Uzbekistan: Staff Concluding Statement of an IMF Staff Visit

IMF News, November 20, 2018

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• Published: November 20, 2018

Economic Outlook

• External trade is supporting growth; import and export data show early signs of an overheating economy.
• Import growth remained very strong through the third quarter, reflecting buoyant domestic demand growth, especially for machinery and equipment.
• Non-commodity exports have slowed significantly through the third quarter, likely reflecting domestic demand pressures partly satisfied by rerouting exports to domestic uses.
• The current account will shift from a surplus in 2017 into a deficit of 3 percent of GDP in 2018 and remain in moderate deficit over the coming years.
• Moderate external deficits are beneficial—and are to be expected—when an economy starts to reform and modernize.
• Gross domestic product (GDP) continued to expand at about 5 percent.
• Growth remained strong through the third quarter in communication, construction, mining, and some service sectors.
• Sectors producing internationally traded goods, mainly agriculture and manufacturing, show little sign of pick up due to intermediate input bottlenecks (energy and water shortages), land degradation, pests, and bad weather.
• Stronger efforts to attract foreign direct investment (FDI) are needed to stimulate growth in tradable-good sectors.
• CPI inflation will remain elevated, primarily reflecting corrections of distorted relative prices and wages.
  • CPI inflation peaked at 20½ percent at the beginning of the year and declined to 16½ percent in October (year-on-year).
  • The GDP deflator reached 31½ percent through the first nine months of 2018.
  • Projected CPI inflation could rise to 17-18 percent by the end of 2019, assuming implementation of tight monetary, credit, and fiscal policies in 2019.
• Additional 2019 inflationary pressures noted:
  • increases in regulated energy prices scheduled for mid-November;
  • the 10 percent hike in public wages in November;
  • additional wage increases for education and health care personnel during 2018;
  • higher indirect taxes starting in January 2018;
  • upward pressures on prices of consumer goods that can be exported, such as fruits and vegetables.

Monetary Policy

• Monetary policy was appropriately tightened in September.
  • Broad money growth through September was 11½ percent (year-on-year).
  • The Central Bank of Uzbekistan (CBU) increased the refinancing rate from 14 to 16 percent in September.
  • The CBU allowed the exchange rate to weaken in tandem with depreciation trends in major trading partner countries.
• A further tightening of monetary policy may be needed if inflation starts surprising on the upside.
• Current CBU policy tools have limited impact on overall monetary and credit conditions.
  • The transmission channel to credit conditions remains weak due to heavy segmentation of the credit market, with about 60 percent of credit allocated at preferential terms.
  • The domestic-currency commercial segment accounts for only about 20 percent of the outstanding credit stock.
• Reducing credit market segmentation is needed as the CBU plans to transition to inflation targeting.

Credit Policies

• Restraint on credit growth is needed to contain inflation.
  • Through September, credit to the economy expanded 43½ percent (year-on-year).
  • About 60 percent of this credit growth was funded—and directed—from government sources, including the Fund for Reconstruction and Development (FRD).
  • It is estimated that more than half of the additional credit was extended on preferential terms.
• The framework for setting amounts and terms of directed credits is less transparent and appears poorly coordinated with other macroeconomic policies.
• Staff estimate: average growth of credit to the economy during 2019 would need to be reduced to about 25 percent to keep CPI inflation in the projected 17-18 percent range by the end of 2019.
• Reducing credit market segmentation should be a priority. Five noted benefits:

1. Enhances CBU’s ability to control inflation. 2. Reduces high loan concentration in a small number of state-owned enterprises (SOEs), lowering financial stability risks. 3. Improves banks’ profitability and reduces the need for regular capital injections. 4. Reduces misallocation of capital caused by directed credit at highly negative interest rates. 5. Improves transparency of credit terms; subsidies—if used—should be reported transparently in the budget.

• Almost 50 percent of total outstanding credit is owed by SOEs, which did not contribute to job creation over the last ten years (according to available labor statistics).

