Uzbekistan is a landlocked country with a gross national income per capita (GNI, Atlas method) of US$900 in 2008 and projected US$1,050 in 2009, but resource rich (gold, copper, natural gas, oil, uranium), with great development potential, and strategically located in the heart of Central Asia. The country also has well developed capital and social infrastructure, especially compared with neighboring countries or countries with similar GDP/capita. It accounts for one third of the region’s population, and an estimated 37% of Uzbekistan’s population lives in urban areas, with about three million inhabitants in Tashkent, the capital and largest city. The country has a very young and rapidly growing population and is facing a serious employment generation challenge, especially in rural areas where roughly two-thirds of Uzbekistan’s population lives.
Economy
Developments Since Independence
Since independence in 1991, in contrast with the majority of the CIS countries, Uzbekistan has adopted a “gradual” approach to transition and state-led development aimed at import substituting industrialization and energy and food self sufficiency. This approach resulted in a less painful economic and social transition than experienced in most countries of the CIS and, in recent years, strong macroeconomic performance.
Despite a significant reduction in agriculture’s share of GDP from 37% in 1991 to around 20% in 2008, it is still an important sector of the economy, accounting for a third of employment. In this sector, cotton, which was strongly developed in Soviet times, accounted for 15% of total agricultural output measured by domestic seed cotton prices in 2008. Industry produced 22% of GDP in 2008, construction 6% and services 43%. The government’s approach has relied heavily on the use of state controls, planning and direct interventions in many sectors of the economy, foreign exchange and trade restrictions, directed and sometimes subsidized credits to selected sectors, and large public investments. Uzbekistan made progress in increasing self-reliance in both energy and foodstuffs, and has been pursuing a policy of “localization,” i.e. encouragement and protection of domestic production. In recent years this policy appears to have been successful in increasing value added in industry from 14% of GDP in 2001 to 22% in 2008, following a decline of the industrial sector from 33% of GDP in 1991. Despite the priority given to industrialization, there are questions regarding the efficiency or lack thereof of a number of industrial investments, as well as concerning their economic viability under conditions of freer market access.
In recent years macroeconomic stability has been largely achieved. Inflation was high throughout the 1990s but was reduced in 2003 as monetary policy was tightened in years prior to the introduction of convertibility. Major progress has been made in maintaining of disciplined fiscal management that resulted in low public debt and budget surpluses every single year since 2003. Large increases in net foreign assets have been mirrored in the growth of monetary aggregates resulting in continued inflationary pressures. Faced with raising international food prices, the central bank managed to tighten monetary policy in 2005-08 via increased deposits from commercial banks, the resumption of the issuance of central bank paper, and the accumulation of government deposits. This resulted in a declining growth of reserve money from 88% in 2005 to 37% in 2006 (broad money growth - from 54% to 37%), although this tendency was reversed slightly in 2007 when reserve and broad money grew by 45% and 46% respectively, but in 2008, again, reserve money and broad money declined further to 28% and 35% respectively.
The consolidated fiscal position has strengthened in 2008, supported by strong revenue from the commodity sector, in particular due to an increase in gold prices and large increases in export prices of gas negotiated with Uzbekistan’s main gas buyer. A budget surplus was achieved despite the government’s deliberate policy of reduction of tax burden on the non-commodity sector. The augmented fiscal surplus (i.e. consolidated budget and Fund for Reconstruction and Development) in 2008 that remained unchanged in 2006-07 at about 5% of GDP, increased to 10% of GDP in 2008, but projected to decline to 3% of GDP in 2009. Total budget expenditures continued to decline as a share of GDP from 36% in 2000-2003 to 32% of GDP in 2008, but projected to increase back to 36% of GDP in 2009 due to implementation of the adopted anti-crisis measures. A policy of high public spending in health and education has mitigated the deterioration of human capital in the difficult years of transition and high spending in the road sector has resulted in a much better maintained road network than in most other countries in the region. In order to focus on medium term fiscal sustainability, the authorities have started preparing their Medium-Term fiscal outlook under the technical reforms in the budget process.
