Public Information Notice: IMF Executive Board Concludes 2008 Article IV Consultation with the Republic of Uzbekistan

July 17, 2008

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. 08/85
July 17, 2008

On July 14, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Uzbekistan.1


The Uzbek economy has performed well in recent years. The favorable external environment and improvements in macroeconomic policies resulted in high growth rates, large current account surpluses, a significant decline in the debt burden, and a more than quadrupling of foreign exchange reserves from 2003 to 2007.

Growth accelerated in 2007. Official statistics indicate that GDP grew by 9½ percent, driven by trade, transport and communications, industry, and services. Available evidence suggests private investment rose as enterprises benefited from lower taxes and moderate improvements in the business environment. Consumption was supported by higher wages and salaries and increased remittance inflows.

The external position strengthened further. The current account surplus rose to 19 percent of GDP in 2007, aided by fast-growing remittance inflows, booming prices of commodities (gold, copper, and energy), and buoyant partner demand for Uzbek exports. Foreign direct investment inflows picked up, but from a low base. The import cover of gross official reserves rose to 10 months by end-2007. External debt (mostly public) fell further to 17½ percent of GDP.

Inflation continued to be high in 2007. Increases in administered prices pushed up the price index, while the large external surplus and sharp increases in wages and salaries contributed to inflationary pressures. The authorities responded, including by adopting a tighter-than-budgeted fiscal stance, tightening monetary conditions in late 2007, and reducing the pace of nominal depreciation of the sum. Fund staff estimates of the CPI (based on the authorities' raw data) indicate a pick up in inflation during 2007 of only ½ percentage point to 12 percent.

Despite the tightening of monetary conditions later in the year, the monetary stance was accommodative for much of 2007. Broad money growth rose to 46 percent by end-2007, as the sharp increase in net foreign assets was only partially sterilized by the accumulation of deposits in the Fund for Reconstruction and Development and the use of monetary policy instruments. Monetary conditions were tightened aggressively at year end and broad money growth slowed to 39 percent by March 2008.

Fiscal policy was prudent and the outcome better than budgeted. The augmented fiscal surplus remained unchanged from 2006 at about 5 percent of GDP, compared with a budgeted deficit of 1 percent of GDP. The impact of tax cuts and higher wage and salary expenditures was offset by increased revenues—from higher international commodity prices, VAT collections, and social security contributions—and a continued decline in public investment.

Structural reforms progressed further in 2007. Most importantly, there was a concerted effort to increase minimum bank capitalization; treasury modernization and tax reforms continued; and the restructuring of "shirkats" into private farms was completed. Uzbekistan moved up slightly in the World Bank's Ease of Doing Business ranking. However, rankings for activities such as trading across borders, protecting investors, and dealing with licenses declined.

Executive Board Assessment

Executive Directors commended the authorities for Uzbekistan's continued strong economic performance, which has benefited from a generally favorable external environment and an improved policy framework. Directors concurred that the current strength of the Uzbek economy provides an excellent opportunity to move forward with the necessary reforms to sustain high growth rates in a stable macroeconomic environment.

Directors agreed that the main policy challenge in 2008 will be to reduce inflationary pressures, and welcomed the envisaged tightening in monetary policy. Given the strength of Uzbekistan's balance of payments position, Directors considered that a move towards a more flexible exchange rate policy, allowing the sum to appreciate, would provide much-needed support in easing inflationary pressures, and help relieve pressure on monetary and fiscal policies. While recognizing the difficulties and large uncertainties surrounding the assessment of the real effective exchange rate level of the sum, most Directors supported the view that the sum is undervalued. Given the significant strengthening of Uzbekistan's fundamentals, they considered that a real appreciation of the exchange rate would be inevitable. Allowing this appreciation to take place through nominal appreciation rather than inflation would lessen economic distortions, give the central bank greater control of the money supply, provide room for the growth of private sector credit, and lower the burden on fiscal policy of the sterilization of foreign exchange inflows.

