Press Release No. 21/112

IMF Executive Board Concludes 2021 Article IV Consultation with the Republic of Uzbekistan

April 23, 2021

Washington, DC—April 22, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with the Republic of Uzbekistan and considered and endorsed the staff appraisal without a meeting on a lapse-of-time basis [2] .

While the pandemic hit Uzbekistan’s economy especially hard in the first half of 2020 and inflicted considerable hardship, the recession was moderated by strong and timely containment and support measures. These included a forceful public health response and the deployment of a set of fiscal, monetary, and financial measures, made possible by substantial buffers owing to prudent macro-economic policies in preceding years, and thanks also to sizable international support. As a result, the economy rebounded sharply in the second half of the year and Uzbekistan was able to post positive overall growth in 2020, at a rate of 1.6 percent. Similarly, while the current account deficit at 5½ percent of GDP was almost equal in size as in 2019, trade flows were considerably depressed. Inflation continued to gradually decline in 2020, but higher increases in food prices kept overall inflation in the low double digits, ending the year at just over 11 percent.

Growth is expected to pick up in 2021. With the rollout of vaccines globally, a recovery of trading partner growth, and building on the domestic recovery, the economy is projected to grow by about 5 percent in 2021. The current account deficit is projected to widen slightly, to about 6½ percent of GDP, as imports are expected to recover faster than exports. Inflation is projected to decline marginally, to just below 10 percent by end-2021 due to food price pressures and government wage increases.

The level of uncertainty is very large, however. The recovery could be delayed by a resurgence of infections, a slower-than-expected rollout of vaccines, or new containment measures, as well as slower growth in Uzbekistan’s main trading partners and fluctuations in commodity prices, notably the price of gold.

The humanitarian and economic impact of the pandemic slowed Uzbekistan’s transformation to a modern market economy. As the pandemic abates, Uzbekistan will need to secure strong, sustainable, and inclusive growth to narrow the income gap relative to other emerging economies and achieve the Sustainable Development Goals. The authorities will need to continue with wide-ranging structural reforms to help achieve this, including by reducing the role of the state in the economy and creating an environment conducive to strong private sector growth, while expanding the social safety net to protect vulnerable households.

Executive Board Assessment

In concluding the Article IV consultation with the Republic of Uzbekistan, Executive Directors endorsed the staff’s appraisal as follows:

Mitigated by the authorities’ timely and strong policy response, the COVID-19 pandemic has, so far, had a relatively short-lived adverse impact on Uzbekistan’s population and economy. Although the pandemic hit the economy hard in the first half of 2020 and inflicted considerable hardship, strong and timely containment and support measures moderated the recession. These included a forceful public health response and the deployment of a comprehensive set of fiscal, monetary, and financial measures, made possible by substantial buffers owing to prudent macro-economic policies in preceding years and to sizable international support. As a result, activity rebounded in the second half of 2020 and Uzbekistan was among the few countries posting positive growth in 2020.

Uncertainty remains high, however, and continued near-term support is needed. The recovery will depend especially on the vaccine rollout, while new variants of the virus and surges in infections are key risks. Much will depend also on developments in Uzbekistan’s main trading partners. The authorities rightly continue to focus on protecting lives and livelihoods and securing enough vaccines for the population. The 2021 budget maintains an appropriate accommodative stance and ensures that the healthcare system and vaccine rollout are sufficiently resourced. If downside risks materialize, the authorities could use fiscal buffers to provide additional, targeted support to households and businesses.

Beyond the near-term, maintaining strong economic fundamentals will require tackling vulnerabilities that have increased due to the pandemic, and restarting income convergence, which temporarily stalled. Public debt, while still at a relatively low level, has almost doubled in a few years’ time. Banks’ loan portfolios may be affected with a lag. And importantly, incomes remain relatively low compared to other emerging economies, while the social safety net still leaves out many vulnerable households.

The authorities’ commitment to continued sound macro-economic policies is welcome, but the withdrawal of fiscal stimulus should be gradual as the pandemic subsides. The authorities are committed to ensure fiscal sustainability, by adopting a set of fiscal rules and reducing the budget deficit in the coming years to place public debt on a downward path. With this, the risk of public debt distress is assessed to remain low. At the same time, the government should create room—by further improving revenue administration and spending efficiency—to allow for a further expansion of the social safety net and additional investment in healthcare and education. Monetary policy remains appropriately focused on lowering inflation, and the CBU should continue to allow exchange rate flexibility. Further improvements are needed in the CBU’s supervisory capabilities to better monitor banks and effectively respond to possible banking sector difficulties. Adherence to sound policy frameworks and close coordination among policymakers are essential to maintain macro-financial stability.

As the crisis abates, it will be particularly important to pick up the pace of structural reforms to achieve strong, sustainable, and inclusive economic growth. After years of relative isolation and strict state control, Uzbekistan has come a long way in modernizing its economy. The reform agenda is still large, however, and the economy does not create enough jobs for its growing population. There is a need to reduce the still large role of the state in the economy and to create an environment conducive to strong private sector growth. Of particular importance is the creation of strong and independent institutions necessary for a well-functioning and fair market economy and enhance policy stability and predictability. As many of the reforms in these areas are just starting, Uzbekistan can benefit from other countries’ experiences and avoid the pitfalls of poor governance, by ensuring strict adherence to the rule of law and government transparency, facilitated also by increased digitalization.