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 2005–2006: Uzbekistan

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Implementation of the Country Strategy and Program

A. Progress on Poverty Reduction

5. The LSS, prepared with TA⁶ from ADB, was discussed at a roundtable conference held in mid-May 2004. Several of Uzbekistan's development partners, while commending the authorities for producing the strategy, noted that it required more work on prioritization of goals and measures, on selection of monitorable indicators with particular regard to the MDGs, and on the resource implications of the strategy. It is expected that the strategy will be further developed into an interim poverty reduction strategy paper that could provide the basis for future development assistance. Preparation of the new country strategy and program (CSP) needs to be coordinated with the Government's strategy formulation process. For this reason, a CSP Update (CSPU) is being presented to the ADB Management and Board in September 2004. In the meantime, analytical work for the full CSP is proceeding and the CSP is expected to be presented to the Board in 2005.

B. Progress in the Country Strategy and Program Focus Areas

1. Managing the Transition

6. In the transition to a market economy, Uzbekistan's policy makers view the state as continuing to play a leading role in initiating reforms across all sectors of the economy. At the same time, they have expressed commitment to (i) promoting private sector development by strengthening the legal and institutional framework, and (ii) allowing greater involvement of nongovernmental institutions in the implementation of the national strategy for improving living standards.

a. Institutional Development and Governance

7. ADB's strategy⁷ for institutional development and governance envisages that assistance for reform in this area will be provided for (i) corporate governance initiatives that can assist small and medium enterprises (SMEs), (ii) measures to reform the banking system, (iii) antimonopoly and competition policies, and (iv) decentralization measures affecting local government. Institutional development components are expected to be embedded in projects at the sector level.

8. ADB's assistance has had some impact in strengthening the regulatory framework governing private sector activities. Under the TA on Enterprise Restructuring and Corporate Governance,⁸ analytical work on the Uzbek legal system, with focus on insolvency and bankruptcy proceedings, has contributed to improved implementation of the Bankruptcy Law. In addition, capacity-building assistance is being provided to key government agencies concerned with the enterprise restructuring process. At the Government's request, ADB TA is also being provided to strengthen the policy and institutional framework for foreign direct investment, including legal protection for foreign investments.⁹ The Government has initiated some pilot decentralization programs which have been largely launched through Presidential decrees.

9. ADB was right to have identified institutional development as a central element in its strategy but its activities to support such development have not been focused, lacking the underpinnings of adequate sector work. More important, the monitoring measures identified were too broad to establish linkages with ADB interventions. A governance assessment to be completed in the fourth quarter of 2004 will take into consideration the evolving national agenda for improving governance, which includes: (i) prioritized reduction in the size of the civil service;¹⁰ (ii) streamlining of the powers and functions of central government bodies; (iii) decentralization, especially in the delivery of social services; and (iv) public finance management through tax and budget reform. The governance assessment is also expected to examine the impact of corruption on living standards.¹¹ Based on its analysis of the Government's priorities, the governance assessment will identify a menu of options for assistance with a focus on governance improvements that benefit the poor.

b. The Financial Sector

10. The legal and institutional framework in Uzbekistan's financial sector is relatively strong. However, public trust in the system has been undermined by extensive state control over banking sector operations. Examples of such control include discrimination between cash and noncash transactions, restrictions on cash withdrawals by individuals and legal entities from bank accounts, mandatory deposit of cash receipts in bank accounts by enterprises, and functions performed by banks that are inappropriate for a financial intermediary, e.g., tax collection. Reforms initiated recently include the unification of the correspondent accounts for banks and granting banks the right to fully access their correspondent accounts at the Central Bank of Uzbekistan. The authorities' reform agenda includes streamlining the operations of commercial banks and eliminating inappropriate functions.

