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p. 41 of 68 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Central Asia Azerbaijan Kazakhstan Kyrgyz Republic Tajikistan Turkmenistan Uzbekistan The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : Central Asia

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Uzbekistan

GDP growth in 2002 remained slow and, with unchanged policies, the medium-term outlook is for continued sluggish expansion. The Government wants to attract greater investment inflows to accelerate development, but this would require action to carry out far-reaching economic and structural reforms.

Macronomic Assessment

Growth in GDP, according to official estimates, slowed to 4.2% in 2002 from 4.5% in 2001 and was below the official 5.0% target. Agriculture and industry recorded moderately improved performance, though expansion in other sectors, mainly services (accounting for about 50% of GDP), slowed markedly to about 1.5% from 14.2% in 2001. Value added in agriculture, the largest employer and exporter, rose to 6.1% growth from 4.1% in 2001. Productivity and area increases raised grain production by 38% to 5.3 million tons, exceeding domestic consumption needs. Adverse weather lowered the cotton harvest by 80,000 metric tons to 3.2 million tons, but most of it was of premium quality. The industry sector reportedly grew by 8.5%, up from 8.1% growth in 2001, though the data are unclear on what drove it. Intensified import restrictions and a weaker exchange rate boosted domestic manufacturing but hurt import-dependent enterprises and retail trade.

Oil production rose for the second consecutive year, by 2.4%, and natural gas production increased by 1.8%. The transport and communications subsector posted stronger performance, of 6.8% compared with 3.3% in 2001, driven mainly by the operations of Uzbekistan Airways. Retail trade output contracted by 0.5%, against 8.6% growth in 2001, as the impact of intensified trade restrictions on imports disrupted trade. The number of private SMEs continued to rise during the year with most new entrants in the agriculture sector.

Regional disparities in incomes persist. Per capita incomes in Tashkent were the highest at $40 per month (at the official exchange rate) and the lowest were in Samarkand at just $10 per month. Official unemployment data at 0.4% of the labor force continue to mask hidden unemployment as they do not include the unregistered unemployed. Actual unemployment remains high, especially in poorer regions, and mirrors regional variations in SME growth. No sustained migration out of depressed regions has been observed.

The fiscal deficit in 2002 was 0.8% of GDP according to official sources, with about one half of the deficit financed by privatization revenues, mainly equity sales to foreign investors, and the balance by credit from the Central Bank of Uzbekistan (CBU). Most government expenditures, 38% of the total, were on welfare and social programs, while subsidies and investment took up 7% and 20%, respectively, of the total, with most of this directed to state-owned industry and infrastructure.

While a tightening stance was adopted in January 2002 when CBU raised its monthly benchmark refinancing rate from 2.0% to 2.5% (for an annual compounded rate of 34.5%), monetary operations remained largely oriented to financing the credit needs of SOEs and the budget. Accordingly, little progress was made during 2002 in reducing inflation with the official CPI indicating an average annual rate of 27.6%, against a target of 18.0% and virtually unchanged from the previous year. Moreover, price controls, an artificial exchange rate, and methodological issues cause the official CPI to underestimate true inflation. Devaluation of the official exchange rate and a rise in fuel prices, pensions, and public sector wages were the main sources of pressure on prices, as were import restrictions that led to shortages of consumer goods.

The official exchange rate was devalued in steps by about 30% against the dollar over the course of 2002 and the spread between the official and black-market rates was markedly narrowed. However, the 35% spread at year-end failed to achieve the 20% government target. The black market exchange rate appreciated by about 12% by year-end; however, since such strong action was taken to repress private import trading during the year, the appreciation may not reflect a fundamental improvement in the exchange market. At end-2002, the dollar was trading at 1,320 sum on the black market compared with the official rate of 970 sum. A secondary official rate, at which the public may buy limited amounts of foreign exchange, traded at 1,020 sum.

The trade surplus rose to $276.4 million from $35.0 million in 2001, due to import compression. Exports fell by nearly 6%. Cotton export earnings were lower than in 2001, as were exports to Commonwealth of Independent States (CIS) countries; however, higher global gold prices boosted gold earnings. Cotton, gold, and energy products, and for the first time, services were large foreign exchange earners. Imports fell by more than 13% from the 2001 level. Machinery and equipment and foodstuffs accounted for most of the import bill. The Russian Federation remained the main trade partner.

The estimated current account surplus of $47 million was around 0.6% of GDP, a turnaround from a deficit of about 0.5% of GDP in 2001. Estimates of the capital account are highly tentative, though it appears that FDI was substantially lower than in 2001 and the capital account was in deficit. Bank for International Settlements deposit data suggest that reserves have declined during the year. External debt is estimated at $4.4 billion (about 56% of GDP) at end-2002, and the debt service ratio for the year was 29.0%. The ratio of debt service costs to hard currency exports was over 40%.

