## 1. Key Economic Reforms ## Source details **Canonical URL:** [1. Key Economic Reforms](https://www.imf.org/-/media/files/publications/cr/2021/english/1uzbea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1uzbea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1uzbea2021001.pdf.json) --- ### Context and pre-pandemic fundamentals - Growth and incomes - Economy was growing at a rate of 5–6 percent in the years preceding the COVID-19 crisis. - Per capita incomes averaged nearly US$1,750 in 2019 (about US$11,250 in PPP terms). - Migration and remittances - Number of migrants rose to 2½ million in 2019. - Remittances amounted to the equivalent of 12½ percent of GDP in 2019. - State presence - SOEs account for nearly half of (recorded) output and more than three quarters of tax revenues. - State-owned banks hold 85 percent of banking system assets. - Data provision - Participates in the IMF’s e-GDDS since 2018; authorities aim to join the SDDS by end 2022 with ongoing IMF technical assistance. ### Impact of the pandemic (key observations) - Health and activity - COVID-19 infections peaked at 6,000 new cases per week in early August 2020. - Economic activity and trade fell sharply in Q2 2020 and much of the summer; hospitality and gas exports faced near stand-still. - Labor and social outcomes - At the height of the pandemic, 60 percent of households reported no one working. - Unemployment rose sharply through mid-2020 and remained above pre-crisis levels at the start of 2021. - Wages grew in real terms in 2020 only marginally. - Sectoral resilience and outcomes - Construction and agriculture showed resilience through 2020; agriculture benefited from recent reforms. - Outcome for 2020: - GDP growth: 1.6 percent. - Inflation: ended 2020 at just over 11 percent. - Current account deficit: 5½ percent of GDP in 2020. - Overall fiscal deficit: 4½ percent of GDP in 2020. ### Policy response and fiscal/monetary measures - Fiscal support and composition - 2020 budget amended to provide additional spending totaling almost 4 percent of GDP on healthcare, social assistance, investment, and business support. - Number of households receiving social assistance nearly doubled to 1.1 million households by year-end. - Much additional spending channeled through the Anti-Crisis Fund; the Anti-Crisis Fund was closed at end-2020. - Transparency measures: publication of contract information and summary reports; audit of crisis-related spending by the Chamber of Accounts scheduled in April 2021 with report set to be published in May. - Fiscal financing and debt - Multilateral and bilateral creditors provided about US$1.7 billion in budget support, including US$375 million in emergency financing from the IMF. - Successful international bond placement of US$750 million in November 2020. - Public and publicly guaranteed (PPG) debt reached 38 percent of GDP by end-2020. - Monetary and liquidity measures - Central Bank of Uzbekistan (CBU) lowered its policy rate by 200 basis-points to 14 percent in 2020. - CBU provided additional liquidity to banks, eased reserve requirements, and encouraged loan payment deferrals. - CBU is implementing an inflation targeting regime aiming to reduce inflation to 5 percent by 2023. - Estimated 2020 stimulus composition (change compared to the original 2020 budget, percent of GDP): - Tax Relief: 0.5% - Expenditure: 1.3% - Health: 0.8% - Social Safety Net: 0.2% - Economy & Investment: 1.7% - Budget Deficit (policy): 4.2% planned, 2.1% actual, 1.5% budget? - Overall Fiscal Deficit (total): 4.5% planned, 1.4% actual, 1.5% budget? ### Key reforms implemented since 2017 - Trade and foreign exchange liberalization - 2017: unified official and parallel exchange rates, liberalized access to foreign exchange, and reduced trade tariffs. - Result: imports grew rapidly and the current account moved from a surplus into a deficit. - Price and utility pricing reforms - Prices of most goods and services liberalized, including flour, bread, and fuel. - Utility tariffs have been raised but remain regulated and below cost recovery. - Tax and public financial management reforms - 2019: considerable reduction in direct taxes on private enterprises and labor; tax base widened by lowering thresholds and eliminating exemptions and privileges. - State Tax Committee established a Large Taxpayers Office and developed risk-profiling tools. - Incorporated most extrabudgetary funds, externally financed expenditures, and the Fund for Reconstruction and Development (FRD) into the budget. - Parliament approved the budget for the first time in 2019; borrowing limits included in annual budget laws; a debt management office was created. - Monetary and financial sector reforms - 2019 central bank law enhanced CBU independence with price and financial stability mandate. - 2019 banking law and 2020 banking sector reform strategy to substantially reduce the state’s role; governance at state-owned banks improving. - Interest rates on policy loans raised to the CBU’s policy rate. - Agricultural reforms - Reduced arable land assigned to wheat and cotton; raised farm-gate prices for wheat and cotton to market levels; abolished the system of state orders. ### Recovery, outlook, and risks - Baseline macro outlook (staff projections) - 2021 GDP growth projected at about 5 percent. - Inflation projected to decline marginally to just below 10 percent by end-2021. - Current account deficit projected to widen slightly to about 6½ percent of GDP in 2021. - Major risks - Recovery depends on vaccine rollout and recovery in trading partners. - Structural challenges: large state role, limited progress in restructuring/divesting SOEs and state-owned banks, need to build strong independent institutions. - Shortcomings in statistical systems—national accounts, government finance, and external sector statistics—and a large informal sector. ### Vaccination and pandemic outlook (vaccination-specific) - Vaccination timeline and supplies - Authorities have started vaccinating the population and expect to complete this by mid-2022. - First shipment of vaccines arrived in mid-March under the WHO’s COVAX program. - Uzbekistan is to receive 2 million doses through COVAX in 2021. - Authorities seeking vaccines from other sources, including local production under licensing agreements and partnerships. ### Fiscal policy stance and 2021 budget - 2021 budget and financing - 2021 budget envisages an overall fiscal deficit of 5½ percent of GDP. - Budget ensures healthcare systems and vaccine rollout resourced, expands social assistance, and carries over some investment from 2020. - Financing mainly from further international support (World Bank and ADB), FRD resources, and another bond issuance. - Budget includes a conservative estimate of privatization proceeds. - Fiscal consolidation objectives and reforms - Authorities aim to reduce the overall fiscal deficit to 2 percent of GDP in the coming years to place PPG debt on a downward path. - Means: moderate increase in revenues, expenditure restraint, improvements in spending efficiency, and reduction of policy lending. - Preparing a Medium-Term Fiscal Strategy and a Medium-Term Revenue Strategy with IMF technical assistance. ### Key fiscal statistics (percent of GDP, Uzbekistan: Fiscal Developments, 2019-2021) - Revenues: 2019 = 28.1; 2020 = 26.6; 2021 Est./Proj. = 26.6 - Expenditures: 2019 = 28.3; 2020 = 29.9; 2021 Est./Proj. = 30.1 - o/w Health: 2019 = 1.9; 2020 = 2.3; 2021 = 2.9 - o/w Social safety net: 2019 = 6.2; 2020 = 7.0; 2021 = 7.1 - Budget balance: 2019 = -0.3; 2020 = -3.3; 2021 = -3.5 - Policy lending: 2019 = 3.7; 2020 = 1.2; 2021 = 2.0 - Overall fiscal balance: 2019 = -3.9; 2020 = -4.4; 2021 = -5.5 - Financing: 2019 = 4.6; 2020 = 5.1; 2021 = 5.5 - Domestic: 2019 = -1.5; 2020 = -1.3; 2021 = 1.1 - External: 2019 = 6.0; 2020 = 6.4; 2021 = 4.3 - Multilateral: 2019 = 3.1; 2020 = 4.1; 2021 = 2.5 - Budget support: 2019 = 1.6; 2020 = 3.0; 2021 = 1.5 - o/w: IMF...0.6... - Project lending: 2019 = 1.5; 2020 = 1.1; 2021 = 1.0 - Bilateral: 2019 = 1.2; 2020 = 1.0; 2021 = 0.4 - Eurobonds: 2019 = 1.7; 2020 = 1.3; 2021 = 1.4 ### Fiscal rules, debt outlook, and public investment management - Planned and ongoing measures - Authorities plan to adopt a debt law capping PPG debt at 60 percent of GDP. - Amendments to the budget code to introduce limits on the budget deficit and issuance of guarantees. - Recommendations: better manage external borrowing, strengthen selection procedures for capital projects, establish a single pipeline of appraised projects, and better integrate investment planning. - Debt outlook and stress tests - Uzbekistan remains at a low risk of debt distress. - With gradual fiscal consolidation, PPG debt projected to peak at 44 percent of GDP in 2022, before gradually declining to around 40 percent of GDP. - DSA stress scenario: under lower exports, debt-service-to-revenue threshold could be temporarily breached in 2024 due to repayment of the US$ 500 million 2019 Eurobond. - Mitigants: existing international reserve buffers and low rollover risk due to long maturity of debt. ### Social protection, SDGs, and labor - Social protection spending and coverage - Spending on social protection (pensions, social assistance, unemployment) is 7 percent of GDP. - Main assistance program: number of households covered doubled, but coverage of vulnerable households remains poor. - Pension coverage: about 80 percent of the elderly receive pensions, at a level of 55 percent of the average salary. - Labor market programs: only 2½ percent of the unemployed are registered and receive assistance. - Spending on unemployment, public works, and training: 0.1 percent of GDP. - SDGs and informal sector - Informal sector estimated at about 40 percent of employment and a third or more of GDP. - Prior to the pandemic, staff estimated an additional 8 percent of GDP per year would be needed to reach SDGs by 2030. - Spending on healthcare and infrastructure increased by a combined 2 percentage points in 2020. ### Monetary and exchange rate policies - CBU stance and targets - CBU’s monetary policy stance remains appropriate: focus on reducing inflation and building credibility. - IT objective: inflation target of 10 percent by 2021 and 5 percent by 2023. - Projected inflation path: decline to just under 10 percent by end-2021 and toward 5 percent by 2023 subject to utility tariff adjustments. - Exchange rate and reserves - CBU should continue to allow exchange rate flexibility; neutrality policy where purchases of domestically produced gold are offset by sales of foreign exchange. - Staff assesses Uzbekistan’s external position is broadly in line with fundamentals and reserves are adequate for precautionary and operational purposes. - Monetary transmission constraints - Constraints include low financial intermediation, low financial market development, high degree of dollarization, dominance of state-owned banks, and directed lending. - Dollarization in 2020: deposits about 43 percent; credit about 50 percent. - State-owned banks account for 85 percent of total banking system assets. ### Financial sector risks and recommended actions - Banking system resilience and concerns - Banks appeared resilient during the pandemic but full impact may not yet be observed; banks entered the crisis with relatively strong capital buffers. - CBU instructed banks to refrain from paying dividends. - Reported NPLs are low but accounting standards are weak; move to IFRS9 recommended. - Recommended supervisory and structural actions - Conduct stress tests and detailed third-party asset quality reviews for largest banks. - Address risks from high credit growth financed via wholesale funding, largely in foreign currency. - Improve accounting standards (adopt IFRS9) and perform asset quality reviews. - Strengthen CBU supervisory capabilities, adopt a new bank resolution law, amend deposit insurance law, and strengthen emergency liquidity assistance framework. - Macroprudential: consider higher risk weights for foreign currency denominated loans and adjust prudential liquidity requirements. - Banking reform strategy - Authorities launched strategy to increase share of assets held by private banks to 60 percent by end-2025. - Strategy includes attracting strategic investors and divesting state-owned banks; first banks planned to be sold this year. ### Structural reform priorities and governance - Priorities to support medium-term growth - Further open markets, increase competition, and allow prices to be determined by market forces. - Remove barriers to market entry and eliminate tariff, tax, and other privileges that SOEs enjoy. - Antimonopoly Committee to break up monopolies and remove distortions. - Establish an independent energy