; 6.0; 6.0; 6.0; 6.0; 6.0; 7.1; 6.0. ### KEY STATISTICS AND FIGURES (selected exact values preserved) - Real GDP growth: 4½ percent in 2017; 5 percent in 2018. - Nominal credit expansion: about 50 percent in 2018. - CPI inflation: peaked at 20½ percent (early 2018); receded to 14½ percent by year end 2018. - Current account: surplus of 2¼ percent of GDP in 2017; deficit of 7 percent of GDP in 2018. - EBA 2018 external deficit norm: centered on 4½ percent of GDP; underlying current account deficit: 5½ percent of GDP. - Staff growth projections: 5½ percent in 2019; 6 percent in 2020. - Formal sector employment pickup projection: about 1½ percent. - Projected external deficits: about 6 percent of GDP during 2019-20. - Credit growth benchmark for 2019: 25-30 percent range. - Official budget reported surplus in 2018: ½ percent of GDP; over-performance relative to budget: ¾ percent of GDP. - Overall fiscal deficit in 2018 (including policy-based lending): 2 percent of GDP. - FX reserves: $27 billion (end-2018); equivalent to 54 percent of GDP; equivalent to 13 months of imports. - Fixed investment (Percent of GDP): 2018 26.3. - Centralized investment (Percent of GDP): 2018 8.5. *Source: IMF Article IV staff report excerpt for the Republic of Uzbekistan (1uzbea2019004).* ### 2019. The team included Messrs. Cabezon, Dwight, and Jaeger (all ### REPUBLIC OF UZBEKISTAN ### CONTEXT - Foremost economic challenge: create more and better jobs amid a rapid demographic transition; working-age population as a share of total population has surged since the 1990s (Figure 1, Panel A). - Labor market outcome: over the last two decades, job creation in the formal sector fell increasingly short of expanding labor supply (Figure 1, Panel B); some job creation in informal economy and millions of workers sought jobs abroad. - Reform agenda initiated in 2016 by President Mirziyoyev to tackle job malaise. - Legacy of state-led growth model: - Resources directed to capital-intensive production by large state-owned enterprises (SOEs): mining, energy, chemicals. - Agriculture operated largely in Soviet planning mode. - Policies included accumulating large FX reserves, discouraging mobility of jobless workers, and restricting foreign investments. - Distorting policies: import substitution, FX restrictions, directed credits, micro-managing SOEs and state banks. - Reforms completed since 2016: - FX liberalization: unified official and parallel exchange rates at a heavily depreciated rate; eliminated all FX restrictions subject to IMF jurisdiction. - Tax reform aimed to reduce tax burden on private firms and workers to foster job creation. - Improved availability and quality of economic statistics. - Major themes of Article IV discussions: - Prioritizing structural reforms to address binding constraints on investment and entrepreneurship. - Avoiding a boom-bust credit cycle as credit and investment expand. - Reorienting policies toward inclusive growth anchored on the UN’s Sustainable Development Goals (SDGs) and overhauling labor policies. ### OUTLOOK, RISKS, AND REGIONAL SPILLOVERS A. Economic Developments - Credit and investment: - Nominal credit to the economy expanded by about 50 percent in 2018, financing a massive increase in imports of capital goods and investments in housing and infrastructure (Figure 2, Table 2). - Government funded and directed a large part of the credit expansion by shifting deposits to banks and through policy-based lending operations. - Growth and employment: - Real GDP expanded by 5 percent in 2018, following 4½ percent growth in 2017 (Table 2). - Despite booming investment, growth and job creation picked up only moderately; response muted by absence of significant cyclical slack and binding intermediate input bottlenecks (energy and water shortages); agriculture affected by bad weather. - Available labor market data suggest little dent in pool of unused labor resources; remittances data indicate number of workers abroad continued to expand. - Inflation: - CPI inflation peaked at 20½ percent at the beginning of 2018 and receded to 14½ percent by year end (Figure 4). - Expectations of high inflation remain well entrenched; GDP deflator and tradable goods prices indicate high underlying price pressures. B. External Sector Assessment - External position deterioration drivers: - FX and trade liberalization removed previous import-repressing policy props. - Real exchange rate depreciated by about 50 percent, improving external cost competitiveness. - FX reserve accumulation policy switched to broadly neutral stance; CBU allowed some nominal exchange rate flexibility. - Expansionary credit policies increased imports, especially capital goods. - Current account: - Current account deficit increased to 7 percent of GDP in 2018, after a surplus of 2¼ percent of GDP in 2017. - IMF’s revised external balance approach (EBA) suggests 2018 external deficit norm centered on 4½ percent of GDP, compared with an underlying current account deficit of 5½ percent of GDP. - Conclusion: Uzbekistan’s external position is presently moderately weaker than implied by fundamentals and desirable policies. - External stability: - Risks contained by large FX reserves, a strong international investment position, and external debt levels projected to remain moderate over the medium term. - FX market participants continue to be able to make payments and transfers for current transactions without impediments. - Authorities plan to proceed cautiously with removing strict outflow controls on capital flows. C. Outlook and Risks (staff projections and assumptions) - External assumptions: - Trading partners’ import demand and relevant commodity prices, except gold, are projected to temporarily soften in 2019; assumptions subject to significant downside risks. - Monetary policy assumptions: - CBU maintains neutral FX reserve accumulation policy (sterilizes domestic purchases of gold with matching FX sales), allows nominal exchange rate to move with fundamentals, and adjusts refinancing rate in response to prospective inflation pressures. - Credit policy assumption: - Credit growth in 2019 is assumed to be brought back in line with nominal GDP growth in the 25-30 percent range, mainly by scaling back directed and preferential lending. - A large upward deviation from this credit growth benchmark is a key short-term stabilization risk. - Fiscal policy assumption: - Overall fiscal stance remains broadly unchanged in 2019 and beyond; low risk of significant deviations from official budget targets, but risk that fiscal policy could behave pro-cyclically and that policy-based lending and off-budget operations could be scaled up. - Structural reforms: - Government maintains reform momentum across a wide range of policies; slowing reform momentum is a key medium-term domestic policy risk. D. Staff projections (2019-2020) - Growth: - Projected to pick up to 5½ percent in 2019 and to 6 percent in 2020, reflecting mainly higher investment and normalization of agricultural production growth. - Job creation: - Formal sector employment projected to pick up to about 1½ percent, supported by lower labor taxes and formalization as more firms enter the tax net. - External position: - Expected to stay in deficits of about 6 percent of GDP during 2019-20; external debt levels will remain moderate and decline over the medium term. - Inflation: - CPI inflation projected to decline only gradually to low double-digits by end-2020 due to persistence and pressures from price liberalization and relative wage adjustments. E. Regional Spillovers - Uzbekistan has led improvements in regional cooperation since reforms, reconnecting regional energy and transportation networks and defusing disputes about water rights, boosting regional trade and integration. ### POLICY DISCUSSIONS A. Maintaining a Prudent Fiscal Policy - Fiscal stance in 2018: - Official budget reported a surplus of ½ percent of GDP, an over-performance of ¾ percent of GDP relative to the budget (Table 4). - Additional revenue from FX liberalization, favorable commodity prices, and improved tax collections was partly saved to provide counter-cyclical support. - Staff’s preferred fiscal gauge: - Overall fiscal balance adjusts reported revenue and expenditure for off-budget transactions and includes an estimate of policy-based lending operations. - In 2018, with policy-based lending the main deficit driver, the overall fiscal deficit amounted to 2 percent of GDP, the same as in 2017. Box 1. Risk Assessment Matrix — selected external risks and policy advice - Weaker-than-Expected Global Growth - Likelihood/Timeframe: Medium, Short to Medium-Term. - Possible