Monetary policy in Uzbekistan should remain tight to continue to reduce inflation – IMF

Improving budget planning will facilitate better outcomes with fewer resources and minimize deviations from fiscal targets. This includes strictly adhering to the budget calendar, unifying the investment budget irrespective of the financing source and preparing it together with the recurrent budget, and limiting the frequency of within-year changes, as frequent changes complicate budget execution and are unlikely to improve budget outcomes. Continued efforts to improve the measurement and management of fiscal risks, especially from SOEs and PPPs, are needed to ensure that the planned fiscal consolidation is realized.

Monetary policy should remain tight to continue to reduce inflation. Needed increases in administered energy prices are expected to raise inflation. However, the effect will be partially offset by continued tight monetary policy and a sizable fiscal consolidation. Staff welcomes the commitment of the Central Bank of Uzbekistan (CBU) to keep monetary policy relatively tight until inflation decelerates clearly toward the target and to raise the policy rate if core inflation surprises to the upside. Efforts to strengthen monetary policy transmission, which remains constrained by a low level of financial intermediation, high dollarization, and still sizable policy lending, should continue. Exchange rate flexibility is important to absorb potential shocks and safeguard reserves.

Financial sector reforms need to continue to safeguard stability. Despite tight monetary policy, credit growth remains high, particularly for car loans, microcredit, and mortgages. The CBU has appropriately tightened loan-to-value ratios and introduced concentration limits for banks. Additional supervisory and macroprudential measures would help ensure banks assess the creditworthiness of borrowers and limit the risk of declining asset quality. The authorities’ continued efforts are needed to bolster corporate governance and transparency of state banks and further reduce policy lending. These measures would facilitate bank privatization, level the playing field, deepen financial intermediation, and improve access to financial services.

Continued implementation of structural reforms is key to sustaining robust growth. The government has improved the transparency of public procurement, strengthened reporting and the management of SOEs, and privatized a large bank and several state enterprises. An increase in energy prices for businesses was implemented and the Law on Competition became effective in October 2023. Further reforms were announced in September and October 2023, including the creation of an independent energy regulator and the unbundling of the railway sector, and measures were adopted towards addressing climate change. Nevertheless, additional measures are needed to increase energy prices to at least cost recovery levels, enhance governance and transparency (including for SOEs), further restructure and privatize state enterprises, and strengthen competition policies to reduce the state’s role in the economy. Accelerating World Trade Organization negotiations and cooperating with neighboring countries to improve transport routes will reduce transportation costs and open new markets for Uzbekistan’s products.