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Regions and Countries Country Assistance Plans Document
Country Assistance Plans - Uzbekistan : I. Country Performance Assessment
A. Economic Performance Assessment1. While Uzbekistan's gross domestic product (GDP) fell by about 20 percent during 1991-1995, the economic contraction was not as severe as that in the other Central Asian republics of the former Soviet Union. Uzbekistan resumed moderate positive growth since 1996. Despite the difficult macroeconomic environment and the repercussions of the Russian and Asian economic crises, real GDP grew by 4.4 percent in 1999. Growth was spurred mainly by agriculture and industry. Agricultural output increased by 5.9 percent in 1999. The agriculture sector did not experience inclement weather as it did during 1996 - 1998, and witnessed an across-the-board increase in output that included cotton, the most important export crop. 2. Industrial production increased by 6.1 percent, and construction services by 3.9 percent, boosting overall economic growth. Growth of the service sector also contributed to GDP growth, despite the Government's policy of restricting imports of consumer goods that in turn constrained private trading. Nevertheless, by opening the service sector to private initiatives, this sector and non-government employment grew rapidly. Military expenditures grew at 5.4 percent in 1999 compared to 6.4 percent in 1998. The tight budgetary situation and the increased allocation of scarce budgetary resources for social expenditures resulted in the ratio of military expenditures to GDP contracting from 5.3 percent in 1998 to 4.1 percent in 1999. Official statistics indicate that the overall macroeconomic situation remained on an even keel with financial stability in the first half of 2000. Real GDP increased by 3.8 percent compared with the first half of 1999. The growth of GDP is attributed to an increase in industrial production by 6.2 percent in the first half of 2000 compared to the same period of the previous year. 3. Despite the tight monetary and fiscal policies maintained by the Government, average monthly inflation was 1.9 percent in 1999, about 26 percent annually, as in the previous year. Average monthly inflation in the first half of 2000 was 1.5 percent. The national currency, sum, depreciated by about 27.3 percent during 1999. 4. The balance of payments remained under pressure in 1999. The Russian crisis, a bad cotton harvest in 1998, and falling world commodity prices contributed to an increase in the current account deficit from 0.6 percent of GDP in 1998 to 1.3 percent in 1999. The Government responded by further restricting imports, tightening access to foreign exchange, and increasing foreign borrowing to finance public investments. 5. Despite the deterioration in the current account deficit, official foreign exchange reserves increased by $115 million because surplus in the capital account resulted from the presale of gold to a foreign commercial bank and drawdowns on previously contracted debt during the year. By the end of 1999, these reserves were $1.28 billion (5.9 months of import equivalent). The increasing external debt, as a percent of GDP from 24.8 percent in 1998 to 28.1 percent in 1999, is a cause for concern. Detailed economic performance indicators are shown in Appendix 1. 6. Uzbekistan continues to make progress in transforming itself into a market economy, although recent external shocks have placed additional pressure on the economy. The institutional framework and basic laws and regulations required for a market economy are being put in place; prices of consumer goods have been liberalized; privatization of small enterprises and housing is virtually complete; and privatization of medium- and large-scale enterprises through privatization investment funds and the post-privatization support program have been initiated. With regard to public finances, the Government has taken steps to improve revenue collection and rationalize expenditures. On the revenue side, it introduced value-added tax, imposed new land and excise taxes, and increased the existing excise taxes and duties. Public expenditure management has improved, with the adoption of a strict cash management system, cuts in administrative expenses, removal of direct subsidies on food and public transportation, and reduction in subsidies on housing maintenance and utilities. To minimize the social cost of the transition to a market economy, the Government considers the provision of social services and protection for vulnerable groups as integral components of the reform process. Thus, expenditures have been maintained for education and health, and the social assistance program to the needy has been improved. The impact of price increases on vulnerable groups has been offset by adjustments to the minimum wage. 7. In accordance with the national development strategy with a phased approach, the Government intends to move to the second stage in the reform program. As announced by the Government, liberalization of the foreign trade and exchange regimes, including unification of the foreign exchange rates and adoption of the current account convertibility, is expected to be introduced during 2000 - 2001, as well as deepening structural reforms in agriculture, finance, and state-owned enterprise sectors. Effective 1 May 2000, as a first step, the Government announced the unification of two exchange rates (the official and the commercial rates). Effective 1 July 2000, currency exchange offices were opened (the free market rate 1 $=sum 675, compared to the official exchange rate 1$=sum 269). Access to foreign exchange for importers of selected consumer goods and for citizens at large for the foreign travel was further liberalized. The Government issued a resolution, allowing all licensed banks to buy hard currency at the free market rate, while the four state-owned banks are allowed to sell hard currency to individuals in certain conditions and regulations. Further steps and concrete actions by the Government toward liberalization of the foreign trade and exchange regimes to create a truly market determined exchange rate, including reforms on the foreign currency surrender system, import licensing and registration, and the state procurement system, need to be closely monitored. 8. If the planned reforms take place, the temporary adverse macroeconomic consequences will likely slow GDP growth and result in significant costs of adjustment in the short term. However, once the relative price and structural adjustments are completed, real GDP is likely to grow steadily until the economy attains its full growth potential. In the medium-and long-term, it should be possible for the country's economic development to improve the investment climate and greater market efficiency, and to fully unlock the growth potential of the economy and bring about an improvement in the standard of living. 9. Therefore, the key short- and medium-term issues for the Government include (i) continuing reforms in the agriculture, finance, and corporate sectors; (ii) adopting policies to stimulate non-inflationary economic growth; and (iii) providing a social safety net program to offset the anticipated social costs of reforms. 10. The Uzbekistan economy is not sufficiently diversified and is still over-dependent on a few commodity exports. In the long run, further diversification and improved competitiveness of the economy will be the key to maintaining robust growth. 11. The recent security incidents have distracted the Government's attention temporarily from the economic reform program. This however, will change as the security situation is expected to be improved.
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