Impact: Weaker exports, reduced remittances, weaker confidence and investment, slowing growth and job creation. - Policy Advice: - Near term: counter-cyclical stimulus through additional fiscal spending while allowing nominal exchange rate to adjust. - Medium term: foster resilience via structural reforms, reduce barriers to trade (especially customs costs), and better enforce competition in product markets. - Large Swings in Energy Prices - Likelihood/Timeframe: Medium, Short to Medium-Term. - Possible Impact: Net energy exports ~4 percent of GDP in 2018; lower energy prices could worsen trade balance and fiscal revenue and increase investment uncertainty; higher energy prices could improve trade balance and fiscal revenue. - Policy Advice: - Allow nominal exchange rate to adjust to persistent external price shocks. - Allow automatic fiscal stabilizers in short term; correct fiscal position over medium term if shocks persist. - Continue structural reforms to diversify exports. ### KEY STATISTICS AND FIGURES (selected exact values) - Real GDP growth: 4½ percent in 2017; 5 percent in 2018. - Nominal credit expansion: about 50 percent in 2018. - CPI inflation: peaked at 20½ percent (early 2018); receded to 14½ percent by year end 2018. - Current account: surplus of 2¼ percent of GDP in 2017; deficit of 7 percent of GDP in 2018. - EBA 2018 external deficit norm: centered on 4½ percent of GDP; underlying current account deficit: 5½ percent of GDP. - Staff growth projections: 5½ percent in 2019; 6 percent in 2020. - Formal sector employment pickup projection: about 1½ percent. - Projected external deficits: about 6 percent of GDP during 2019-20. - Credit growth benchmark for 2019: 25-30 percent range. - Official budget reported surplus in 2018: ½ percent of GDP; over-performance relative to budget: ¾ percent of GDP. - Overall fiscal deficit in 2018 (including policy-based lending): 2 percent of GDP. *Source: IMF Article IV staff report excerpt for the Republic of Uzbekistan (2019).* ### Box 1. Risk Assessment Matrix ### Box 1. Risk Assessment Matrix ### Intensification of Security Risks - Risk Description: Heightened socio-economic or political disruptions in parts of Africa, Asia, Europe, Latin America, and/or the Middle East have regional/global spillovers. - Likelihood / Timeframe: High / Short to Medium-Term - Possible Impact (if realized) / Transmission Channels: Low — Regional conflict or security risks outside Uzbekistan could disrupt regional trade, tourism, or foreign investment. - Policy Advice: Emphasize that Uzbekistan will maintain consistent policies and commitment to reforms. Provide fiscal stimulus, if needed, to counteract a decline in growth. ### Domestic Risks — Continued Credit Boom - Risk Description: Continued rapid credit growth leads to higher inflation, excessive external imbalances, and aggravates misallocation of resources. - Likelihood / Timeframe: Medium / Short to Medium Term - Possible Impact (if realized) / Transmission Channels: High — Could lead to a boom-bust credit cycle with adverse implications for growth and stability (see Annex I for details). - Policy Advice: Bring credit growth in 2019 and beyond in line with external and internal stability requirements. ### Domestic Risks — Slowing of Reform Momentum - Risk Description: Disappointment or impatience with reform results or reform paralysis because of a lack of prioritization overwhelms implementation capacity. - Likelihood / Timeframe: Medium / Medium Term - Possible Impact (if realized) / Transmission Channels: High — Improvements in the investment climate and regional cooperation could slow or reverse. Investor expectations are disappointed and recent improvements in country risk perceptions reverse. - Policy Advice: Emphasize that the previous growth model failed and that experiences of other economies show major reforms take many years to show results. Prioritize reforms to remove the most binding constraints on private investment and job creation. ### Domestic Risks — Bank Credit Constrained by Funding Gaps Over the Medium Term - Risk Description: Cutbacks on government funding of banks could create funding gaps if the banking system does not manage to tap alternative and more diversified funding sources over the medium term. - Likelihood / Timeframe: Medium / Medium Term - Possible Impact (if realized) / Transmission Channels: High — Banks would be limited in their ability to intermediate the economy’s savings to fund investment projects and support more inclusive growth. - Policy Advice: Foster macroeconomic stability, especially low and stable inflation. Improve public and bank governance to assure depositors or potential foreign bank investors that their property rights will be respected. *Source: Box 1. Risk Assessment Matrix (1uzbea2019004)* ### Box 1. Risk Assessment Matrix ### Box 1. Risk Assessment Matrix ### Risk: Fiscal Revenues Decline Over the Medium Term as SOEs Are Reformed - Risk description: - "SOEs account for a large share of fiscal revenue, and SOE reforms and restructuring are likely to limit the ability of SOEs to carry their present elevated tax burden." - Likelihood / Timeframe: - "High" - "Medium-Term" - Possible Impact (if realized) / Transmission Channels: - "Medium" - "Fiscal revenue could decline, putting pressure on the fiscal deficit. Alternatively, the government may continue to rely on high taxes from SOEs, delaying SOE reform and boosting quasi-fiscal deficits." - Policy Advice: - "Implement tax reforms to improve tax collections, including by bringing the informal economy into the tax net." - "Improve corporate governance and performance in SOEs." ### Context on the Risk Assessment Matrix (RAM) - Purpose and interpretation: - "The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff)." - "The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline ('low' is meant to indicate a probability below 10 percent, 'medium' a probability between 10 and 30 percent, and 'high' a probability between 30 and 50 percent)." - "The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly." - "'Short term' and 'medium term' are meant to indicate that the risk could materialize within one year and three years, respectively." *Source: Box 1. Risk Assessment Matrix, 1uzbea2019004 - Box 1. Risk Assessment Matrix (IMF).* ### Annex I. Simulating a Boom-Bust Credit Cycle ### Annex I. Simulating a Boom-Bust Credit Cycle ### A. Credit Growth in 2018 - 2018 Article IV projection for credit growth to the economy: 25 percent in 2018. - Actual credit growth in 2018: 51 percent. - Sectoral contributions (abs chg. sum, contr. percent, chg. Yoy percent): - Total: 54.6 (abs chg.), 50.8 (Contr.), 50.8 (chg. Yoy) - Corporations: 44.1 (abs chg.), 41.1 (Contr.), 46.9 (chg. Yoy) - Industry: 20.6 (abs chg.), 19.2 (Contr.), 46.9 (chg. Yoy) - Agriculture: 5.3 (abs chg.), 5.0 (Contr.), 104.9 (chg. Yoy) - Construction: 4.5 (abs chg.), 4.2 (Contr.), 28.6 (chg. Yoy) - Trade and public catering: 4.5 (abs chg.), 4.2 (Contr.), 98.0 (chg. Yoy) - Transport and commun.: 3.8 (abs chg.), 3.6 (Contr.), 19.1 (chg. Yoy) - Logistics supply and sales: 2.4 (abs chg.), 2.2 (Contr.), 71.1 (chg. Yoy) - Housing and community serv.: 2.2 (abs chg.), 2.0 (Contr.), 479.7 (chg. Yoy) - Other sectors: 0.8 (abs chg.), 0.7 (Contr.), 82.2 (chg. Yoy) - Individuals (households): 10.4 (abs chg.), 9.7 (Contr.), 79.0 (chg. Yoy) - Credit at preferential terms explained more than half of the credit growth in 2018. - Across banks, state-owned banks contributed 45 percentage points to the 51 percent overall growth. - Demand-side drivers of faster credit growth in 2018: - Larger government investment plan related to modernization of state-owned enterprises. - Government initiatives to develop the private sector including preferential credit programs for agriculture and SMEs. - Underestimation of the impact of price and FX liberalization and opening of borders, stimulating private demand for credit. - Supply-side driver: Larger-than-anticipated government funding for credit (capitalizations, loans, government placement of deposits at commercial banks), fueling the 2018 credit boom. ### B. Structure of the Credit Market - Three main segments of Uzbekistan’s credit market: - Directed credit: allocated based on the government’s investment plan; generally extended at preferential (or concessional) terms. - Other preferential credit: concessional credit apart from directed credit. - Market credit: allocated by demand and supply at commercial or market terms. - Market segmentation observations (2018): - Total credit stock: 165 (Trillion Sum) total; 75 (In Sum?), 90 (In FX?) — (table headings as