As part of the International Monetary Fund’s revised July report for Uzbekistan, Daryo’s correspondent interviewed IMF Resident Representative in Uzbekistan, Koba Gvenetadze. The discussion focused on the expected outcomes of Uzbekistan’s economic reforms, particularly those targeting inflation reduction and the management of the country’s external debt, that stood at 61.3% of GDP ($53bn) in 2023.
Management of External Debt:
The report mentions that starting next year, external debt will decrease in relation to GDP. Can you provide more details on the specific measures the government of Uzbekistan plans to implement to ensure this reduction in external debt? Additionally, how does the IMF assess the risks associated with the current high levels of external debt?
Uzbekistan has undertaken far-reaching structural reforms over the past seven years to liberalize its economy and bolster growth, which also required borrowing from abroad to finance needed investments. While external debt has risen in dollar terms, it has remained broadly stable as a percentage of GDP since 2020, as nominal GDP grew rapidly. By end-2023, Uzbekistan’s total external debt stood at 61.3% of GDP ($53bn)—of which 34.3% of GDP were external public and publicly guaranteed (PPG) ($29.6bn). Total external debt is projected to decline as a share of GDP starting this year and over the medium term, helped by fiscal consolidation and external current account deficit moderation.
The government employs caps on the annual fiscal deficit and on new external and domestic borrowing to address debt-related risks. It has enacted a debt law that limits PPG debt to 60% of GDP and requires corrective action at 50%. We encourage the government to continue to prudently manage external and domestic borrowing as well as fiscal risks from state-owned enterprises and public-private partnerships. We also recommend finalizing and publishing the Medium-Term Debt Strategy.
The Debt Sustainability Analysis (DSA) carried out in our recently published staff report shows that Uzbekistan is at low risk of external and public debt distress. The analysis highlights several mitigating factors, including substantial foreign exchange reserves,prudent government policies, and low rollover risk, as public and publicly guaranteed external borrowing is mostly multilateral and bilateral at long maturities with relatively low interest rates. The DSA suggests that even under various stress scenarios, debt indicators would remain below critical thresholds, with the most significant risks potentially arising from the realization of contingent liabilities or lower exports.
Inflation Control and Policy Measures:
According to the report, inflation will temporarily rise to 11.5% by the end of 2024 due to increased regulated energy prices. Can you provide more detailed information on the proposed timeline for stabilizing inflation and what additional monetary policy measures the IMF recommends for Uzbekistan to achieve the Central Bank’s inflation target by 2027?
We project inflation to rise temporarily to 11.5% year-over-year by end-2024 and stand at 8.7% at end-2025, following a welcome administered energy price increase this year and planned increase next year. With monetary policy maintaining a high real policy rate, and as tight fiscal and macroprudential policies continue and supportive structural reforms advance, we expect inflation to gradually decline to the central bank’s 5% target by end-2027. The gradual pace reflects factoring in theimpact of the necessary increases in energy prices and inflation inertia.
The Central Bank of Uzbekistan has managed to lower inflation and should remain focused on reducing it further to the target. It should continue to carefully monitor developments, remain data-driven, and stand ready to increase its policy rate if the energy price reform results in broader price pressures and raises inflation expectations. Equally important is the central bank’s continued communication of monetary policy decisions, which will help anchor inflation expectations. In addition, as part of its overarching reforms, the central bank should continue with its efforts to further enhance monetary policy transmission.
Impact of Structural Reforms:
Ongoing structural reforms in Uzbekistan, particularly in energy pricing and privatization, are highlighted as significant factors in the positive economic outlook. Can you discuss the potential short-term risks these reforms may pose and how the IMF advises the government of Uzbekistan to mitigate these risks while maintaining reform momentum?
Uzbekistan has made substantial progress on structural reforms. Notably, large parts of the economy have been liberalized, and the allocation of resources is more driven by market forces. The government accelerated negotiations for WTO accession, has privatized several medium-sized enterprises and a large state bank, and is committed to privatizing two large state banks and additional state enterprises in the near term. Most recently, the government implemented energy tariff reform, including by adjusting administered energy prices upward with the aim of achieving full cost recovery in 2026. This will incentivize better energy use, attract further investment into the sector, and make the energy supply more reliable while strengthening public finances.