Policy Developments

The Staff Monitored Program (SMP) agreed between the Government and IMF dominated macroeconomic policy in 2002. The Government stated its intention to accelerate the transition to a market economy and achieve macroeconomic stability by reducing the role of the state in the economy and adopting tight fiscal and monetary policies. Government policies in 2002 were consequently aimed at establishing an economic structure in line with SMP objectives while implementing safeguards against outcomes unwanted by the Government and ensuring government monitoring and control. However, progress in transition was far from satisfactory. The Government was especially sensitive to possible outflows of international reserves. Monetary and fiscal policies were broadly in line with agreed benchmarks through mid-2002.

In 2002, the Government was under particular pressure to show progress in three key areas of the SMP: (i) liberalization of the foreign exchange regime, (ii) trade liberalization, and (iii) reform of the state procurement system for cotton and grain. On the first, the Government devalued the official foreign exchange rate and liberalized over-the-counter foreign exchange transactions that are conducted at the secondary market rate. At the same time, wary of the possibility of large foreign exchange outflows and with a view to controlling imports, it enforced trade and exchange restrictions that allowed it to ration and reduce demand for foreign exchange. These restrictions adversely affected private business. Multiple exchange rates continued to be applied and a substantial spread between the secondary official rate and the market rate reemerged after its elimination in May.

The Government's policy measures were designed to redirect unofficial transactions to the more liberalized official channels. This was done to protect local industry and curb illegal trading. These regulations were accompanied by incentives to domestic producers of consumer goods. But cumbersome industrial licensing procedures restricted the growth of private enterprises. In addition, restrictions aimed at curbing imports adversely affected private retail trade.

The Government gradually moved to liberalize the agriculture sector, but needed reforms are so numerous that a gradual approach is, indeed, required. The Government has achieved successes in areas such as livestock, fruits and vegetables, and farm restructuring. However, as with other reforms, the Government has been careful to ensure that any changes do not cause disruptions that it considers unacceptable. Grain self-sufficiency remains a particularly sensitive matter: government efforts to stabilize grain production have ensured input and credit availability as well as a working marketing channel but have, in some cases, crowded out private rural enterprises.

Reforms have also been tempered by the importance to government finances of the foreign exchange earnings from cotton. While the general rationalization of regulations that apply to private enterprises and the liberalization of certain subsectors encouraged the development of agricultural SMEs, state ownership and control, as well as marketing restrictions, prevent the potential benefits of rural enterprise development from being realized fully. Export bans on certain products have been used to foster development of the domestic agroprocessing industry.

Government cotton procurement accounts for 50% of total production. However, despite being permitted to do so, farmers find it difficult to sell the remaining 50% on the free market because of inadequate private marketing channels. Ambiguities in the interpretation of resolutions and persistence with old practices by local leaders have impeded reform of the procurement system. Government procurement prices for wheat and cotton were increased to adjust for inflation and international price increases in 2002, but not for exchange rate changes.

Banking sector reforms were prominent in the Government's reform agenda. CBU officially reduced its directed lending and other interference in the operations of commercial banks. Informal control, however, persisted. Low deposit interest rates and regulations limiting private cash withdrawals from bank accounts continued discouraging savings, and inadequate domestic deposit mobilization has resulted in a large exposure of the banking system to external borrowing. During 2002, the Government made efforts to withdraw cash from circulation to reduce unmonitorable cash transactions and this adversely affected private business activity. In these circumstances, the population generally continues to show distrust of the banking sector.

Overall, the Government has been hesitant to make substantial changes to existing economic policies because it weighs the potential benefits of liberalization against in its view potential serious problems, including reduction in state direction and the adverse impact on the budget of unification of the exchange rate, especially on the state system of consumer subsidies and the domestic cost of external debt service.

Outlook for 2003-2004

Growth in 2003 is likely to remain at 2002's level or to fall slightly. Government steps to shore up its foreign exchange position and to avoid foreign exchange volatility are likely to continue to adversely impact private sector growth in the period ahead. GDP growth in 2003 is expected to be 3.5% with a moderate increase in 2004 to 4.0%.

Industrial growth is likely to remain slow in the forecast period and, without substantial foreign exchange reforms, state enterprises and private firms are unlikely to be able to attract significant FDI. Agriculture will probably continue on its present course with the slow pace of reforms unlikely to have any substantial impact on growth unless policies are adopted to substantially improve the incentive structure facing farmers. Indeed, if the Government persists with its plan to increase the grain crop area by 12% in 2003, it will probably be faced with a poor harvest as it fails to finance the input needs of this additional acreage. The services sector, particularly retail trade and restaurants, is likely to continue feeling the adverse effects of government trade controls in 2003.

Medium-term developments on the balance of payments are difficult to assess given the limited information available and the recent policy actions that have mixed exchange market reforms with strong administrative action to restrict trade activity. Barring introduction of comprehensive economic reforms, it appears that exports would grow by perhaps 4-5% in the medium term, bolstered by an improvement in cotton prices, as expansion in export volume is limited. Growth in imports would continue to be affected by restrictions on consumer goods so as to limit the bulk of spending on capital goods in support of the Government's investment program. In these circumstances, the recorded trade surplus is likely to remain at about $250 million, essentially the 2002 outcome, unless a stronger degree of import compression than was seen in 2002 leads to a further decline in imports.

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