presented: In Sum (Trillion Sum), In FX (Trillion Sum), Total (Trillion Sum) 165 75 90 55 0.3 50.3) [Note: preserved numeric strings as in source table layout]. - Credit change YoY: Total credit change YoY contribution and absolute change presented in source tables. - In 2018 credit increased by 55 trillion sum: 27 trillion sum represented market credit, 19 trillion sum directed credit, 10 trillion sum preferential credit. - Interest rates (December 2018): - Average interest rate on market loans: 21.8 percent. - Average interest rate on preferential loans: 8.4 percent. - Government intervention and state-owned banks: - Government provides concessional funding via FRD loans, loans from the treasury, deposits at commercial banks, and recapitalizations. - State-owned banks largely intermediary of government-supported lending; private banks predominantly funded via retail deposits. - Loan-to-deposits ratios: state-owned banks average 2.4; private banks average 0.8. ### C. Credit and Investment - The government investment plan accounts for about half of gross fixed capital formation. - Fixed investment and centralized vs non-centralized investment (Percent of GDP): - Fixed investment: 2015 19.4; 2016 19.8; 2017 22.6; 2018 26.3. - Centralized investment: 2015 3.6; 2016 4.3; 2017 5.3; 2018 8.5. - Budget resources: 2015 0.9; 2016 0.9; 2017 1.1; 2018 1.0. - Gov. trust funds: 2015 1.2; 2016 1.0; 2017 0.8; 2018 1.3. - Funds of the FRD: 2015 0.9; 2016 1.0; 2017 1.7; 2018 1.9. - Foreign investments and gov. guaranteed loans: 2015 0.5; 2016 1.4; 2017 1.7; 2018 4.1. - Non-centralized investment: 2015 15.8; 2016 15.5; 2017 17.3; 2018 17.9. - Funds of enterprises: 2015 5.4; 2016 5.9; 2017 5.9; 2018 7.4. - Public funds: 2015 4.7; 2016 3.6; 2017 5.1; 2018 3.0. - FDI and loans: 2015 3.4; 2016 3.8; 2017 4.1; 2018 3.6. - Commercial-bank loans and other borrowing: 2015 2.3; 2016 2.1; 2017 2.2; 2018 3.9. - After 2017, FX liberalization and opening of borders removed prior constraints on imports; sizable buffers and foreign borrowing availability allowed investment plans to expand and credit to grow to finance those plans. - Centralized investment increased from 5.3 percent to 8.5 percent (2017 to 2018). ### D. Boom-Bust Credit Cycles: A Simulation - Stylized description of boom-bust cycles (Box 1): two-stage process — boom-stage (rapid credit and domestic demand growth, inflation and CA pressures, real appreciation, shift to nontradables, rising non-performing loans) and bust-stage (credit growth decelerates, domestic demand slows, real GDP declines, potential FX crisis or bank runs). - Simulation assumptions (illustrative for Uzbekistan): - Credit boom phase continues during 2019-20 and credit growth halts in 2021. - Credit growth in boom-bust scenario: 50 percent in 2019 and 40 percent in 2020 (compared with baseline 25 and 20 percent, respectively). - Additional credit growth relative to baseline is exclusively funded by the government, approximately half via external borrowing and half via FX reserves of the FRD. - Additional government funding for credit is about US$ 4-5 billion per year during 2019-20. - Other key assumptions: (i) economy at full capacity so additional domestic demand mainly raises imports and inflation; (ii) credit growth slows after inflation reaches 20 percent and current account deficit reaches 15 percent; (iii) nominal exchange rate remains at baseline during boom, and depreciates at bust to restore real exchange rate to baseline. - Simulation outcomes and risks (selected): - International FX reserves would decline significantly by 2024, reaching about 5 months of imports (compared with 10 months under the baseline scenario). - External debt would reach 40 percent of GDP (compared with 30 percent in the baseline scenario). - Economy would become more volatile, adversely affecting the investment climate. - Selected indicators from Table I.1 (Percent unless otherwise stated). Values shown for 2018–2024; baseline versus boom-bust scenarios (selected series, preserved exactly as presented): - Credit growth - Baseline: 2018 50.8; 2019 25.0; 2020 20.1; 2021 18.8; 2022 17.3; 2023 16.3; 2024 15.4 - Boom-bust: 2018 50.8; 2019 50.0; 2020 40.5; 2021 13.2; 2022 12.5; 2023 14.8; 2024 14.6 - Credit-to-GDP - Baseline: 2018 39.7; 2019 38.7; 2020 37.9; 2021 38.0; 2022 38.5; 2023 39.0; 2024 39.4 - Boom-bust: 2018 39.7; 2019 44.8; 2020 47.9; 2021 44.4; 2022 43.1; 2023 41.8; 2024 40.8 - NPLs-to-gross loans - Baseline: 2018 2.8; 2019 4.9; 2020 4.4; 2021 4.0; 2022 4.1; 2023 4.3; 2024 4.6 - Boom-bust: 2018 2.8; 2019 6.0; 2020 9.8; 2021 12.2; 2022 9.6; 2023 8.6; 2024 7.6 - Real GDP growth - Baseline: 2018 5.1; 2019 5.5; 2020 6.0; 2021 6.0; 2022 6.0; 2023 6.0; 2024 6.0 - Boom-bust: 2018 5.1; 2019 6.0; 2020 6.5; 2021 2.0; 2022 2.0; 2023 6.0; 2024 6.0 - Domestic demand growth - Baseline: 2018 44.7; 2019 27.1; 2020 21.3; 2021 17.2; 2022 15.1; 2023 14.3; 2024 13.8 - Boom-bust: 2018 44.7; 2019 36.3; 2020 34.4; 2021 18.2; 2022 12.9; 2023 16.8; 2024 15.1 - Gross fixed capital formation-to-GDP - Baseline: 2018 29.8; 2019 30.7; 2020 30.6; 2021 30.6; 2022 30.8; 2023 30.9; 2024 31.1 - Boom-bust: 2018 29.8; 2019 32.4; 2020 36.0; 2021 34.0; 2022 29.9; 2023 29.9; 2024 30.1 - Inflation, avg - Baseline: 2018 17.5; 2019 14.7; 2020 4.1; 2021 10.6; 2022 8.6; 2023 7.8; 2024 7.6 - Boom-bust: 2018 17.5; 2019 18.4; 2020 20.5; 2021 18.2; 2022 14.7; 2023 11.2; 2024 9.9 - GDP deflator change - Baseline: 2018 28.1; 2019 21.7; 2020 15.6; 2021 11.7; 2022 9.3; 2023 8.3; 2024 7.8 - Boom-bust: 2018 28.1; 2019 25.5; 2020 23.3; 2021 19.7; 2022 13.5; 2023 11.7; 2024 10.7 - REER (index 2015=100, + appreciation) - Baseline: 2018 60.2; 2019 64.6; 2020 67.8; 2021 70.2; 2022 72.0; 2023 74.1; 2024 75.9 - Boom-bust: 2018 60.2; 2019 66.7; 2020 73.8; 2021 80.2; 2022 80.1; 2023 77.2; 2024 76.8 - Current account-to-GDP - Baseline: 2018 -7.1; 2019 -6.5; 2020 -5.6; 2021 -4.8; 2022 -4.4; 2023 -4.4; 2024 -4.2 - Boom-bust: 2018 -7.1; 2019 -11.2; 2020 -15.1; 2021 -11.2; 2022 -8.2; 2023 -6.9; 2024 -4.9 - External debt-to-GDP - Baseline: 2018 34.5; 2019 34.0; 2020 33.5; 2021 32.2; 2022 31.4; 2023 30.9; 2024 30.6 - Boom-bust: 2018 34.5; 2019 36.1; 2020 36.5; 2021 35.8; 2022 38.3; 2023 39.6; 2024 39.5 - Reserves (Months of imports) - Baseline: 2018 13.6; 2019 12.9; 2020 12.6; 2021 11.6; 2022 10.6; 2023 9.9; 2024 9.2 - Boom-bust: 2018 12.2; 2019 9.7; 2020 8.3; 2021 6.8; 2022 5.6; 2023 4.8; 2024 4.6 - Overall fiscal balance-to-GDP - Baseline: 2018 -2.1; 2019 -1.6; 2020 -1.8; 2021 -1.8; 2022 -1.8; 2023 -1.8; 2024 -1.7 - Boom-bust: 2018 -2.1; 2019 -7.3; 2020 -7.6; 2021 -3.2; 2022 -2.9; 2023 -1.9; 2024 -1.8 - Consolidated fiscal balance-to-GDP - Baseline: 2018 2.2; 2019 0.6; 2020 0.4; 2021 0.3; 2022 0.1; 2023 0.1; 2024 0.1 - Boom-bust: 2018 2.2; 2019 0.4; 2020 0.1; 2021 -0.1; 2022 0.0; 2023 0.4; 2024 0.4 - Policy lending-to-GDP - Baseline: 2018 -4.3; 2019 -2.2; 2020 -2.2; 2021 -2.1; 2022 -2.0; 2023 -1.9; 2024 -1.8 - Boom-bust: 2018 -4.3; 2019 -7.7; 2020 -7.7; 2021 -3.1; 2022 -2.9; 2023 -2.3; 2024 -2.2 - Simulation conclusion: continued fast credit growth funded substantially by the government and FRD reserves risks triggering a boom-bust cycle that would raise inflation, widen current account deficits, erode reserves, increase external debt, raise NPLs, and create macroeconomic and financial volatility. *Source: IMF staff estimates, Annex I. Simulating a Boom-Bust Credit Cycle.