Regions and Countries

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p. 1 of 4 BACK | NEXT I. Current Development Trends and Issues II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Lending Level

Country Strategy and Program Update 2003-2005: Uzbekistan

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I. Development Situation

A. Recent Political and Social Developments

1. Developments since 11 September 2001 have marked a watershed for Uzbekistan. They have contributed in many ways to a more favorable climate for the ongoing dialogue between the Uzbek Government and its development partners on issues requiring urgent attention. Major themes of the dialogue include (i) the importance of creating a more dynamic economy that is export-led and investment-driven, generating opportunities for Uzbekistan's young labor force; (ii) the urgency of liberalizing the exchange rate regime; (iii) the concern about a possible adverse impact of the currency reforms and the need to protect the most vulnerable groups; (iv) reforms of the state order system in agriculture to raise agricultural income; and (v) the need for greater Government efforts to expand regional cooperation and address issues of regional significance relating to energy, water resource utilization, and transport. The Government for its part has arrived at a better appreciation of the changed circumstances and is reconsidering its policies in the key areas noted above. Appendix 1, Table A1.1, indicates the country's progress toward the Millennium Development Goal (MDG) and targets.

B. Economic Assessment and Outlook

2. Although the country's economy appears stable, the economic situation has remained difficult due to falling cotton prices, overvalued exchange rates, and rising debt service payments. (Key indicators are given in Appendix 1, Tables A1.2–A1.4) The outlook for the short term depends primarily on the coherence of Government reform measures and the pace of reform implementation. The Government has reiterated its commitment to maintaining a tight monetary and fiscal policy stance and to ease the tax burden of the productive sector. It has recently adopted a monetary policy geared at reducing cash circulation of local currency and at directly reducing import demand. Both measures are likely to stifle economic activity in the short run and may reduce economic growth. The Government’s main concern is, however, to keep inflation and debt service in check once currency convertibility is fully introduced.

3. In the first half of 2002, gross domestic product (GDP) increased by approximately 4.2%,¹ spurred by robust growth in services. However, the likely poor cotton crop and weak industrial growth could lead to an annual growth rate of 2.5% for 2002 and 3% in 2003. The inflation rate has been on a modestly declining trend but is expected to remain in approximately the 25% range through 2003. Moreover, the official inflation rate tends to underestimate actual inflation given price controls and the artificial exchange rate. The Government’s targeted budget deficit of 1.5% will be difficult to reach since it is based on a higher growth projection than is likely to be the case.² While full convertibility of the currency has now been announced for end 2002, the spread between the official and curb rates remains wide. In terms of the foreign debt position, the envisaged liberalization of the foreign exchange regime would entail a more realistic valuation of the debt expressed in local currency and a significant deterioration of the debt ratio. Thus, a unification of exchange rates at a level of SUM1,000 to $1 would result in a rise of the ratio from currently 39% of GDP to about 60% of GDP.

4. The International Monetary Fund (IMF) and the Government agreed in December 2001 on a program of economic and fiscal reforms incorporated into a staff-monitored program (SMP). The joint statement by the Government and the June 2002 IMF review mission notes the progress being made toward the required reforms, and announces the extension of the SMP to end August 2002 “to assess sustainability and irreversibility of the reforms”. It suggests the possibility of an IMF-supported financial program coming into force in the fourth quarter of 2002 if all SMP objectives are met by then. The implementation of reforms would place further pressure on the already tight budget. Foreign currency liberalization and the ensuing devaluation of the sum would, in the short run, lead to rising expenditures for imports financed from the budget, increased debt service payments, and higher social expenditures to protect vulnerable segments of the population.³ In addition, as liquidity of strategic enterprises decreases in step with the devaluation, the Government would intend to provide selective support.

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

5. ADB's current strategy supports basic reforms and minimizing the social costs of transition, both of which may become even more important in the coming months as Uzbekistan enters a new phase of adjustment. At the same time, while continuing to address the Government's past-stated priorities for ADB involvement,⁴ this country strategy and program update (CSPU) also proposes to target recently emerging priorities of the Government, including assistance to the drought-affected areas of Western Uzbekistan, the health sector,⁵ and mitigation of the social costs of macroeconomic and structural reforms within the scope of the existing country operational strategy. The CSPU envisages closer aid coordination, particularly with IMF and World Bank, and support for activities to achieve the MDG (para. 9 and Appendix 1, Table A1.1). ADB operations for 2003–2005 should retain an appropriate degree of flexibility both in scope and content to respond to the social and economic pressures and opportunities that may result from implementing economic and fiscal reforms. The Government proposes to host a donors meeting in Tashkent towards the end of 2002, at which plans for the short term and clear roles for each donor organization could be defined.⁶ Timely and measured donor intervention remains important to support essential progress by the Government in priority areas.

6. In light of the developments indicated above, a 3-year average lending of $150 million per annum is envisaged. If further reforms are implemented, the content and volume of ADB operations as well as lending levels would be adjusted to be responsive to emerging needs. These operations would be a mix of project loans, technical assistance and if appropriate, quick disbursing operations. Thus, ADB's proposed lending strategy would focus on the existing and emerging priority sectors which include the banking system, corporate governance, education,⁷ agriculture,⁸ public utilities, and large-scale privatization. In addition, interventions in poverty reduction and human development would be supported. An overarching criterion for the strategy will be satisfactory implementation of the ongoing project and program portfolio. With regard to nonlending products, ADB’s economic, thematic, and sector work would support (i) institutional strengthening and capacity building in key areas of the public and private sectors that would have a catalytic role in the furthering of reforms, namely, finance and trade policy, public and corporate governance, and land management; (ii) mitigation of the social costs of reforms through livelihood and human development, targeted poverty reduction, and promotion of gender equity; and (iii) the fostering of regional cooperation and environmental preservation and management.

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