11. ADB's strategy for assistance in financial sector development focuses on unblocking savings, stimulating investment, and reducing distortions. This strategy has been moderately successful. ADB has provided assistance for developing a nationwide savings and credit union system aimed at providing a range of financial services, including savings mobilization in semiurban and rural areas.¹² TA has also been provided for capital market development¹³ focused on institutional strengthening of the Center on Coordination Functioning of the Securities Market, the capital markets regulator.

12. The LSS aims to continue banking sector liberalization, focusing on strengthening the viability of commercial banks and increasing their independence. A holistic financial sector development plan is needed to forge the linkage with pro-poor growth, one that pays due regard to supply- and demand-side considerations. This entails, on the supply side, building bank and nonbank financial institutions and financial infrastructure, and developing financial instruments and financial markets; and on the demand side, complementary efforts to enhance the ability of enterprises to borrow, particularly the private SMEs.

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

13. Uzbekistan's strategy of gradual reform with emphasis on maintaining social stability is reflected in the sizable share of public spending on the social sector and in the still modest scale of labor displacement due to the slow pace of enterprise restructuring. However, there is increasing concern about maintaining the level and quality of education and health services for the poor. ADB's continuing assistance for improving basic education and water supply services and its project for improving the health of women and children are consistent with its strategy of focusing on projects that have a significant impact on poverty reduction and that contribute to the achievement of the MDGs.

a. Education

14. The main challenges currently confronting the education sector include (i) improving the education system's content and methods; and (ii) ensuring equitable resource allocation between subsectors, with particular attention to basic education. A Presidential Decree on Measures on Preparation of the School Education Development Program for 2004–2009 was recently issued. The initiative is aimed at revamping the basic education system with a particular focus on reducing rural-urban disparities in access to basic education. The financial implications of the proposed program are being worked out.

15. ADB assistance has aimed at improving educational quality through investment project interventions focusing on curriculum reform, textbook development and availability, and teacher education. TA has aimed to develop government capacity to design, manage, and monitor education reforms. The Education Sector Development Program¹⁴ aims to improve overall sector efficiency and pro-poor budget restructuring. The Basic Education Textbook Development Project,¹⁵ which is nearing completion, is a successful example of ADB’s assistance program in Uzbekistan. In particular, its policy development impact (textbook rental scheme, competitive procurement practices, and improved technical specification for textbooks) has exceeded initial expectations. The Senior Secondary Education Project¹⁶ under implementation is assisting the Government in introducing a new senior secondary education system in 45 pilot institutions with attention focused on external efficiency (i.e., linkages and relevance of the curriculum to students' learning needs and the job market). The Second Textbook Development Project circulated to the Board will build on the achievements of the Basic Education Textbook Development Project by (i) scaling up at the national level a textbook rental scheme to improve affordability of basic education, and (ii) supporting a comprehensive curriculum reform process. The Science and ICT in Basic Education Project in the 2006 pipeline (standby for 2005) will continue to focus assistance on basic education, given the strong impact on poverty reduction through such a focus.

b. Urban Development and Social Infrastructure

16. ADB's interventions in support of social infrastructure development have aimed to (i) promote a national focus on water sector reform, (ii) develop integrated management of water resources, improve and expand the delivery of water services, (iii) foster the conservation of water and increase system efficiencies, and (iv) improve sector governance. Implementation performance of two ongoing water supply projects has now improved. To address the urgent need to strengthen the rural water supply system, a loan assistance in 2005 is proposed for the Kashkadarya and Navoi Rural Water Supply Project. These two provinces (oblasts) were selected because half of the villages in these provinces are without safe and reliable water supply and sanitation services.

c. Health

17. The Government has initiated major reforms in the health sector since 1998 but there is scope for making public spending on health more pro-poor. Further, Uzbekistan may not achieve the MDGs for reducing maternal, infant, and child mortality. To help address this challenge, the Woman and Child Health Development Project (ADB's first intervention in the health sector in Uzbekistan), was recently approved by the Board. The project will help improve maternal and child health services in the rural health care delivery system; strengthen finance, information, and management systems; and build a blood safety program.