* ### 9. Background: Uzbekistan’s international investment position (IIP) appears strong relative to ### 9. Background: Uzbekistan’s international investment position (IIP) appears strong relative to ### International Investment Position (IIP) — background and assessment - Findings: - Uzbekistan’s IIP appears strong relative to regional peers, reflecting FX reserve accumulation, the private sector’s desire to accumulate large FX cash holdings, and restraint on external borrowing. - The strong IIP position is the result of past FX reserves accumulation and the desire of the private sector to accumulate large FX cash holdings. - External assets mainly constitute FX reserves and private FX cash holdings. - External liabilities are largely multilateral and bilateral loans at concessional rates and with long maturities (almost 90 percent of external debt is at maturities exceeding 10 years). - Assessment: - Uzbekistan’s external balance sheet points to large FX buffers that shelter the country from external shocks. - External assets and liabilities are largely insulated from global financial volatility and external liabilities have low rollover risk. - Risk: excessive expansion of market-based borrowing by the government or SOEs could build up balance sheet risks over the medium term. - Selected IIP figures (Assets / Liabilities / IIP): - Assets: 36.4, 41.7, 43.1 (2016, 2017, 2018 respectively) - Direct investment (assets): 0.2, 0.2, 0.2 (2016, 2017, 2018) - Other investment: Deposits and FX cash (assets): 7.3, 10.5, 13.6 (2016, 2017, 2018) - Other investment: Others (assets): 2.5, 2.9, 2.2 (2016, 2017, 2018) - Reserve assets (assets): 26.4, 28.1, 27.1 (2016, 2017, 2018) - Liabilities: 23.9, 27.5, 31.0 (2016, 2017, 2018) - Direct investment (liabilities): 8.7, 10.0, 9.0 (2016, 2017, 2018) - Other investment (liabilities): 15.2, 17.4, 22.0 (2016, 2017, 2018) - of which: Gov. loans: 6.5, 7.6, 10.1 (2016, 2017, 2018) - of which: Other sectors loans: 6.3, 6.3, 5.4 (2016, 2017, 2018) - of which: Other sectors trade credit: 2.0, 2.8, 5.4 (2016, 2017, 2018) - IIP: 12.6, 14.2, 12.0 (2016, 2017, 2018) ### FX Reserve adequacy and composition - Background and size: - At $27 billion at end-2018, FX reserves were equivalent to about 54 percent of GDP or 13 months of imports of goods and services. - FX reserves were considerably above the IMF’s reserve adequacy metric for emerging markets or developing countries. - About half of FX reserves represent deposits by the Fund for Reconstruction for Development (FRD). - Even if FRD deposits were excluded, FX reserves would remain significantly above standard FX reserve metrics. - Opportunity cost: - Assuming an alternative return of 7 percent, the opportunity cost of FX reserves (including FRD deposits) would be about $ 1.5 billion annually or 3 percent of GDP. - Staff estimates Uzbekistan receives about a one percent return on its FX reserves. - Assessment: - High FX reserves help ensure access to needed imports, insure against external shocks, support the transition to a more flexible FX rate, and are useful for operational purposes (including smoothing volatility in the FX market). - A share of FX reserves may eventually have to be devoted to cleaning up the balance sheets of SOEs as not all of their FX loans guaranteed by the state may be repaid. - Staff assesses Uzbekistan’s FX reserves are broadly adequate for precautionary or operational purposes, notwithstanding the significant opportunity cost. - FX-reserve indicators (2018): - FX reserves: $27 billion (end-2018) - Equivalent to 54 percent of GDP - Equivalent to 13 months of imports of goods and services - Actual reserves are about 1,000 percent for the IMF’s reserve adequacy metric (above the 100-150 percent recommended). ### Exchange rate liberalization, real exchange rate (REER), and outlook - Policy actions and nominal exchange rate: - On September 5, 2017, Uzbekistan unified its official and parallel exchange rates and liberalized access to foreign exchange. - The official nominal exchange rate depreciated from 4,250 to 8,100 sum per dollar. - During 2018, the nominal exchange rate fluctuated, but the sum remained relatively stable against the U.S. dollar. - The de jure exchange arrangement is floating; the Fund classifies the de facto exchange rate regime as “other managed” because the nominal exchange rate path seems highly predictable and shows only very limited day-to-day volatility. - REER assessment and EBA findings: - The Fund’s EBA for exchange rates suggests that the real exchange rate is heavily undervalued. - Reflecting the sharp depreciation of the real effective exchange rate following FX liberalization, the real exchange rate is estimated to be about 45 percent weaker than implied by fundamentals and desired policies. - Ln(REER) actual: 4.07 - Ln(REER) fitted: 4.58 - Ln(REER) norm: 4.53 - Residual: -50.5 - REER gap: -45.3 - Policy gaps: 5.2 - This EBA-lite IREER estimate contrasts with the current-account based estimate of a moderate overvaluation. - Stylized fact: Sharp initial real depreciations followed by relatively rapid real appreciations are typical for transition economies and are difficult to capture by conventional macroeconomic models. - Outlook and staff assessment: - Near-term projection: staff projects the real exchange rate will appreciate as the transition evolves, as observed in other transition economies in the past. - Subject to data uncertainties, staff assesses that the 2018 average REER was broadly consistent with fundamentals and desired policies. ### SDG spending needs (Annex III) — summary and policy implications - National context: - Uzbekistan has anchored its development agenda in the SDGs. A Presidential resolution adopted in October 2018 sets 16 of the 17 SDGs as national goals to attain by 2030, with 127 related targets. - Uzbekistan’s global SDG ranking: 51 out of 156 countries. - Current per capita income: around $1,500. - Uzbekistan performs well on education and access to electricity relative to peers with per capita income between $1,500 and $6,000, but lags on industry, innovation and infrastructure (SDG 9) and water and sanitation (SDG 6). - Aggregate spending needs to reach selected SDGs: - Total additional spending to reach the SDGs in social and infrastructure sectors is estimated at about 8.7 percent of GDP in 2030. - This compares with: - Low-income countries: estimated spending needs of 17 percent of GDP. - Emerging economies: estimated spending needs of 4 percent of GDP. - Sectoral estimates and key figures: - Health: - Current spending: 6.2 percent of GDP. - Additional spending needed to close the gap with peers: 2.3 percent of GDP in 2030. - If public-private mix unchanged: public spending would need to increase by 1.4 percent of GDP and private spending by 0.9 percent of GDP. - SDG3 index: Uzbekistan score 76; high performing peers have scores in excess of 80 at similar spending levels. - Education: - Total spending on education exceeds 7 percent of GDP (largely public). - Additional spending required by 2030 to maintain the score and accommodate demographic pressures: 0.3 percent of GDP. - Tertiary enrollment: 9 percent. - Infrastructure (annual additional investment until 2030): - Water and sanitation: 1 percent of GDP to provide universal access to basic and safely managed water, sanitation, and hygiene. - Electricity: 0.8 percent of GDP, largely because consumption is expected to track GDP; estimate may increase with plant replacements and renewable investments. - Roads: additional capital spending of 2.8 percent of GDP each year until 2030 to double the road network by 2030 and improve rural access from 57 to 85 percent; plus increased maintenance costs adding 1.5 percent of GDP. - Breakdown of SDG spending needs by sector (Percent of GDP): - Health: included above - Education: included above - Water: included above - Electricity: included above - Roads: included above - Policy implications and financing: - Funding options require careful consideration given large spending needs. - Phasing-out of policy-based lending (currently about 2 percent of GDP) could open significant fiscal space. - Concessional debt financing could be available for public infrastructure. - Scope exists to mobilize additional revenues: Uzbekistan’s revenue-to-GDP ratio at 25 percent is significantly lower than the average for CIS countries at 34 percent of GDP. - At 8.7 percent of GDP, some spending needs will need to be met by the private sector. - Reforms to encourage private participation include: - Liberalization of energy prices, especially for gas and electricity. - Improvement of the investment climate by combating corruption, promoting competition, and enforcing the rule of law. - Development of a strong legal framework for public private partnerships (PPPs). - Caveats: - Estimates for health and education spending are based on SDG scores that are affected by data gaps (e.g., only literacy rates, primary enrolment, and years of schooling available for Uzbekistan). - Infrastructure spending estimates do not include the cost of upgrading or replacing dated infrastructure. - Estimates are based on an average efficiency scenario; improving governance can increase returns to spending. *Source: IMF staff estimates and country authorities (content from the IMF chapter/section provided).