On May 6, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Uzbekistan.

In 2018, GDP growth picked up moderately to 5 percent as adverse weather impacted agriculture and bottlenecks in energy and water slowed economic growth, despite strong investment growth. Consumer inflation had fallen to 14½ percent by end-2018, but rapid credit growth, price liberalization, public wage adjustments, and high inflation expectations will maintain price pressures in 2019. A shift towards more liberal exchange rate and trade regimes in 2017 along with expansionary credit policies in 2018, pulled in additional imports causing a decline in Uzbekistan’s current account balance from a small surplus in 2017 to a 7 percent of GDP deficit in 2018. Nonetheless, Uzbekistan has substantial external buffers with reserves at 13 months of imports and external debt a moderate 35 percent of GDP at end-2018.

The fiscal stance remained prudent in 2018 with the overall fiscal deficit, which includes policy lending, staying around two percent of GDP and public debt remaining at 20 percent of GDP. VAT and mining revenues surged but were offset by higher social expenditures and policy lending. In 2019, the authorities began implementing a major tax reform designed to simplify taxes, expand the standard corporate tax regime and value added tax, while reducing the tax burden on private firms and workers.

The central bank tightened monetary policy in 2018, raising the refinancing rate from 14 to 16 percent and using foreign exchange sales to sterilize liquidity generated by substantial purchases of domestic gold. Following nominal depreciation of 60 percent in 2017, the exchange rate remained relatively constant in 2018 and appreciated in real terms. However, credit to the economy grew more than 50 percent driven in part by a substantial increase in policy lending. State banks account for about 85 percent of banking system assets and their main function is to support government investment and development plans. Nonetheless, bank soundness indicators continue to look reassuring. The central bank has begun using macroprudential tools to more actively contain risks, while continuing to upgrade its supervisory capacity and intervention tools.

Progress continued on structural and institutional reforms, but the reform agenda remains large. Currently, the government is accelerating state enterprise reforms by creating an asset management agency, unbundling responsibilities in the energy and transportation sectors, and identifying enterprises for restructuring or privatization. Other reforms focus on additional price liberalization, improving labor skills, implementing land reforms, streamlining regulations, and improving public governance. Uzbekistan has embraced the Sustainable Development Goals, with a focus on education, health, gender equality, infrastructure, and financial inclusion.

Executive Board Assessment 

Executive Directors welcomed the implementation of a first wave of economic reforms, including foreign exchange liberalization and tax reform, which has supported robust growth and helped transition toward a more open and market-based economy. Looking ahead, Directors encouraged the authorities to sustain and prioritize the reform momentum to maintain macroeconomic stability, boost inclusive growth, and spur private sector job creation.

Directors encouraged the authorities to continue their tight monetary policy to contain inflation, while bringing credit growth in line with external and internal stability requirements. Containing credit growth and phasing out directed credit would help limit inflationary pressures, avoid excessive external deficits, and prevent a potentially costly boom-bust cycle. Directors supported continued exchange rate flexibility, which would allow the economy to adjust in line with economic fundamentals. They encouraged the authorities to implement greater central bank independence.

Directors welcomed the authorities’ prudent fiscal policy, which has kept the overall fiscal deficit and public debt at moderate levels. They supported the authorities’ intention to reduce policy lending in 2019 and welcomed the commitment to include all off-budget fiscal operations in the 2020 budget. While Uzbekistan has significant investment needs, Directors agreed it would be important to resist pressures to scale up spending, which could have a procyclical economic impact. Directors commended the authorities’ decision to proceed with a major tax reform, and advised its careful implementation, while standing ready to introduce additional measures as needed, particularly in the event of reduced revenues from state enterprises.

While reported bank soundness indicators are strong, Directors considered that state-owned banks need to address lingering balance sheet issues and improve governance. They supported the authorities’ efforts to develop a strategy to restructure the banking sector, upgrade supervisory capacity in line with international best practice, and use macroprudential tools more actively.

Given the challenging structural reform agenda, Directors encouraged the authorities to prioritize reforms to address distortions and boost job creation. They supported efforts to improve the business environment, including by reducing the cost of doing business and strengthening public governance. Directors stressed the need to reform state-owned enterprises by improving corporate governance and allowing privatization or minority stakes. Streamlining and making the regulatory framework more predictable would encourage private entrepreneurship and stronger foreign investment. Directors strongly supported Uzbekistan’s efforts to tackle corruption by boosting public education and legal, regulatory, and institutional reforms. They urged the authorities to continue to improve the quality and transparency of economic data.

Directors welcomed the authorities’ agenda for inclusive growth anchored by the Sustainable Development Goals, including plans to help vulnerable groups by improving skills training, boosting funding for active labor market programs, providing greater support for migrants, and reforms to the labor market.