Fiscal Policy

• Fiscal policy encompasses both traditional fiscal operations and policy-based lending operations.
  • Consolidated fiscal balance: difference between all revenues and expenditures of the state budget and specialized public funds but excluding policy-based lending operations.
  • Policy-based lending operations include: investment project financing and on-lending by the FRD; recapitalization or capital injections in SOEs including state banks; loans to construct affordable housing in rural and urban areas.
  • Combining consolidated fiscal balance with policy-based lending operations yields the overall fiscal balance (staff’s preferred measure to gauge fiscal policy impact on domestic demand).
• Fiscal policy remains the primary tool to control inflation; government should target an overall fiscal balance consistent with preventing first- and second-round effects of price and wage adjustments from becoming permanently higher inflation.
• Fiscal performance in 2018:
  • January to September consolidated fiscal balance registered a surplus of 3.4 percent of GDP, relative to a budgeted surplus of 0.9 percent of GDP for the full year.
  • Authorities aim at a full-year surplus of 2.3 percent of GDP (close to the 2017 consolidated surplus outcome of 2.1 percent of GDP).
  • Policy-based lending operations added a fiscal impulse of 4.7 percent of GDP to domestic demand in 2018, above the budgeted 2.4 percent of GDP.
  • Lending operations financed by external borrowing not included in the budget are estimated at 0.6 percent of GDP in 2018.
  • Combining consolidated fiscal balance and policy-based lending operations, the overall fiscal deficit in 2018 is projected to reach 2.5 percent of GDP, 1 percent of GDP above the budgeted overall fiscal deficit of 1.5 percent of GDP.
  • In the authorities’ budget presentation, the estimated fiscal deficit in 2018 amounts to ¼ percent of GDP.
• Fiscal policy plans for 2019 (on present plans):
  • Mission projects the consolidated fiscal surplus will amount to 0.3 percent of GDP (a relaxation relative to 2018 surplus of 2.3 percent of GDP).
  • The decline reflects mainly the cost of the tax reform, estimated at about 2 percent of GDP.
  • Authorities plan to scale policy-based lending back to 2.8 percent of GDP in 2019 (including 0.5 percent of GDP lending operations financed off-budget by external borrowing).
  • Projected overall fiscal deficit would remain at its 2018 level of 2.5 percent of GDP.
  • In the authorities’ 2019 budget submitted to parliament in early November, the fiscal deficit amounted to 1.8 percent of GDP.
• Policy recommendation: curbing the projected overall fiscal deficit for 2019 to 2 percent of GDP would be prudent.
  • This could be achieved by further scaling back policy-based lending or by reducing non-priority spending.
  • Main implementation challenge: keep policy-based lending operations within the limit of 2.8 percent of GDP.
• Tax reform and administration:
  • Tax reform in 2019 will be a multi-year project requiring increased Ministry of Finance capacity to design tax policy, address VAT and excise collection challenges, and create a more level playing field regarding taxation of labor.
  • Addition of some 19,000 firms to the standard tax regime at the beginning of 2019 will raise administrative challenges.
  • Short-term priorities: restructure and strengthen tax administration at headquarters and set up a large taxpayer office.
  • Medium-term tasks: consolidate the field office network, transform business processes, and improve taxpayer compliance.
  • An IMF technical assistance program will support these efforts over the medium term.
• Coverage and fiscal transparency:
  • 2019 budget featured medium-term projections and an assessment of risks for the first time.
  • A comprehensive fiscal risk statement quantifying contingent liabilities will become available in subsequent years.
  • Legal basis and resources for compiling government finance statistics (GFS) have been enhanced; more work needed to align budget presentation with GFS guidelines.
  • Achieving coverage of all fiscal operations in the budget, including all off-budget accounts and activities of institutional units that should be classified as general government, has been postponed beyond 2019.
• Authorities are considering introducing numerical fiscal rules.
  • Two caveats noted:

1. Some fiscal transactions remain outside reported fiscal data; macroeconomic data, including nominal GDP, could be significantly revised in the future, rendering ratios to nominal GDP unstable. 2. Fiscal policy measured by the overall fiscal balance is currently the primary tool for stabilizing the economy and may need flexibility to counteract destabilizing swings in domestic demand.