* ### Annex IV. Prioritizing Structural Reforms: ### Annex IV. Prioritizing Structural Reforms: What Do Investors Want? ### Overview - Purpose: Report results of an IMF staff survey of investors in Uzbekistan to help prioritize the authorities’ structural reform agenda and assess perceived urgency of reforms across reform areas. - Context: Many observers view the lack of FDI as the “missing bridge” to transition from a state-led to a more market-based growth model. - Constraint: A wholesale reform approach is unrealistic given legacy distortions and information and implementation capacity constraints. ### Approaches to Prioritizing Reforms (as discussed) - Scan international competitiveness rankings to pick priorities: - Main ranking used: World Bank’s Doing Business. - Uzbekistan moved from the lowest quartile (2014 report) to second quartile (2018 report). - High rankings in “starting a business” and “getting electricity”; low rankings in “trading across borders” (lowest quartile) and “dealing with construction permits” (third quartile). - Caveat: Rankings may reflect targeted, metropolitan-area (Tashkent) measures and not de facto nationwide investment climate. - Assemble a reform roadmap based on expert advice: - Uzbekistan issued a comprehensive reform roadmap for 2019-21 largely based on World Bank recommendations, listing more than 500 reform actions. - Downsides: roadmaps can be unstructured, participants’ preferences diffuse, links between measures and outcomes complex, and risk of “solutions” seeking “problems.” - Search for the most binding investment climate constraints (growth diagnostics approach): - Seeks to identify the most binding constraints on private investment using a blend of empirics and heuristics. - More structured and pragmatic, but resource- and time-consuming. ### Investor Survey: Methodology - Questionnaire: Identified about 30 potential constraints across three broad reform areas and asked two questions per area: 1. What has been the impact of reforms so far on Uzbekistan’s attractiveness as an investment location? (choices: "no impact" (score = -2), "some impact" (score = 0), "significant impact" (score = 2)) 2. What is the urgency of reforms to improve Uzbekistan’s attractiveness as an investment location? (choices: "no need" (score = 2), "some need" (score = 0), "urgent need" (score = -2)) - Sample: Survey sent to about 100 domestic and foreign investors using the membership register of Uzbekistan’s largest investor association. - Response rate: about 30 percent. - Scoring: Numbers indicate average scores across investors' responses, standardized in the range -2 to +2. Colors in original table correspond to value intervals (not replicated here). ### Key Survey Findings — Impact of Reforms So Far (average scores) and Perceived Urgency (average scores) Availability of economic resources - Credit: Perceived impact of reforms so far = -0.3; Perceived urgency of more reforms = -1.1 - Energy: Perceived impact = 0.0; Perceived urgency = -1.2 - Land tenure rights: Perceived impact = -0.6; Perceived urgency = -1.3 - Skilled labor: Perceived impact = -0.4; Perceived urgency = -1.4 - Immigration services (visas): Perceived impact = 0.7; Perceived urgency = -1.1 Cost of doing business - Costliness of export procedures: Perceived impact = 0.4; Perceived urgency = -1.0 - Costliness of import procedures: Perceived impact = -0.2; Perceived urgency = -1.1 - Costliness of payment services: Perceived impact = 0.2; Perceived urgency = -0.6 - Costliness of licensing: Perceived impact = 0.2; Perceived urgency = -0.8 - Costliness of transportation: Perceived impact = 0.0; Perceived urgency = -0.8 - Costliness of telecommunication: Perceived impact = -0.3; Perceived urgency = -1.0 - Costliness of skilled labor: Perceived impact = -0.3; Perceived urgency = -1.0 - Costliness of unskilled labor: Perceived impact = -0.1; Perceived urgency = -0.6 - Level of tax rates: Perceived impact = -0.3; Perceived urgency = -1.4 - Cost of paying taxes: Perceived impact = -0.3; Perceived urgency = -1.2 - Investment incentives: Perceived impact = 0.0; Perceived urgency = -1.3 - Effectiveness of free economic zones: Perceived impact = -0.6; Perceived urgency = -1.1 Quality of governance - Cost of red tape: central government level: Perceived impact = -0.1; Perceived urgency = -1.0 - Cost of red tape: local government level: Perceived impact = -0.1; Perceived urgency = -1.0 - Ease of repatriation of investments: Perceived impact = 0.9; Perceived urgency = -0.9 - Effectiveness of FDI promotion agencies: Perceived impact = -0.4; Perceived urgency = -1.2 - Enforcement of competition: Perceived impact = -0.2; Perceived urgency = -1.2 - Effectiveness of tax administration: Perceived impact = -0.5; Perceived urgency = -1.4 - Resolution of tax disputes: Perceived impact = -0.6; Perceived urgency = -1.1 - Costliness of contract enforcement: Perceived impact = -0.4; Perceived urgency = -1.2 - Reducing corruption: Perceived impact = -0.3; Perceived urgency = -1.4 - Availability of reliable statistics: Perceived impact = -0.2; Perceived urgency = -1.2 - Predictability of economic policies: Perceived impact = -0.8; Perceived urgency = -1.5 ### Survey-based Conclusions (as reported) - Reforms under the “cost of doing business” header generally indicated positive impacts to date; reforms under “availability of resources” and “quality of public governance” showed more limited positive impacts. - Very few reforms were perceived as having had significant positive impacts; notable exceptions included: - Easing of rules on repatriation of investments (Perceived impact = 0.9) - Costliness of export procedures improvement (Perceived impact = 0.4) - Relaxation of rules for immigration visas for foreign workers (Perceived impact = 0.7) - Binding constraints identified by investors: - Availability of resources (especially skilled labor, land, and energy) and a well-functioning financial system are binding constraints for attracting and absorbing FDI. - Taxes/incentives and, to a lesser extent, customs procedures are especially binding for the cost of doing business. - Quality of public governance is identified as a binding constraint across almost all listed governance areas; some areas (administrative bottlenecks, taxation, competition, FDI promotion) are relatively straightforward targets for reform, while rule of law (corruption) and predictability are much harder to tackle. ### Policy Implications and Priorities (inferred from findings reported) - Prioritize reforms that remove the most binding constraints to private investment and FDI absorption: - Address availability of skilled labor, land tenure rights, energy reliability, and financial system functioning. - Advance tax/incentive measures and further customs/trade facilitation given their high urgency scores (e.g., Level of tax rates urgency = -1.4; Predictability of economic policies urgency = -1.5). - Continue measures that improved repatriation of investment and immigration services for foreign workers. - Use structured, pragmatic diagnostic methods (growth diagnostics) to sequence and focus reforms, to avoid overly broad or unprioritized roadmaps. - Target governance reforms where implementation is feasible (administrative bottlenecks, tax administration, competition, FDI promotion) while recognizing the longer horizon needed for rule-of-law and predictability improvements. ### Caveats and Follow-up - Caveats in interpreting investor survey results: - Respondents may not be aware of actual reform outcomes or urgencies but still hold strong perceptions. - Perceptions, regardless of accuracy, can materially affect investment decisions. - Respondents may attribute their own lack of investment activity to perceived lack of reforms. - Time lags: some structural reforms may take time to affect investor perceptions. - Recommendation: Repeat the investor survey in one or two years to assess whether perceptions of reform effectiveness have improved. *Source: Annex IV. Prioritizing Structural Reforms: What Do Investors Want? (IMF staff).