3. Unlocking the Potential for Future Growth

a. Encouraging Regional Cooperation and Trade

18. Energy. The challenges facing Uzbekistan's energy sector include (i) increasing energy efficiency and reducing operational losses, (ii) raising tariffs to cost-recovery levels and enforcing payment discipline, and (iii) adopting regional least-cost solutions to energy production and distribution. ADB's past strategy for assistance in the energy sector focused on realizing the full potential of regional energy trade. To this end, the Regional Power Transmission Modernization Project¹⁷ for Uzbekistan and Tajikistan was approved in 2002. However, the project has encountered delays while Uzbekistan has reconsidered the key Power Trade Relations Agreement with Tajikistan. Uzbekistan has recently reconfirmed its commitment to the project and it is hoped that implementation will now proceed. A regional TA for identifying gas transmission investment will be completed in 2004.

19. While regional energy development is likely to remain the key theme for ADB's future operations in Central Asia, it is also important to focus on increasing energy efficiency and utilization of renewable energy resources within Uzbekistan. ADB's future interventions in the country’s energy sector are therefore likely to take a two-pronged approach for new investments: (i) regional trade-related projects to increase energy flow between Uzbekistan and its neighbors, either for in-country consumption or as a conduit to markets beyond; and (ii) projects within the country to improve efficiency and develop renewable energy sources. The proposed Regional Gas Transmission Project (standby 2006) will serve to contribute both to regional trade and to increase energy efficiency. Uzbekistan already supplies natural gas to southern Kazakhstan, Kyrgyz Republic, and Tajikistan, and the proposed investments in the gas transportation systems will be based on gas sales contracts. The finalization of the Power Trade Relations Agreement will open other opportunities to strengthen grid-based power supply, including transmission lines and clean hydropower generation.

20. ADB is providing TAs to assess energy needs and off-grid energy development with particular emphasis on meeting the needs of the poor. This could lead to possible loan assistance for increasing energy distribution efficiency and supply reliability. In addition, capacity-building assistance will focus on the areas of accounting (to improve governance and quality of financial information), tariff reform (to improve cost recovery and sustainability), improved metering and leakage monitoring (to reduce losses), and economic regulation (to facilitate Uzbekistan's participation in the Central Asian Regulators' Network and in energy sector reform).

21. Transport. Given Uzbekistan's double-landlocked position, ADB's assistance in the development of various transport modes is essential. The first Railway Rehabilitation Project,¹⁸ which experienced delays due to procurement issues, is nearing completion. The main accomplishments under the project have been to increase operational efficiency on the main Tashkent–Samarkand line and to encourage further modernization and reform in the sector. The Railway Modernization Project¹⁹ is being implemented satisfactorily. ADB assistance has helped further institutional reform in the sector. As agreed under loans 1631 and 1773, Uzbekistan’s Railway Company has made good progress in the divestment of educational institutions and of health care and recreational facilities from its core activities.

22. Preparation of a Regional Railway Development Project for the rehabilitation of the Marakand–Karshi line has begun. This line connects to the planned Japan Bank for International Cooperation-financed project for new railway line construction from Tashguzar– Baisun–Kumkurgan to the railway terminal at Termez in Afghanistan. This rail link will provide a shorter and more direct route from Uzbekistan, Kazakhstan, and Tajikistan to Afghanistan and to the ports in Iran. The proposed project is consistent with ADB's assistance strategy of furthering regional cooperation through infrastructure rehabilitation and development.²⁰

