Uzbekistan: Staff Concluding Statement of the 2018 Article IV Mission
IMF News, March 14, 2018
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- Published: March 14, 2018
Context and reform momentum
- Uzbekistan has initiated reforms to address lack of jobs amid a rapidly expanding working-age population; about 500,000 new job seekers enter the labor market each year.
- The authorities liberalized the foreign exchange (FX) market in September 2017; the official exchange rate depreciated by 50 percent.
- First-wave transition reforms already initiated: price liberalization, SOE reform, greater Central Bank of Uzbekistan (CBU) independence, and improved statistics.
- Historic policy stance emphasized state intervention, import substitution, FX restrictions, and limited regional trade; black-market FX rate surged by more than 100 percent above the official rate prior to liberalization.
Outlook
- Growth and employment
- GDP projected to expand at about 5 percent during 2018-19.
- Domestic employment growth likely to remain well below one percent; job creation concentrated in family businesses and other very small-scale businesses.
- Number of Uzbek labor migrants working abroad expected to continue trending upward.
- External sector
- Current account expected to shift from surplus to a small deficit by 2019.
- Exports projected to increase at a healthy pace; imports expected to expand significantly due to better statistical capture, more cross-border trade, end of fuel rationing, and higher imports of machinery and intermediate inputs.
- Inflation
- Consumer price inflation has picked up, reflecting FX and price liberalization pass-through.
- Inflation is expected to decline only gradually over the next two years despite assumed tighter fiscal, credit, and monetary policies during 2018-19.
Monetary and exchange rate policy recommendations
- Adopt a tighter monetary stance to contain inflation pressures, including:
- Increasing the refinancing rate.
- Reducing the pace of accumulation of FX reserves, potentially by introducing a regular, announced program of FX sales from the CBU’s gold purchases.
- Move to inflation targeting over the medium term, underpinned by further increasing the CBU’s de facto independence.
- Preconditions for inflation targeting: create a strong transmission mechanism for monetary policy, build central bank analytical capacity, and communicate policies clearly.
Credit and banking sector recommendations
- Address market segmentation: SOEs dominate FX credit, often via state banks or on-lending through the Fund for Reconstruction and Development (FRD), depressing bank profitability; private sector concentrated in domestic currency lending.
- Modify FRD credit practices:
- Put stricter limits on the FRD’s on-lending activities through banks.
- Provide FRD funding to banks for on-lending in domestic currency to make credit costs more transparent and reduce loan dollarization.
- Financial sector reforms already implemented:
- Banks no longer required to keep non-banking records for authorities.
- Presidential decree to refrain from pressuring banks to provide preferential credit.
- CBU divested from two banks and withdrew officials from supervisory boards.
- Additional needed reforms:
- Reserve requirement reform including reserve averaging to foster interbank market.
- Enhance emergency liquidity assistance, expand acceptable collateral, restart issuing T-bills to aid money market development.
- Continue upgrading supervisory capacity and tools (including stress testing) and promote financial education.
- Address potential funding and capital gaps:
- Increase deposits from households and foreign funding.
- Raise bank profitability through better credit management, reducing administrative cost, and possible mergers.
- Attract more foreign banks; policies needed include more stable macro environment, public trust in banking stability, and improved investment climate.
Fiscal policy and tax reform
- Fiscal stance and projections
- The augmented fiscal deficit (consolidated fiscal balance plus FRD balance) reached 3¼ percent of GDP in 2017.
- For 2018, measures planned (restraining additional on-lending, FRD aiming to balance its budget, saving about half of expected additional revenue) could reduce the augmented fiscal deficit in 2018 to only 1¼ percent of GDP.
- Social safety net spending and public wages will be adjusted for actual inflation in mid-year as foreseen in the approved budget.
- Fiscal transparency
- Past routine use of off-budget transactions hindered assessment of fiscal stance.
- Authorities have consolidated on- and off-budget transactions in fiscal data presentation; recommendation to include all existing off-budget transactions in the approved budget from 2019 onward.
- Comprehensive tax reform
- Current tax system is highly complex, with exemptions and a split standard/simplified regime that segments firms by number of employees and discourages firm growth.
- Tax reform is essential for job creation but should be revenue neutral and introduced gradually alongside increased tax administration capacity and improved taxpayers’ accounting capacity.
- Tax reform needed to mitigate fiscal risk from a potential sharp decline in future revenue collections from SOEs as SOE privileges erode.
Coordination of stabilization policies
- Stabilization during the transition should be a cooperative undertaking with closer coordination of fiscal, credit, and monetary policies.
Structural reform priorities
- SOE reforms and balance sheet issues
- SOE FX exposures to banks and external lenders created balance sheet strains; dealing with SOE losses should be a priority.