* ### Annex VI . Recommendations of the 2018 Article IV Consultation ### Annex VI . Recommendations of the 2018 Article IV Consultation ### Maintaining Prudent Fiscal Policy, Improving Fiscal Transparency, and Tackling Tax Reform - Fund recommendation: Staff supported the authorities’ plans to tighten fiscal policy in 2018 to reduce inflation. - Authorities’ views: A tighter short-run fiscal stance, driven by reduced on-lending, was needed to counter inflation; authorities argued staff’s revenue projections were too conservative. - Developments since March 2018: - The 2018 consolidated fiscal balance was -2.2 percent of GDP vs. staff’s projection of -1.9 percent of GDP. - Revenues overperformed by 2.1 percent of GDP, primarily due to higher revenues from income, mining, customs, and VAT. - Expenditures were 1.7 percent of GDP higher than projected, primarily due to social and other expenditures. - Bank recapitalization and policy lending were 1.5 percent of GDP higher than projected, resulting in an overall fiscal balance of -2.1 percent of GDP vs. a projection of -0.9 percent of GDP. - Assessment: - Staff’s projections for both revenues and expenditures were too conservative, resulting in a better than expected consolidated fiscal balance. - However, the overall fiscal deficit was 1.2 percent of GDP higher than projected due to higher than expected bank recapitalization and policy lending. - Fiscal transparency: - Fund recommendation: Fiscal transparency should be a priority. - Authorities’ views: Progress in consolidating on- and off-budget transactions; committed to bring all fiscal operations on-budget starting in 2019. - Developments since March 2018: - Authorities undertook a fiscal transparency evaluation in 2018. - A Presidential decree established a GFS and fiscal transparency division in the Ministry of Finance. - The 2019 budget included medium-term fiscal projections, a discussion of risks, and the publication of a citizen’s budget. - The 2019 budget did not include all off-budget fiscal transactions. - Assessment: Significant progress has been made on fiscal reporting and fiscal transparency. But the government was unable to bring all off-budget fiscal transactions onto the budget. - Comprehensive tax reform: - Fund recommendation: Comprehensive tax reform is needed to foster job creation and to forestall the risk of a sharp decline in revenue collections from state enterprises. - Authorities’ views: Tax reform is a top priority; the Ministry of Finance agreed reforms should be revenue neutral and proceed in line with improvements in tax administration. - Developments since March 2018: - Government moved forward with a major tax reform in 2018, with implementation starting in 2019. - Reform significantly reduced tax rates on private corporations, SMEs, and labor income. - The number of firms registered under the standard tax regime and VAT regime rose from 7,000 in 2018 to 35,000 in 2019. - Government is reforming tax administration, including by setting up a large taxpayer office. - Assessment: The 2018 tax reform is a major step that should improve incentives for private businesses and workers while expanding the tax base. It is too early to determine the impact on revenues. Tax administration has been improving and will need to deal with many new taxpayers. ### Tightening Monetary Policy, Moving to Inflation Targeting, and Reducing Credit Market Segmentation - Tighter monetary stance: - Fund recommendation: A tighter monetary stance would help contain inflation over the next two years. Measures could include increasing the refinancing rate and halting FX accumulation. - Authorities’ views: Hiked the refinancing rate in 2017; current level could be appropriate if inflation declined rapidly in 2018. Adopted a neutrality principle whereby FX sales would offset CBU gold purchases. - Developments since March 2018: - End of period CPI inflation measured 14¼ percent in December 2018 versus staff’s forecast of 17 percent. - Central bank increased the refinancing rate from 14 to 16 percent in September 2018. - Prime lending rate increased 2½ percent in 2018. - Overall credit to the economy increased more than 50 percent, compared to staff’s forecast of 25 percent, driven by policy lending. - Central Bank kept policy of offsetting gold purchases with FX sales. - Assessment: Consumer inflation was lower than projected by staff, due to lower than expected pass through of wage increases, tariff increases, and exchange rate depreciation. The CBU monetary stance tightened as measured by the policy rate and FX intervention. But overall credit policy was looser as bank and FRD lending increased significantly. - Move to inflation targeting: - Fund recommendation: Staff supported the authorities’ plan to move to inflation targeting over the medium-term, including developing additional tools for monetary operations. - Authorities’ views: Agreed they should rely on multiple indicators of the policy stance in the near-term; noted ongoing efforts to improve the monetary framework and operations. - Developments since March 2018: - CBU improved liquidity forecasting and started operations to remove excess liquidity. - Reformed reserve requirements (RRs) by including household deposits in the base and requiring that RRs be held in domestic currency. - Introduced transparent open market operations for term deposits. - Assessment: Authorities have continued to make significant progress towards medium-term inflation targeting by improving liquidity forecasting, reserve requirements, and initiating open market operations. - Credit market segmentation and FRD lending: - Fund recommendation: Steps should be taken to reduce segmentation of the credit market, including stricter limits on FRD lending. - Authorities’ views: Agreed on need to increase share of lending at market interest rates; planned to limit FRD on-lending by aiming for a zero balance on FRD inflows and outflows. - Developments since March 2018: - Subsidized lending was stable. Preferential lending accounted for 49 percent of the new loans in 2018, compared with 51 percent in 2017. - FRD on-lending was 12 trillion in 2018, 7 trillion (1½ percent of GDP) higher than projected. - Assessment: The credit market remains highly segmented between firms that receive loans at subsidized and market rates. On-lending by the FRD significantly exceeded planned limits in 2018. ### Safeguarding Financial Stability and Building a Growth-Promoting Financial Sector - Emergency liquidity framework and collateral: - Fund recommendation: Enhance the framework for emergency liquidity assistance. Issue treasury securities to expand available collateral. - Authorities’ views: CBU believed its supervisory framework was adequate; planned to continue upgrading supervisory capacity and intervention tools, e.g. by incorporating stress tests. - Developments since March 2018: - CBU is improving its ability to conduct stress tests, including with help from IMF technical assistance; plans to implement bottom-up stress tests to assist banks to improve risk management. - In December 2018, the government issued UZS 600 billion in treasury bills and bonds with maturities of three months, six months, and three years. - Assessment: Good progress has been made on stress testing and on issuing domestic treasury bills and bonds. ### Promoting Structural Reform and Sustainable Development - Restructuring state enterprises: - Fund recommendation: Addressing balance sheet strains and restructuring state enterprises should be a key priority. - Authorities’ views: Agreed that tackling reforms of state enterprises was important, with a focus on improving operations & governance. - Developments since March 2018: - Authorities are classifying state enterprises into those that provide public and commercial services. - With help from external partners, developing roadmaps to restructure the domestic power and banking sectors, among others. - A new anti-monopoly agency was created. - Assessment: Authorities have made initial steps to prepare state enterprises for restructuring. However, the pace has been slow. - Trade liberalization and WTO accession: - Fund recommendation: Uzbekistan should further liberalize trade, including by acceding to the WTO. - Authorities’ views: Noted efforts to promote diversification and increase value-added in exports. - Developments since March 2018: - After the depreciation and cut in import tariffs in 2017, exports and imports rose 18 and 38 percent, respectively, in US dollars in 2018. - In June 2018, the President signed a resolution to streamline customs and tariff regulations. - In March 2019, an inter-agency commission on joining the WTO began meeting. - Assessment: The 2017 trade and exchange rate reforms continue to promote development of trade in 2018. Some steps were taken on WTO accession. ### Other Recommendations - Statistical improvements: - Fund recommendation: The government should continue to improve the quality and dissemination of economic statistics. - Authorities’ views: Noted efforts to improve balance of payments, national account, and government financial statistics. - Developments since March 2018: - In May 2018, the government joined the IMF’s enhanced General Data Dissemination System including publication of statistics on a National Summary Data Page. - Authorities have improved labor and government financial statistics, among others. - In February 2019, the government revised national accounts estimates. - Assessment: There has been a major improvement in access to economic statistics. Methodologies have also been improved, although additional steps are needed to bring them fully in line with international standards. *Source: Annex VI — Recommendations of the 2018 Article IV Consultation (IMF staff report content provided).