However, these reforms may have potential short-term costs and risks. For example, phasing out energy subsidies may hurt low-income users with a lower ability to pay if unaccompanied with targeted support. Reforms are also becoming more complex and therefore more challenging, requiring careful preparation, proper sequencing, and time to bear fruit—which is also true in the case of privatization.
To ensure that the reform momentum is maintained, the authorities should focus on the highest priority reforms, which are important to create a dynamic economy, attract investment, increase productivity, and support sustainable growth. This includes price liberalization, state enterprise reform and privatization, making the banking systemcommercially oriented, and improving governance and the business environment. At the same time, they should leverage the international experience and best practices when implementing such reforms. To shield the vulnerable layers of the population from temporary short-term costs, the authorities are reforming social protection programs to ensure they reach those in need better. The social consumption norm and the compensation for additional electricity costs in winter, which the Uzbek authorities are implementing in parallel with the energy tariff increases, are good examples of this.
Effective public communication is also essential. The government should transparently explain the long-term benefits of reform to manage public expectations and help maintain public trust and patience throughout the reform process.
Fiscal Policy and Public Debt:
The report outlines an ambitious fiscal consolidation path to reduce the deficit and maintain sustainable public finances. How does the IMF assess the feasibility of these goals in the current economic conditions, and what key areas of spending efficiency should the government of Uzbekistan focus on to achieve these fiscal objectives?
The authorities are appropriately making efforts to reduce the fiscal deficit to 4% of GDP in 2024 and 3% of GDP in the medium term, which would rebuild fiscal buffers, support monetary policy in containing inflation, and facilitate external adjustment. The envisaged consolidation of 1.0-1.5% of GDP per year over 2 years is ambitious but achievable. Its composition is generally growth-friendly, based on reducing untargeted energy subsidies while protecting the vulnerable (including bycompensating them for higher winter heating costs), improving social and safety net expenditure targeting, and curbing policy lending.
Nevertheless, there is scope to broaden the tax base and modernize the tax system to create space for priority social and development needs and support the planned fiscal adjustment. On the expenditure side, the government should improve the efficiency of health and education spending while improving services, advance pension reform, rationalize the size of public sector employment, reduce the costs of goods and services through improved procurement, phase out support to state-owned enterprises, and strengthen public financial management, including reforming the public investment management process.
Current Account Deficit and International Reserves:
While the current account deficit is expected to gradually decrease, it remains relatively high. What strategies does the IMF recommend for Uzbekistan to sustainably reduce the current account deficit? How critical is maintaining high international reserves for Uzbekistan’s economic stability, and what potential challenges might arise in achieving this goal?
The current account deficit widened from 3.5% of GDP in 2022 to 8.6% of GDP in 2023, reflecting the return of remittances from high levels to the pre-2022 trend,an unplanned fiscal expansion, an investment acceleration, temporary increases in some imports (airplanes, buses and cars, and gasoline), higher net interest payments on foreign debt, and repatriation of earnings by foreign companies partly offset by a large increase in gold exports.
The current account deficit is expected to gradually decline to 7.6% of GDP in 2024 and 7.1% in 2025, before reaching around 5% of GDP over the medium term. Such a deficit would be in line with current account deficits experienced by other transition economies in their journey towards market-based economies. The reduction in the current account deficit would be achieved through both demand and supply channels. On the demand side, the high real policy rate, planned fiscal consolidation, tight macroprudential policy, and the reversal of the temporary import increases would reduce imports. On the supply side, continued structural reforms—including those that improve the business environment, reduce trade barriers, and enhancing governance—and high investment levels would increase production capacity and help sustain robust export growth.
Holding adequate international reserves helps preserve economic and financial stability. Uzbekistan’s reserves are adequate by all reserve adequacy metrics. They stood at close to 9 months’ worth of imports at end-2023 and are projected to gradually fall but remain adequate at close to 5 months of imports by 2029. More exchange rate flexibility would also help absorb shocks, facilitate external adjustment, and thus safeguard international reserves.