- Recommendations of the consulting group on SOE governance expected in July to inform comprehensive plans to address SOE legacy issues.
- Immediate structural priorities:
- Price liberalization: continue adjusting key prices (including electricity and natural gas) toward cost-recovery levels and expand goods on commodity exchanges.
- Trade liberalization: simplify customs tariffs, prepare for WTO accession, and streamline customs clearance procedures.
- Competition policy: strengthen the State Committee on Competition to counteract widespread monopolistic practices, especially in SOE-dominated sectors, to improve price responsiveness to exchange rate movements.
- Sustainable Development Goals (SDGs)
- Authorities embrace the UN’s SDGs; working with UN and World Bank to identify funding requirements to achieve SDGs by 2030 in education, health, and public infrastructure.
Statistics and data transparency
- Significant improvements already made:
- 1990s decree restricting public dissemination of key economic statistics abolished; replaced by a September 2017 presidential decree mandating dissemination of economic and financial data.
- Authorities plan to join the IMF’s enhanced General Data Dissemination System (e-GDDS).
- Expectation to post on a National Summary Data Page all key economic, financial, and social statistics by May 1, 2018.
- CPI compilation aligned with international standards; public debt data to be published quarterly.
- CBU to compile balance of payments data from 2018 onward and, for the first time, the International Investment Position; Ministry of Economy should cooperate to smooth the handover.
- Next steps and road maps
- Road maps for statistics improvements by the CBU, Ministry of Finance, and Statistics Committee planned before November 2018 are key tests of technical capacity and cooperation.
- Improve quality and breadth of national accounts and upgrade labor market statistics (including concentrating labor survey data collection at the Statistics Committee).
- Authorities encouraged to publish data according to an advance release calendar and accelerate work to assemble an Uzbekistan country page in the IMF’s International Finance Statistics (IFS).
Key statistics (2015-19)
- National income
- Real GDP growth (percent change): 2015: 7.9; 2016: 7.8; 2017 Est: 5.3; 2018 Proj: 5.0; 2019: (blank)
- GDP per capita (in U.S. dollars): 2015: 2,124; 2016: 2,094; 2017 Est: 1,491; 2018 Proj: 1,238; 2019: 1,455
- Population (in millions): 2015: 31.3; 2016: 31.8; 2017 Est: 32.1; 2018 Proj: 32.5; 2019: 32.9
- Prices (percent change)
- Consumer price inflation (eop): 2015: 8.4; 2016: 18.9; 2017 Est: 16.9; 2018 Proj: 10.1
- GDP deflator: 2015: 9.2; 2016: 7.4; 2017 Est: 19.0; 2018 Proj: 20.3; 2019: 13.8
- External sector
- Current account balance (percent of GDP): 2015: 0.7; 2016: 3.7; 2017 Est: 0.4; 2018 Proj: -1.0
- Gross official reserves (in billions of U.S. dollars): 2015: 24.3; 2016: 26.5; 2017 Est: 28.1; 2018 Proj: 29.2; 2019: 29.5
- External debt (in billions of U.S. dollars): 2015: 11.8; 2016: 13.0; 2017 Est: 15.6; 2018 Proj: 15.7; 2019: 16.2
- Exchange rate (in Sums per U.S. dollar; eop): 2015: 2,810; 2016: 3,231; 2017 Est: 8,120; 2018 Proj: …
- Real effective exchange rate (in levels, - = depreciation): 2015: 100; 2016: 93; 2017 Est: 63; 2018 Proj: 51; 2019: 58
- Government finance (percent of GDP)
- Consolidated budget balance: 2015: -1.2; 2016: -0.8; 2017 Est: -0.1; 2018 Proj: -1.3
- Fund for Reconstruction & Development balance: 2015: 0.2; 2016: -3.2; 2017 Est: 0.0
- Augmented fiscal balance: 2015: -0.6; 2016: -3.3
- Augmented revenues & grants: 2015: 34.3; 2016: 31.6; 2017 Est: 31.7
- Augmented expenditures & net lending: 2015: 35.6; 2016: 32.7; 2017 Est: 34.9; 2018 Proj: 33.0
- Public debt: 2015: 10.5; 2016: 24.5; 2017 Est: 20.6; 2018 Proj: 21.3
- Money and credit
- Reserve money: 2015: 20.0; 2016: 22.2; 2017 Est: 84.8; 2018 Proj: 15.4; 2019: 14.5
- Broad money: 2015: 24.2; 2016: 23.5; 2017 Est: 40.3; 2018 Proj: 17.8
- Credit to the economy: 2015: 23.3; 2016: 28.4; 2017 Est: 103; 2018 Proj: 22.3; 2019: 13.6
IMF Staff Concluding Statement of the 2018 Article IV Mission for Uzbekistan (March 14, 2018).