* ### 3. Public debt coverage is broad. Public debt covers debt of the general government ### 3. Public debt coverage is broad. Public debt covers debt of the general government ### Public debt coverage and data limitations - Public debt covers debt of the general government (central government, local government, the pension fund, and other extrabudgetary funds) and SOE debt guaranteed by the government. - Data limitations undermine the completeness and comprehensiveness of PPG external debt data; the amount of non-guaranteed SOE debt is currently not known. - Efforts to improve debt coverage are under way (A joint IMF/World Bank mission in April 2019 worked to improve the quality of debt data and develop a medium-term debt management strategy). - Most reported private external debt reflects joint ventures between Uzbek SOEs and other firms, mostly in the energy sector. - Contingency stress tests use standard parameters implying: - a 2 percent of GDP shock to SOE debt (default shock of 2 percent of GDP triggered where government-guaranteed debt is not fully captured), - a 5 percent of GDP shock in case of financial market default (the default value of 5 percent of GDP is the minimum value). - Currently, there are no significant Public Private Partnership (PPP) projects in Uzbekistan. ### Public sector coverage table (subsectors) - 1 Central government: X - 2 State and local government: X - 3 Other elements in the general government: X - 4 o/w: Social security fund: X - 5 o/w: Extra budgetary funds (EBFs): X - 6 Guarantees (to other entities in the public and private sector, including to SOEs): X - 7 Central bank (borrowed on behalf of the government): (not marked) - 8 Non-guaranteed SOE debt: (not marked) ### Debt shocks and defaults (used values) - Other elements of the general government not captured in 1.0 percent of GDP: 0.0 - SoE's debt (guaranteed and not guaranteed by the government) 1/2 percent of GDP: 2.0 - PPP 35 percent of PPP stock: 0.0 (No significant PPPs currently) - Financial market (the default value of 5 percent of GDP is the minimum value): 5 percent of GDP (5.0) - Total (2+3+4+5) (in percent of GDP): 7.0 - Note: The default shock of 2 percent of GDP will be triggered for countries whose government-guaranteed debt is not fully captured under the country's public debt definition (1.). ### Debt-carrying capacity (Composite Indicator, CI) - Uzbekistan’s present CI score: 3.06 (just above the 3.05 lower bound for strong debt carrying capacity). - Final classification based on current vintage: Strong (CI 3.06); previous vintages: Strong (3.06) and Strong/Medium (3.43). - The strong reading largely reflects Uzbekistan’s high international reserves. - Calculation details (Applicable components, coefficients, 10-year averages, and contributions): - CPIA coefficient: 0.39; 10-year average value: 3.50; CI component: 1.35; Contribution: 44.0 percent - Real growth rate (in percent) coefficient: 2.72; 10-year average value: 6.45; CI component: 0.18; Contribution: 5.7 percent - Import coverage of reserves (in percent) coefficient: 4.05; 10-year average value: 57.96; CI component: 2.35; Contribution: 76.6 percent - Import coverage of reserves^2 (in percent) coefficient: -3.99; 10-year average value: 33.60; CI component: -1.34; Contribution: -43.7 percent - Remittances (in percent) coefficient: 2.02; 10-year average value: 2.41; CI component: 0.05; Contribution: 1.6 percent - World economic growth (in percent) coefficient: 13.52; 10-year average value: 3.58; CI component: 0.48; Contribution: 15.8 percent - CI Score: 3.06; total contribution: 100.0 percent - CI rating: Strong. - Applicable external debt burden thresholds: - PV of debt-to-exports: 140 180 240 - PV of debt-to-GDP: 30 40 55 - Debt service-to-exports: 10 15 21 - Debt service-to-revenue: 14 18 23 - Total public debt benchmark Public debt-to-GDP: 35 50 70 ### Macroeconomic assumptions (summary) - Real growth: - Projected real GDP growth rates marginally upgraded for 2019-20; medium-term growth projected at 6 percent. - Inflation projected to be high in the near term; over the medium term, inflation gradually decline as price liberalization is completed. - Fiscal: - Overall fiscal deficit projected to stabilize at 1¾ percent of GDP over the medium term (versus 1½ percent of GDP in the 2018 DSA). - External: - Current account deficit significantly larger than previously projected due to opening and modernization of the economy and surge of capital goods imports in 2018. - FDI revised up assuming reforms continue; international reserves projected to remain relatively stable as government borrowing and FDI cover most of the current account deficit. ### Comparison of selected macroeconomic indicators, 2017-21 (Current DSA vs Previous DSA) - Real GDP growth (percent) Current DSA: 2017 4.5; 2018 5.1; 2019 5.5; 2020 6.0; 2021 6.0 - Real GDP growth (percent) Previous DSA: 2017 5.3; 2018 5.0; 2019 5.0; 2020 5.5; 2021 6.0 - Overall fiscal balance (percent of GDP) Current DSA 1/: 2017 -1.9; 2018 -2.1; 2019 -1.6; 2020 -1.8; 2021 -1.8 - Overall fiscal balance (percent of GDP) Previous DSA 1/: 2017 -2.6; 2018 -1.0; 2019 -1.1; 2020 -1.1; 2021 -1.4 - Current account (percent of GDP) Current DSA 2/: 2017 1.2; 2018 -6.9; 2019 -6.5; 2020 -5.6; 2021 -4.7 - Current account (percent of GDP) Previous DSA: 2017 3.0; 2018 0.3; 2019 -0.8; 2020 -2.1; 2021 -2.1 - Notes: - 1/ Current and previous data were adjusted for recent revisions, which increased nominal GDP by about 25 percent. - 2/ Balance of payments (BOP) statistics revision in 2018 implied a current account deficit ½ percentage points higher due to the adoption of a new methodology. ### Realism tools and fiscal-real sector consistency - Projections deemed realistic: fiscal and real sector projections consistent according to realism tests. - Change in primary balance over next 3 years is close to the median of the cross-country distribution (zero). - For 2019, a small fiscal tightening of 0.2 percent of GDP is projected with limited impact on real GDP growth. - Government capital expenditure contribution to growth projected to decline as reforms reduce the government footprint. - Government aims to keep issuing moderate levels of domestic debt in domestic currency to support financial sector development; given high inflation, the cost of local debt can be high, while the government has sizable liquid assets amounting about 30 percent of GDP; domestic debt issuance expected to remain negligible. ### Total Public and Publicly-Guaranteed (PPG) debt projections and assumptions - Baseline: government’s primary deficit will stabilize at 1½ percent of GDP. - Disbursements of new debt assumed to average around 5 percent of GDP per year. - Historical composition: - About half of PPG external borrowing came from multilateral creditors and one third from official bilateral creditors; maturities ~20 years; implicit interest rates ~2 percent. - Eurobonds issued in 2019 had maturities of five and ten years and interest rates of 4¾ and 5⅜ percent, respectively. - For SOEs, about three-quarters of guaranteed debts reflected official bilateral creditors, with a small portion from commercial creditors. - Commercial borrowing for SOEs: average maturity ~5 years; implicit interest rates of about 2½ percent. - Projections assume borrowing maturities and interest rates remain comparable to historical values. - PPG debt-to-GDP ratio projected to rise from 20½ percent of GDP in 2018 to 26 percent of GDP in 2039. - Solvency indicators: - PV of public debt-to-GDP increases marginally from 16 percent in 2018 to about 20 percent in 2029 (below 70 percent benchmark). - PV of public debt-to-revenue ratio ticks up from 73 to 77 percent between 2019 and 2029. - Public debt service-to-revenue ratio remains below 10 percent. ### Total external debt and private external debt - Under baseline, total external debt declines from 34 percent of GDP in 2018 to 31 percent of GDP in 2024 and remains around that value until 2039. - Public external debt increases over next 20 years, private external debt is projected to decline. - Drivers include projected persistent real exchange appreciation. - Under baseline, all PPG external debt indicators remain below their indicative thresholds: - PV of PPG external debt-to-GDP rises from 18 percent in 2019 to 20 percent in 2039 (below indicative threshold of 55 percent). - PV of PPG external debt-to-exports rises from 69 percent in 2019 to about 97 percent in 2039 (below indicative threshold of 240 percent). - PPG debt service-to-exports and to-revenue ratios stay below 10 percent and remain below thresholds of 21 and 23 percent respectively. - Private external