Economic growth has accelerated from around 4% in 1996-2003 to over 7% in 2004-06 and to over 9% in 2007-08, largely (but not exclusively) driven by external demand. This growth performance, coupled with an impressive decline in the population growth rate from 2% from 1996-99 to 1.3% between 2000-08 according to official statistics, has led to a sharp increase of annual per capita GDP growth, from 2% in the late 1990s to 6% in 2004-06, to over 7% in 2007-08, and to 8% in first half of 2009. However, the reported 3.2% decline in electricity production in first quarter of 2009 and 10% decline in domestic freight turnover volume in first half of 2009 (from 39.9 billion ton-kilometers in first half of 2008 to 35.9 billion ton-kilometers in first half of 2009), which would normally correlate with output growth, suggests that actual numbers of real GDP growth in first half of 2009 could have been lower. A sharper slowdown of GDP growth in 2009 will be prevented by rising investment, mainly funded by government expenditure, supported by policy emphasis on anti-crisis measures, as well as some FDI mainly from China and Russia. Private consumption will suffer from a decline in remittances, but will be sustained to some extent by government efforts to increase wages and social payments. Despite reported high economic growth, employment generation and private consumption have lagged and there has not been a commensurate reduction in poverty in recent years. National poverty level (defined as percentage of population consuming less than 2,100 kilo-calories per person per day) dropped by just 3.9 percentage points from 27.5% of the population in 2001 to 23.6% in 2007. Significant increases of remittances and other transfers to Uzbekistan at 8-10% of the GDP in 2005-08 from labor migrants in Russia, Kazakhstan and other countries have contributed to the support of living standards of the Uzbek population, particularly among low income and poor families. The foreign exchange reserves of Uzbekistan more than tripled since 2004 to reach more than US$9 billion in 2008 (equivalent of 11 months of next year’s imports) and created financial cushion against financial crisis in 2009-10. Unidentified capital outflows have also tripled since 2004 and amounted to around 10% GDP in average in 2005-08 that may partly reflect an increase in smuggled imports. After heavy external borrowing to finance large-scale public investment in the late 1990s, the government has also pursued a zero net external borrowing policy since 2001, and total outstanding external debt declined from 64% of GDP in 2001 to 14% in 2008, and projected to decline further to 13% in 2009, and total debt service payments in percent to exports also declined to less than 8% in 2008. Despite some increase in recent years, actual foreign direct investment has remained one of the lowest among the transition economies relative to the size of the economy at 3% of GDP on average in 2006-08. Compared to other low income countries, Uzbekistan’s non-monetary social indicators such as levels of literacy and school enrollment tend to be favorable, reflecting the legacy of Soviet investment in social infrastructure, but also post-independence efforts, particularly in basic education. Education spending currently stands at 9% of GDP and accounts for over a quarter of the total budget – considerably above the OECD average. Total expenditure on health (including externally-financed) was 5% of GDP in 2006. However, the overall pace of economic liberalization and structural reform is still uneven and remains slow. The major distortions to the economy stem from a large role for the state, continuation of elements of centralized planning and import substitution, numerous obstacles to private business such as restrictions on access of cash (despite some easing in 2005), de jure or de facto monopoly or oligopoly power of majority state-owned enterprises in many sectors and high rates of protection. Extensive state controls over the economy continue to hinder the functioning of markets and the development of the private sector. Privatization, particularly large scale, has been limited and private property rights are often overridden by state structures. Despite strong growth of exports in 2002-08, the government continues to administratively manage and discourage imports (especially of consumer goods) through restrictions on convertibility, high tariff/non-tariff protection and restrictive trade regulations. The financial sector is hampered by the dominance of a few large state banks and the use of commercial banks as enforcers of tax discipline, and a legacy of directed lending adds an element of risk to the quality of the banks’ credit portfolio. Governance is undermined by low government accountability and transparency to public, restrictions on access to statistical information, lack of public voice and few possibilities for citizens to comment and participate in policy making, and - as elsewhere in the region - significant rent-seeking opportunities and corruption. Although Uzbekistan entered into the global financial and economic crisis with a limited financial vulnerability and strong national fiscal and external position, the country is still feeling the effects as it is linked to global markets through three channels: capital, products, and labor. Severe economic slowdown in trading partners has reduced demand for Uzbek exports and this affected both the volumes and the prices of Uzbek exports of raw materials and that of export of goods from capital-intensive manufacturing industries. Some foreign direct investment in new projects in some export-oriented industries have been delayed though most ongoing projects are continued, and consumer spending of the most vulnerable part of the population may have declined with the reduction in flows of labor migrants and remittances.
In late 2008 and during 2009 the government of Uzbekistan adopted and started implementing its anti-crisis program of measures for 2009-2012 estimated at around 4% of GDP. In these turbulent and uncertain times of continued global crisis, sound macroeconomic management, contingency planning, and effective communication of policies are essential to instill confidence and respond effectively to the crisis.
