Countries and Regions

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Country Strategy and Program Update 2005–2006: Uzbekistan

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I. Current Development Trends and Issues

A. Recent Political and Social Developments

1. A series of militant attacks took place in Tashkent and Bukhara in March 2004 and two embassies in Tashkent were targeted at end-July 2004. The next elections are due in December 2004. So far, five political parties that have programs similar to the Government's agenda have been registered. Following the elections, the Oliy Majlis (Parliament) will change to a bicameral structure from the current, unicameral system. The lower chamber will be elected by popular vote and will be responsible for drafting legislation, while the upper chamber will be elected by government bodies from the various regions of Uzbekistan. The Government will be responsible only to the upper chamber. The authorities have introduced re-registration requirements for international and local nongovernment organizations. One consequence has been the closure of the Tashkent chapter of the Open Society after the Uzbek authorities turned down the organization's application for re-registration.

2. The Government's Living Standard Strategy (LSS)¹ suggests a declining trend in poverty since 1996 that is attributed to robust economic growth.² The LSS also notes with concern that although child mortality rates are declining, they are still relatively high, and are linked to maternal health status, particularly in the rural population. Further, the LSS recognizes the increase in HIV/AIDS morbidity rates as a serious problem. The United Nations Development Programme (UNDP) Human Development Report 2004 ranks Uzbekistan 107th out of 177 countries in terms of its human development index (101st in the Human Development Report 2003). The Government is cooperating with UNDP in preparing the first Millennium Development Goals (MDGs) baseline study for Uzbekistan.³ Table A1.1 in Appendix 1 indicates the country's progress toward the MDGs and targets.

B. Economic Assessment and Outlook

3. According to official estimates, Uzbekistan's gross domestic product (GDP) growth rate picked up from 4.2% in 2002 to 4.4% in 2003,⁴ driven by a robust growth performance of the agriculture sector (5.9%) and a rebound of the trade sector (7.5%). The budgetary balance swung into a small surplus (0.1% of GDP) from a deficit of 1.9% in 2002, with the lower revenue-to-GDP ratio more than offset by expenditure restraint, modest wage increases, lower energy subsidies, and lower public investment. Monetary policy was very tight in 2003, contributing to the sharp drop in officially reported inflation (3.8%). Alternative sources also cite the unmet demand for cash and the attendant decline in purchasing power as a contributory factor in inflation’s decline. In September 2003, exchange rates were unified and the Government formally accepted the obligations under Article VIII of the International Monetary Fund's Articles of Agreement, effective 15 October 2003. The current account surplus increased significantly in 2003 due to both price and volume surges in export earnings and the more modest recovery of import growth. Foreign direct investment inflows had been slowing down since 1998 but there was a moderate pickup in 2003 due to hydrocarbon-related investment inflows from the Russian Federation. International reserves jumped to $1.6 billion in 2003. The Government's cautious external borrowing policy is reflected in the decline in new public and publicly guaranteed debt. With regard to structural policies, slow overall progress in implementing reforms continued to inhibit private sector development. Positive developments included increases in energy tariffs and reduction in payments due to Uzbekenergo. Marketing reform in the grain subsector has been relatively successful, though progress in the cotton subsector has been slower. Restructuring of shirkats (cooperative farms) into private farms is progressing, but deeper liberalization of the cotton subsector is needed to catalyze private sector participation in processing and exporting cotton. While over 1,000 state enterprises were reported privatized in 2003, these did not include any major enterprises. Increasing informalization of economic activities underscores the need to establish a level playing field for all entities by eliminating formal and informal restrictions against traders and individual entrepreneurs. The LSS indicates that by 2010, annual growth rates are targeted to double, reaching 8.0–8.5%. There is consensus among Uzbekistan's development partners that to achieve such high levels of growth and to realize widespread and visible improvements in the living standards of the population, a substantially reinvigorated structural reform effort is needed.

C. Implications for Country Strategy and Program

4. The Asian Development Bank (ADB) remains committed to being constructively engaged in Uzbekistan, with its assistance tailored to the pace and direction of reforms undertaken by the authorities. Until a credible reform package is in place, any additional prospective program lending would need to be carefully considered. ADB's approach to new investment lending also needs to take into account (i) project impact on poverty reduction, (ii) contribution to regional cooperation, (iii) the conduciveness of the Government's sector policies and level of commitment to reform for achieving project objectives, and (iv) implementation of ongoing projects in the sector under consideration. Uzbekistan's gross national income per capita is at a level⁵ that allows access to the Asian Development Fund (ADF) and its reclassification from a Group C borrower to Group B2 has been approved by the Board of Directors. With reclassification, the applicable limits for project and technical assistance (TA) cost sharing will be more liberal. The access to ADF resources is expected to more strongly orient the program toward poverty reduction initiatives.

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