Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Republic of Uzbekistan

June 10, 2005

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 16, 2005, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Republic of Uzbekistan.1


Following the decision to switch to an accelerated course of reforms in 2001, the authorities pursued tight fiscal and monetary policies, allowed better access to foreign currency, and undertook privatization in the agricultural sector. However, the state continues to maintain a dominant ownership position in the economy and the progress in privatization has been slow. Monetary policy turned loose again in 2004. While currency convertibility, introduced in October 2003, stimulated economic activity in 2004, serious restrictions in foreign as well as domestic trade remain. In addition, pervasive cash shortages led to wage and pension arrears throughout 2004. These are reportedly removed by end-December 2004 and banks are being given full access to their correspondent accounts.

Led by strong growth in trade and agriculture, real GDP growth in 2004 was an estimated 7.7 percent. While fiscal policy was tight, rapid growth of monetary aggregates in the second half of the year led to higher inflation. Disagreements over the extent of the CPI increase, however, remain. While the official estimate of CPI inflation is only 3.7 percent in 2004, the staff has identified methodological problems with the official calculations. When these problems are corrected, the official data produce an estimated 2004 CPI increase of 9.1 percent; this compares to the Fund staff's alternative estimate of 15.5 percent. The staff and authorities agree on the increases in the PPI and GDP deflator, which grew 26.5 and 15 percent, respectively.

The current account registered a surplus of 10.1 percent of GDP in 2004, as export growth of 31.6 percent outpaced import growth (27.3 percent). Foreign direct investment was US$187 million, up substantially from 2003, but remained modest compared to the size of the economy (1.6 percent of GDP). The CBU continued its policy of rapid reserve accumulation (US$488 million), which combined with the growth of import demand, contributed to a further depreciation of the sum. The real effective exchange rate depreciated 7.5 percent, following a depreciation of 21.5 percent in 2003.

The sizable net foreign assets accumulation by the CBU was only partially sterilized by a decline in net domestic assets, leading to 39 and 48 percent increases in reserve and broad money, respectively. Barriers to the normal functioning of financial markets remain, with banks continuing to exercise tax administration and financial control functions. Other distortions that continue to limit financial intermediation include the distinction between cash and non-cash settlements, reported problems with conversion, and foreign exchange surrender requirements.

Budget performance was strong, although accompanied by significant wage and pension arrears during the year; all arrears were cleared by end-December. Higher-than-budgeted revenues and lower-than-budgeted expenditures and net lending resulted in a 0.4 percent of GDP consolidated budget surplus, mostly on account of the four extra-budgetary funds, while the state budget was roughly balanced. In large part due to the zero-net-borrowing policy adopted by the government in 2001, the public debt declined from 45 percent to 38 percent of GDP between 2002 and 2004.

While measures were implemented to improve tax administration, the business environment continues to be difficult, as private businessmen complain about serious governance problems. Both domestic and external trade regimes remain highly restrictive, with sizable barriers to entry existing in wholesale and retail trade.

Executive Board Assessment

Executive Directors welcomed the steps taken by the Uzbek authorities in laying the foundation for economic growth by introducing current account convertibility and continuing privatization, particularly in agriculture. GDP growth in 2004 was strong, external balances improved, and further progress was achieved on fiscal consolidation. However, the rapid growth of monetary aggregates had led to an acceleration of inflation toward the end of 2004. More generally, taking note of Uzbekistan's lagging transformation to a market economy, Directors emphasized that significant reforms are needed to enable Uzbekistan to reach its economic potential, attract foreign direct investment, and improve living standards and reduce poverty substantially. In particular, decisive efforts are called for in order to further liberalize domestic and foreign trade, improve the business climate and governance, press ahead with privatization plans, and raise the quality and provision of economic data to international standards.