sector regulator. - SOE divestiture and governance - Presidential decree sets agenda to reform/divest nearly 3,000 SOEs. - Actions: divestment of minority stakes via an online platform; new asset management company to privatize mid-sized companies; drafting of a new privatization law and a state-ownership law. - Recommendations: improve governance and financial reporting of larger SOEs, place them at arm’s length, and limit government guarantees. - Governance, rule of law, and anti-corruption - Judicial reforms: establishment of the Supreme Judicial Council, regular publication of court decisions, increased use of electronic procedures. - New anti-corruption agency created; planned asset and income declaration scheme for public officials to focus on senior officials. - Public procurement: new public procurement law and online platform expected to increase transparency and publish beneficial ownership information. ### Trade liberalization and international integration - Actions and membership - Restarted WTO accession process; obtained observer status at the Eurasian Economic Union. - Joined the Kyoto Customs Convention, the Istanbul Convention on temporary imports, and the SECO-World Customs Union Global Trade Facilitation program. - Granted trade preferences under the EU’s GSP+ system in late 2020. ### Staff appraisal and key policy recommendations - Macroeconomic assessment - Pandemic impact mitigated by timely and strong policy response; Uzbekistan rebounded in the second half of 2020 and posted positive growth in 2020. - Continued high uncertainty; recovery dependent on vaccine rollout and external developments. - Main staff recommendations - Gradual withdrawal of fiscal stimulus as the pandemic subsides. - Adopt fiscal rules and reduce the budget deficit to place public debt on a downward path. - Create fiscal space by improving revenue administration and spending efficiency to expand social safety net and invest in healthcare and education. - Monetary policy to remain focused on lowering inflation; CBU should continue to allow exchange rate flexibility. - Improve CBU supervisory capabilities to monitor banks and respond to banking sector difficulties. - Maintain adherence to sound policy frameworks and close coordination among policymakers. ### Risk Assessment Matrix (selected risks and policy advice) - Unexpected shifts in the COVID-19 pandemic - Likelihood / Timeframe: Medium / Short-Term - Possible Impact: High - Policy Advice: Slow fiscal consolidation and target additional spending; allow exchange rate to adjust to prevent external imbalances. - Commodity prices decline or become more volatile (e.g., gold, natural gas, oil) - Likelihood / Timeframe: Medium / Short to Medium-Term - Background facts: Gold prices rose 27 percent in 2020; natural gas prices fell 26 percent in 2020. - Possible Impact: Medium - Policy Advice: Allow nominal exchange rate to adjust; slow fiscal consolidation short-term if needed; pursue trade liberalization and structural reforms to diversify exports. - Credit boom and/or pandemic weakens bank balance sheets - Likelihood / Timeframe: Medium / Short to Medium Term - Possible Impact: High - Policy Advice: Continue banking reforms, improve supervision, crisis preparedness, emergency liquidity framework, and reduce policy lending. - Reform fatigue - Likelihood / Timeframe: Medium / Medium Term - Possible Impact: High - Policy Advice: Reiterate commitment, communicate reforms’ rationale, and focus on highest priority reforms including price liberalization, SOE reform, banking reform, social protection, and business environment improvements. - Continued high fiscal deficits and a rise in public debt - Risk Description: Public debt rose rapidly to 38 percent of GDP at end-2020. - Likelihood / Timeframe: Medium / Medium-Term - Policy Advice: Continue fiscal consolidation toward 2 percent of GDP deficit; set annual limits on PPG debt; build fiscal risk framework; improve project selection. *Source: Republic of Uzbekistan — International Monetary Fund (excerpts from content unit provided).* ### 1. Key Economic Reforms _________________________________________________________________________________ 5 ### 1. Key Economic Reforms ### Context and pre-pandemic fundamentals - The economy was growing at a rate of 5–6 percent in the years preceding the COVID-19 crisis, reflecting sound macro-economic policies and an ambitious reform program launched in 2017. - Per capita incomes averaged nearly US$1,750 in 2019 (about US$11,250 in PPP terms). - The number of migrants rose to 2½ million in 2019, sending the equivalent of 12½ percent of GDP back home in remittances. - State presence in the economy remains large: - SOEs account for nearly half of (recorded) output and more than three quarters of tax revenues. - State-owned banks hold 85 percent of banking system assets. - Data provision: participates in the IMF’s e-GDDS since 2018; authorities aim to join the SDDS by end 2022 with ongoing IMF technical assistance. ### The impact of the pandemic (key observations) - COVID-19 infections peaked at 6,000 new cases per week in early August 2020. - Economic activity and trade fell sharply in Q2 2020 and much of the summer; hospitality and gas exports faced near stand-still. - Seasonal migration and remittance flows dropped due to travel restrictions; remittances ultimately fell less than feared. - Employment and social outcomes deteriorated: - At the height of the pandemic, 60 percent of households reported no one working. - Unemployment rose sharply through mid-2020 and remained above pre-crisis levels at the start of 2021. - Wages grew in real terms in 2020 only marginally. - Sectoral resilience: construction and agriculture showed resilience through 2020, with agriculture benefiting from recent reforms. - Outcome for 2020: - GDP growth: 1.6 percent (positive overall growth in 2020). - Inflation: ended 2020 at just over 11 percent. - Current account deficit: 5½ percent of GDP in 2020. - Overall fiscal deficit reached 4½ percent of GDP in 2020 (well below the amended budget projection). ### Policy response and fiscal/monetary measures - Fiscal support in 2020: - The 2020 budget was amended to provide additional spending totaling almost 4 percent of GDP on healthcare, social assistance, investment, and business support. - The number of households receiving social assistance nearly doubled, reaching 1.1 million households by year-end. - Much additional spending was channeled through the Anti-Crisis Fund to allow flexible allocation to urgent needs. - Transparency measures: publication of contract information, including beneficial ownership, and summary reports; audit of crisis-related spending by the Chamber of Accounts scheduled in April 2021 with report set to be published in May. - The Anti-Crisis Fund was closed at end-2020; publication of procurement data has ceased pending a transparent online procurement platform. - Fiscal financing and debt: - Multilateral and bilateral creditors provided about US$1.7 billion in budget support, including US$375 million in emergency financing from the IMF. - Successful international bond placement of US$750 million in November 2020. - Public and publicly guaranteed (PPG) debt reached 38 percent of GDP by end-2020, almost double the level of three years earlier. - Central bank and liquidity measures: - The Central Bank of Uzbekistan (CBU) lowered its policy rate by 200 basis-points to 14 percent in 2020. - CBU provided additional liquidity to banks and eased reserve requirements. - Banks were encouraged to allow households and affected firms to defer loan payments. - The CBU is implementing an inflation targeting regime with the goal of reducing inflation to 5 percent by 2023. - Estimated 2020 stimulus composition (change compared to the original 2020 budget, percent of GDP): - Tax Relief: 0.5% - Expenditure: 1.3% - Health: 0.8% - Social Safety Net: 0.2% - Economy & Investment: 1.7% - Budget Deficit (policy): 4.2% planned, 2.1% actual, 1.5% budget? - Overall Fiscal Deficit (total): 4.5% planned, 1.4% actual, 1.5% budget? (Note: table in source shows planned, actual, and budget columns for 2020–2021 stimulus items.) ### Key reforms implemented since 2017 (Box 1: Key Economic Reforms) - Trade and foreign exchange liberalization: - 2017: unified official and parallel exchange rates, liberalized access to foreign exchange, and reduced trade tariffs. - Result: imports grew rapidly and the current account moved from a surplus into a deficit. - Price liberalization: - Prices of most goods and services liberalized, including key food items (flour, bread) and fuel. - Utility tariffs have been raised but remain regulated and below cost recovery. - Tax reforms: - 2019: considerable reduction in direct taxes on private enterprises and labor; widened tax base by lowering thresholds and eliminating exemptions and privileges. - State Tax Committee established a Large Taxpayers Office covering the bulk of tax revenues and developed risk-profiling tools. - Public financial management reforms: - Incorporated most extrabudgetary funds, externally financed expenditures, and the Fund for Reconstruction and Development (FRD) into the budget. - Budget processes, coverage, quality, and transparency of fiscal reporting improved; parliament approved the budget for the first time in 2019. - Borrowing limits included in annual budget laws and a debt management office was created. - Monetary and financial sector reforms: - 2019 central bank law enhanced CBU independence with price and financial stability mandate. - CBU implementing inflation targeting aiming for inflation of 5 percent by 2023. - Interest rates on policy loans raised from below-market levels to the CBU’s policy rate. - 2019 banking law and 2020 banking sector reform strategy to substantially reduce the state’s role; governance at state-owned banks improving through appointment of professional and independent supervisory board members. - Agricultural reforms: - Reduced arable land assigned to wheat and cotton to allow higher-earning crops. - Raised farm-gate prices for wheat and cotton to market levels and abolished the system of state orders. ### Recovery, outlook, and risks - Macroeconomic outlook (baseline projections from source): - 2021 GDP growth projected at about 5 percent. - Inflation projected to decline marginally to just below 10 percent by end-2021, due to food price pressures and government wage increases. - Current account deficit projected to widen slightly to about 6½ percent of GDP as imports recover faster than exports. - Risks: - High uncertainty remains; recovery depends especially on vaccine rollout and recovery in trading partners. - Structural challenges to securing strong, sustainable, and inclusive growth include large state role in the economy, limited progress in restructuring and divesting SOEs and state-owned banks, and the need to build strong and independent institutions. - Shortcomings in statistical systems—national accounts, government finance, and external sector statistics—remain, with the informal sector difficult to capture. *Source: 1. Key Economic Reforms (IMF staff report text provided).