Despite the situation in the world, Uzbekistan is expected to grow by 5.3 percent in 2022. The medium-term outlook remains positive provided that the ambitious ongoing economic reforms will continue to invigorate private sector-led growth.

KEY CONDITIONS AND CHALLENGES

Uzbekistan has pursued an ambitious initial set of trade and price liberalization reforms in recent years. However further reforms are needed to continue to spur productivity, private-sector-led growth, and job creation. The focus should shift to addressing weak factor markets, high trade and transit costs, dominant state-owned enterprises, the weak regulatory environment, and further strengthening market incentives and sustainability in agriculture and across the economy. The government recognizes the need for a more inclusive transition. According to the new national poverty line, about 17 percent of the population was in poverty in 2021. The recent reform efforts to expand the coverage and strengthen the targeting of social assistance will be key to supporting those that may otherwise fall behind.

RECENT DEVELOPMENTS

Despite the uncertain regional outlook, GDP grew by 5.4 percent in the first half (H1) of 2022, led by strong remittances, exports, and investments. Real wages increased by more than 6 percent yoy in the second quarter. On the supply side, stronger growth in construction and agriculture partly offset slower growth in industry and services. Investment (mostly in energy production, fertilizers, and infrastructure) grew by 9.4 percent. The value of exports (in US$) grew by 40.5 percent yoy, led by a more than doubling of gold exports. Non-gold exports were 22.5 percent higher, driven by natural gas, textiles, food, machinery, transport, and tourism. Imports expanded by 27.4 percent as prices of imported food and energy rose, as did domestic demand. Food exports were 41 percent higher, machinery and equipment 29 percent, and service imports 65 percent, yoy. Contrary to earlier expectations, remittance inflows doubled as a share of GDP in H1 to 16.7 percent, due to favorable exchange rate movements with the Russian Ruble, and more labor migrants going abroad, mostly to Russia. These drivers narrowed the current account deficit to just 1.4 percent of GDP in H1 2022, compared to 4.8 percent in H1 2021. The fiscal deficit declined from 5 percent of GDP in H1 2021 to 4.2 percent in H1 2022, supported by higher revenues from gold exports. International reserves increased by $1.5 billion in the year to July to $35.6 billion and remain ample, equivalent to 11 months of imports. Higher costs of food, fuel, and logistics drove CPI inflation up to 12.3 percent in June 2022 (against 10.9 percent in June 2021). In March-May 2022 the Som depreciated by 7 percent against the US$. In response to exchange rate pressures and an uncertain inflation outlook, the Central Bank (CBU) initially hiked the policy rate by 300 bps to 17 percent. In June and July, the stabilization of the exchange rate, the recovery of foreign exchange inflows, and the growth of domestic deposits enabled the CBU to cut the policy rate to 15 percent. 

Decreasing capital buffers and more cautious lending policies of banks following the war in Ukraine slowed credit growth to 14 percent in end-June 2022 yoy from 23 percent the year earlier. Stricter capital adequacy regulations and increased loan loss provisions enacted in 2021, partly mitigated by stronger profits and recapitalization of a few state-owned banks, reduced the banking sector’s total capital adequacy ratio (CAR) slightly, from 17.7 percent at the end-H1 2021 to 17.0 percent at the end-H1 2022, relative to a required CAR of 13 percent. While the banking system remains resilient overall, a few banks are in vulnerable positions, and several are in need of additional loan loss provisions for non-performing loans (NPLs). NPLs spiked from 2 percent in end-2020 to 6.2 percent in August 2021, but gradually decreased since then to 4.9 percent in H1 2022. Higher remittances contributed to an expected decline in the poverty rate of 1.25 percentage points, to 15.7 percent in 2022. The unemployment rate fell to 8.8 percent in H1 2022, though still elevated among youth and women, and in lagging regions.

OUTLOOK

Growth is expected to slow to 5.3 percent in 2022. Increased logistical challenges linked to sanctions on Russia are expected to dent private consumption growth. Private investment and exports are expected to grow strongly, and the current account balance improve, as Uzbekistan benefits from strong global commodity prices (gold, copper, natural gas) and increasing remittances. FDI is not expected to pick up in 2022, with the trade deficit financed largely by official borrowing. Higher revenues from commodity exports and slower public investment spending will see the fiscal deficit decline from 6.2 percent of GDP in 2021 to 4.4 percent in 2022, nevertheless higher than the 2022 budget target of 3 percent due to higher social protection, health, education, and infrastructure spending. An anticipated fiscal consolidation by 2023 is now expected to be delayed as targeted social protection increases in response to pressure from rising food price priorities and the impacts of the war in Ukraine. Continued growth and expanded social protection programs are expected to sustain poverty reduction, with the national poverty rate projected to fall to 14.5 percent in 2023, and 12.2 percent in 2024. Nonetheless, expenditure consolidation is expected to resume in future years, supported by both revenue mobilization and spending efficiency. The government is expected to continue adhering to its overall debt limits, with public debt and total external debt gradually falling to 32 and 55 percent of GDP, respectively, by end-2024. The risks to the outlook are tilted to the downside, including a prolonged war and further sanctions on Russia, and tighter than expected global financial conditions. There is a risk from reform inertia in this more complex phase of economic reforms, that is compounded by the difficult international environment. Potential positive surprises include higher global gold, natural gas, and copper prices and stronger productivity growth arising from ongoing structural reforms.

Source: The World Bank