Directors commended the authorities for their prudent fiscal stance and the saving of a considerable part of commodity revenues in the Fund for Reconstruction and Development (FRD), which serves as an important sterilization tool in the effort to reduce inflation. Over the medium term, as inflationary pressures abate in the context of a more balanced policy mix, there should be scope to reduce fiscal savings to finance needed social and infrastructure expenditures. At the same time, Directors called for continued fiscal prudence, and cautioned against continued sharp increases in public sector wages.

Directors welcomed the authorities' steadfast implementation of tax and treasury reforms. The priorities going forward should be to complete the introduction of the treasury single account, improve tax enforcement, and switch to standard accounting for budget preparation and reporting.

Directors emphasized the importance of a strong structural reform agenda to sustain high growth rates. A macroeconomic policy setting that would allow domestic demand to make a larger contribution to growth should be underpinned by enhanced financial intermediation, a liberalized price and trade system, and an improved business environment.

Directors considered that financial sector reforms will be especially important. They welcomed the plans to continue increasing bank capitalization over the next few years, which should further strengthen the banking system. Directors encouraged the authorities to discontinue as soon as possible the non-core functions of banks and eliminate any remaining de facto restrictions on cash withdrawals and transactions. These reforms should also allow the elimination of current distortionary policies to attract deposits. Directors called on the authorities to comply fully with international AML/CFT standards.

Directors underscored the important role that trade liberalization would play in supporting private sector development. They encouraged the authorities to lower tariffs, eliminate differences in excises on imported and domestic goods, remove export restrictions, reduce international trade administrative costs, and accelerate efforts for WTO accession. They called on the authorities to ensure that sales of foreign exchange for imports of consumer goods are honored on a timely basis.

Directors underscored the importance of giving urgent priority to making tangible improvements in the quality of economic statistics, to strengthen the effectiveness of policy planning and surveillance. They called on the authorities to work closely with the IMF-provided statistical advisors in addressing weaknesses in price indices, the national income accounts, and the balance of payments statistics. Directors also encouraged the authorities to enhance the dissemination of economic data, and to participate in the General Data Dissemination Standard (GDDS).

Uzbekistan: Selected Economic Indicators
  2003 2004 2005 2006 2007

GDP in US $ million

10,116 11,941 14,197 16,977 22,231
  (Annual percentage change)

Production and prices


Real GDP

4.2 7.7 7.0 7.3 9.5

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

7.8 9.1 12.3 11.4 11.9

GDP deflator 2/

26.7 15.7 21.4 21.5 24.0

Producer price index (e.o.p) 2/

27.4 26.5 28.2 24.0 10.8
  (In percent of GDP)

General government 3/


Total revenue and grants

33.4 32.2 30.8 34.4 35.6

Total expenditure and net lending

33.9 32.1 31.1 30.9 31.1

Overall balance (-=deficit) 4/

0.1 0.6 1.2 5.2 5.1
  (Annual percentage change)

Monetary Indicators


Reserve money

26.7 38.7 87.5 36.5 44.9

Broad money

27.1 47.8 54.3 36.8 46.1

Velocity of average broad money (level)

10.5 9.5 8.4 7.6 7.3
  (In million of U.S. dollars, unless otherwise specified)

External sector


Export of goods and services

3,775 4,836 5,416 6,390 8,991

Import of goods and services

3,097 3,927 4,101 4,668 6,736

Current account

881 1,215 1,949 2,933 4,267

In percent of GDP

8.7 10.2 13.7 17.3 19.2

Gross international reserves

1,659 2,146 2,895 4,459 7,413

In months of next year imports

5.1 6.3 7.4 7.9 10.2

Sources: Uzbek authorities; and Fund staff estimates.

1/Based on authorities' source data and Fund staff calculations using international methodology.
2/Official estimates.
3/Including the Fund for Reconstruction and Development.
4/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.


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