* ### 14. The authorities have started vaccinating the population and expect to complete this by ### 1uzbea2021001 - 14. The authorities have started vaccinating the population and expect to complete this by ### Vaccination and pandemic outlook - The authorities have started vaccinating the population and expect to complete this by mid-2022. - The first shipment of vaccines arrived in mid-March, under the World Health Organization’s COVAX program. - Uzbekistan is to receive 2 million doses through the COVAX program in 2021. - Authorities are seeking vaccines from other sources, including by producing vaccines locally under licensing agreements and partnerships, to secure enough vaccines for the country’s entire population. - While infections remain low, there has been a pick-up in new cases more recently. ### Risks to the recovery - Risks are elevated: recovery could be delayed by a resurgence of infections, a slower-than-expected rollout of vaccines, new containment measures, slower growth in Uzbekistan’s main trading partners, and fluctuations in commodity prices, notably the price of gold. - With elections planned for later this year, reform progress may slow or give way to populist measures aimed at quick results. - The accompanying Risk Assessment Matrix (referenced in source) details these risks. ### Fiscal policy role and stance - The recovery will depend on continued economic policies to protect lives, support growth, and mitigate economic scarring. - Support for the nascent recovery will need to come mainly from fiscal policy; Uzbekistan has space to use fiscal policy to respond to shocks. - The role for monetary policy is more limited: it needs to focus on reducing inflation further and building credibility, while allowing exchange rate flexibility. ### 2021 budget and financing - The 2021 budget envisages an overall fiscal deficit of 5½ percent of GDP. - The budget ensures healthcare systems and vaccine rollout are adequately resourced, expands social assistance, and carries over some investment from 2020. - The budget includes wage increases postponed in 2020 to catch up with inflation. - Financing will be covered mainly by further international support (mainly from the World Bank and the Asian Development Bank), FRD resources, and another bond issuance. - The budget includes a conservative estimate of privatization proceeds; additional proceeds could be used for additional capital spending. - If downside risks materialize, room exists to further expand fiscal support by increasing targeted transfers to vulnerable households and viable firms and by accelerating public investment. ### Fiscal consolidation objectives and reforms - Authorities are committed to gradual fiscal consolidation once the pandemic abates to ensure medium-term sustainability. - Aim: reduce the overall fiscal deficit to 2 percent of GDP in the coming years to place PPG debt on a downward path. - Means: moderate increase in revenues, expenditure restraint, improvements in spending efficiency, and reduction of policy lending. - Ongoing improvements: preparing a Medium-Term Fiscal Strategy and a Medium-Term Revenue Strategy with extensive IMF technical assistance; improvements in public financial management and revenue administration. ### Key fiscal statistics (Uzbekistan: Fiscal Developments, 2019-2021, percent of GDP) - Revenues: 2019 = 28.1; 2020 = 26.6; 2021 Est./Proj. = 26.6 - Expenditures: 2019 = 28.3; 2020 = 29.9; 2021 Est./Proj. = 30.1 - o/w: Health: 2019 = 1.9; 2020 = 2.3; 2021 = 2.9 - Social safety net: 2019 = 6.2; 2020 = 7.0; 2021 = 7.1 - Budget balance: 2019 = -0.3; 2020 = -3.3; 2021 = -3.5 - Policy lending: 2019 = 3.7; 2020 = 1.2; 2021 = 2.0 - Overall fiscal balance: 2019 = -3.9; 2020 = -4.4; 2021 = -5.5 - Statistical Discrepancy: 2019 = 0.7; 2020 = 0.7; 2021 = 0.0 - Financing: 2019 = 4.6; 2020 = 5.1; 2021 = 5.5 - Domestic: 2019 = -1.5; 2020 = -1.3; 2021 = 1.1 - Securities: 2019 = 0.1; 2020 = 0.5; 2021 = 0.3 - Banks: 2019 = -1.6; 2020 = -1.8; 2021 = 0.8 - External: 2019 = 6.0; 2020 = 6.4; 2021 = 4.3 - Multilateral: 2019 = 3.1; 2020 = 4.1; 2021 = 2.5 - Budget support: 2019 = 1.6; 2020 = 3.0; 2021 = 1.5 - o/w: IMF...0.6... - Project lending: 2019 = 1.5; 2020 = 1.1; 2021 = 1.0 - Bilateral: 2019 = 1.2; 2020 = 1.0; 2021 = 0.4 - Eurobonds: 2019 = 1.7; 2020 = 1.3; 2021 = 1.4 ### Fiscal rules, debt outlook, and public investment management - Authorities plan to adopt a debt law this year capping PPG debt at 60 percent of GDP. - Follow-up: amendments to the budget code to introduce limits on the budget deficit and the issuance of guarantees. - Aim: stabilize debt well below the ceiling to deal with possible future crises. - Recommendations: better manage external borrowing, strengthen selection procedures for capital projects, establish a single pipeline of appraised projects, and better integrate investment planning in annual and medium-term budget processes. - Enhance assessment of fiscal risks, including from SOEs and public-private partnerships. - Debt outlook: Uzbekistan remains at a low risk of debt distress. With gradual fiscal consolidation, PPG debt is projected to peak at 44 percent of GDP in 2022, before gradually declining to around 40 percent of GDP. - Stress scenario: the DSA suggests that under a stress scenario with lower exports, the debt-service-to-revenue threshold could be temporarily breached in 2024 (due to the repayment of the US$ 500 million 2019 Eurobond). - Mitigants: existing international reserve buffers and low rollover risk—due to the long maturity of debt. ### Social protection and SDGs financing - Spending on social protection (pensions, social assistance, unemployment) is relatively modest at 7 percent of GDP. - Coverage: - Main assistance program: number of households covered doubled, but coverage of vulnerable households remains poor. - Pension coverage: about 80 percent of the elderly receive pensions, at a level of 55 percent of the average salary. - Labor market programs: minimal. Only 2½ percent of the unemployed are registered and receive assistance. - Spending on unemployment, public works, and training: 0.1 percent of GDP. - Authorities are working with the World Bank and the UNDP to improve the social safety net, including creating a single registry for beneficiaries. - Authorities have requested IMF assistance to improve the pension system to ensure financial viability and protect against old-age poverty. - SDGs: Uzbekistan scores relatively well on the SDGs; primary and secondary school enrollment and literacy are high, as are access to sanitation and electricity. - Informal sector: estimated at about 40 percent of employment and a third or more of GDP. - In 2018, Uzbekistan adopted 125 SDG-related targets focused on governance, policy coherence, job opportunities, resilience to climate change, and access to education, health, and social services. - Prior to the pandemic, staff estimated an additional 8 percent of GDP per year would be needed to reach these goals by 2030. - Spending on healthcare and infrastructure increased by a combined 2 percentage points in 2020. - Further progress will require additional resources from higher revenues, improvements in spending efficiency, or financing. ### Monetary and exchange rate policies - The CBU’s monetary policy stance remains appropriate: focus on further reducing inflation to build credibility and better anchor inflation expectations. - With current relatively tight monetary stance, inflation is projected to continue to gradually decline, to just under 10 percent by end-2021. - The CBU should remain vigilant about possible increases in inflation due to food price increases or planned government wage increases and stand ready to respond to downside risks. - Achieving the CBU’s 2023 goal of reducing inflation to 5 percent will depend on the pace of utility tariff adjustments. - Exchange rate policy: the CBU should continue to allow exchange rate flexibility, allowing the exchange rate to act as a key shock absorber. - The CBU continues its neutral intervention policy, whereby purchases of domestically produced gold are offset by sales of foreign exchange. - Uzbekistan’s external position is assessed to be broadly in line with economic fundamentals. ### Monetary framework, transmission, and CBU governance - The CBU has improved communications, transparency, forecasting capabilities, and modernized operations by introducing open market operations and foreign exchange auctions. - Monetary policy transmission remains constrained by: - Low level of financial intermediation (notably a low share of private deposits in banks’ funding), - Low financial market development, - High degree of dollarization, - Dominance of state-owned banks, and - Directed lending. - Continued sound monetary policies and further financial sector reforms—while safeguarding central bank independence—are needed to strengthen confidence in the national currency and the banking system. - Lending rates: while interest rates on almost all government lending programs have been raised to the CBU’s policy rate, lending rates should be left to be set freely by banks, with subsidies provided for critical activities authorities wish to support. - CBU governance: established as a strong and independent institution; further efforts should include adopting IFRS9 and publishing financial statements as required under the IMF’s safeguards assessment policy, and enhancements in procedures for appointing the CBU’s management and supervisory boards. - A safeguards assessment is planned for no later than in 2022. ### Financial sector risks and recommended actions - Banks appeared resilient during the pandemic but full impact may not yet be observed; the CBU should closely monitor banks. - Banks entered the crisis with relatively strong capital buffers; the CBU instructed banks to refrain from paying dividends. - As loan deferrals are phased out, recommended actions: - Conduct stress tests and detailed third-party asset quality reviews, at least for the largest banks, to determine possible capital needs. - Address risks from high credit growth financed mainly via wholesale funding, largely in foreign currency. - Address loan portfolio concentration and foreign currency risks, noting largest exposures mainly to SOEs and some banks heavily exposed to specific sectors. - Improve accounting standards (move to IFRS9) and perform asset quality reviews: reported NPLs are low but accounting standards are weak; loan quality may prove worse than reported. - Further strengthen CBU supervisory capabilities: address information gaps, deepen capability to assess banks’ capital requirements considering individual risk profiles, continue move to risk-based supervision, and address gaps from the self-assessment against Basel Core Principles. - Complementary reforms: adopt a new bank resolution law and amend the deposit insurance law (with World Bank assistance), strengthen emergency liquidity assistance framework. - Macroprudential considerations: consider higher risk weights for foreign currency denominated loans (notably to unhedged borrowers) and adjust prudential liquidity requirements to discourage over-reliance on wholesale funding. - A recent Financial Sector Stability Review (FSSR) laid out a technical assistance roadmap to strengthen detection of risks and capacity in financial sector oversight. ### Structural reforms for financial intermediation and state banks - Broader financial sector reforms are needed to reduce the role of state-owned banks and enhance financial intermediation. - The dominance of state-owned banks has contributed to low financial intermediation and constrained access to finance. - Authorities launched an ambitious banking sector reform strategy to reduce the state’s role and increase the share of assets held by private banks to 60 percent by end-2025. - Strategy to be achieved by attracting strategic investors to some state-owned banks and divesting others; the first banks are planned to be sold this year. - State-owned banks’ governance is being improved with appointment of independent, professional supervisory board members. _Italic: Source — Republic of Uzbekistan, International Monetary Fund (excerpts from content unit provided)._ ### 30. The authorities agreed with staff’s assessment and policy recommendations. Notably, ### 1uzbea2021001 - 30. ### Authorities' agreement, outlook, and risks - Authorities largely agreed with staff’s outlook and risk assessment, while being somewhat more optimistic about the pace of the recovery. - They agreed uncertainty was large and risks many, with the spread of new variants and possible delays in vaccine rollout among the largest risks. - They also saw upside risks, especially given recovery in some of Uzbekistan’s main trading partners. - Much depended on the global policy response, as Uzbekistan’s economy depends to a great deal on developments abroad. ### Near-term priorities and fiscal policy - Near-term priority: protect lives and livelihoods while supporting the recovery; fiscal policy needed to remain accommodative. - Authorities expected a greater rebound in tax revenues, especially VAT, but noted this could be offset by a possible decline in gold prices. - Commitment to medium-term fiscal sustainability: adopt a set of fiscal rules and reduce the budget deficit in the coming years to place public debt on a downward path. - Need to increase coordination and efficiency of public investment projects, including to achieve the SDGs, and to further expand the social safety net. ### Monetary policy and Central Bank of Uzbekistan (CBU) - The CBU considered its monetary stance appropriate to bring down inflation to its goal for end-2021. - CBU highlighted increases in food prices and noted readiness to adjust its policy rate as needed: tighten if inflationary pressures emerged or ease further if downside risks to growth materialized. - CBU reiterated commitment to exchange rate flexibility. - Acknowledged constrained monetary policy transmission but noted strengthening over the last two years due to progress in financial sector reforms. - Acknowledged increased vulnerabilities in the banking sector and is working to address information gaps and strengthen bank supervision. ### Structural reform priorities to support medium-term growth - Challenge: