The International Monetary Fund has positively assessed the measures taken by the Government of Uzbekistan to reduce the consolidated budget deficit (CBD) in 2024 and called for continuing the policy of fiscal discipline, paying attention to reforms in the tax system and increasing the efficiency of public spending.
Recent Developments, Outlook, and Risks
The economy has continued to perform strongly. Real GDP growth was robust at 6.5 percent in 2024, supported by strong domestic demand. The external current account deficit narrowed by 2.6 percentage points of GDP to 5.0 percent in 2024 on the back of strong remittances, high commodity prices, rapidly growing non-gold exports, and the winding down of a one-off increase in imports in 2023. International reserves remain ample. The consolidated government deficit (CGD) fell by 1.7 percentage points of GDP to 3.2 percent in 2024, largely reflecting a reduction in energy subsidies and better-targeted social expenditure, with higher gold prices mitigating lower VAT revenues from high VAT refunds. However, the reduction in domestic demand from the smaller deficit was dampened by higher spending in the broader public sector, including from SOEs, facilitated by an increase in the external borrowing ceiling. Inflation remains elevated, with a headline reading of 10.3 percent year-on-year (y/y) in March 2025, reflecting last year’s needed increases in energy tariffs and other administered prices, as well as spillovers into other prices.
Growth is expected to remain robust, however, external uncertainty has ratcheted up recently. The announced global tariff increases have increased uncertainty and tightened global financial conditions and could affect Uzbekistan through external demand, commodity prices, and financial flows. Despite this uncertainty, under the baseline, real GDP growth is projected to remain close to 6 percent in 2025 and 2026, supported by continued strength in private consumption, investment, and advancement of structural reforms. The current account deficit is forecast to remain unchanged at 5 percent of GDP in 2025, as higher gold exports and broader public sector consolidation offset weaker non-gold export performance brought about by slower growth in trading partners. Inflation is expected to moderate to slightly above 8 percent y/y at end-2025, and continue to gradually decline thereafter, supported by tight macroeconomic and macroprudential policies and the continuation of structural reforms.
Elevated uncertainty presents both risks and opportunities. Key external risks stem from larger and protracted trade policy shocks, spillovers from the war in Ukraine, reduced availability of external financing, and commodity price volatility. Domestically, risks include higher-than-expected fiscal deficits, upward adjustments to borrowing ceilings, weakened bank balance sheets, and contingent liabilities from state-owned enterprises, state-owned commercial banks (SOCBs), and public-private partnerships (PPPs). Opportunities could arise from faster implementation of structural reforms, stronger capital and remittance inflows, and higher gold prices.
Fiscal Policy
The decline in the consolidated government deficit (CGD) in 2024 is welcome. Staff commends the government for reducing the CGD and remaining committed to the 3 percent medium-term fiscal target. Adhering to the external borrowing limit of US $5.5 billion in 2025 and setting future borrowing ceilings that ensure public and publicly guaranteed debt as a share of GDP doesn’t increase are paramount to enhance budget credibility, help mitigate risks from state-owned enterprises and PPPs, and alleviate demand pressures on inflation. Volatile gold prices create risks of inflationary spending pressures when they are high, and pressures to lower spending when they are low, exacerbating macroeconomic fluctuations. The authorities should thus seek to minimize responses of government spending to gold price changes.
Revenue mobilization and spending rationalization are needed to create room for development and social needs. A medium-term revenue strategy is needed to offset the 2 percentage point of GDP decline in the tax-to-GDP ratio since 2020. Tax policy options include reforming the corporate and personal income taxes, reducing income-based tax incentives, and removing ineffective customs exemptions while refraining from granting new ones. These should be complemented by revenue administration measures, including revamping the audit program and improving large taxpayer office operations, while ensuring that taxpayers’ rights are respected. In this regard, the two strategies currently under consideration, to reform the tax administration and combat the shadow economy should be approved and implemented. Rationalizing wages, reducing the cost of goods and services leveraging recent procurement reforms, accelerating state-owned enterprise reforms, further consolidating and improving the design of social assistance programs, and reforming the pension system would enhance spending efficiency.
The reform of fiscal institutions should continue in order to strengthen fiscal discipline and transparency. Staff commends the government for adhering to the budget calendar, preparing the fiscal strategy paper and fiscal risk statements, and adopting the 2025-2030 Public Financial Management Reform Strategy. Further progress is needed to unify the public investment process irrespective of the financing source, better align and integrate the preparation of capital and current budgets, cover all capital expenditures institutions are responsible for when setting their budget ceilings, and publish these ceilings with the budget documents. Importantly, to address fiscal risks from a rapidly growing PPP pipeline, the authorities have made notable progress in designing a system to monitor and manage risks from PPPs. This should be complemented by conducting a sensitivity analysis of key assumptions, include potential PPP costs in the budget, integrate PPPs in the broader public investment management framework, and lower the annual PPP cap in line with limited absorption capacity. Improving Government Financial Statistics (GFS) reporting and publishing the debt management strategy, along with annual borrowing plan, will strengthen fiscal transparency and facilitate relations with investors.
