Uzbekistan: Staff Concluding Statement of the 2019 Article IV Mission

March 5, 2019

A Concluding Statement describes the preliminary findings of IMF staff at the end of an official staff visit (or ‘mission’), in most cases to a member country. Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, or as part of other staff monitoring of economic developments.

The authorities have consented to the publication of this statement. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. Based on the preliminary findings of this mission, staff will prepare a report that, subject to management approval, will be presented to the IMF Executive Board for discussion and decision.


Uzbekistan has successfully implemented a first wave of significant economic reforms. Initiated by President Mirziyoyev in 2016, the reforms aim to revive an economy that was hobbled by distorting policies, including foreign exchange and trade restrictions, a punishing tax burden, and directed credit. Flagship reforms implemented so far include foreign exchange liberalization, tax reform, and a major upgrade in the quality and availability of economic statistics. Uzbekistan has also taken the lead on regional cooperation, key for promoting regional trade and reconnecting the region’s energy and transportation networks.

Excessive credit growth has emerged as a major risk to macroeconomic stability. Rapid credit growth in 2018 financed a surge in imports of capital goods and bolstered investments in housing and infrastructure following decades of underinvestment. Looking ahead, the main macroeconomic stability risk is that a prolonged credit boom will aggravate inflationary pressures and feed into excessive external deficits. To wit, available potential funding of credit is plentiful: the country has large accumulated financial buffers that could be drawn down; and external lenders seem eager to provide debt financing at favorable terms, as highlighted by last month’s oversubscription of the country’s first sovereign debt issue. While this is a new macroeconomic stability challenge for Uzbekistan, the authorities are acutely aware of the need to adjust policies to forestall a boom-bust credit cycle.

Setting priorities for a vast structural reform agenda is another major challenge. Reforms so far have rightly focused on high-impact, broadly popular, and administratively workable priorities, with foreign exchange liberalization being the exemplar of this pragmatic approach. But the reform agenda is expanding rapidly. The authorities recognize the need to prioritize reforms that address the economy’s most damaging distortions first.


The mission projects GDP growth will pick up, reflecting strong investment . While investment boomed in 2018, agricultural production was disappointing due to severe weather and water shortages. In 2019, despite lower commodity prices and slowing external demand, GDP growth is projected to pick up from 5 percent to 5½ percent (see attached table). [1] Investment will remain the main driver, followed by private consumption, which will benefit from robust wage growth. Growth of formal sector jobs is projected to expand in 2019, spurred by lower labor taxes and formalization of jobs. The main short-term risk to growth remains a significantly worse external environment.

Inflation has moderated recently, but pressures will remain elevated . After peaking at 20½ percent in January, CPI inflation slowed during 2018. Inflation is expected to hover around 15 percent through 2019, mainly reflecting the delayed effects of energy price hikes for businesses in November 2018, robust wage growth, and projected increases in VAT collections as the number of firms paying VAT has expanded significantly.

External deficits are likely to persist, but risks remain low. Imports, especially capital and intermediate goods, surged in 2018 reflecting foreign exchange and trade liberalization and rapid credit growth. With strong domestic demand, external deficits will likely remain high in 2019. External stability risks are mitigated by large foreign exchange reserves and moderate external debt. The main risk is that a continued boom in credit growth could propel external deficits—and inflation rates—significantly above projections.

Monetary and Exchange Rate Policies

Given persistent inflationary pressures, the monetary stance needs to remain tight. The Central Bank of Uzbekistan (CBU) aims to gradually bring CPI inflation back to single digits. After increasing the refinancing rate last year, the CBU needs to keep liquidity in line with the tighter monetary stance, even if such operations are costly. The exchange rate has moved broadly in line with underlying fundamentals, including depreciations in key trading partners. However, CBU foreign exchange interventions to sterilize liquidity generated by purchases of domestic gold could become more regular and predictable. To facilitate the move to inflation targeting over the medium term, the proposed new central bank law should provide the CBU with sufficient independence to conduct policies effectively.

Credit Policies

In 2018, the government largely funded rapid credit growth. Pre-reform constraints on credit growth—especially the target of current account surpluses—are no longer binding. To finance a surge in investment, credit to the economy grew by 50 percent in 2018. The government funded and directed a large part of this credit expansion through policy-based lending operations and shifting deposits to banks. Moreover, about half of overall credit was extended on preferential terms.

Looking ahead, the expansion of credit—both in scope and composition—needs to be contained based on three objectives:

  • Ensuring macroeconomic stability : Excessive credit growth pushes inflation and the external deficit higher. Bringing credit growth closer to projected nominal GDP growth of about 25 percent during 2019-20 would facilitate growth and job creation while avoiding excessive inflation and external imbalances, in line with Presidential Decree No. 4141 dated January 31, 2019.

