OREANDA-NEWS. On February, 22, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Uzbekistan.1

Despite setbacks in global recovery, Uzbekistan's resource-rich economy has recorded a solid growth in recent years. Following a strong performance in 2011, high economic growth continued in 2012. GDP grew by 8.3 percent in 2011 and by 8.2 percent through September 2012, boosted by high prices for export commodities, and state-led investment. After peaking at 13.8 percent in November 2011, annual inflation has declined to 10.7 percent in October 2012. The double-digit inflation rate reflects increases in administrative prices, as well as currency depreciation and demand pressures stemming from pension and wage increases.

The external position continues to be strong, but the current account surplus has narrowed, on account of recent drop of gold exports, and lower cotton and food prices. At the same time, import was strong, supported by remittances and Foreign Direct Investment (FDI). As a result, the current account surplus narrowed to 5.8 percent of GDP in 2011 and further to an estimated 2.7 percent of GDP in 2012. The drop in gold exports reflects the authorities' preference to monetize gold in official reserves which reached 16 months of import cover (including the assets of the Fund for Reconstruction and Development (FRD) abroad) in October 2012.

Monetary policy has been tightened since mid-2011, with continued accumulation of government deposits, including FRD, and intensified liquidity-mopping operations by the Central Bank of Uzbekistan (CBU). Reserve and broad money growth decelerated considerably from 27 and 52 percent at end-2010 to 16 and 30 percent, respectively, through October 2012. Credit growth has also decelerated, but remained high in real terms, supported by directed lending. At the same time, the refinance rate (that guides bank lending rates) and reserve requirements have remained unchanged. Aiming at improving competitiveness of the export sector, the authorities have continued their policy of a nominal depreciation of the sum.

Fiscal policy was prudent in 2011, and preliminary data for 2012 point to a better-than-projected budget outcome, reflecting continued measures to broaden the tax base and strengthen tax administration. Overall expenditures benefited from better targeting of social welfare, while wages continued to grow strongly. Fueled by strong commodity revenue, the FRD has continued to play a stabilizing role by shielding the state budget from the effects of volatile commodity prices as three quarters of all mineral revenue was channeled to it in 2011?12.

Growth prospects remain favorable, but risks are tilted to the downside as a result of global uncertainties. Cushioned against external shocks by high external and fiscal buffers, GDP growth will be strong, predicated by continued implementation of the authorities' investment program, and by favorable terms of trade as prices for Uzbekistan's main exports are expected to stay elevated compared to their historical averages. Under current policies, inflation is expected to stay in double digits throughout 2013 and is projected to be elevated over the medium term.

Executive Board Assessment

Directors welcomed Uzbekistan's strong economic performance and accumulation of large policy buffers in recent years. Looking ahead, Directors agreed that the main policy priorities should be to bring down inflation, broaden the base of economic growth, and expand employment. Continued implementation of prudent policies and structural reforms will be critical to achieve these goals.

Directors supported a further tightening of monetary policy to head off overheating risks, as part of a well coordinated policy mix. A less accommodative stance should be supported by a slowdown in the accumulation of already ample reserves and a shift toward a market-determined exchange rate.

Directors commended the authorities' commitment to fiscal prudence. They welcomed plans to improve revenue administration, curtail tax exemptions, and reduce energy subsidies while strengthening social assistance. Directors stressed the importance of adopting a medium-term budget framework and upgrading the management of the mineral revenue fund in line with international best practice.

Directors noted that the banking system remains stable and well capitalized. Nonetheless, they encouraged the authorities to strengthen prudential oversight, relieve banks of their noncore functions, and phase out directed lending.

Directors encouraged the authorities to accelerate structural reforms in a variety of areas to raise productivity and unlock new growth engines. They noted with satisfaction recent steps to improve the business environment and promote small- and medium-sized enterprises. Against this background, Directors considered it especially important to further liberalize the foreign exchange and trade regimes.

Directors welcomed the authorities' decision to join the IMF's General Data Dissemination System and called for further improvements in the quality and transparency of economic data.