Mission Concluding Statement 

Uzbekistan: Staff Concluding Statement of the 2024 Article IV Mission

May 14, 2024

Washington, DC: An International Monetary Fund (IMF) mission led by Mr. Yasser Abdih conducted discussions for the 2024 Article IV consultation with Uzbekistan from April 23 to May 7 in Tashkent. At the end of the visit, the mission issued the following statement:

Recent developments, outlook, and risks

Uzbekistan’s growth has remained strong. While remittances fell back to the pre-2022 trend, an expansionary fiscal stance, a surge in fixed investment, and buoyant private consumption propelled real GDP growth to 6 percent in 2023. Growth remained high at 6.2 percent year-over-year (yoy) in the first quarter of 2024. Robust real income growth, combined with safety net expansion since 2020, contributed to a steady decline in the poverty rate from 17 percent in 2021 to 11 percent in 2023. Headline inflation fell from 12.3 percent (yoy) at the end of 2022 to 8.0 percent in March 2024 including due to the relatively high real policy rate and falling international food and energy prices. The external current account deficit widened to 8.6 percent of GDP in 2023 from 3.5 percent of GDP in 2022, as rapid growth in imports of machinery and equipment (some of which is temporary), declining remittances compared to 2022, higher net interest payments on foreign debt, and repatriation of earnings by foreign-owned enterprises more than offset buoyant gold exports. International reserves fell by $1.2 billion in 2023 but remain high—about 9 months’ worth of imports at end-March 2024.

The outlook is broadly positive but domestic and external risks remain. The authorities’ strong reform efforts, most notably on energy, privatization, and SOEs, have continued to improve economic prospects. Real GDP growth is projected to remain robust at 5.4 percent in 2024—supported by buoyant domestic demand—and rise slightly to 5.5 percent in 2025. The ongoing fiscal adjustment, moderation in bank lending growth, and the reversal of the 2023 temporary increases in imports will contain import growth and reduce the current account deficit this year and next. Inflation is projected to temporarily rise by end-2024 as administered energy prices increase, but continuing tight macroeconomic and macroprudential policies and structural reforms will reduce it thereafter toward the Central Bank of Uzbekistan’s (CBU) target. Given a highly uncertain external environment, risks are elevated. External risks include geoeconomic spillovers from an intensification of Russia’s war in Ukraine, commodity price volatility, and an abrupt global slowdown. Domestic risks include slower-than-planned fiscal consolidation, weakening bank balance sheets, and the materialization of contingent liabilities from state banks (SBs), state-owned enterprises (SOEs), and public-private partnerships (PPPs). Upside risks include acceleration of structural reforms, continued favorable inflows of income and capital, and higher gold prices.

Fiscal policy

The government appropriately aims to reduce the fiscal deficit to 4 percent of GDP in 2024 and 3 percent of GDP in 2025. This ambitious but necessary consolidation aims to maintain robust public finances and contain near-term inflation pressures, while ensuring the protection of the vulnerable and increased medium-term economic efficiency. The consolidation is planned through growth-friendly measures, such as reducing untargeted energy subsidies while safeguarding the vulnerable, improving social and safety net expenditure targeting, and scaling back policy lending. The authorities should stand ready to take additional measures to meet their fiscal deficit targets if risks to revenue and/or expenditure pressures materialize. There is room to broaden the tax base, further modernize the tax system, improve spending efficiency, strengthen core budget processes, unify the public investment process, and better manage fiscal risks—all of which would further support the authorities’ fiscal effort. Leveraging continued capacity development support in the areas of tax policy, revenue administration, and public financial management, the authorities have implemented an efficient value added tax and made important progress towards preparing a fiscal strategy paper and a fiscal risk statement to improve budget management and monitor and manage fiscal risks. Such progress should continue. To prevent fiscal risks from PPPs, staff recommends introducing a ceiling on PPP guarantees as authorized in the public debt law taking into account the results of the ongoing stock-taking exercise.