support recovery and continue transformation to a modern market economy; reform agenda remains large with need to accelerate implementation. - Priority areas for impact on growth: financial, trade, and governance areas. - Recommended actions: - Further open markets, increase competition, and allow prices to be fully determined by market forces. - Remove barriers to market entry and eliminate tariff, tax, and other privileges that SOEs enjoy. - Antimonopoly Committee to step up efforts to break up monopolies and remove distortions. - Establish an independent energy sector regulator to set and adjust energy tariffs until market determination is feasible. ### State-owned enterprises (SOEs) and privatization - Recent presidential decree sets an ambitious agenda for the reform and divestiture of nearly 3,000 SOEs, including the largest companies. - Actions underway: - Divestment of minority stakes and smaller assets via an online platform. - New asset management company set up to privatize a first set of mid-sized companies this year. - Drafting of a new privatization law with EBRD assistance. - Drafting of a state-ownership law to define ownership principles for companies remaining in state hands. - Governance and financial reporting of larger SOEs should be improved; place them more at arm’s length and limit government guarantees to impose greater financial discipline. - Privatization processes must be open and transparent. ### Governance, rule of law, and anti-corruption measures - Judicial reforms undertaken: establishment of the Supreme Judicial Council, regular publication of court decisions, increased use of electronic procedures. - Further efforts needed to strengthen independence of the Supreme Judicial Council and procedures for selecting judges and organizing courts. - A new insolvency law is under preparation. - New anti-corruption agency created to develop prevention strategies, reduce the informal sector, and detect/investigate cases of corruption in cooperation with the prosecutor’s office. - Planned asset and income declaration scheme for public officials should focus on senior officials and be effective through increased transparency. ### Public procurement, digitalization, and transparency - Authorities about to adopt a new public procurement law and implement a new online platform for all public procurement this year, developed with EBRD assistance. - Expected effects: increased transparency, including beneficial ownership of contracting companies, and reduced opportunities for corruption. - Importance of accurate and up-to-date beneficial ownership information in business registers. - Ongoing digitalization of government services, including tax and customs, to increase efficiency and reduce the informal sector. ### Trade liberalization and international integration - Actions under way: - Restarted WTO accession process. - Obtained observer status at the Eurasian Economic Union. - Joined the Kyoto Customs Convention, the Istanbul Convention on temporary imports, and the SECO-World Customs Union Global Trade Facilitation (TF) program. - Granted trade preferences under the EU’s GSP+ system in late 2020, allowing exports to the EU at duty free or reduced rates. - These measures, together with the TF program, will help align trade standards and regulations with international best practices. ### Energy sector reforms and pricing - State-owned gas and power companies unbundled into separate production, transmission, and distribution companies to enhance efficiency and allow eventual (partial) privatization. - Authorities lifted customs duties on liquified natural gas, abolished import permit requirements, and announced plans to allow producers and importers to sell gas and electricity to wholesale consumers on the open market later this year. - Household energy tariffs are below cost recovery and export-parity levels; below cost recovery pricing of natural gas implies a subsidy to end users of about 2¼ percent of GDP and of about 5 percent of GDP when compared to export-parity levels. - Recommendation: raise household energy tariffs to market levels gradually while expanding the social safety net to protect vulnerable households; market pricing will stimulate private sector participation. ### Land, agriculture, and labor market issues - Strengthening land tenure rights and making them tradable needed to increase investment and productivity in agriculture. - Authorities planning to start selling non-agricultural land plots via auctions and have reorganized the public cadaster, transferring the agricultural cadaster to the Ministry of Agriculture. - Labor market: - Uzbekistan estimated to have on average some 400,000 job opportunities available each year, while labor market entrants total about 600,000. - Pandemic response included more resources for job training, SME development, and job matching. - Controls on internal migration relaxed and assistance increased for workers seeking work abroad. - Development of an employment strategy and almost full elimination of forced labor during cotton harvests in cooperation with the ILO. ### Authorities’ stated views on reforms - Authorities reiterated commitment to continue structural reforms to ensure strong and sustainable growth and improve living standards. - Acknowledged reform implementation slowed due to the pandemic but preparations continued in many areas. - Noted that second-generation reforms (privatization, tariff reforms) will require careful preparation and communication given social impact. - Aim to sell several SOEs and state-owned banks this year and continue working closely with international partners. - Emphasized importance of strong institutions, transparency, and reducing opportunities for corruption. ### Staff appraisal — macroeconomic assessment and recommendations - Pandemic impact mitigated by timely and strong policy response; Uzbekistan’s economy rebounded in the second half of 2020 and was among the few countries posting positive growth in 2020. - Continued high uncertainty; recovery dependent on vaccine rollout and risks from new variants and infections; also depends on developments in main trading partners. - 2021 budget maintains an appropriate accommodative stance and ensures healthcare and vaccine rollout are sufficiently resourced. - If downside risks materialize, authorities could use fiscal buffers to provide additional, targeted support to households and businesses. - Vulnerabilities to address: - Public debt has almost doubled in a few years’ time. - Banks’ loan portfolios may be affected with a lag. - Incomes remain relatively low compared to other emerging economies; social safety net still leaves out many vulnerable households. - Recommendations: - Gradual withdrawal of fiscal stimulus as the pandemic subsides. - Adopt fiscal rules and reduce the budget deficit to place public debt on a downward path; risk of public debt distress assessed to remain low. - Create fiscal space by improving revenue administration and spending efficiency to expand social safety net and invest in healthcare and education. - Monetary policy should remain focused on lowering inflation; CBU should continue to allow exchange rate flexibility. - Further improvements needed in CBU’s supervisory capabilities to better monitor banks and respond to possible banking sector difficulties. - Adherence to sound policy frameworks and close coordination among policymakers essential to maintain macro-financial stability. *Source: IMF staff report excerpt.* ### 51. As the crisis abates, it will be particularly important to pick up the pace of structural ### 1uzbea2021001 - 51. As the crisis abates, it will be particularly important to pick up the pace of structural ### Overview and policy context - After years of relative isolation and strict state control, Uzbekistan has modernized its economy, but the reform agenda remains large and the economy does not create enough jobs for its growing population. - Priority areas: reduce the large role of the state in the economy; create an environment conducive to strong private sector growth; create strong and independent institutions; ensure strict adherence to the rule of law and government transparency; increase digitalization to facilitate transparency and policy predictability. ### Real sector and inflation (selected projections) - Real GDP growth (GDP at constant prices): 2018: 5.4 percent; 2019: 5.8 percent; 2020: 1.5 percent; 2021: 1.6 percent; 2022–2026: 5.0, 5.3, 5.5, 5.5, 5.5 percent respectively. - GDP at current prices (in trillions of Sum): 2018: 4075; 2019: 1060; 2020: 2580; 2021: 6697; 2022: 8594; 2023: 999; 2024: 1,109; 2025: 1,232 (note: table includes long series—preserve entries as shown). - GDP per capita (in U.S. dollars): 2018: 1,543; 2019: 1,736; 2020: 1,795; 2021: 1,702; 2022: 1,780; 2023: 1,922; 2024: 2,097; 2025: 2,299; 2026: 2,511; 2027: 2,745. - Consumer price index (end of period): 2018: 14.3 percent; 2019: 15.2 percent; 2020: 11.2 percent; 2021: 11.2 percent; 2022: 9.8 percent; 2023: 10.6 percent; 2024: 5.5 percent; 2025: 5.0 percent; 2026: 5.0 percent. - GDP deflator: 2018: 27.5; 2019: 18.6; 2020: 15.8; 2021: 11.9; 2022: 9.8; 2023: 11.5; 2024: 7.9; 2025: 5.9; 2026: 5.3. ### External sector and reserves - Current account (percent of GDP): 2018: -7.1; 2019: -5.8; 2020: -9.6; 2021: -5.4; 2022: -6.4; 2023: -5.9; 2024: -5.4; 2025: -5.2; 2026: -5.1; 2027: -4.8. - Gross international reserves (billions of U.S. dollars): 2018: 27.1; 2019: 29.2; 2020: 27.7; 2021: 34.9; 2022: 34.5; 2023: 35.2; 2024: 35.6; 2025: 35.8; 2026: 36.0; 2027: 36.3. - Gross international reserves (months of imports): 2018: 12.2; 2019: 15.5; 2020: 11.5; 2021: 15.8; 2022: 13.7; 2023: 12.6; 2024: 11.5; 2025: 10.5; 2026: 9.5; 2027: 8.7. - Exports of goods and services (annual percent change): 2018: 13.9; 2019: 20.2; 2020: -10.4; 2021: -15.4; 2022: 19.8; 2023: 17.6; 2024: 15.4; 2025: 13.0; 2026: 11.4; 2027: 12.1. - Imports of goods and services (annual percent change): 2018: 42.3; 2019: 13.3; 2020: -8.6; 2021: -15.2; 2022: 18.0; 2023: 13.4; 2024: 11.6; 2025: 10.9; 2026: 10.1; 2027: 10.4. ### Fiscal position and public debt - Consolidated budget revenues (percent of GDP): 2018: 28.7; 2019: 28.7; 2020: 25.2; 2021: 27.6; 2022: 27.6; 2023: 27.7; 2024: 28.0; 2025: 28.4; 2026: 28.8; 2027: 29.2. - Consolidated budget expenditures (percent of GDP): 2018: 30.8; 2019: 32.6; 2020: 30.8; 2021: 32.0; 2022: 33.1; 2023: 31.6; 2024: 31.2; 2025: 31.1; 2026: 30.8; 2027: 31.2. - Consolidated budget balance (percent of GDP): 2018: -2.1; 2019: -3.9; 2020: -3.5; 2021: -4.4; 2022: -5.5; 2023: -4.0; 2024: -3.2; 2025: -2.7; 2026: -2.0; 2027: -2.0. - Adjusted fiscal balance (percent of GDP): 2018: 1.7; 2019: -0.3; 2020: -4.1; 2021: -3.3; 2022: -3.5; 2023: -2.8; 2024: -2.2; 2025: -1.8; 2026: -1.2; 2027: -1.3. - Total public & publicly guaranteed debt (percent of GDP): 2018: 20.3; 2019: 29.3; 2020: 34.5; 2021: 37.8; 2022: 42.1; 2023: 44.2; 2024: 43.8; 2025: 42.8; 2026: 41.4; 2027: 40.0. ### Monetary and financial sector - Broad money (annual percent change): 2018: 13.2; 2019: 13.8; 2020: 16.7; 2021: 17.9; 2022: 15.7; 2023: 17.2; 2024: 17.1; 2025: 17.3; 2026: 16.9; 2027: 16.8. - Credit to the economy growth (adjusted for FRD transfers): 2018: 51.3; 2019: 48.1; 2020: 21.6; 2021: 34.4; 2022: 19.7; 2023: 17.6; 2024: 13.2; 2025: 12.3; 2026: 11.4; 2027: 11.3. - Reserve money (annual percent change): 2018: -1.9; 2019: 17.8; 2020: 6.0; 2021: 15.4; 2022: 10.0; 2023: 12.1; 2024: 10.7; 2025: 10.8; 2026: 10.4; 2027: 10.3. - Central bank: Gross international reserves (billions of U.S. dollars) repeated: 27.1; 29.2; 27.7; 34.9; 34.5; 35.2; 35.6; 35.8; 36.0; 36.3. - Financial sector indicators (selected, end-period): - Non-performing loans to total gross loans: 2015: 1.5; 2016: 0.7; 2017: 1.2; 2018: 1.3; 2019: 1.5; 2020: 2.1 (percent). - Regulatory capital to risk-weighted assets: 2015: 14.7; 2016: 14.7; 2017: 18.8; 2018: 15.6; 2019: 23.5; 2020: 18.4 (percent). ### Labor market and social indicators - Formal sector employment growth (percent): 2018: 0.7; 2019: 1.8; 2020: -4.0; 2021: 1.7; 2022: 1.0; 2023: 0.7; 2024: 0.8; 2025: 0.8; 2026: 0.7; 2027: 0.8. - Working-age population growth (percent): 2018: 0.9; 2019: 0.2; 2020: 0.9; 2021: 0.9; 2022–2027: 0.9 (each year). - Unemployment rate (percent): 2018: 9.3; 2019: 9.0; 2020: 16.5; 2021: 10.5; 2022: 9.5; 2023: 9.0; 2024: 8.5; 2025: 8.0; 2026: 7.5; 2027: 7.0. - Labor migrants (millions): 2018: 2.4; 2019: 2.5; 2020: 2.0; 2021: 1.8; 2022: 2.0; 2023: 2.3; 2024: 2.4; 2025: 2.4; 2026: 2.5; 2027: 2.5. ### Key structural and policy recommendations (from 2019 Article IV recommendations and staff observations) - Fiscal policy - Maintain moderate fiscal deficits to support macroeconomic