Given the generally limited ties of financial systems in Uzbekistan to global financial markets, significant fiscal support to its financial system to reduce impact of global crisis is not required. Howevercontinued efforts will be needed to manage financial sector risks and ensure appropriate banking supervision to reduce vulnerabilities, and to raise and use domestic resources in a noninflationary manner, without draining international reserves or crowding out the domestic private sector as this sector is the main source of long-term growth. Although Uzbekistan can afford the adopted stimulus package to counteract the downturn in the real economy and preserve growth, it might be important to apply sound cost/benefit analysis to better prioritize policy interventions and new investment projects. Some of the stimulus measures might have a lower effectiveness in export manufacturing and commodities given lower demand of trading partners for cars and production inputs. Intervention of the government may insulate the economy from shocks in the short-term but affect the long term growth prospects.
Country’s challenges to ensure sustainable and private sector-led growth
Uzbekistan has a great economic potential, however, it still not being fully realized. While its landlocked location and long distance to major markets impose constraints on Uzbekistan’s economic development, the main obstacles to growth in Uzbekistan are policy-related. In order to keep growth sustainable and inclusive and increase per capita incomes more rapidly Uzbekistan needs to lay the institutional foundations of a middle-income country and a transition to a competitive market economy. The Government’s recently completed Welfare Improvement Strategy (WIS) recognizes that despite past achievements, a large unfinished reform agenda remains. Uzbekistan’s growing population requires a higher level of job creation and faster poverty reduction. Key policy challenges in addressing the potential sources of vulnerability in the long run therefore include:
Improving business climate. Due to the faster reforms and improvements of business climate made in other developing countries, Uzbekistan’s DB 2010 rating in the ease of doing business has worsened to 150th place out of 183 countries from 145th place in DB 2009 (adjusted for the change in methodology).
Sustaining macroeconomic stability and managing vulnerability to shocks. Strengthening macroeconomic policies and structural reforms to maintain high rates of economic growth, preventing the reemergence of high inflation and dual exchange rates, eliminating restrictions on current account convertibility, and better management of the money supply will all help to sustain macroeconomic stability.
Boosting agricultural productivity. Given the country’s predominantly rural population, further agricultural reforms are essential to reducing poverty. The abolition of state-dictated cropping patterns, the liberalization of input and output markets, wide participation of farmers in the shares of industrial enterprises processing agricultural products, and wide application of modern agro- and agro-processing machinery and technologies would boost agricultural productivity, raise per capita incomes and alleviate potential social tensions. The challenge of the global economic crisis and new export opportunities further call for the need to increase agricultural productivity.
Responsive social service delivery systems that reach the poor are required to achieve the Millennium Development Goals. With less work available for Uzbek migrant workers in Russia, Kazakhstan and other host countries, some of them are returning to Uzbekistan, contributing to additional pressure on social spending. This will require protecting or increasing spending (including spending on operations and maintenance) in health, education, water and sanitation, and social protection that can help cushion the impact of the crisis on vulnerable households. Raising labor productivity and reaching the more difficult goals for maternal mortality and malnutrition will require improving the quality of education and health services. This could be supported by improving institutional accountability and incentive structures in these sectors that are still very weak as a result of a poorly functioning and overly centralized bureaucracy.
Improving accountability and transparency. Improvements in the investment climate and service delivery also require stronger governance. Public financial management, including procurement, has to be strengthened to reduce leakages of public resources and greater public access to information will be needed if civil society and the public are to hold government bodies accountable for service delivery. Key categories of data – balance of payments, monetary statistics, external debt, details of foreign trade, investment and fiscal operations – are not publicly released, although restrictions are gradually being reduced. Openness, transparency, and accountability to public (e.g., in government operations, public expenditure management, policy making, data and legislation) are essential to the credibility of economic policies and for creating an effective and stable environment for the private sector.
Improving regional cooperation between the Central Asian countries is required to gain from large potential in increase of cross-border trade in goods and services and to optimize irrigation-hydropower generation and jointly consider and implement appropriate projects for mutual benefit of bordering countries and sustainable use of transboundary water resources.
TIn June 2007 the government prepared its Welfare Improvement Strategy (WIS) which reflected government’s priorities in a medium-term macro-fiscal framework for 2008-2010. The WIS was formally endorsed by the Presidium of Cabinet of Ministers decision in August 2007, and prioritizes and costs proposed policy measures. The government is trying to focus on enhancing the efficiency of the public goods provision by introducing a medium-term approach to public expenditure planning and developing a Monitoring and Evaluation system among other things, as part of the implementation of the strategy. The government’s target is to accelerate poverty reduction, improving living standards and reducing inter-regional inequalities in socio-economic development. In late 2008 the government adopted the anti-crisis program for 2009-2012.