  • Reducing credit misallocation: Directing preferential credits to low-return investments in capital-intensive sectors is not an effective way to create jobs. Phasing out directed credit over the next few years would improve credit allocation.

  • Increasing transparency : There are good public policy rationales for extending preferential credit, but the subsidy component of preferential credit should be reported in the budget, as is already the case for credit subsidies covered by the Support Fund for Entrepreneurship.

    Fiscal Policies

    The overall fiscal stance in 2018 was broadly appropriate. The budget balance based on the government’s definition yielded a surplus of ½ percent of GDP (see attached table), an over-performance of 1 percent of GDP relative to the budget. Additional revenue from foreign exchange liberalization, favorable commodity price developments, and improvements in tax collections, especially at the local government level, was partly saved, providing counter-cyclical support to the economy. The mission adjusts revenues and expenditures for extra-budgetary flows and policy lending not included in the budget. The resulting overall fiscal balance is staff’s preferred measure to gauge the impact of fiscal policy. In 2018, policy-based lending rose significantly, increasing the overall fiscal deficit to 2½ percent of GDP, moderately higher than in 2017.

    The fiscal stance in 2019 should continue to support macroeconomic stability. The government’s budget balance is projected to shift to a deficit of ¾ percent of GDP, reflecting the cost of the 2019 tax reform. With a planned decline in policy lending, the corresponding overall fiscal deficit is projected to tighten to 2 percent of GDP, in line with the need to curb credit growth. If revenue over-performs again in 2019, the government should avoid pro-cyclical spending increases. Also, as external financing is more than sufficient to cover the overall fiscal deficit in 2019, the government should resist pressures to expand expenditures.

    Public debt is projected to remain moderate over the medium term, but lower revenue from SOEs are a risk . Overall fiscal deficits of about 2 percent of GDP would stabilize the public debt at moderate levels (about 30 percent of GDP). If revenues remain constant as a share of GDP, reducing policy lending would open up space for higher spending, including priorities linked to the UN’s Sustainable Development Goals (SDGs). However, SOEs currently provide a large share of revenues and, as shown by experiences in other transition economies, their restructuring could reduce collections. Expanding the tax net to cover more private sector firms would help compensate such revenue losses.

    Enhancing fiscal transparency further would improve the quality of information and strengthen accountability. Including medium-term fiscal projections and risks in the 2019 budget and publication of a citizen’s budget are major achievements. The government is committed to include all fiscal operations, including off-budget spending of budgetary organizations, in the budget by the end of this year. It also plans to conduct a comprehensive assessment of fiscal risks, particularly risks related to SOEs, and establish a strong legal framework for Public Private Partnerships (PPPs). The mission welcomes the envisaged publication of the audited balance sheet of the Fund for Reconstruction and Development (FRD).

    Additional tax reforms are needed to spur investment and create jobs. The 2019 tax reform appropriately focused on simplifying taxes, reducing labor taxes, and broadening the VAT. But with the standard tax regime expanding from 7,000 to 35,000 firms—tax administration is daunting. The next reforms should prune tax preferences, equalize labor taxes across firms, and provide efficient incentives for foreign investment. Regarding tax administration, measures are taken to reorganize the headquarter, establish a large tax payer office, and, in the medium term, the governance of field offices should be strengthened.

    Financial Sector Policies

    A roadmap for restructuring the banking system is urgently needed. State banks presently dominate the banking system. Their major function is to implement the government’s investment plan by extending credit to SOEs, with government providing funding, bank capital, and guarantees. Unsurprisingly, reported bank soundness indicators look re-assuring. But following foreign exchange liberalization, large unhedged SOEs suspended service on some credits extended by the FRD. This signals there are bank balance sheet fissures that will need to be addressed as part of the restructuring of banks.

    To obtain funds, a restructured banking system will need to gain the trust of the private sector. Currently, banks intermediate less than 10 percent of non-government savings. As the government gradually reduces funding of banks, they will need alternative funding sources to support an expanding economy. This will require ensuring macroeconomic stability, especially low and stable inflation; assuring depositors that property rights are protected; and building trust in bank governance. The proposed new banking law provides an opportunity to support these requirements.

    Structural Policies

An investor survey emphasized the need for reforms to improve resource availability, reduce business costs, and strengthen public governance. The mission surveyed investors regarding the urgency of about 30 structural reform areas. Investor responses highlighted that reforms should prioritize: (i) improving the availability of energy, skilled labor, and credit, the latter by reducing credit market segmentation to level the playing field across borrowers and by increasing the trust in the banking system to help it expand its funding base; (ii) reducing business costs through lowering the cost of complying with tax obligations, better enforcing competition and contracts, and, again, by reducing credit market segmentation but also increasing competition across banks; and (iii) strengthening governance by combating corruption, improving statistics, and making policies more predictable.

