Countries and Regions

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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 Assistance Levels

Country Strategy and Program Update 2004-2006: Uzbekistan

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II. Implementation of the Country Strategy and Program

A. Progress Under the Poverty Partnership Agreement

5. The Government is undertaking the preparation of a Comprehensive Medium-Term Strategy for Improving the Living Standards of the People of Uzbekistan with ADB technical assistance (TA). ADB and the World Bank have agreed to work closely in preparing the strategy. The recently completed LSA of the World Bank will be used as an input in formulating the strategy. In turn, the living standards improvement strategy will serve as an input in preparing the interim poverty reduction strategy paper (I-PRSP).⁴ A high level forum is planned for the first quarter of 2004, and the poverty partnership agreement (PPA) between the Government and ADB is expected to be signed in the third quarter of 2004.

B. Progress in the Country Strategy and Program Focus Areas

1. Managing the Transition

6. In helping Uzbekistan advance the transition agenda, ADB's country strategy⁵ has been to focus on developing institutions and improving capacity for governance, mitigating the social costs of transition and human development, and unlocking the potential for growth through regional cooperation and trade, rural reforms, and support for the private sector. Progress in these areas is discussed below. A full Country Strategy and Program (CSP), proposed to be completed in 2004, will undertake a fresh review of Uzbekistan's development needs and identify priorities for future ADB operations.

a. Institutional Development

7. Institutional development, which is at the heart of the transition process, depends critically on parallel reforms in public sector management and in the environment for private sector development. While institutional development features in most ADB loan and TA projects, it is the main focus of ADB's support for a set of related interventions aimed at improving the business environment: (i) establishing the institutional foundations for effective corporate governance and enterprise restructuring, (ii) developing capital markets that reward good corporate governance, and (iii) reforming the institutional framework for competition policy to foster new business entry and contestability. The Government has issued a number of decrees relating to enterprise ownership and corporate governance that it considers key to the development of the private sector. A recent Presidential decree⁶ (elements of which drew upon ADB TA) aims at accelerated transformation of enterprise ownership and strengthened corporate governance. While the decree is a significant step, the Government still needs to improve the environment for private sector development, particularly the regulatory environment. Progress on the case-by-case privatization program remains slow. The legal framework needs to be strengthened and reliance on decrees for managing public policy needs to be reinforced with implementation on the ground.

8. The above assessment indicates that, to ensure the efficacy and sustainability of its institutional development efforts, ADB will need to develop and implement a program for supporting institutional reform that is grounded in a realistic assessment of the political economy and governance issues in Uzbekistan. A governance assessment is planned for 2004. Subject to the results of this assessment, it is envisaged that future ADB assistance will complement and build on earlier and ongoing support for corporate governance and enterprise reform. Processing of related TAs—one on the development of a capital market and another on the strengthening of the State Antimonopoly Commission—is continuing. The proposed corporate governance program loan will be designed to meet part of the costs of enterprise restructuring. However, processing of the program loan will depend on progress with macroeconomic and structural reforms as indicated in paragraph 5.

b. The Financial Sector

9. The Government recently announced a number of steps for reducing state control over the banking sector: abolition of the so-called cash plan system and phaseout of directed lending. Further, Government-guaranteed loans are on the decline. The Central Bank of Uzbekistan (CBU) has issued 22 new regulations for banking supervision in the past 2 years and has drafted two new laws on deposit insurance and on credit unions, respectively, that have since been enacted.⁷ A draft decree on nonjudicial foreclosure of collateral has been prepared, together with recommended amendments to the Civil Code. CBU has also drafted a Banking Secrecy Law as well as amendments to the provisions of the Banking Law concerning bankruptcy.

2. Minimizing the Social Costs of Transition and Increasing Human Development⁸

10. Uzbekistan faces serious challenges in providing social protection as part of the economic restructuring process. Although the registered unemployment rate is less than 1% in recent years, the actual unemployment rate is estimated to be 4–6% according to the Ministry of Labor (MOL). Restructuring the agricultural enterprises since 1998 has resulted in retrenchment of more than 400,000 farm employees in rural areas. MOL reported 314,000 lost jobs in 2002 due to bankruptcy and restructuring of enterprises in urban areas. The number of people receiving unemployment assistance is expected to double in 2003. The pension system is a pay-as-you-go scheme and there is no plan yet to convert it into a funded scheme. The magnitude of outstanding social security liabilities stemming from enterprise restructuring, a factor that can pose significant risks to the Government’s financial position, has to be further assessed.