Structural Reforms

• Price liberalization is a key theme.
  • Liberalization of bread prices in September aimed to incentivize market-based grain production arrangements.
  • Announced increases in regulated energy prices in mid-November are intended to stem losses at energy SOEs, increase incentives to save energy, and could attract foreign investors.
  • Uzbekistan is pursuing a gradual approach to price liberalization to lower short-term social and output costs and to build enforcement mechanisms for competition and regulation.
  • Mission recommendations:
  • Clearly communicate the “why” of price liberalization to the public.
  • Reduce price uncertainty by issuing an advance calendar of regulated price hikes and liberalizations over the next 1-2 years.
  • Protect vulnerable households by improving targeting of the present social safety net.
• SOE reform should complement price liberalization.
  • Government opted for a sequential firm-by-firm approach, starting with energy companies, followed by transportation companies (especially the national air company), and other SOEs.
  • Reforms include unbundling SOE activities, removing non-core activities, and improving governance by separating management, supervision, and regulation.
  • Mission suggests designing a roadmap for SOE sector transformation to complement the firm-by-firm approach.

Inclusive Growth

• Authorities have placed the UN’s Sustainable Development Goals (SDGs) at the center of the inclusive growth agenda.
  • A Cabinet of Ministers’ resolution lays out national development goals and targets until 2030 and details steps to achieve them.
  • A Coordination Council chaired by the Minister of Finance will oversee the process.
  • Key SDGs focus on promoting accumulation of human capital (education, health, gender) and real capital (public infrastructure, financial inclusion).
  • SDGs align with Uzbekistan’s ambition to create jobs for a bulging working-age population and to achieve upper middle-income country status before the demographic window of opportunity starts closing around 2040.

Statistics

• Progress on improving economic statistics has been impressive.
  • One year ago few statistics were publicly available and those available were often of dubious quality.
  • Authorities joined the IMF’s enhanced General Data Dissemination Standard System (e-GDDS).
  • Starting in May 2018, authorities began publishing all key economic, financial, and social statistics on a National Summary Data Page.
  • An Uzbekistan country page in the IMF’s International Finance Statistics (IFS) is planned to be launched before the end of the year.
• Authorities’ plans to build on achievements:

1. The Statistics Committee, the Ministry of Finance, and the CBU plan to develop a roadmap for further improving statistics. 2. Continue to take full advantage of IMF technical assistance to improve national accounts, balance of payments, and government finances statistics. 3. Seek participation in the IMF’s Special Data Dissemination Standard (SDDS), which requires expanding coverage and would improve timeliness or periodicity of several data categories. 4. Produce additional statistics to monitor and report on SDG targets, especially labor market statistics.

Technical Assistance Coordination

• Delivery and coordination of technical assistance could be improved.
  • Ongoing reforms touch virtually every economic, financial, and social area and involve both policy change and capacity building.
  • The complexity can lead to technical assistance lagging in bottleneck areas such as SOE and financial sector reforms, and to duplication or conflicting advice across providers.
  • The World Bank has compiled a list of reform priorities.
  • The creation of an Economic Council chaired by the Prime Minister could be useful.
  • One option to improve coordination: create a public depository of existing reform roadmaps in key areas, identify incomplete or missing roadmaps, inform the public about reform plans, highlight delivery gaps, and help prioritize and coordinate technical assistance across providers.

Mission Concluding Statement. Tashkent, November 8, 2018. Uzbekistan: Staff Concluding Statement of an IMF Staff Visit, November 20, 2018.

References

• Republic of Uzbekistan and the IMF
• Technical Assistance -- A Factsheet
• Mission Concluding Statements
• PRESS CENTER
• [Uzbekistan: Staff Concluding Statement of an IMF Staff Visit,

July 31, 2018](https://www.imf.org/en/News/Articles/2018/07/31/ms073118-uzbekistan-staff-concluding-statement-of-an-imf-staff-visit)

• https://www.imf.org/en/home