Bank’s impact on the ground to date
The World Bank has assisted Uzbekistan’s development and transition to a market economy since the country joined the institution in 1992. The Bank’s assistance has helped the country improve primary health care facilities for some 4 million people in rural areas—or about 15% of the total population. Incidences of infectious diseases have been reduced. More than 600 family doctors and nurses have been trained and 673 rural medical offices are being equipped with the latest medical equipment.
The Bank’s assistance has also helped people in the rural western part of the country gain access to safe and reliable drinking water. Nearly 44,000 people got access to safe water and over 800,000 receive improved quality and quantity of water in South Karakalpakstan. 90% of the population in the area have access to water supply services. Assistance to improve the water supply in the historic cities of Bukhara and Samarkand is ongoing. In addition, the sanitation system in Tashkent has improved as a result of better waste collection.
The Bank has also helped the country restore the biodiversity of the wetlands near Lake Sudochie. The wetlands were flushed with over 800 million cubic meters of fresh water from the Amu Darya River, thereby raising the water levels and increasing the incomes of the people living in its vicinity. A project to improve drainage in the downstream part of the Amu Darya with significant expected benefits for land quality, the environment, and rural incomes is under implementation.
Through a dialogue with the authorities, the World Bank has contributed to some changes in the quality and pricing of cotton, Uzbekistan’s main export crop, and the development of new – albeit still limited - marketing opportunities offered to producers of cotton. In the context of its projects, the Bank has been helping cotton farmers initially in 5 pilot rayons, now expanded to 90, through the introduction by government of a legislative base for a new marketing system that allows them to sell their crop outside the dominant state-order system. Almost 450 new private farmers received credit and bought machinery. Over 5,000 farmers benefited from improved irrigation.
Other positive assistance included the successful Carbon Finance Technical Assistance that supported the initiation of design of several projects susceptible to be financed under the Clean Development Mechanism (CDM) of the Kyoto Protocol, and the signing and effectiveness of the IDF Monitoring and Evaluation capacity building grant in health and education in support of reforms in these sectors. Primary health care has improved AIDS prevention programs. The World Bank’s Poverty Assessment was widely used by the Government in preparing the WIS. Training and capacity-building workshops have been much appreciated. Also, registration of new businesses is now easier, which was made possible through one-stop-shop registration. The cost and time of registering a business were significantly reduced.
Going Forward
The Government is concerned over a slow pace in poverty reduction and growing inequality – this offers a good point for cooperation and Bank Group support in the implementation of the Government’s own Welfare Improvement Strategy. The World Bank’s Country Assistance Strategy (CAS) for FY2008-2011 is aligned with the Government’s WIS and aims to reduce poverty and improve the living standards of the population. The CAS will also support global goods provision including agricultural infrastructure and marketing, business environment and investment climate, public utilities and municipal services, health and education, drainage and soil improvement and carbon emission reductions.
More than 600 family doctors and nurses have been trained and 673 rural medical offices are being equipped with the latest medical equipment.
With research and analysis, the World Bank will support Uzbekistan by assisting the Government in capacity building for the implementation of Welfare Improvement Strategy goals and strengthening the Monitoring and Evaluation of its impact as well as by contributing to economic and sectoral analysis and policy dialogue in response to the government’s needs. In addition, the Bank will support regional cooperation activities around water and energy or communicable diseases and will explore options for cooperation in economic research, analytical and advisory work. Additional analysis will examine the impact of climate change on Uzbekistan and seek to improve energy efficiency and clean development mechanisms.
As of July 2009, the active World Bank portfolio currently includes 6 projects in sectors of agriculture and agroindustry (9% of total portfolio), drainage and irrigation (28%), water supply (38%) and human development (25%). Active commitments comprise $251 million, of which $100.4 million has been disbursed.
World Bank Commitments (US$ millions)
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of April, 2009 (US$ millions)
For general inquiries on the World Bank in Uzbekistan, please contact:
The World Bank (IBRD) Business Center 107B Amir Temur Street Block C, 15th floor Tashkent, Uzbekistan 100084 Tel: (998-71) 238 5950 Fax: (998-71) 238 5951, 238 5952 Email: itsoy@worldbank.org URL: http://www.worldbank.org.uz
RSS