11. Uzbekistan is moving ahead with significant human development sector reforms. The main objective is to align the structure, finance, and delivery of services with those of a market-oriented economy, while retaining the equity and access of the pretransition system. Commendably, these reform efforts reflect the Government's own initiatives, with ADB and other external partners playing a supporting role to help effectively implement the reforms in a pro-poor and sustainable manner.

a. Education

12. ADB support has aimed to improve the quality and relevance of education as well as to enhance national capacities to manage sector reforms. More recently, the focus has been on helping the government develop a more holistic sector policy framework and to address sectorwide efficiency issues. There has been progress in the area of curriculum and textbook development, supported in part by the Basic Education Textbook Development (BETD) Project.⁹ However, the persisting regional disparities in school attendance reported in the LSA indicate the need for continued efforts to raise attendance and the quality of basic education. The proposed Second Textbook Development Project will provide critical investment in basic education with a geographic focus on poor areas. Processing this Project will depend on the resolution of outstanding issues in the BETD project.

b. Urban Development and Social Infrastructure¹⁰

13. ADB's involvement in the water supply and sanitation sector aims to expand and upgrade infrastructure, support institutional reform for decentralizing service delivery to local governments, and increase community participation in the operation and maintenance of systems. Implementation of the two approved water supply projects has been less than satisfactory but more recently, there has been some progress on the Urban Water Supply Project.¹¹ New lending in the sector will depend on further progress in implementing the current portfolio and in realizing project objectives. ¹² ADB will continue to maintain policy dialogue with the Government, particularly in the areas of institutional reform, tariff restructuring, financial management, and community participation.

c. Health

14. ADB's new involvement in the health sector responds to the priority accorded to addressing woman and child health (WCH) concerns in the Government's health care reform program. The WCH project can contribute to progress toward key health-related MDGs by addressing morbidity and mortality issues related to WCH. ADB's project will have a geographic and functional split with the World Bank's Health II project, with core components of both projects to concentrate on WCH through the primary health care system. In addition, ADB's proposed WCH project will address the strengthening of first and second referral networks for WCH and hematology services, and ADB will take the lead in WCH-related health sector reform initiatives.

3. Unlocking the Potential for Future Growth

a. Encouraging Regional Cooperation and Trade

15. Transportation. ADB's assistance to the transport sector has focused on physical rehabilitation, institutional reform of sector institutions, and developing regional linkages. The performance of the transport sector projects (one for the road sector¹³ and two for the railway sector¹⁴) has been mixed.¹⁵ To address the near- and long-term issues from a regional perspective, ADB recently prepared a revised regional transport sector strategy from which priorities for regional rail links are expected to emerge.¹⁶ For its part, the Government is giving the highest priority to developing Uzbekistan as a transit country in the region and is actively pursuing transport links from Uzbekistan through Afghanistan to Iran. The Government also supports a regional road project linking Uzbekistan with the Kyrgyz Republic and the People's Republic of China, which is proposed by ADB. Looking ahead, ADB will be extending further lending support for railway modernization and strengthening linkage with Afghanistan (Regional Railways Rehabilitation Project). In addition to promoting regional linkages, ADB will focus future assistance on furthering institutional reform of public sector agencies and establishing the policy and institutional framework for private participation in the transport infrastructure.

16. Energy. The key issues in the energy sector include the potential for expanding regional power trade; addressing inefficiencies in energy generation, distribution, and use; and adjusting energy pricing to ensure cost recovery. ADB's assistance to the energy sector has focused on facilitating the development of a regional power market, improving energy efficiency and conservation, and promoting institution building and policy reform. In December 2002, ADB approved a TA for Energy Needs Assessment¹⁷ with emphasis on improving the efficiency of energy utilization for possible ADB assistance. ADB is also providing support for harnessing renewable energy sources through another TA.¹⁸ The Energy Efficiency and Renewable Energy Project planned for 2005 is expected to have significant environmental benefits and improve access to a reliable power supply in rural areas.¹⁹ ADB has begun implementing a regional TA²⁰ to identify suitable projects for improving regional gas transmission among the Central Asian republics. A loan to support such projects is programmed for 2004. Satisfactory progress in implementing the regional power transmission project²¹ that was approved in December 2002 could set the stage for further assistance in 2006 for regional power development.

17. Trade. Regional trade is of paramount importance to the interdependent and landlocked economies of Central Asia including Uzbekistan. The key obstacles to trade facilitation that Uzbekistan must further address include transportation bottlenecks, remaining distortions in the foreign trade and exchange regime, and cumbersome customs procedures. The recent restructuring of the Ministry of Foreign Economic Relations focusing primarily on foreign trade regulation to a specialized agency focusing on trade facilitation is a positive step. The Government has also stepped up efforts to gain World Trade Organization (WTO) accession. The Uzbekistan Customs Authority actively participates in regional efforts to enhance customs cooperation and simplification of customs procedures. Looking ahead, ADB will continue to dialogue with the Government to improve the predictability and transparency of the regulatory system and to encourage Uzbekistan and other regional countries to adopt a coherent strategy to harmonize their trade regimes.