SOE reforms would address several of these priorities. In the past, SOEs absorbed a disproportionate share of the economy’s credit, energy, and skilled labor, while facing weak competition and distorted prices. Since last year, the authorities have clarified their restructuring strategy. First, the new Agency for Management of State Assets has been given a mandate to strengthen corporate governance. Second, the government has started unbundling SOE activities in the energy and transportation sectors and has made progress on separating management, supervision, and regulation. Third, SOEs are being classified into those that will privatized, open for minority stakes, and remain under full state ownership.

The government made progress on price liberalization in 2018. After bringing energy prices for businesses closer to cost recovery levels, the government liberalized bread prices. The mission encourages continued price adjustments, especially in the energy sector, to reduce SOE losses, save energy, and attract foreign investors. To reduce price uncertainty, the adjustments should follow a pre-announced calendar. The government plans to take measures to alleviate the impact on vulnerable households to improve the targeting social assistance. At the same time, the government should strengthen the Anti-Monopoly Agency to more effectively address anti-competitive practices.

The authorities rightly consider improving governance a corner stone of their reform strategy. One of the first laws adopted by the new government was Uzbekistan’s Law on Combating Corruption. And two pillars of the President’s Development Strategy focus on (i) reforming public governance and (ii) improving the rule of law. Implementation agencies have stepped up activities to address these issues. Efforts are focusing on educating citizens and officials on anti-corruption policies, prevention, and enforcement, especially in the socially sensitive areas of education and health.

Inclusive Growth

Creating jobs, especially for unskilled and disadvantaged workers, is the country’s number one priority. The pre-reform growth model paid scant attention to labor market problems, especially in poor areas. Past policy hindered the mobility of both internal and external migrants. Currently, concerns focus on regional demand-supply mismatches and shortages of skilled labor. The authorities have started to tackle these issues. First, they recognize that working abroad is one coping mechanism, and have created an agency to support migrants and are allowing private employment agencies. Second, restrictions on internal labor mobility have been lifted. Third, the 2018 and 2019 budgets significantly increased funding for active labor market programs, including training, public works, and wage subsidies. It would be desirable to complete already started reforms in the labor market, including the revisions of the outdated labor code and employment law.

The SDGs could anchor the country’s development agenda over the next decade. The authorities have embraced the SDGs to help set development goals, including for education, health, gender equality, infrastructure, and financial inclusion. Achieving these goals will help create jobs and Uzbekistan’s capacity to attract and absorb foreign investment. The mission discussed with the government the public and private resources needed to achieve key SDG goals over the next decade.


The government should further improve economic statistics. Before the reforms started, available statistics were scarce and often confirm achievement of economic targets. Since May 2018, key economic, financial, and social statistics can be downloaded from a National Summary Data Page. More work is needed to improve national accounts and labor market statistics, including the revision of past data. Two initiatives could further catalyze reforms. First, the Statistics Committee, the Ministry of Finance, the Ministry of Labor, and the CBU should agree on a roadmap to further improve statistics. Second, subscription to the IMF’s Special Data Dissemination Standard (SDDS) would confirm the authorities’ readiness to adhere to international standards and accountability.

The team would like to thank the authorities for their warm hospitality and constructive discussions of a wide range of issues.

Uzbekistan: Selected Economic Indicators, 2016-21











National income 1/

Real GDP growth (percent change)







GDP per capita (in U.S. dollars)







Population (in millions)








(Percent change)

Consumer price inflation (eop)







GDP deflator







External sector

Current account balance (percent of GDP)







External debt (percent of GDP)







Exchange rate (in sums per U.S. dollar; eop)




Real effective exchange rate (2015=100 ave, - = depreciation)




Government finance

(Percent of GDP)

Budget revenues







Budget expenditures







Budget balance







Revenues (adjusted) 2/







Expenditures (adjusted) 2/







Consolidated fiscal balance







Policy-based lending







Overall fiscal balance







Public debt







Money and credit

(Percent change)

Reserve money







Broad money







Credit to the economy







Sources: Uzbekistan authorities and IMF staff estimates and projections.

1/ The nominal GDP level has not yet been adjusted for the upward revision for 2017 and 2018. Real GDP growth rates have been adjusted.

2/ IMF staff adjusts budget revenues and expenditures for extrabudgetary funds (primarily the Fund for Reconstruction and Development), lending and borrowing, and externally financed expenditures.

[1] The national account data are being revised, and a revision of the data for 2014-18 should become available later this month.

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