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p. 39 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asian Republics Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : Central Asian Republics

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Uzbekistan

GDP grew by 4.5% during 2001, despite soft international prices for the country’s main exports and a second consecutive year of drought. For sustaining long-term growth with macroeconomic stability, the Government needs to persevere with the major economic and structural reforms that were initiated in 2001.

Macronomic Assessment

GDP growth of 4.5% in 2001, marginally higher than in 2000, pushed national income to 3% above its pre-independence level in 1991 (Figure 2.26). This reflected reasonably strong growth in industrial output and in agriculture, despite continuing drought conditions. The agriculture sector, the largest employer and exporter, recovered after a poor performance in 2000, when the cotton crop was the lowest since independence. The sector registered an expansion of 4.5% in 2001, as cotton yields increased by nearly 10%.

Growth of industrial output accelerated to 8.1% in 2001 from 5.8% in 2000. Production of automobiles surged, mainly as a result of better capacity utilization at UzDaewooAuto, a joint venture. Production of natural gas and ferrous metals also rose, while output of oil and gas condensate decreased.

Due mainly to growing private activity, the services sector strengthened by 14.2% in 2001, marking a slight improvement on 13% in 2000. Retail trading, restaurants, and ICT have contributed noticeably to the expansion of the sector over the past few years as a result of small-scale privatization. This growth was achieved despite government restrictions on consumer goods imports.

A slump in international cotton and gold prices in 2001 hurt export earnings, exposing the vulnerability of the economy to fluctuations in commodity markets. The fall in commodity prices forced the Government to continue its policy of import compression and import substitution, to prevent external financing requirements from rising further. Despite these measures, a current account deficit of 0.5% of GDP emerged in 2001, compared with a surplus of 0.8% of GDP in 2000.

The fiscal deficit stayed at 1% of GDP in 2001. The shortfall was financed by central bank credits, the issuance of treasury bills, and proceeds from the sale of SOEs. The central bank’s benchmark refinancing rate was 26.8% in 2000 and 2001 on an annual compound basis. The policy of keeping interest rates low can be attributed to the desire of the Government both to prevent its borrowing costs from increasing and to avoid bankruptcies among loss-incurring SOEs.

Consumer price inflation stood at 26.6% in 2001. However, IMF estimates put the inflation rate much higher, as the official data understate the true level of inflation, mainly because of shortcomings in the methodology by which consumer price data are collected. Exchange rate reforms and an effective depreciation of the commercial exchange rate, along with a rise in fuel prices and public sector wages, were the main sources of inflation in 2001. Despite the foreign exchange reforms, the market rate stayed at about 2.5 times that of the official rate at the end of 2001, about the same level as at the end of 2000. Exchange rate controls continued to stifle domestic investment activity and flows of FDI into the oil and gas sector.

Official statistics show that registered unemployment at end-2001 was the same as 12 months earlier, namely 0.4% of the workforce. Actual unemployment, however, is estimated to be much higher, and hidden unemployment in the rural sector has been rising.

Policy Developments

With the objective of pursuing a tighter monetary policy and making real interest rates positive, the central bank raised its monthly refinancing rate to 2.5% on 1 January 2002, or to 34.5% on an annual compound basis; the rate in 2001 was 26.8%. This should help bring down inflation and enable the Government to achieve the macroeconomic targets established toward the end of 2001 under an IMF staff-monitored program. The central feature of the IMF reform package is the commitment to initially reduce the differential between the market and official exchange rates to less than 50% by end-March 2002 and to unify the exchange rates by July.

The banking sector and financial markets are still at an early stage of development. This is reflected in the low level of financial intermediation in the economy. Moreover, the banking sector is highly concentrated, with the larger banks remaining in the public sector and facing limited competition. There is a need to facilitate market-oriented reforms, dismantle administrative controls on bank operations including the removal of restrictions on withdrawals, and strengthen public confidence in the banking system. This would allow the banks to increase their deposit base, raise the level of financial intermediation in the economy, and improve the environment for private sector development by ensuring greater access to commercial bank credit.

The 2001 budget targeted a fiscal deficit of 1.5% of GDP, with revenues at 30.1% of GDP and expenditures at 31.6%, based on government growth forecasts. According to official figures, the deficit in 2001 stood at about 1% of GDP. However, this could understate the true figure somewhat because transfers to loss-incurring SOEs were made as directed credit from the banking sector, not as allocations from the budget.

Outlook for 2002–2003

Prospects for 2002 hinge on the policy stance of the Government. Exchange rate unification could dampen short-term growth prospects by restraining consumption and making imported capital goods more expensive. In the medium to long term, however, its positive effects will far outweigh any short-term negative impact. This necessary policy advance will significantly improve the investment climate in Uzbekistan.

The Government envisages growth of 5.1% in 2002. This may not be realized given the global economic environment, continuing softness in international commodity prices, and the short-term impact of the policy changes. A GDP growth rate of 4% is more realistic. With the positive effects of policy measures likely to come through during 2002, higher GDP growth of 5% could be expected for 2003. Inflation by the end of 2002 is forecast to fall to 18%, but the actual figure may be higher because of upward pressure on prices due to exchange rate depreciation. Inflation will tend toward low double-digits in 2003 as the impact of depreciation works its way through the system and supply conditions improve.

Parliament has endorsed the 2002 state budget, which envisages a fiscal deficit of 2% of GDP, to be financed from privatization revenues, short-term government bonds, and credits from the central bank amounting to 0.5% of GDP. The budget includes social assistance to support vulnerable population groups that are likely to be affected by the liberalization measures.

The positive stimulus from exchange rate depreciation may encourage nontraditional exports and help the economy diversify its export base away from cotton and gold. However, a current account deficit of 1–2% of GDP is forecast for 2002–2003, as imports are likely to rise faster with investment activity picking up in response to an improved policy environment. The deficit is, however, likely to be fully financed by larger concessional and private foreign capital inflows, provided that the program of structural reforms is implemented in line with the Government’s plans for exchange rate unification and for further liberalization of price and procurement policies in the cotton-growing sector.

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