On monetary and financial policies for the period ahead, Directors highlighted the importance of keeping inflation in check, and urged the Central Bank of Uzbekistan (CBU) to slow the growth of monetary aggregates. They welcomed the authorities' readiness to revise their monetary program, if needed, to achieve inflation objectives. In the implementation of monetary policy, Directors advised the CBU to limit its purchases of foreign exchange, and increase its reliance on indirect monetary instruments. They were encouraged by the CBU's decision to eliminate cash shortages, and, in particular, urged the authorities to abolish cash restrictions by allowing banks' access to their correspondent accounts, as part of a general policy targeting monetary aggregates rather than their components. Directors also emphasized the importance of reliable inflation statistics for the credibility and effectiveness of monetary policy.

Directors were encouraged by the recently announced plans to reform the banking sector. They urged the authorities to abolish mandatory cash deposits and foreign exchange surrender requirements, free banks from their role in tax administration and financial oversight, and eliminate the distinction between cash and non-cash payments. Efforts to privatize the National Bank of Uzbekistan and Asaka Bank should also be accelerated, and financial soundness indicators should continue to be monitored closely. To help guide future financial sector reforms, Directors encouraged the authorities to request a financial sector assessment program at an early date.

Directors commended the authorities for a tight fiscal performance in 2004, and a prudent 2005 budget, while cautioning that expenditure restraint will need to be maintained. They were encouraged by the progress toward the establishment of a unified treasury system and plans to move toward a comprehensive Medium-Term Budget Framework. Directors supported the reduction in quasi-fiscal outlays in the energy sector through increases in electricity tariffs, while stressing the need for appropriate measures to address the social impact of these increases. They welcomed the plans to introduce a funded pension scheme, but urged the authorities to ensure that they have adequate capacity to manage the new scheme, as well as proper procedures in place to protect the funds. They cautioned that the growing share of payroll tax payments channeled to fund these new pension accounts should not endanger the funding of ongoing pension liabilities.

Directors welcomed the recent steps to improve tax administration, and called for further decisive actions in this area as well as the initiation of similar reforms in the Customs Committee. They also welcomed the intention to adopt a comprehensive new Tax Code, while stressing the importance of devoting sufficient time and effort to its drafting.

Directors regretted the authorities' continued reliance on protectionist trade policies. To reduce distortions and long-term vulnerability, they called for early steps to reduce taxes, fees, and administrative burdens on imports and goods transiting the country, and for full adherence to the provisioning of foreign exchange for legitimate current account transactions. Directors encouraged the authorities to follow through on regional integration initiatives and their efforts to join the WTO. While noting that the extensive trade and other restrictions complicate the assessment of the exchange rate and the appropriateness of exchange rate policy, Directors supported the view that, going forward, a more flexible exchange rate policy would be in Uzbekistan's interest.

On domestic trade policies, Directors noted that high barriers to entry and the normal functioning of retail and whole-sale trade increase the cost of doing business in Uzbekistan, and should be removed. They were encouraged by the plans for a substantial revision of the inspections and penalty regime, which would be an important step toward improving the business environment. This revision should now be implemented promptly, and complemented by additional steps to strengthen property rights. Directors also emphasized the need to liberalize the agriculture sector, as a key step toward improving the welfare of the poor. They welcomed the plan to privatize state-owned farms, and urged the authorities to eliminate cropping restrictions and state-orders, and to liberalize agricultural inputs and marketing.

Directors regretted that continued weaknesses in economic data hamper effective economic policy formulation and Fund surveillance. They urged the authorities to improve the quality as well as the transparency of data, including through the establishment of an IFS page and participation in the GDDS. They also encouraged the authorities to request a data ROSC.

Uzbekistan: Selected Economic Indicators







Production and Prices

(Annual percent change)

Real GDP






Producer price index (e.o.p.)







General government

(In percent of GDP)

Total revenue and grants






Total expenditure and net lending






Overall balance (-=deficit)







Monetary Indicators

(Annual percent change)

Reserve money






Broad money






Velocity of average broad money







External sector

(In millions of U.S. dollars, unless otherwise specified)

Exports of goods






Imports of goods






Current account






In percent of GDP






Gross international reserves






In months of imports






Sources: Uzbek authorities; and IMF Staff estimates.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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