b. Developing the Rural Sector

23. Around 70% of Uzbekistan's poor live in rural areas. Contributory factors to depressed rural incomes have included heavy state involvement, particularly in the cotton subsector, which has undermined farmers' incentives and engendered high dependence on the state for input supply, credit, processing, and marketing. ADB's interventions in the rural sector have focused on (i) demonstrating the benefit of reforms and rehabilitation of irrigation and water infrastructure in selected pilot areas; (ii) fostering private sector and farmer participation in farm support services, extension, and agro-processing; (iii) developing rural financial services; and (iv) funding agricultural research. Implementation of the ADB-supported Ak Altin Agriculture Development Project²¹ has largely been satisfactory. In the pilot district of Ak Altin, obligatory cotton sales to the state have been reduced since 2003.²² As agreed with ADB and partner development institutions, state purchase prices for cotton and wheat have been increased nationwide. Large state and cooperative farms in Ak Altin have been fully converted to 845 private farms. A new Cabinet of Ministers' resolution (Resolution 153 of 30 March 2004) delineates procedures for implementing reforms relating to the cotton and wheat subsectors as well as to rehabilitation of irrigation infrastructure in the pilot districts included in ADB's Ak Altin Agriculture Development Project and in the World Bank's Rural Enterprise Support Project. Implementation on the ground, including widespread dissemination of the reforms being introduced is, however, needed. Under the Grain Productivity Improvement²³ and Amu Zang Water Resources Development²⁴ projects approved in 2003, additional reforms will be implemented beginning in 2005 to liberalize the procurement of wheat seeds and improve cost recovery in irrigation services.

24. Land degradation has contributed to declining agricultural productivity and in turn has adversely affected rural living standards. A feasibility study for a Land Improvement Project²⁵ is ongoing and is expected to lead to an investment loan in 2005. The proposed project aims to help address the problem of degradation of farmlands due to secondary salinization and waterlogging in selected provinces. The project will also support the rehabilitation of on-farm drainage infrastructure and improvement in the efficiency of water use, thereby enhancing farm productivity and incomes in areas where rural poverty is particularly acute. The proposed investments will be complemented by advances in policy reforms, primarily to rationalize water utilization and enhance cost recovery in irrigation and drainage services.

c. Supporting the Private Sector

25. ADB's strategy for private sector development in Uzbekistan aims at SME development, enterprise restructuring, postprivatization rehabilitation, and TA for small enterprise development, including business planning and accounting. The results so far in these proposed areas of intervention have been mixed. The subprojects financed under the second SME Development Project²⁶ appear to be viable but the financial performance of two of the three banks in terms of profitability has deteriorated. The Small and Microfinance Development Project,²⁷ approved in December 2002, had experienced start-up delays, but with the loan now declared effective, implementation performance is expected to pick up. The environment facing SMEs remains challenging: while the tax burden on SMEs has been significantly reduced, other high formal sector transactions costs are driving enterprises to the informal sector. There is a need for creating a level playing field for all enterprises. A recent study has noted that lack of access to local authorities by some firms—and privileged access by others—results in an uneven playing field for the private sector.²⁸ Progress in the privatization of medium and large enterprises has been slow. The Government has recently announced tenders for several largescale enterprises and closure on one transaction is expected soon. Overall, the unfinished agenda for private sector development remains significant. Given the disbursement trends under the Second SME Development Project and the overall policy environment for SMEs, the Third SME Development Project has now been moved to the 2006 pipeline. The Private Sector Assessment for Uzbekistan, expected to be finalized in the fourth quarter of 2004, will provide a framework to guide ADB's future assistance for private sector development.

C. Highlights in Coordination of External Funding and Partnership Arrangements

26. ADB has been closely coordinating with other multilateral and bilateral development agencies on policy dialogue and sector activities. Notably, ADB provided substantial inputs into the preparation of UNDP's report on the MDGs²⁹ with a view to ensuring that the MDGs are appropriately incorporated in the LSS. Further, ADB has been coordinating with the World Bank in helping the Government build on the LSS. The Uzbekistan Resident Mission (URM) has played an important role in policy dialogue and partner coordination. In conjunction with its lending program, ADB will continue to actively pursue cofinancing, mainly from official sources, particularly with concessional loan cofinanciers.

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