stability; authorities committed to tighten fiscal policy as the pandemic abates. - Improve tax administration and widen the tax base while maintaining revenues; tax base broadened and improvements underway. - Bring all fiscal operations on budget; budget coverage improved by including FRD and externally financed operations, though some small accounts remain excluded. - Resist pressures to scale up policy lending or off-budget operations; policy lending was reduced in 2020 but integration into overall budget needs improvement. - Improve targeting and coverage of social benefits; social protection programs expanded but do not yet reach all vulnerable households. - Monetary and financial policy - CBU should maintain a tight monetary policy and reduce liquidity to banks if necessary; CBU maintained positive real interest rates while supporting banks’ liquidity during the pandemic. - Contain credit growth to avoid macroeconomic stability risks; credit growth has slowed but remains high and vulnerabilities may have increased. - Phase out directed credit, improve credit allocation, and report subsidy component in the budget; the interest rate on policy loans was raised to at least the CBU policy rate and a large volume of policy loans was moved from banks to the FRD. - Allow exchange rate to move with fundamentals; FX intervention should be more regular and predictable; exchange rate appears in line with fundamentals and FX auctions help develop the market. - Enhance bank efficiency through governance improvements and restructuring; strategy to restructure and divest state-owned banks adopted with first bank to be sold in 2021. - Growth and structural policies - Prioritize structural reforms to alleviate resource constraints, lower business costs, and improve public governance; plans to restructure and divest state assets exist but implementation has been slow. - Future price increases (especially in energy) should be raised and follow a pre-announced calendar; food and fuel prices are market-determined but utility prices remain regulated and below cost-recovery levels. - Economic statistics - Continue to improve quality and availability of statistics and develop roadmap to subscribe to IMF’s SDDS; progress made and efforts ongoing to subscribe to the SDDS by end-2022. ### Selected additional indicators (high-frequency/sectoral) - Current account balance (millions of U.S. dollars): 2018: -3,573; 2019: -3,359; 2020: -5,859; 2021: -3,142; 2022: -3,921; 2023: -3,969; 2024: -4,055; 2025: -4,293; 2026: -4,676; 2027: -4,951. - Exports of goods (millions of U.S. dollars, selected years): 2018: 11,386; 2019: 13,899; 2020: 12,582; 2021: 12,709; 2022: 14,877; 2023: 16,783; 2024: 18,560; 2025: 20,598; 2026: 22,865; 2027: 25,574. - Imports of goods (millions of U.S. dollars, selected years): 2018: 18,252; 2019: 21,190; 2020: 19,778; 2021: 19,054; 2022: 22,349; 2023: 24,931; 2024: 27,296; 2025: 30,382; 2026: 33,527; 2027: 37,095. - Remittances (billions of U.S. dollars, selected years): 2018: 7.8; 2019: 8.7; 2020: 5.8; 2021: 7.3; 2022: 8.0; 2023: 8.8; 2024: 9.4; 2025: 9.9; 2026: 10.4; 2027: 11.0. *Source: Republic of Uzbekistan — IMF staff estimates and projections as presented in the provided tables and text.* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### Overview - The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. - Staff’s relative likelihood categories: “low” = probability below 10 percent; “medium” = probability between 10 and 30 percent; “high” = probability between 30 and 50 percent. - “Short term” indicates the risk could materialize within one year; “medium term” indicates within three years. - Non-mutually exclusive risks may interact and materialize jointly. ### External Risks and Spillovers - Unexpected shifts in the COVID-19 pandemic - Risk Description: - The disease proves hard to eradicate, requiring more costly containment efforts and impacting economic activity. - Delays in availability of vaccine and continued weakness in trading partners prompt a reassessment of growth prospects. - Likelihood / Timeframe: - Medium / Short-Term - Possible Impact / Transmission Channels: - High - A resurgence or setbacks could result in lower domestic demand, continued slow growth, and loss of jobs. - A global or regional slowdown could result in lower exports and remittances, and more unemployment. - Policy Advice: - Uzbekistan could slow fiscal consolidation and target additional spending at affected sectors. - The authorities should allow the exchange rate to adjust in line with fundamentals to prevent external imbalances and to maintain adequate reserves. - Commodity prices decline or become more volatile (e.g., gold, natural gas, and oil) - Risk Description / Background facts: - Gold prices rose 27 percent in 2020. - Natural gas prices fell 26 percent in 2020, and China and Russia reduced purchases. - Given heightened uncertainty, commodity prices may fluctuate sharply, complicating policy making. - Likelihood / Timeframe: - Medium / Short to Medium-Term - Possible Impact / Transmission Channels: - Medium - In 2020, gold exports were about 10 percent of GDP and the loss in natural gas exports was about 3 percent of GDP. - Adverse movements could worsen the trade balance, fiscal revenues, and contribute to uncertainty that dampens investment. - Gold prices tend to move counter cyclically, partly acting as a natural hedge to global slowdowns and lower energy prices. - Policy Advice: - The authorities should allow the nominal exchange rate to adjust to persistent external price shocks. - Uzbekistan can slow fiscal consolidation in the short-term to offset a shock but should reduce spending in the medium-term if large fiscal deficits are persistent. - Over the medium to long-term, trade liberalization and structural reforms can provide incentives to diversify exports and boost competitiveness. ### Domestic Risks - Credit boom and/or pandemic weakens bank balance sheets - Risk Description: - With continued rapid credit growth and high policy lending, banks have increased foreign borrowing and lend to projects with low returns. Asset quality declines. - Likelihood / Timeframe: - Medium / Short to Medium Term - Possible Impact / Transmission Channels: - High - If a shock occurs, non-performing loans would increase, and banks’ balance sheets would weaken. The government may need to bail out state banks and enterprises at significant cost. - Policy Advice: - Continue reforms in the banking sector to improve corporate governance. - Continue to improve bank supervision, crisis preparedness, and framework for emergency liquidity assistance. - Reduce the share of policy loans so that projects are chosen on commercial terms based on risk and return. - Reform Fatigue - Risk Description: - Lack of implementation capacity, disappointment, or impatience with reforms results in popular frustration. With presidential elections planned for late 2021, structural reforms (e.g., banking system, SOEs, price controls, competition policy) may slow or come to a halt. - Remaining reforms are more complex and will require sufficient time and careful preparation and sequencing. - Likelihood / Timeframe: - Medium / Medium Term - Possible Impact / Transmission Channels: - High - A slowdown in reforms could result in lower investment and productivity and slower growth. Popular frustration could grow. - Significant progress has already been made in “first generation” reforms, such as FX and trade liberalization, tax reforms, budget reform, introduction of inflation targeting. - Policy Advice: - Reiterate the government’s commitment and communicate that reforms are needed to address current shortcomings (e.g., misallocation of resources, lack of sufficient investment in health, education, and infrastructure). - Continue to focus on the highest priority reforms including price liberalization, reforming state enterprises, improving the banking system, upgrading the social protection system, and improving the business environment. ### Continued High Fiscal Deficits and a Rise in Public Debt - Risk Description / Background facts: - Public debt has risen rapidly in recent years and stood at 38 percent of GDP at end-2020. - High foreign and domestic borrowing could make it harder to service debt. - Under an extreme scenario, a high share of foreign borrowing coupled with an economic shock could result in a sudden loss of confidence. - Likelihood / Timeframe: - Medium / Medium-Term - Possible Impact / Transmission Channels: - Low (as stated in the matrix for one row) and Medium-Term Medium (other lines) - Higher debt service could squeeze out needed expenditures (e.g., investment and social spending). - Alternatively, fiscal consolidation could slow, raising concerns about debt sustainability. - Under an extreme scenario, Uzbekistan could lose access or face higher costs for foreign or domestic financing. - High buffers (e.g., FX holdings of the CBU and FRD) mitigate these risks. - Policy Advice: - Continue fiscal consolidation to achieve the government’s goal of reaching a 2 percent of GDP fiscal deficit over the medium-term. - Continue to set annual limits on contracting public and publicly guaranteed debt so that debt remains below 60 percent of GDP. - Build the government’s fiscal risk framework, including steps to take if debt approaches the limit. - Improve project selection. *Source: Annex I. Risk Assessment Matrix, REPUBLIC OF UZBEKISTAN.* ### 14. CBU intervention has predominantly been limited to adherence to the neutrality ### 14. CBU intervention has predominantly been limited to adherence to the neutrality ### FX reserves and CBU intervention - CBU intervention has predominantly been limited to adherence to the neutrality principle, indicating that demand and supply largely determine the exchange rate trends. - Reserves, after removing the revaluation of gold, have been almost flat over the last few years. - The CBU has limited intervention to sterilize the funds it injects when purchasing gold from domestic producers (the so-called neutrality principle). - Assessment: Staff assesses Uzbekistan’s FX reserves are adequate for precautionary and operational purposes. - FX reserves help ensure Uzbekistan has access to needed imports and insure against shocks. - FX reserves are also needed for operational purposes, including smoothing volatility in the FX market, while allowing the exchange rate to adjust in line with market forces. ### Real Exchange Rate (REER): background, outlook, and assessment - Background: - On September 5, 2017, Uzbekistan unified its official and parallel exchange rates and liberalized access to foreign exchange. - The official nominal exchange rate depreciated from 4,250 to 8,100 sum per U.S. dollar. - The average annual nominal depreciation reached about 10 percent during 2019–20. - The real effective exchange rate has been relatively stable since late 2018. - The de jure exchange arrangement is floating; the IMF classifies Uzbekistan’s de facto exchange rate regime as crawl-like. - EBA-lite (EBA-IREER) approach: - The EBA-lite exchange rate approach (EBA-IREER) is not informative for Uzbekistan due to the large structural break since 2017. - The EBA-IREER approach suggests that the real exchange rate is strongly weaker than implied by fundamentals and desired policies, a result considered unfeasible given Uzbekistan’s CA deficit above 5 percent of GDP. - Outlook: - Staff assesses that the real exchange rate will remain broadly stable in the near term. - In the medium term, the REER is expected to gradually appreciate by about 2 percent per year, consistent with experiences in other transition economies and assuming productivity gains of 2–3 percent per year. - Assessment: - Subject to data uncertainties, staff assesses that the 2020 average REER was broadly consistent with fundamentals and desired policies based on the EBA-current account approach. - Footnote: This estimation assumes the REER was in equilibrium on average during 2011–2019. ### Box 1 — Adjusting the Current Account for Temporary Factors - Adjusted CA deficit in 2020 (correcting for temporary and cyclical factors) is estimated at -3.2 percent of GDP. - Two additional adjustments beyond standard cyclical corrections: 1. Adjusting for the CBU’s decision on how much of its annual purchase of gold it exports during the year. - In 2020, purchases of domestically produced gold amounted to 9.7 per cent of GDP, while gold exports reached 10.1 per cent of GDP. - Exports of gold exceeded CBU purchases by 0.4 percent of GDP; after correcting, the CA deficit is 0.4 percent of GDP higher. 