Monetary and Exchange Rate Policy
The Central Bank of Uzbekistan (CBU) should keep monetary policy tight until inflation approaches its 5 percent target. The recent policy rate hike in response to rising inflation and inflation expectations signals the CBU's readiness to address existing pressures. Monetary policy should remain data-driven and be tightened further if core inflation or inflation expectations do not decline. The exchange rate should be gradually allowed to fluctuate in wider ranges to better reflect market conditions, serve as a shock absorber, safeguard reserves, incentivize firms to hedge foreign exchange exposures, and help avoid persistent depreciation expectations. In addition, adhering to the principle of neutrality within the calendar year will facilitate exchange rate flexibility. Staff commends the CBU for its efforts to enhance communication. Bolstering communication further will help anchor inflation expectations and ensure predictability of monetary policy. Efforts to strengthen monetary policy transmission should continue by further improving liquidity management, modernizing the reserve requirements framework, and reducing the role of the state in the banking sector and high dollarization.
Financial Sector Stability
The authorities should advance reforms of state-owned commercial banks (SOCBs) and accelerate their privatization to promote financial stability and efficient resource allocation. Their mandates should focus on profitability, and any costs arising from non-commercial operations should be fully and transparently compensated for in the budget until these operations are gradually phased out. Strengthening the corporate governance of SOCBs would support their commercial focus, facilitate privatization, promote state-owned enterprise restructuring, improve monetary policy transmission, and increase access to affordable credit for the private sector. A reduction in government ownership of banking system assets to 40 percent, as envisaged in the 2020-2025 banking reform strategy, calls for the acceleration of SOCB privatization. Transparent procedures, strong regulatory frameworks, good creditor and shareholder rights, and competitive bidding during the privatization process would ensure the attraction of qualified investors and maximize asset value. Furthermore, staff advises against current plans to keep systemic banks as policy banks, which could increase financial risks or costs to the budget.
Bank supervision should be enhanced, including by adopting international standards. Staff advises the authorities to implement the recommendations of the recent and first Financial Sector Assessment Program (FSAP) for Uzbekistan. These call for reforms to focus on strengthening bank regulation; implementing robust risk-based supervision; enhancing systemic risk analysis and stress testing; strengthening capital requirements; aligning asset classification and non-performing loan resolution with international best practices; improving payment system oversight; and establishing adequate bank resolution, crisis management, and financial safety net arrangements.
The Central Bank of Uzbekistan (CBU) should continue to closely monitor and be prepared to address emerging financial stability risks. The welcome introduction of macroprudential measures in 2023-24 has moderated household credit growth and resulted in banks’ increased attention to borrower’s creditworthiness. Nevertheless, the microlending segment has been growing rapidly as micro loans and credits are provided under less stringent conditions. While initiatives that aim at enhancing financial inclusion and deepening are welcome, they should not undermine proper credit assessment by banks, which would add to financial stability risks. The CBU should therefore strengthen risk-based supervision to limit these risks and deploy additional capital requirements or other binding macroprudential measures, as needed. It should also address risks from foreign exchange lending to unhedged corporate borrowers, and lending to individuals without formal income and to corporates facing heightened risks of insolvency or illiquidity. Phasing out preferential and directed lending should remain a priority.
Structural and Governance Reforms
After significantly advancing economic transition reforms, Uzbekistan needs to complete them and accelerate implementation of institutional reforms. Necessary energy tariff and broader administrative price increases have advanced price liberalization and should be continued until its completion to allow prices to fully reflect market forces. Significant progress has also been made with World Trade Organization accession in both bilateral and multilateral tracks, and the increased engagement with neighboring countries and other regions such as the Gulf Cooperation Council, have significantly contributed to advancing trade liberalization and diversification. Support for state-owned enterprises needs to be transparent, made conditional on restructuring, and be gradually phased out to level the playing field for the private sector. State involvement in the economy should continue to be reduced, and privatization of large state-owned enterprises should be accelerated and carried out in accordance with international best practices. Controls and direct intervention should be replaced with effective regulation and market institutions. Facilitating firm entry and exit would further contribute to stimulate a competitive environment for the private sector.
Governance, labor, and climate reforms should continue. Governance indicators have improved significantly in recent years. The enactment of the conflict-of-interest law, training of government officials to implement it, and the establishment of the Virtual Anti-Corruption Academy are welcome. Public discussion of the draft law on asset declaration for officials of the government and state enterprises, and cabinet review of the draft whistleblower protection law are expected soon. The authorities should enact and implement these laws as soon as possible. Improving transparency and access to information, particularly regarding procurement, and finalizing the National Strategy on Anti-Corruption would also contribute to improved efficiency of public spending and administration. Labor market reforms need to be accelerated to address low female labor participation, high informality, and skill mismatches. Completing the energy price reform and swiftly adopting measures to enhance water efficiency, diversify crops, and support reforestation efforts will significantly advance the climate agenda. Improving the quality of statistics would lead to better analysis and more informed policymaking.