Monetary and exchange rate policy

Monetary policy should remain focused on reducing inflation. The CBU should continue to carefully monitor price developments and maintain a tight monetary stance until inflation is firmly on a downward trajectory. If higher energy prices spill over to core inflation and inflation expectations, the CBU should raise the policy rate. The CBU’s welcome efforts to enhance communication of monetary policy decisions should continue to help anchor inflation expectations.

The authorities should continue efforts to further enhance monetary policy transmission. Continuation of sound monetary policies and safeguarding central bank independence will facilitate de-dollarization and strengthen transmission channels. Acceleration of financial sector reforms, including privatizing SBs, reducing still-sizable policy lending, and deepening the interbank market would support financial intermediation, reduce structural excess liquidity, and facilitate local capital market development. Additional exchange rate flexibility would help absorb potential shocks and safeguard reserves.

Financial sector stability

Strong supervision and accurate asset quality assessment will help maintain financial stability. Mortgage and car loan growth moderated from high levels after the authorities tightened loan-to-value (LTV) ratios and introduced concentration limits. Implementation of mandatory debt service-to-income (DSTI) ratio limits and additional capital requirements for loans with high LTV and DSTI ratios, effective July 2024, will help mitigate the accumulation of financial risks and contain borrowers’ debt burden. The authorities should conduct independent asset quality reviews, enhance risk assessment and asset classification standards, phase out directed and policy lending, and limit foreign exchange financing of businesses without foreign currency revenue. The Financial Sector Assessment Program (FSAP) planned for 2024-2025 will help the authorities identify weaknesses and vulnerabilities and develop a road map for reform.

State bank reform remains a priority and should focus on improving governance, achieving commercial objectives, and preparing them for privatization. SBs dominate the financial system with 68 percent of bank assets at end-2023. After the privatization of Ipoteka bank, the authorities have continued to make important progress by slating two large state banks (Asaka and SQB) for privatization. Going forward, further accelerating privatization of the SBs would improve competition, level the playing field, allow more efficient allocation of resources, and increase access to financial services. Banks that remain state owned should be mandated to operate commercially with efficient systems and appropriate governance structures. Any non-commercial activities should be moved to, or transparently compensated from, the budget. The rationale for state ownership of commercial banks should be assessed periodically, and SBs that fail to meet their objectives should be restructured for privatization or be resolved.

Structural reforms

The authorities rightly prioritized their structural reform agenda to gradually reduce the state footprint in the economy and create jobs for the growing population. Significant progress has been made in recent years to liberalize the economy, most recently through the energy tariff reform, which will incentivize better energy use, attract further investment, make energy supply more reliable, and bolster public finances. These efforts should continue. SOE reform should accelerate and focus on separating regulatory and operational functions, phasing out non-commercial goals, strengthening management qualifications, boosting the independence of corporate boards, and adopting comprehensive and transparent reporting of operational performance and SOE finances—based on International Financial Reporting Standards. These measures will facilitate SOE privatization and generate significant efficiency gains.

Further improving the business environment will enhance competition, diversification, and job creation while supporting disinflation. The authorities are keen to pursue accession to the World Trade Organization. Such accession, along with strengthened trade cooperation with neighboring countries and improved transport routes, would enhance Uzbekistan’s exports. Empowering women and closing existing gender gaps in labor force participation would foster inclusion, increase productivity, and boost GDP. Policies to adapt to climate change and incentivize green technology would mitigate climate vulnerabilities, help decarbonize the economy, and promote green growth.

The government should maintain momentum on anticorruption efforts, building on sustained and significant improvements in governance and rule of law indicators. In the near term, staff recommends putting into force the asset declaration and conflict of interest laws and establishing an efficient income declaration system. Uzbekistan should ensure the implementation of access to information norms and boost compliance. To facilitate efforts to detect corruption, the government should enact the whistleblower protection bill and increase accountability. Boosting the independence of the Chamber of Accounts and the judiciary would enhance financial oversight, contract enforcement, and the business environment.

The team would like to thank the Uzbek authorities, stakeholders, and private sector representatives for their hospitality, constructive policy dialogue, and productive collaboration during the Article IV mission.