2. Adjusting for additional one-off temporary effects due to the pandemic on energy, remittances, and tourism. - Energy: The difference in the projected energy balance for 2020 compared with January 2020 WEO is about -3.2 percent of GDP. The current account adjustor is -2.3 per cent of GDP (0.7 × -3.2), where 0.7 is an estimated elasticity. - Remittances: The difference in projected remittances for 2020 compared with January 2020 WEO is about -0.9 percent of GDP. The CA adjustor is -0.3 per cent of GDP (0.35 × -0.9), where 0.35 is an assumed elasticity. - Tourism: The change in projected tourism in 2020 compared with January 2020 WEO is about 0.1 percent of GDP. The CA adjustor is 0.1 per cent of GDP (0.75 × 0.1), where 0.75 is an estimated elasticity. - Method: The temporary component for a flow “X” is estimated by comparing changes in projected balances for 2020 and 2025 between the baseline scenario and the January 2020 WEO; the temporary component is the part of the revision expected to fade by 2025. ### Annex III — Monetary Policy Transmission and Inflation Targeting - Policy framework and targets: - In late 2019, the CBU announced moving to an inflation targeting (IT) regime by 2023. - New central bank law sets price stability as the CBU’s main mandate. - IT strategy approved by the President guides transition to an inflation target of 10 percent by 2021 and 5 percent by 2023. - CBU has implemented reforms: financial sector reform strategy, new laws on FX regulation, payment system, and banking, modernization of monetary framework and operations, and improved communication. - Constraints on monetary transmission: - Undeveloped financial markets, high degree of dollarization, and large government footprint in the financial system reduce monetary policy effectiveness. - Interbank market: progress in 2020 with interbank rates kept within the policy rate corridor; market segmentation remains. - Government securities market remains shallow with a low level of domestic public debt in 2020 compared to regional peers. - FX market: transactions dominated by the government and SOEs; CBU supplies steady FX as part of intervention policy, contributing to relatively low daily FX volatility. - Dollarization: In 2020, dollarization with respect to deposits and credit was about 43 and 50 percent, respectively. - State-owned banks: state-owned banks account for 85 percent of total banking system assets; limited transmission from CBU policy rate to state bank lending and deposit rates. - Empirical transmission estimates: - Elasticity of retail rates to monetary policy rates estimated by OLS on monthly data 2010:M1–2020:M12. - Results indicate some improvement in coefficients after the start of reforms in 2017, but coefficients remain statistically insignificant due to limited observations. - Estimated coefficients for the whole sample are below those seen in other emerging economies. - Elasticity estimates (selected): - Lending Rates UZB (2010M1-2020M12): 0.17** (UZB), 0.36 (2018-20), 0.20** (2010M1-2017M8) — note: table presents segmented sample coefficients. - Deposit Rates UZB: 0.16 (various samples); Selected IT peers: 0.60** (deposit), 0.69** (lending). - Recommendations to strengthen transmission: - Foster financial market development, including government securities market and FX market. - Continue reform of state-owned banks while safeguarding financial stability. - Maintain sound monetary policies aimed at achieving low inflation to improve confidence in the banking system and the national currency. ### Annex IV — Impact of Structural Reforms - Key findings: - Governance reforms are most likely to raise growth in the near term. - Reforms to domestic finance, trade openness, and governance would have the biggest impact over the medium term. - Significant reforms in all areas could raise the level of GDP by as much as 10-15 percent. - Conceptual basis: - Growth decomposition shows that about half of recent growth in CCA comes from increases in physical capital, a small share from labor, and the rest from total factor productivity (TFP). - Structural and institutional factors significantly impact TFP. - Uzbekistan’s structural position: - Uzbekistan tends to do relatively well on fiscal and monetary management, trade, goods and labor markets, and political stability. - Uzbekistan scores relatively less well on access to finance, investment attractiveness, innovation, and governance. - Firms cite tax rates, informality, transportation, electricity, and land as obstacles; corruption and financing cited at similar rates to other countries. - Evidence from cross-country studies: - IMF 2015 study: biggest impacts in developing countries from reforms in agriculture, banking, business regulations, infrastructure, labor markets, and governance and institutions. - IMF October 2019 WEO study: a major reform (two standard deviation improvement in all structural indicators) estimated to raise output by a total of 7½ percent after six years. - Governance reforms have the greatest impact after one year. - Domestic finance and governance reforms have the greatest impact after six years. - Complementarities: better governance (top quartile) increases output an additional one percentage point for financial reforms and three percentage points for product market reforms after six years. - Quantified potential impacts for Uzbekistan: - Closing half the gap with the frontier in domestic finance, trade, and governance could each raise GDP by 3-4 percentage points over six years. - A major reform in all categories could increase Uzbekistan’s GDP by almost 11 percentage points after six years. - Productivity gains from different structural reforms (average % change for two standard deviation improvement): - Domestic Finance: Output at 1 year = 0.1; at 6 years = 2.2 - External Finance: Output at 1 year = 0.3; at 6 years = 1.3 - Trade: Output at 1 year = 0.0; at 6 years = 1.1 - Product Market: Output at 1 year = 0.4; at 6 years = 0.9 - Governance: Output at 1 year = 1.4; at 6 years = 2.1 - Labor Market: Jobs at 1 year = 0.1; at 6 years = 0.8 - Conclusion: Reforms, especially in governance, domestic finance, and trade, can materially raise growth and jobs; complementarities and reductions in informality would likely increase benefits beyond these estimates. *Republic of Uzbekistan — International Monetary Fund, IMF staff report excerpts.* ### 6. Recent indicators suggest Uzbekistan has ### 6. Recent indicators suggest Uzbekistan has already made progress in these reform areas ### Progress in reform areas and indicators - Trade foreign exchange liberalization took place in 2017. - Authorities have gradually improved domestic finance by raising interest rates on and removing policy loans from banks’ balance sheets. - A surge in external financing has boosted investment. - Measures of domestic and external finance and trade have improved significantly. - World Bank’s Country Policy and Institutional Assessment (CPIA) indicators improved by six percent from 2016 to 2019. - The CPIA subindex for structural measures rose by almost 20 percent from 2016 to 2019. - Exact text-preserved sector/gap table fragment: - UzbekistanGap vsGap vs - SectorScoreCISFrontierCIS Ave1/2 Frontier - Domestic Finance0.44-0.22-0.563.23.9 - External Finance0.50-0.20-0.500.70.8 - Trade0.70-0.07-0.281.32.7 - Product Market0.690.17-0.31...0.4 - Governance0.29-0.07-0.400.32.9 - Labor Market 0.680.07-0.29...0.4 ### Estimated impact of structural reforms on GDP (findings and projection) - Studies show that structural reforms can significantly raise GDP but take many years to show their full effect. - If structural reforms—especially in domestic finance, trade, and governance—are able to close half of Uzbekistan’s gap with the frontier, it is estimated the level of Uzbekistan’s GDP could rise by an additional 10-15 percent over the medium-term. - Reforms to trade in 2017 and domestic finance in 2019 would not be expected to have their full impact until 2023 and beyond. - Given steps already taken in these areas, governance reforms would be expected to have the biggest impact and could raise GDP over a shorter time period. - Graphic/text-preserved line on estimated ∆GDP if improve to: - year 6 ∆GDP if improve to: - 2.5 - 3.0 - 3.5 - 4.0 - 4.5 ### IMF staff analysis: external debt and fiscal risk (Debt Sustainability Analysis highlights) - Risk of External Debt Distress: Low. - Overall Risk of Debt Distress: Low. - Under the baseline scenario, the path of public and publicly guaranteed (PPG) external debt is expected to remain around 40 percent of GDP over the medium term. - This is about 7 percentage points of GDP higher than under the previous DSA of May 2020. - Uzbekistan’s total and PPG external debt are projected to peak at 64 and 43 percent of GDP, respectively, in 2022 before declining modestly out to 2026 and then stabilizing. - Under the baseline scenario, PPG external debt indicators remain well below relevant thresholds. - Under the most extreme scenario (worse-than-expected exports), the debt service-to-exports ratio would breach its threshold in only one year (2024) due to repayment of a Eurobond; then the ratio returns and remains below the threshold thereafter. - Shock scenarios with higher primary deficits or higher contingent liabilities arising from state enterprise debt would raise risk indicators modestly; the probability of these risks being realized is about the same as in the May 2020 DSA. ### Policy recommendations from staff analysis - Continue to carefully manage public and external borrowing. - Improve public investment management and coordination. - Be cautious on granting government debt guarantees. - Under the authorities’ plans (which include an annual limit on PPG debt commitments and a limit on the overall PPG debt stock), the PPG debt-to-GDP ratio will remain around 40 percent of GDP over the medium term. - To limit risks to its strong external position, maintain strong foreign exchange reserves and low rollover risk (noted due to the long-term maturity of debt). ### Data and statistical capacity assessments and plans - General: Data are broadly adequate for surveillance purposes, with shortcomings mainly in national accounts, government finance, and external sector statistics. Capturing the informal sector remains a challenge. - National Accounts: - The State Statistics Committee (SSC) aims to implement the 2008 System of National Accounts (SNA) standards by December 2021. - SSC is improving compilation of financial intermediation services, imputed rent, and output of public administration. - SSC is using supply and use tables and plans to report discrete quarterly data from September 2021. - The nominal level of GDP is underestimated due to a large non-observed economy (NOE). SSC is developing sector surveys (construction, trade, hotels and restaurants, education, health care and other personal services) to improve NOE estimates in line with IMF technical assistance. - SSC plans a major revision of national accounts in 2024 which will incorporate survey results and results of the population survey planned for 2023. - Price Statistics: - SSC updated CPI methodology in 2018 and plans further improvements (telecommunication services and electronics pricing, imputing missing prices, expenditure weights, sampling, aggregation). - SSC compiles monthly PPI for mining and extraction, manufacturing, and utilities; coverage will be expanded to include PPI for agriculture (planned for early 2022) and for construction. - Government Finance Statistics (GFS): - Detailed consolidated government budget revenue and expenditure data are compiled monthly and available after about four weeks. - Government is expanding GFS to include off-budget accounts and foreign financed investment in the budget; expected to complete expansion within the next 12 months. - Significant statistical discrepancy remains between above-the-line and below-the-line financing data; recommendation to reconcile monetary and fiscal financing data regularly. - Public sector debt statistics (PSDS) are not yet fully compiled according to international standards; authorities not yet reporting to the joint World Bank-IMF Quarterly PSDS database. - Ministry of Finance established a debt management office and implemented DMFAS, improving debt reporting. - Monetary and Financial Statistics: - Following the 2019 mission, the CBU started reporting standardized report forms feeding into IFS in December 2019; further efforts needed to improve consistency and develop longer time series. - CBU reports key series and Financial Access Survey indicators, including two U.N. SDG indicators. - Financial Soundness Indicators: - CBU reports the 12 core FSIs and 9 of the 13 encouraged FSIs for deposit takers and one for other sectors with a lag of one month. - FSI reporting frequency improved from quarterly