Regions and Countries

	Table of Contents
p. 1 of 4 BACK | NEXT I. Development Situation II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Lending Levels

Country Strategy and Program Update 2002-2004: Uzbekistan

---

I. Development Situation

A. Recent Political and Social Developments

1. The Government continues to attach high priority to social and political stability that is a condition for sustainable economic growth and poverty reduction. However, the country is facing increasing security threats posed by the recent expansion of ethnic and religious strife, both in Uzbekistan and in neighboring countries. The Government’s efforts to contain any insurgency has led to tightened internal security and to tension along Uzbekistan’s borders. The political and security issues may further distract the Government from concentrating on implementing the necessary macroeconomic and structural reforms and promoting cross-border economic cooperation. Uzbekistan recently joined the Shanghai Cooperation Organization (former Shanghai Five Forum) with the People’s Republic of China, Kazakhstan, the Kyrgyz Republic, Tajikistan, and Russia to affirm their commitment to containing ethnic and religious militancy in Central Asia.

2. To minimize the social costs of the transition to a market economy, the Government is making efforts to maintain the provision of social services (health, education, and basic communal services) and social protection for vulnerable groups as integral components of the reform process. However, increasing inequalities in income distribution and considerable regional variation in poverty are a matter of concern.

B. Economic Assessment and Outlook

3. Uzbekistan has adopted its own gradualist reform strategy. The depth and the length of the post-independence recession have not been as severe as those in other former Soviet Union republics. Modest economic growth resumed in 1996. By 2000, gross domestic product (GDP) recovered to the 1991 level. While GDP growth and some of the macroeconomic figures from the Government’s official data and statistics continued to show improvements, the general economic situation remained difficult in 2000. Economic growth decelerated to 4 percent. Inflation was reported at still high levels around 28 percent. Monetary policy remained relatively loose, with interest rates still negative in real terms. The Government encountered rising debt-service payments, and balance-of-payments pressures. While export earnings declined due to lower gold prices and falling cotton export volumes, import decreased even more because of a further tightening of access to foreign exchange and intensified import controls. Detailed economic indicators are in Appendix 1.

4. Economic performance is forecast to remain modest in 2001, with GDP growth projected to stay at around 3 percent. Development prospects for agriculture remain bleak, especially as Uzbekistan is faced with another drought in 2001, the second successive year of below normal rainfall for the country. Industry is likely to continue experiencing difficulties, as reforms of state-owned enterprises (SOEs) will probably lead to more downsizing and closure of nonviable SOEs. The environment for private sector investment and growth remains unattractive. Privatization of large enterprises is slow. In the short to medium term, the economy remains fragile, as its high dependence on exports of two major products, gold and cotton, makes it vulnerable to adverse movements in world prices and weather conditions.

5. Accelerated key macroeconomic and structural reforms (e.g. liberalization of the foreign exchange and trade regimes, agriculture, enterprise, and banking sector reforms) along with further diversification and improved competitiveness of the economy are required to attract foreign direct investments and spur the growth of the economy.

6. The multiple exchange rate regime is considered the most significant impediment to foreign investment and overall economic performance. At the start of 2000, the Government announced its intention to move forward with reforms towards the unification of the foreign exchange rates and introduction of current account convertibility. The unification of the official and commercial bank exchange rates in May 2000, the partial liberalization of the cash market for foreign exchange in July 2000, and passage of a Government resolution¹ in June 2001 were important steps forward. However, a modified multiple foreign exchange system and administrative controls on the foreign exchange and trade regimes remain in place and no time-bound plan for implementation of reform measures has been announced. Continuing Government efforts are required to follow up without delay with additional measures towards exchange rate unification and current account convertibility.

C. Implication for the Country Strategy and Program (CSP)

7. Compared to other CIS countries, the Government’s gradualist reform strategy has achieved relatively greater stability in socioeconomic trends and avoided severe social costs. However, to fully unlock the growth potential of the economy and bring about an improvement in standards of living, the current macroeconomic and policy frameworks, characterized by a high degree of Government control and interventions, will require speedier implementation of reforms. The Government’s current pace of reforms introduces significant uncertainty in the operations of the Asian Development Bank (ADB) in Uzbekistan.

8. The slow progress and lack of expeditious response by the Government on the key macroeconomic and structural reform agenda have already affected the preparation and implementation of ADB’s programs. ADB has intensified dialogue with the Government and consultation with major aid agencies to move the reform agenda forward in 2001. Together, they will work to map out a course for more comprehensive and expeditious reforms that would provide an essential basis for any policy-based lending.

9. The current political and regional instability, regional tensions and border disputes impede cross-border cooperation and the effectiveness of the ADB-promoted regional cooperation in Central Asia.

Back Country Strategy and Program Update 2002-2004: Uzbekistan	Next II. Implementation of the Country Strategy and Program