Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with the Republic of Uzbekistan

March 23, 2007

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.

Public Information Notice (PIN) No. 07/37
March 23, 2007

On February 9, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Uzbekistan.1


Uzbekistan's macroeconomic performance was generally strong in 2005-06, reflecting significant macroeconomic policy adjustment and a favorable external environment. According to official data, real GDP growth was over 7 percent, driven by agriculture, industry, and transport and communications, and supported by buoyant external demand. The external current account registered large surpluses due to favorable commodity prices, strong growth in non-commodity exports, increased remittances, and restricted imports. Official foreign exchange reserves continued to rise and reached 12 months of import cover at end-2006. Inflation, as measured by various price indices, picked up in 2005. With a tightening of monetary policy, it started coming down in 2006, but remains high.

After a gradual depreciation in 2005 and early 2006, the sum was de facto pegged to the U.S. dollar during the second half of 2006. The real effective exchange rate appreciated in the past two years due to higher inflation.

Monetary policy was accommodative in 2005, but was tightened in 2006. In 2005, the sharp accumulation of net foreign assets by the Central Bank of Uzbekistan (CBU) was only partially sterilized by a decline in net domestic assets, resulting in surging reserve and broad money. In 2006, to offset the large build up of reserves, the authorities tightened monetary policy significantly via increased deposits from banks, the accumulation of government deposits, including through the newly created Fund for Reconstruction and Development (FRD), and the resumption of the issuance of central bank paper. As a result, growth of monetary aggregates decelerated considerably by end-2006, with growth in reserve money declining from 88 percent in 2005 to 37 percent in 2006.

The banking sector is undergoing structural changes, with the expansion of business areas and the move to local currency lending. Furthermore, prudential ratios exceed minimum standards and non-performing loans are declining. However, monetization is low, growth of cash-in-circulation is faster than that of deposits, and the ratio of credit-to-GDP continues to decline. The banking system's ability to fulfill its intermediary role has been constrained by the limited room for credit expansion given the strong growth in net foreign assets and the need to control the growth of reserve money as well as banks' involvement in financial oversight and implementing government treasury operations, which affects confidence in the banking sector.

Fiscal policy outperformed budget projections in 2005-06. Despite tax cuts, revenue collection was strong due to ongoing tax reforms. On the expenditure side, large increases in public sector wages and pensions were mainly offset by lower capital expenditures. As a result, the consolidated budget registered a surplus of 1.3 percent of GDP in 2005 and is estimated to have registered a small surplus in 2006, compared to the budgeted deficits of about 3 percent of GDP in both years. The overall fiscal surplus, including the FRD, is estimated at about 3½ percent of GDP in 2006.

Structural reforms continued at a gradual pace. Tax reforms to ease the tax burden led to improved collections, while treasury reforms were effective in enhancing fiscal management. Licensing, inspections, and reporting were streamlined, and the restructuring of agricultural enterprises (shirkats) into private farms was mostly completed. Furthermore, restrictions on banks' access to their correspondent accounts at the CBU and cash withdrawals from bank deposits were eased, and a real time gross settlement system was introduced. However, privatization stalled, a difficult investment climate resulted in low FDI inflows, and the trade regime remains protective and complex. Despite improvements in data availability, weaknesses in economic data remain.

Executive Board Assessment

Executive Directors commended the Uzbek authorities on the strong performance of the economy, which has been supported by a favorable external environment, improvements in macroeconomic policies, and gradual progress in structural reforms.

Directors were of the view that economic prospects are strong in the near term, but emphasized that containing inflation, enhancing financial intermediation and confidence in the banking system, and improving the business climate including through the liberalization of trade and payments would be crucial to achieve the authorities' ambitious growth objectives in the medium term.

Directors considered that the main challenge in 2007 is to reduce inflation and supported the authorities' intention to further tighten monetary policy. They recommended a more flexible exchange rate policy to take some pressure off indirect monetary policy instruments in curbing inflation and creating room for greater credit expansion to the private sector. Allowing some nominal appreciation would be compatible with indications that the sum is undervalued.

Directors recommended continuation of cautious fiscal policies in 2007 to help reduce inflation. They also noted that—given the low level of debt—lower inflation would provide room in the medium term for moderate fiscal loosening and small deficits to finance higher social and infrastructure expenditure. Directors expressed concern that the recent increases in public sector salaries and pensions have limited resources for investment spending, and considered that the income objectives could be better served by well-targeted subsidies to the poor. Directors encouraged the authorities to make further progress in tax and treasury reforms, introduce a multi-year budget framework, and integrate the FRD into the government budget.

Directors stressed the crucial importance of financial deepening to enhance the role of banks in economic development and strengthen the monetary transmission mechanism. To enhance confidence in the banking system and encourage deposits, all remaining restrictions on cash withdrawals should be removed and the role of banks in financial oversight and government treasury functions should be discontinued. A Financial Sector Assessment Program would help prioritize banking sector reforms.

Directors noted that the trade system continues to be protective in Uzbekistan. The authorities should reduce and unify tariffs, eliminate differences in excise taxes on imported and domestic goods, reduce administrative costs related to international trade, streamline customs procedures, and accelerate efforts to join the World Trade Organization.

Directors welcomed the authorities' reiteration of their commitment to current account convertibility amid reports of delays in convertibility in 2006. They hoped that the transitory convertibility problems associated with the implementation of the anti-money laundering law would be resolved in early 2007.

Directors regretted that weaknesses in economic data continue to hamper surveillance. They welcomed the authorities' intention to enhance the quality of statistics, and their request for technical assistance in national accounts, price, and balance of payments statistics. Directors urged the authorities to participate in the General Data Dissemination Standards and publish economic data, including in the IFS.

Uzbekistan: Selected Economic Indicators

  2002 2003 2004 2005 2006

  (Annual percentage change)

Production and prices


Real GDP

4.0 4.2 7.7 7.0 7.2

Consumer price index (e.o.p) 1/

21.6 3.7 3.8 7.8 7.0

GDP deflator 1/

45.4 26.7 15.7 15.9 20.3

Producer price index (e.o.p) 1/

46.1 27.4 26.5 28.2 27.0
  (In percent of GDP)

General government 2/


Total revenue and grants

35.7 33.4 32.2 32.2 35.8

Total expenditure and net lending

37.2 33.9 32.1 32.5 32.6

Overall balance (-=deficit) 3/

-1.9 0.1 0.6 1.3 3.6
  (Annual percentage change)

Monetary Indicators


Reserve money

25.2 26.7 38.7 87.5 37.0

Broad money

29.7 27.1 47.8 54.3 37.0

Velocity of average broad money (level)

10.8 10.5 9.5 8.0 7.2
  (In million of U.S. dollars, unless otherwise specified)

External sector


Export of goods

2,510 3,240 4,263 4,757 5,842

Import of goods

2,186 2,405 3,061 3,310 3,787

Current account

117 881 1,215 1,949 3,136

In percent of GDP

1.2 8.7 10.2 14.3 19.5

Gross international reserves

1,215 1,659 2,146 2,895 4,604

In months of imports

5.1 6.4 6.6 8.5 12.0

Sources: Uzbek authorities; and IMF staff estimates.

1/ Official estimates.

2/ Including the Fund for Reconstruction and Development created in 2006.

3/ Based on below-the-line financing data.

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.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100