Regions and Countries

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p. 2 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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II. Implementation of the Country Strategy and Program

A. Poverty Partnership Agreement

7. The Government does not have an official national poverty reduction program. ADB has provided a TA to develop a comprehensive medium-term strategy for improving living standards, built on a World Bank’s living standards assessment.⁹ The resulting strategy is expected to be the basis for subsequent dialogue with the Government to conclude a poverty partnership agreement in 2003.

8. One common concern of the Government and the aid community active in Uzbekistan is the welfare and development of Karakalpakstan, a region with one of the highest rates of poverty incidence in Uzbekistan. In addition to the Western Uzbekistan Rural Water Supply Project,¹⁰ a grant from the Japan Fund for Poverty Reduction (JFPR)¹¹ provides a combination of microcredit, livelihood training, leasing, and water components in partnership with the local government, nongovernment organizations (NGOs), the private sector, local communities, and the United Nations Development Programme (UNDP).¹² At present, the Uzbekistan Resident Mission (URM) is collaborating with the resident offices of the European Bank for Reconstruction and Development (EBRD), UNDP, and the World Bank on the development of Western Uzbekistan (Karakalpakstan and Khorezm).¹³

9. ADB's ongoing operations in Uzbekistan are focused directly on several of the MDGs particularly in the areas of eradication of poverty and hunger, provision of universal primary education, promotion of gender equality and women, and environmental sustainability. ADB's first health project in Uzbekistan, programmed for 2003 approval, will address mother and child health needs in the country, which are key goals of the MDGs.

B. Progress in the Country Strategy and Program Focus Areas

10. Uzbekistan’s growth prospects will depend upon reducing macroeconomic imbalances and staying the course on structural reforms in key sectors. As discussed in the Country Operational Strategy of 2000, the structural challenges facing Uzbekistan include: (i) private sector development, (ii) rural development, (iii) building social sector institutions and social infrastructure, and (iv) physical infrastructure development including regional infrastructure cooperation. In helping Uzbekistan meet these challenges, the 2000 COS adopted the following objectives: (i) managing transition through support for basic reforms and by minimizing the social costs of transition; and (ii) unlocking the potential for growth through regional cooperation, investment in the rural sector, and private sector development. Progress in these areas is discussed in the following sections. A full CSP, proposed to be completed in 2004, will undertake a fresh review of Uzbekistan's development needs and identify priorities for future ADB operations.

(i) Managing the transition

1. Support for Basic Reforms

11. While macroeconomic reforms are ongoing under the SMP, progress is also being made in sectors such as finance, education, and rural development and rural water supply. In finance, a law on savings and credit unions that was passed in April 2002 establishes a legal framework for nonbanking microfinance institutions. In the education sector, a new education structure is being implemented (with target completion date in 2010) that will extend compulsory education from 9 to 12 years and improve the relevance of education through curriculum and textbook development, streamline institutional support, and strengthen protection of vulnerable groups. In the health sector, structural reforms have received assistance from other assistance agencies. In rural water supply, the Government prepared a program in June 2001 to address the immediate concerns of water shortages in the drought-affected areas of Karakalpakstan and Khorezm (footnote 10) with particular focus on sustainable water resource management at the local level and private sector participation.

12. Ongoing ADB projects and TAs have been supporting basic reforms in their respective sectors. The Ak Altin Agriculture Development Project (footnote 8) addresses liberalization of the state procurement system for cotton and wheat, a concern also being monitored by the IMF. The Small and Medium Enterprise (SME) Development Project¹⁴ addresses issues related to convertibility and foreign exchange unification. Two education projects are carrying out curricula and textbook reform at both basic and senior secondary education levels. In addition, nonlending products in education focusing on education finance and monitoring of education reform implementation are paving the way for an education sector development program. Two railway projects are providing support for the restructuring and eventual privatization of the national railway company and a TA for strengthening policy development in the railway sector. The Urban Water Supply Project¹⁵ includes reform of water tariff policy in three cities, and reforms in water conservation and financial management of local water utilities. Likewise, nonlending products are laying the groundwork for basic reforms in finance and corporate governance, pension, insurance, and rural finance, as well as for strengthening the Government's research and analytical capability for structural reforms. The CSPU for 2003-2005 continues this support for basic reforms in the sectors of education, rural finance, water resource management, corporate governance and finance, enterprise restructuring, energy, and social security.

13. Governance reform is a key component of further reform, and good governance underpins success in the ongoing transformation process. The Government has emphasized its concern with good governance. Progress achieved includes improvements in public financial management. ADB assistance in this area has focused on the areas of banking, pension reform, and rural enterprises. In support of governance reform, the CSPU contemplates a program loan for corporate governance and enterprise reform in 2004 and TAs that will review the trade and customs sector and the reform and restructuring of selected enterprises. A governance assessment to be completed by 2003 will serve as the basis for preparing an action plan for future assistance in governance.