b. Developing the Rural Sector

18. Sustained pursuit of policy and institutional reforms in the rural sector is critical for accelerating growth and improving living standards. The agenda for rural reforms is substantial, including farm restructuring, reform of the state procurement system for wheat and cotton, greater private sector participation in input and output market arrangements, strengthening rural finance, modernizing the agricultural research system, upgrading rural infrastructure, and managing natural resources sustainably. ADB assistance to agriculture has focused on (i) pilot reforms to demonstrate the utility of sector reforms and selected investments, (ii) support for rural financial institutions, and (iii) direct support to agriculture-related private sector activities. In recent months, the Government has taken a number of measures that are indicative of its resolve to pursue greater market orientation of the agriculture sector. Progress under the ADB-supported Ak Altin Agriculture Development Project²² has been good. Effective from the 2003 cropping season, State control of the cropping pattern and obligatory wheat and cotton sales to the State are being reduced in the pilot district of Ak Altin. The changes have been accompanied by the introduction of higher procurement prices nationwide for cotton and wheat, discontinuation of joint responsibility of production units to meet state procurement targets, and acceleration of the farm privatization process. The Government has affirmed that the private sector's role in cotton processing is increasing. Further efforts are needed to stimulate the private sector's participation in cotton processing and exporting. The recent Presidential decree on Deepening Reforms in Agriculture aims to consolidate and further the reform process in agriculture. While the decree is a positive signal, it is as yet only a blueprint statement that will need to be backed up with a detailed implementation plan. The plan in turn will require institutional capacity building, particularly at the local level. Possible ADB support in this area could be considered. To address the problem of underdeveloped rural financial institutions, ADB is providing support for developing savings and credit unions (SCUs) that can provide financial services in semi-urban and rural areas. By selected upgrading of the agricultural research system, the Grain Productivity Improvement Project will help meet farmers' need for high-yield wheat varieties that respond to local conditions. The Government has accorded high priority to improvement in rural infrastructure, particularly hydropower and irrigation. An ADB-supported feasibility study for rehabilitating the Amu Zhang irrigation scheme²³ is ongoing and is expected to lead to an investment project at the end of 2003 if all relevant issues can be satisfactorily addressed within this time frame. Uzbekistan is focusing on rationalizing use of water resources to address the desertification of the Aral Sea. These priority issues relating to natural resources and environmental management will be assessed in the Country Environmental Analysis planned for the third quarter of 2004.

c. Supporting the Private Sector

19. ADB's strategy envisages support for the private sector through both its public sector window and its Private Sector Operations Department (PSOD). Public sector operations support policy reform with complementary financial assistance to enhance the competitiveness of the domestic private sector, particularly small and medium enterprises (SMEs). The Rural Enterprise Project,²⁴ ADB's first SME credit line, has been completed. Progress under the Small and Medium Enterprise Development, the second credit line, has been slow. Since June 2002, policy reversals have (i) worked against the interests of SMEs, and (ii) created other impediments not anticipated by policy dialogue for the second SME credit line.²⁵ A lesson learned is that successful implementation of SME credit lines is predicated on a conducive policy environment and the effective absorption of the funds by enterprises. ADB's public sector operations also aim to promote private participation in infrastructure provision and to this end, support has been provided to commercialize Uzbekenergo and make it financially sustainable through tariff reform. Through technical assistance, ADB, in collaboration with EBRD and International Finance Corporation (IFC), is providing pre privatization support by strengthening the management information system (MIS) for UzbekTelecom, a potential candidate for ADB equity investment. Uzbek authorities have signed the Framework Agreement for Private Sector Operations of ADB, paving the way for PSOD to pursue transactions that will catalyze private investment. Potential activities that are being explored include collaboration with EBRD on the Trade Facilitation Program. A private sector assessment is planned for 2004 to identify priority issues in developing the private sector in Uzbekistan.

C. Highlights in Coordination of External Funding and Partnership Arrangements

20. ADB has been closely coordinating with other multilateral and bilateral development agencies on policy dialogue and sector activities. The process has been facilitated with the strengthening of the staff complement of the Uzbekistan Resident Mission (URM). Coordination with the World Bank on formulating the Living Standards Improvement Strategy has been intensified. ADB is also processing the Woman and Child Health Project in parallel with the World Bank's Health II project with the two institutions agreeing to have a common project implementation unit (PIU) for their respective projects. In cooperation with EBRD and IFC, ADB is providing TA for developing a telecommunications regulatory framework, MIS, and business plan. Once an adequate enabling framework is in place, the three international financial institutions will provide a pre privatization loan. ADB is also assisting the Regional Power Transmission Project in cooperation with EBRD. In conjunction with its lending program, ADB will continue to actively pursue cofinancing, mainly from official sources, particularly with concessional loan cofinanciers such as Kreditanstalt fur Wiederauflbau (KfW), Japan Bank for International Cooperation (JBIC), and Islamic Development Bank, and bilateral grant cofinancing partners.