debt to GDP projected to decline as joint ventures reach repayment stage; private external debt projected to decline sharply in 2019 and 2020 and stabilize at around 6 percent of GDP thereafter. ### Debt dynamics drivers - Past: non-interest current account surplus and exchange rate movements (2017 depreciation almost doubled external debt-to-GDP ratio). - Forward: productivity growth expected to contribute to appreciation of the real exchange rate; moderate fiscal deficits (~2 percent of GDP) and significant current account deficits (on the order of 4-6 percent of GDP) expected to drive debt dynamics. ### Stress testing and risks - Debt ratios robust to a range of adverse shocks: - A one standard deviation shock to other external flows (remittances and FDI) would raise PV of external debt-to-GDP to 29 percent in 2024 and decline to 24 percent in 2039 (compared to 19 percent under baseline); PV of debt-to-exports would rise to 139 percent in 2024 and decrease to 116 percent in 2029 (compared to about 92 percent under baseline). All ratios would remain below benchmark thresholds. - A one standard deviation shock to exports would have a considerable, similar impact; stock and flow ratios remain below standard thresholds. - A combination shock (one-half standard deviation in GDP growth, fiscal balance, exports, financing flows, and depreciation) would have the next highest impact; stock and flow ratios remain below standard thresholds. - Overall assessment: - Uzbekistan’s risk of external debt distress remains low. - External debt projected to decrease to about 31 percent of GDP by 2029. - Overall public debt including guaranteed debt projected to reach about 25 percent of GDP. - All debt stocks and debt service ratios projected to remain well below relevant indicative thresholds. - DSA outlook benefits from robust growth and continued relatively low cost of concessional borrowing. - Large fiscal buffers (about 30 percent of GDP) and sizable international reserves (about 13 months of imports) are important risk-mitigating factors. - Market-financing risk: low — low gross financing needs, reduced sovereign spreads, and large liquid fiscal buffers available to cope with temporary adverse shocks. *Source: IMF staff estimates, Uzbekistan DSA text provided.* ### CONCLUSION ### CONCLUSION ### Debt sustainability assessment - Based on the debt sustainability analysis, Uzbekistan’s risk of public debt and external debt distress is low. - All solvency and liquidity indicators are projected to remain below their respective thresholds under both the baseline and stress scenarios. - The analysis assumes external PPG borrowing remains around 4-5 percent of GDP after an initial boost as reforms get underway. ### Risks and scenario analysis - Debt sustainability ratios could worsen if external borrowing is significantly higher than projected. Additional external borrowing could result in higher growth, exports, and revenues, but could impose an additional burden if not used wisely. - Results of stress tests for public debt and PPG external debt are similar; the report focuses discussion on PPG external debt stress-test outcomes. - Stress-test design notes: - All additional financing needs generated by shocks are assumed to be covered by PPG external MLT debt in the external DSA. - Default terms of marginal debt are based on baseline 10-year projections. - The most extreme stress test is the test that yields the highest ratio in or before 2029; one-off breaches are treated as mechanical signals and may be disregarded for presentation. ### Authorities’ views and policy stance - The authorities concur with staff that the risk of debt distress is low, given significant buffers and a low debt-to-GDP ratio. - The authorities share the view that investment needs must be addressed in a context of a sound macroeconomic framework, including a sound fiscal policy. - The authorities are committed to strengthening debt management capacity to further minimize the risk of debt distress. ### Key indicators and projections (selected) - Assumed external PPG borrowing after initial boost: around 4-5 percent of GDP. - PV of PPG external debt-to-GDP ratio (selected projection values): 15.6; 17.7; 19.2; 19.1; 19.2; 19.2; 19.3; 19.5; 20.5. - PV of PPG external debt-to-exports ratio (selected projection values): 55.6; 68.7; 81.6; 86.6; 89.5; 90.5; 91.5; 92.3; 97.5. - PPG debt service-to-exports ratio (selected projection values): 3.9; 4.6; 6.5; 7.5; 7.9; 8.1; 8.7; 8.8; 10.1. - PPG debt service-to-revenue ratio (selected projection values): 3.9; 4.7; 6.0; 6.4; 6.5; 6.6; 7.0; 7.1; 8.1. - Gross external financing need (Million of U.S. dollars, selected): 6,002; 5,424; 5,381; 4,965; 4,887; 5,010; 5,385; 8,379; 17,449. - Real GDP growth (selected projections, in percent): 5.1; 5.5; 6.0; 6.0; 6.0; 6.0; 6.0; 6.0; 7.1; 6.0. - GDP deflator in US dollar terms (change in percent, selected): -17.4; 13.6; 9.4; 7.4; 6.1; 6.2; 5.7; 1.5; 1.0; -2.3; 5.8. - Effective interest rate (percent, selected): 2.7; 3.3; 3.1; 3.0; 2.9; 2.8; 2.8; 2.7; 2.6; 2.4; 2.9. - Growth of exports of G&S (US dollar terms, in percent, selected): 13.9; 10.3; 6.0; 6.5; 9.2; 11.5; 11.4; 7.6; 7.0; 2.3; 9.2. - Growth of imports of G&S (US dollar terms, in percent, selected): 42.3; 8.8; 4.8; 4.8; 4.3; 7.4; 9.6; 9.6; 7.6; 7.0; 8.7; 8.2. - Grant-equivalent financing (in percent of GDP, selected): 1.3; 1.2; 1.1; 1.0; 1.0; 0.9; 0.7; 0.8; 0.9. - Government revenues (excluding grants, in percent of GDP, selected): 27.9; 25.4; 25.4; 25.6; 25.8; 25.9; 26.1; 26.1; 26.1; 28.4; 25.9. - Nominal GDP (Million of US dollars, selected): 50,485; 60,490; 70,156; 79,887; 89,851; 101,155; 113,366; 175,660; 346,685. - Memorandum: PV of external debt (selected): 29.5; 28.6; 28.1; 26.7; 26.0; 25.4; 25.1; 25.3; 26.4. - Memorandum: PV of PPG external debt (in Million of US dollars, selected): 7,855.6; 10,704.2; 13,488.5; 15,249.8; 17,209.2; 19,398.0; 21,868.3; 34,173.9; 71,197.2. *Source: IMF staff estimates and projections as presented in the CONCLUSION section of the report.* ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the ### 1990. The size of 3-year adjustment from program inception is found on the horizontal axis; the percent of sample is found on the vertical axis. ### 3-Year Adjustment in Primary Balance - Chart title: "3-Year Adjustment in Primary Balance (Percentage points of GDP)" - Horizontal axis labels (preserved exactly): -4 .5-4 .0-3 .5-3 .0-2 .5-2 .0-1 .5-1 .0-0 .5 0. 00. 51. 01. 52. 02. 53. 03. 54. 04. 55. 05. 56. 06. 57. 07. 58. 0 - Vertical axis label: "percent of sample" - Notation in figure: "3-year PBadjustment greater than 2.5 percentage points of GDP in approx. top quartile" - Additional label: "Mo re Distribution 1/ Pr ojec t ed 3-yr adjustment" ### Fiscal Adjustment and Possible Growth Paths - Section title: "Fiscal Adjustment and Possible Growth Paths 1/" - Scenario legend entries (preserved exactly): - "Ba sel ine" - "Multiplier = 0.2" - "Multiplier = 0.4" - "Multiplier = 0.6" - "Multiplier = 0.8" - Year markers shown exactly as presented: - "20132014201520162017201820192020" - "201520162017201820192020 20212022 20232024" - Axes and units preserved exactly: - "In percentage points of GDP" - "In percent" - Historical/projected series labels preserved exactly: - "H ist or i calProjected (Prev. DSA)Projected (Curr. DSA)" ### Market-Financing Risk Indicators - Header: "Figure 5. Market-Financing Risk Indicators" - Source line preserved: "S ource: IMF staff estimates." - Footnotes (preserved exactly): - "1/2/ 1/ Maximum gross financing needs (GFN) over 3-year baseline projection horizon." - "2/ Uzbeksitan is not included in EMBI. Spread from the Uzbek 2019 international issuance." - Key items and values preserved exactly as in figure labels and annotations: - "Breach of benchmarkNo" - "GFN" - "Benchmarks14" - "No" - "EMBI" - "570" - "Values3250" - "BaselineMarket financingThreshold" - "Potential heightened liquidity needs" - "Low" - Year sequences appearing on risk indicator charts (preserved exactly): - "201920212023 20252027 2029" - "201920212023202520272029" - "201920212023202520272029" - "201920212023202520272029" - Ratio series labels preserved exactly: - "Debt service-to-revenue ratio" - "PV of debt-to-exports ratio" - "PV of debt-to GDP ratio" - "Debt service-to-exports ratio" - Axis tick values preserved exactly as shown: - For first chart: "0 5 10 15 20 25" - For second chart: "0 50 100 150 200 250 300" - For third chart: "0 10 20 30 40 50 60" - For fourth chart: "0 5 10 15 20 25" *Source: IMF staff estimates as presented in the figure.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2019/1uzbea2019004.pdf_