2. Minimizing the Social Costs of Transition

14. Apart from the ongoing projects that include two projects each in SME development, education, and water supply and one agriculture project, the CSPU includes improvement of mother and child health, two more SME credit lines, assistance to develop a social fund and an employment fund to mitigate the negative effects of corporate governance and enterprise reforms, and develop nonstate social security system. Assistance will be sought from a JFPR grant to provide livelihood opportunities for the retrenched poor. In addition, TA has been programmed to improve the land management system in urban areas, and strengthen a nationwide NGO network of business women's associations.

(ii) Unlocking the Potential for Economic Growth

15. Regional Cooperation. Since the events of 11 September 2001, ADB's regional cooperation activities have gathered further momentum. Important developments include the establishment of the overall institutional framework to guide the ADB-supported regional economic cooperation program. An important step was the convening of the first ministerial conference on economic cooperation in Central Asia in March 2002. As a follow up, ADB organized a customs coordination committee meeting on 20-21 August 2002 to approve a common action plan for customs modernization and cooperation. As the most populous country in Central Asia, Uzbekistan is a key partner in these activities. Accordingly, the CSPU includes regional projects in power transmission modernization, customs modernization and cooperation, and gas transmission improvement. These projects focus on improvements to resolve key regional development constraints in the area of energy and trade facilitation. Also, a study on the Amu Darya River basin development will be undertaken in 2003 to examine issues relating to efficient and environmentally sustainable water resources management in the river basin. Ongoing regional cooperation projects include a JFPR-funded grant for improving nutrition of poor women and children in Asian countries in transition,¹⁶ and TAs in education¹⁷ and audit training.¹⁸ Uzbekistan has offered to host the second ministerial conference on economic cooperation in Central Asia in 2003.

16. Investment in the Rural Sector. Agriculture and rural development have been a focus of ADB operation. Ongoing projects include an SME credit line directed towards agriculture-related and rural enterprises, two investment loans in agriculture and potable water supply in rural areas, and two ongoing education projects for improvement of rural schools. The CSPU includes a microfinance development project that will establish rural savings and credit unions, a project that will improve farmers' incomes through grain productivity improvement and policy reforms in grain production and marketing, and two water resources management projects that would improve the livelihood of rural communities through better and more efficient irrigation systems.

17. Private Sector Development. While the Government's privatization program has made progress in the past two years, overall it is seen to be below the country's privatization potential. Prospective foreign investors are reluctant to invest due to a number of obstacles, such as the lack of current account convertibility, the unwillingness to yield a majority of equity in most firms to foreign investors, and continued state interference with investment decisions. The climate for private sector development would be improved if the Government adequately addresses these obstacles.

18. While ADB has made no equity investments in the private sector so far,¹⁹ two ongoing SME credit lines (for a total of $100 million) are providing direct support to the private sector, and the textbook project provided a credit line of $20 million to improve the capacity of private local publishers and printers. Also, Loan No. 1631-UZB and TA No. 3068-UZB: Institutional Strengthening of Uzbekistan Temir Yullari²⁰ served as a catalyst for the ongoing privatization of the existing national railway company. The CSPU extends ADB's assistance further to the corporate governance and enterprise sectors and includes two more SME credit lines and a microfinance development project. ADB's TAs have a catalytic role to play in supporting the private sector, e.g., review the trade and customs sector, strengthen the Government's antimonopoly committee, pilot the reform and restructuring of selected enterprises, and develop the capital market and a nonstate social security system. A private sector assessment, proposed to be launched in 2003, will serve as the basis for ADB's private sector development strategy in Uzbekistan.

C. Highlights in Coordination of External Funding and Partnership Agreements

19. Development agencies active in Uzbekistan consult each other regularly, particularly with respect to coordination on policy dialogue and specific sector strategies.²¹ In the aftermath of the events of 11 September 2001, several aid consultation meetings on Central Asia were held, including informal aid consultations held in Berlin on 1 March 2002 (cosponsored by UNDP and the government of Germany) and in Manila on 26 March (among ADB, EBRD, UNDP, and the World Bank). In the case of Uzbekistan, these meetings have resulted in stronger country-level consultation between URM and the resident offices of EBRD, UNDP, and the World Bank in Tashkent. Practical steps include further improving aid coordination and mutually agreed goals and processes.²² Cofinancing is actively being sought especially with EBRD and other partners in the energy and water supply sectors. Meanwhile, the World Bank has established a regional office in Almaty to strengthen its capacity to respond operationally to the needs of the region and for closer coordination of its resident offices. The Government also convened a brainstorming roundtable with the World Bank, IMF, EBRD, and ADB to bridge the perception gap in terms of reform content and process between the Government and the IFIs and align more closely their respective goals and expectations. While the roundtable has not resulted in concrete agreements, it has provided the opportunity to discuss important issues more frankly, and contributed to building a working relationship between the Government and the IFIs. Further roundtables are planned with the aim of mapping out more clearly the Government's path to reforms and define concrete roles for each IFI. The development coordination matrix is in Appendix 1, Table A1.5.

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