to monthly; sectoral financial statements reported since January 2020; longer time series needed. - External Sector Statistics: - In 2018, the CBU started publishing balance of payments (BOP) and international investment position (IIP) data; historical statistics starting in 2010 have been produced. - CBU and SSC publish comprehensive reports in English, Russian, and Uzbek; CBU issues a flash estimate of the current account within 15 days after quarter end. - The reserves data template is not yet disseminated. - Recommendations include refining estimates of exports and imports of goods, enhancing estimates of trade credit, and households’ foreign exchange cash holdings to reduce errors and omissions. - Other Statistics: Labor statistics have sizable limitations; definitions and data production need to follow international standards more closely; employment data quality in household and enterprise surveys needs improvement. - Data dissemination standards and plans: - Uzbekistan has participated in the IMF’s Enhanced General Data Dissemination System (e-GDDS) since May 2018 and regularly updates the National Summary Data Page (NSDP). - Authorities are working to subscribe to the IMF’s Special Data Dissemination Standard (SDDS) by end-2022; working to align national accounts, reserve template, government operations and debt, and external debt with SDDS requirements. - In early 2021, authorities undertook a comprehensive statistical diagnostic with IMF assistance, finding much progress in balance of payments, government finance, monetary and financial, national account, and price statistics. - Table of Common Indicators Required for Surveillance (as of March 31, 2021) — selected exact entries: - Exchange Rates: Latest Observation Mar 30, 2021; Date Received Mar 31, 2021; Frequency D W W - International Reserve Assets and Reserve Liabilities of the Monetary Authorities: Latest Observation Feb 2021; Date Received Feb 2021; Frequency M M M - Consumer Price Index: Latest Observation Feb 2021; Date Received Feb 2021; Frequency M M M - GDP: Latest Observation 2020 Q4; Date Received Jan 2021; Frequency Q Q Q _Staff report excerpts from the Republic of Uzbekistan — Staff Report for the 2021 Article IV Consultation (Informational Annex), April 6, 2021._ ### 1. Public debt coverage is broad (see text table 1). Coverage includes debt of the central ### 1uzbea2021001 - 1. Public debt coverage is broad (see text table 1). Coverage includes debt of the central ### Public debt coverage - Coverage includes debt of the central government, state and local governments, the pension fund, extra-budgetary funds, and debt of state-owned enterprises (SOEs) guaranteed by the government. - Public debt does not include non-guaranteed debt of SOEs and joint ventures (about 6 percent of GDP in 2020 down from 7 percent in 2019). - The authorities have established a Debt Management Office (DMO) in the Ministry of Finance and are implementing Debt Management Financial Analysis System (DMFAS) software from UNCTAD with technical support from the IMF and World Bank. - Private external debt is primarily comprised of borrowing by state owned banks and by joint ventures of SOEs. ### Contingency stress tests and assumptions - Financial market shock: default value of 5 percent of GDP; used 5 percent of GDP in analysis. - Shock to SOE debt: staff raised the value from 2 to 7 percent of GDP to reflect large SOE share and rapid credit growth. - PPPs: liabilities arising from Public Private Partnership (PPP) projects are not large currently; government has legal framework and plans to scale up PPPs over the medium-term. - Text Table 2 values used in the analysis (as presented): - Other elements of the general government not captured in 1.0percent of GDP: 0.0 - SoE's debt (guaranteed and not guaranteed by the government) 1/2percent of GDP: 7.0 - PPP 35percent of PPP stock: 0.0 (No PPPs currently) - Financial market (the default value of 5 percent of GDP is the minimum value)5percent of GDP: 5.0 - Total (2+3+4+5) (in percent of GDP): 12.0 ### Recent evolution and levels of public and external debt - Total PPG debt rose from US$ 9.9 billion (20.3 percent of GDP) at end-2018 to US$ 21.0 billion (37.8 percent of GDP) at end-2020. - Total external debt (public and private external debt) rose from US$ 17.0 billion (34.3 percent of GDP) at end-2018 to US$ 32.9 billion (58.4 percent of GDP) at end-2020. - PPG external debt comprises almost two-thirds of external debt and 98 percent of total PPG debt. ### 2019–2020 financing and market issuance - 2019 PPG external debt disbursements: US$ 6.3 billion (11.0 percent of GDP). - US$ 4.4 billion (about 8 percent of GDP and 70 percent of total disbursements) financed projects. - US$ 1.8 billion (about 3 percent of GDP and 30 percent of total disbursements) was used as budget support. - Included proceeds from Uzbekistan’s first issuance of Eurobonds, worth US$ 1 billion. - Government instituted an annual limit on PPG external debt commitments of US$ 4 billion. - 2020 disbursements: US$ 5.3 billion after easing the annual limit to address the COVID crisis. - Fiscal deficit: increased modestly from 4 percent of GDP in 2019 to 4½ percent of GDP in 2020. - Share of external borrowing used as budget support rose to about 50 percent in 2020. - Late 2020 sovereign bond placements: about US$ 750 million total - US$555 million, 10-year Eurobond issued at a 3.7 percent interest rate; trading with a yield of 3.6 percent in early February 2021, about 240 basis points above US Treasuries. - UZS 2 trillion (US$ 192 million), 3-year som denominated bond issued at 14.5 percent interest rate; trading at about 14 percent in early February 2021. ### Composition and use of PPG debt (end-2020) - Total = US$ 21.0 Billion (37.8% of GDP) - External = US$ 20.6 billion (37.2% of GDP) - Domestic = US$ 0.3 billion (0.6% of GDP) - By creditor type (end-2020 values shown in figure): - Multilateral: $9.9, 47% - Bilateral: $8.6, 41% - Commercial: $2.2, 10% - Domestic: $0.3, 2% - By creditor institution (end-2020 values shown in figure): - ADB: $5.0, 24% - China: $4.0, 19% - World Bank: $3.7, 18% - Domestic: $0.3, 2% - Japan: $2.4, 11% - Eurobonds: $1.7, 8% - Other: $3.8, 18% - By type of debt (end-2020 values shown in figure): - Public external debt: $14.6, 70% - Public domestic debt: $0.3, 1% - Guaranteed external debt: $6.0, 29% - By use (end-2020 values shown in figure): - Budget financing*: $6.1, 29% - Energy: $5.7, 27% - Transportation: $2.4, 11% - Agriculture: $2.3, 11% - Housing: $2.0, 10% - Other: $2.5, 12% - * includes external donor support and domestic securities. - Domestic public debt (end-2020): domestic debt securities amounted to US$ 340 million (0.6 percent of GDP). - Seventy percent comprised of short-term bills with maturities of one year or less. - At end-2020, outstanding government bonds had original maturities ranging from 1½ to 3 years, with average maturity of 2.2 years. ### Private external debt - Private external debt rose by US$ 3.7 billion (6½ percent of GDP) in 2020 and stood at US$ 12.2 billion (21 percent of GDP) at end-2020. - Trade and foreign exchange liberalization in 2017 led many firms to increase purchases of capital goods, which jumped by US$ 3 billion in 2018 and US$ 2 billion in 2019; some financed by state banks borrowing abroad. - State banks significantly expanded external borrowing in 2020 to finance domestic credit expansion as the government reduced policy lending. ### Macroeconomic assumptions and outlook (comparisons and projections) - Real GDP growth: - 2020 actual: 1.6 percent. - Projections for 2021 and 2022: about 1½ and half percent lower, respectively, than forecast in May 2020. - For 2021-2026: average growth projection about 5.5 percent. - For 2027-2041: declines to 5 percent. - Consumer price inflation: - Projected to remain around 10 percent with an increase in public wages in 2021 and increases in administrative energy prices in 2022. - Thereafter, central bank policies projected to bring consumer price inflation close to medium-term target of 5 percent. - Fiscal outlook: - Overall fiscal deficit was 4.4 percent of GDP in 2020. - Staff projects overall fiscal deficit will be higher in 2021 as some spending is carried over from 2020. - Projected overall fiscal deficit: 5½ percent of GDP in 2021, before returning to government’s target of 2 percent of GDP over the medium-term. - External outlook: - Current account in 2020: deficit of 5.4 percent of GDP (compared to 5.8 percent of GDP in 2019 and staff’s May 2020 forecast of a deficit of 9.6 percent of GDP). - Current account deficit projected to widen in 2021 as imports rebound. - Over the medium term, current account deficit projected to improve to 5 percent of GDP in 2026. ### Financing strategy assumptions - Near-term financing: international creditors expected to continue to provide majority of financing. - External bond issuance and Fund for Reconstruction and Development financing assumed to remain about the same level as in 2020. - External budget support (primarily from IFIs) expected to decline. - Government plans to increase annual limit on debt commitments to about US$ 5 billion in 2021 and US$ 5.5 billion over the medium term; this will include gross domestic debt issuance in the limit. - Disbursement composition assumed: 30 percent multilateral, 25 percent bilateral, 20 percent sovereign, and 25 percent domestic debt. - Domestic debt issuance assumed split: about one-half government bills and one-half bonds, rising to 2¼ percent of GDP by 2026. - Long-term assumption: share of financing from domestic securities assumed to gradually increase to 5½ percent of GDP by 2041. *Source: Republic of Uzbekistan — IMF staff report excerpt.* ### 7. Realism tools suggest Uzbekistan is an outlier relative to peers, reflecting the rapid ### 7. Realism tools suggest Uzbekistan is an outlier relative to peers, reflecting the rapid ### Forecast errors and drivers of debt increases - The growth of Uzbekistan’s public and external debt is above the 75th percentile for low income countries. - For PPG external debt, the largest contribution has come from prices and the exchange rate; the 2017 opening of the trade and foreign exchange regimes was accompanied by a 50 percent depreciation of the official exchange rate. - For overall PPG debt, the largest contributions have come from primary deficits and other debt creating flows (i.e. public external borrowing for projects). - The increase in debt creating flows is expected to drop from close to 30 percent of GDP over the last 5 years to about 5 percent over the next five years. - Table of key macroeconomic variables (selected entries, annual averages as presented): - Real GDP growth: 2015-2020 = 5.1; 2019-24 = 5.9; 2025-39 = 6.0; 2020-25 = 5.2; 2026-40 = 5.1; 2021-26 = 5.4; 2027-41 = 5.1 - GDP deflator (UZS): 2015-2020 = 2.5; 2019-24 = 12.4; 2025-39 = 6.7; 2020-25 = 8.4; 2026-40 = 5.5; 2021-26 = 7.6; 2027-41 = 3.1 - Nominal GDP (UZS): 2015-2020 = 7.8; 2019-24 = 19.1; 2025-39 = 13.1; 2020-25 = 14.0; 2026-40 = 10.8; 2021-26 = 13.4; 2027-41 = 8.3 - Revenues & grants (percent of GDP): range 25.3–28.6 across projection periods, with specific values including 26.4, 25.7, 26.1, 25.3, 25.7, 27.6, 28.6 - Primary expenditure (percent of GDP): values include 28.5, 27.1, 27.6, 28.2, 27.5, 30.6, 30.7 - Primary deficit (percent of GDP): values include 2.2, 1.4, 1.4, 2.8, 1.8, 3.0, 2.0 - Overall fiscal deficit (percent of GDP): values include 2.3, 1.6, 1.6, 3.1, 2.1, 3.4, 2.5 - Non-interest current account deficit (percent of GDP): values include 1.5, 4.1, 3.4, 4.8, 7.6, 3.7, 3.0 - Current account deficit (percent of GDP): values include 2.4, 5.0, 4.2, 6.4, 4.3, 5.5, 4.8 ### Fiscal adjustment, growth, and investment - Fiscal adjustment: - Realism tools suggest the projected fiscal adjustment over the next three years is feasible; Uzbekistan’s adjustment is not far from the mean for adjustments in other countries. - History suggests fiscal consolidation could lower growth, but the COVID shock’s special features mean prior experience may provide less guidance. - As the crisis subsides global and domestic growth are expected to rebound; with greater external demand, the negative impact of fiscal consolidation on growth is likely to be less than in more normal times. - Investment and growth: - For 2020, government investment was modestly higher and private investment modestly lower than projected in May 2020, reflecting additional government stimulus spending and a poorer outlook for private investment. - Over the medium-term, staff’s current projections for government and private investment are similar to those in May 2020. - Government investment is expected to level off as a share of GDP, while economic reforms provide incentives for private firms to raise investment. ### Country classification and scenario stress tests - Debt-carrying capacity: - Uzbekistan’s Composite Indicator (CI) score is 3.16; this reflects high average international reserves (about 60 percent of the 10-year average of imports) and high average CPIA ratings. - CI represents a modest decline from 3.21 at the time of the May 2020 DSA; the decline was primarily caused by lower projected global growth due to the more prolonged COVID pandemic. - Remittances and scores for domestic components of the CPIA rose; CPIA improvements noted in business environment, revenue mobilization, public sector transparency, and equitable use of public resources. - External DSA baseline projections and vulnerabilities: - Staff assesses Uzbekistan’s risk of external debt distress as low. - From 2020 to 2022, PPG external debt is projected to rise from 37 to 43 percent of GDP, before gradually declining over the medium-term. - Total external debt is driven by PPG external debt (about two-thirds of the total) and is projected to peak at about 64 percent of GDP in 2022. - Under the baseline, sustainability indicators stay well below risk thresholds. - PPG external debt is most vulnerable to an exports shock; under a one standard deviation shock to exports, the debt service-to-exports ratio would breach its threshold in 2024 as a US$ 500 million Eurobond issued in 2019 comes due (this one-off breach is discounted from the risk ratings). - Other significant stress scenarios: (i) a combination of shocks and (ii) a decline in remittances and FDI; these have much less impact than an export shock. - Under the market financing scenario, debt indicators would rise slightly above the baseline; indicators suggest gross financing need and spreads would remain well below threshold. ### External and public debt projections (selected figures from tables) - External debt (nominal) projections (percent of GDP): 2020 = 58.4; 2021 = 62.3; 2022 = 63.8; 2023 = 62.3; 2024 = 60.3; 2025 = 57.8; 2031 = 55.2; 2041 = 52.0 - PV of PPG external debt-to-GDP ratio: 2020 = 17.0; 2021 = 21.3; 2022 = 24.0; 2023 = 25.2; 2024 = 24.2; 2025 = 24.0; 2031 = 25.7; 2041 = 26.6 - PV of PPG external debt-to-exports ratio: 2020 = 68.4; 2021 = 75.9; 2022 = 79.9; 2023 = 80.5; 2024 = 76.1; 2025 = 75.0; 2031 = 79.7; 2041 = 82.4 - PPG debt service-to-exports ratio (selected): 2020 = 7.4; 2021 = 5.6; 2022 = 7.4; 2023 = 8.4; 2024 = 12.3; 2025 = 8.4; 2031 = 6.8; 2041 = 8.1 - Gross external financing need (Million of U.S. dollars): 2020 = 5,259; 2021 = 8,225; 2022 = 7,654; 2023 = 7,434; 2024 = 8,634; 2025 = 8,818; 2031 = 14,028; 2041 = 28,958 - Public sector debt (percent of GDP): 2020 = 37.8; 2021 = 42.1; 2022 = 44.2; 2023 = 43.8; 2024 = 42.8; 2025 = 41.4; 2031 = 40.0; 2041 = 40.0 - PV of public debt-to-GDP ratio: 2020 = 18.4; 2021 = 23.0; 2022 = 25.8; 2023 = 26.7; 2024 = 26.2; 2025 = 25.9; 2031 = 25.9; 2041 = 28.7 - Debt service-to-revenue and grants ratio (selected): 2020 = 8.7; 2021 = 7.9; 2022 = 10.5; 2023 = 12.0; 2024 = 17.7; 2025 = 13.9; 2031 = 12.7; 2041 = 14.3 - Gross financing need (percent of GDP): 2020 = 11.1; 2021 = 7.7; 2022 = 8.0; 2023 = 7.1; 2024 = 7.1; 2025 = 5.9; 2031 = 5.1; 2041 = 5.6 ### Stress tests and robustness - Stress tests suggest PPG debt ratios are robust to a wide range of shocks; even under the most extreme scenario (a decline in exports), the PV of debt-to-GDP ratio remains more than 20 percent of GDP below the public debt benchmark. - Greater use of domestic debt would reduce the risk of reliance on foreign currency external debt. - Staff highlight the need to carefully manage maturity structure and currency composition of public debt to mitigate debt service burdens. - Stress test results are similar to those of the May 2020 DSA. ### Risk rating, vulnerabilities, and policy recommendations - Overall risk of public debt distress: low. - Overall PPG debt projected to rise from 38 percent of GDP in 2020 to 44 percent of GDP in 2022, before gradually declining out to 2026 and stabilizing around 40 percent of GDP thereafter. - Composition shift: domestic securities gradually rising to about 5½ percent of GDP in 2041; PPG external debt would decline modestly as a share of GDP. - Multilateral and official bilateral creditors expected to provide majority of financing over the medium term; share of budget support should decline. - Key vulnerabilities and policy guidance: - Rapid increase in debt in recent years could quickly exhaust fiscal space and raise vulnerabilities if it continues. - Authorities have implemented annual limits on new commitments of PPG debt and are drafting a public debt law to limit overall PPG debt to 60 percent of GDP. - Staff analysis indicates that with annual limits on PPG debt, debt ratios will peak in 2022 and subsequently decline. - Strong FX reserves and low rollover risk (due to long-term maturity of debt) mitigate risk of debt distress. - Recommended actions: continue careful management of public and external borrowing; improve public investment management and coordination; be cautious about granting government debt guarantees; include non-guaranteed debt of state enterprises in public debt coverage given the significant share of state enterprises in the economy. ### Authorities’ views - Authorities generally agreed with the outlook and emphasized commitment to maintain sustainable public and external debt. - Noted substantial progress in improving debt statistics, including via the DMFAS system. - The Ministry of Finance’s Debt Management Office has improved tracking, analysis, and management of domestic and external debt. - Authorities recognize risks from increased public debt and contingent liabilities and have recently undergone an assessment of their public investment management system to improve project selection, monitoring, and intra-governmental coordination. - Concrete policy actions noted: implementation of annual limits on PPG debt commitments and preparation of a debt law introducing a cap on PPG debt as a share of GDP. *Source: 1uzbea2021001 - Republic of Uzbekistan (IMF).* ### 5. Depreciation678128734646 ### 5. Depreciation678128734646 ### Sensitivity Analysis for Key Indicators of Public Debt, 2021-2031 - Table context: Uzbekistan: Sensitivity Analysis for Key Indicators of Public Debt, 2021-2031 (In percent). - Projections 1/ cover 2021–2031. - Notes: - 1/ A bold value indicates a breach of the threshold/benchmark. - 2/ Variables include real GDP growth, GDP deflator (in U.S. dollar terms) (or GDP deflator and primary deficit in percent of GDP for PV of Debt-to-Revenue Ratio table), non-interest current account in percent of GDP, and non-debt creating flows. - 3/ Includes official and private transfers and FDI. - Threshold/Benchmark rows shown as repeated digits: - Threshold: 21 repeated sequence "2121212121212121212121". - Threshold: 23 repeated sequence "2323232323232323232323". - Public debt benchmark: "7070707070707070707070". - Baseline PV of debt-to-GDP ratio time series: - Baseline: 23 26 27 26 26 26 27 28 28 29 29 (for years 2021–2031). - Alternative scenarios and bound/tailored tests (selected series, preserving exact values as given): - A1. Key variables at their historical averages in 2021-2031 2/: 23 21 19 15 13 10 9 8 7 6 5 - B1. Real GDP growth: 23 27 30 31 32 33 35 37 38 40 42 - B2. Primary balance: 23 29 34 33 32 32 33 33 33 33 33 - B3. Exports: 23 32 43 42 41 40 40 40 38 38 37 - B4. Other flows 3/: 23 34 41 40 39 38 38 38 37 37 36 - B5. Depreciation: 23 29 27 24 22 22 20 19 18 17 16 - B6. Combination of B1-B5: 23 26 29 29 28 28 29 29 29 29 29 - C1. Combined contingent liabilities: 23 36 36 35 34 34 34 35 34 35 35 - C4. Market Financing: 23 26 27 27 26 26 27 28 28 29 - Public debt benchmark and baseline PV of Debt-to-GDP ratio (alternate table): - Baseline (PV of debt-to-GDP ratio?): 86 96 98 94 92 90 94 97 97 100 100 (years 2021–2031). - A1. Key variables at their historical averages in 2021-2031 2/: 86 80 68 55 45 37 33 29 24 22 18 - B1. Real GDP growth (PV debt-to-GDP ?): 86 101 111 112 114 116 123 130 134 141 145 - B2. Primary balance: 86 106 124 119 114 111 113 115 114 116 116 - B3. Exports: 86 119 158 151 144 138 139 139 134 133 130 - B4. Other flows 3/: 86 124 152 144 138 133 134 134 130 129 126 - B5. Depreciation: 86 107 99 88 79 72 70 68 63 61 57 - B6. Combination of B1-B5: 86 98 107 103 100 97 100 102 101 103 102 - C1. Combined contingent liabilities: 86 134 132 126 121 117 119 121 120 122 122 - C4. Market Financing: 86 96 99 96 94 92 95 98 97 100 100 - Debt service and PV ratios (selected baseline and scenario rows, preserved formatting/spaces): - Baseline debt service-to-exports ratio (series): 8 10 12 18 14 13 9 10 14 12 14 - A1. (same metric): 8 10 9 13 9 6 3 3 4 3 4 - B1. (same metric): 8 11 13 20 16 15 12 13 17 16 19 - B2. (same metric): 8 10 14 22 17 14 10 12 16 14 16 - B3. (same metric): 8 10 13 20 16 14 10 13 18 16 18 - B4. (same metric): 8 10 13 19 16 14 10 13 17 15 18 - B5. (same metric): 8 11 14 20 15 14 9 10 13 11 13 - B6. (same metric): 8 10 14 20 16 15 11 12 15 13 15 - C1. (same metric): 8 10 18 23 16 14 10 11 15 13 15 - C4. Market Financing (same metric): 8 10 12 18 14 13 12 13 16 12 14 ### Projections, Benchmarks, and Thresholds - Projections and labels explicitly shown: - "Projections 1/" appears ahead of series for PV of debt-to-GDP ratio, Debt service-to-revenue ratio, PV of debt-to-exports ratio, PV of debt-to-GDP ratio (repeated headings in source). - Benchmarks and breach indicators: - 1/ A bold value indicates a breach of the benchmark. - Some series include explicit "Breach of benchmark No" and "No" (for Market-Financing Risk Indicators). ### Figures and Key Indicators (Figures 3–5) - Figure 3. Uzbekistan: Drivers of Debt Dynamics—Baseline Scenario - Concepts and labels preserved exactly: - "Gross Nominal PPG External Debt" - "Debt-creating flows" - "Unexpected Changes in Debt 1/ (past 5 years, percent of GDP)" - "Gross Nominal Public Debt" - "Debt-creating flows" - "Unexpected Changes in Debt 1/ (percent of GDP)" - 1/ Difference between anticipated and actual contributions on debt ratios. - 2/ Distribution across LICs for which LIC DSAs were produced. - 3/ Given the relatively low private external debt for average low-income countries, a ppt change in PPG external debt should be largely explained by the drivers of the external debt dynamics equation. - Axes labels and chart components referenced: "5-year historical change", "5-year projected change", "Residual", "Price and exchange rate", "Real GDP growth", "Nominal interest rate", "Current account + FDI", "Change in PPG debt 3/". - Distribution components: "Interquartile range (25-75)", "Change in PPG debt 3/", "Median", "Contribution of unexpected changes". - Figure 4. Uzbekistan: Realism Tools - Components preserved: - "Gov. Invest. - Prev. DSA", "Gov. Invest. - Curr. DSA", "Contribution of other factors" - "Priv. Invest. - Prev. DSA", "Priv. Invest. - Curr. DSA", "Contribution of government capital" - 1/ Bars refer to annual projected fiscal adjustment (right-hand side scale) and lines show possible real GDP growth paths under different fiscal multipliers (left-hand side scale). - 1/ (second footnote) Data cover Fund-supported programs for LICs (excluding emergency financing) approved since 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. - Chart elements and labels: "Public and Private Investment Rates (percent of GDP)"; "Contribution to Real GDP growth (percent, 5-year average)"; "3-Year Adjustment in Primary Balance (Percentage points of GDP)"; "Fiscal Adjustment and Possible Growth Paths 1/". - Baseline and multipliers labels preserved: "Baseline", "Multiplier = 0.2", "Multiplier = 0.4", "Multiplier = 0.6", "Multiplier = 0.8". - Example data axis ticks and values preserved as in source: "-4.5 -4.0 -3.5 -3.0 -2.5 -2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 5.5 6.0 6.5 7.0 7.5 8.0". - Figure 5. Uzbekistan: Market-Financing Risk Indicators - Footnotes preserved: - 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. - Risk labels and categories preserved: - "Baseline", "Market financing", "Threshold", "Potential heightened liquidity needs", "Low". - Benchmarks and values preserved: - "Benchmarks14", "No", "EMBI", "570" - "Values8267" - GFN and series labels preserved: "Debt service-to-revenue ratio", "PV of debt-to-exports ratio", "PV of debt-to GDP ratio", "Debt service-to-exports ratio". - Year tick references preserved where present: "20 21 20 23 20 25 20 27 20 29 20 31" and other repeated year groupings as printed. *Source: Country authorities; and staff estimates and projections.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1uzbea2021001.pdf_