Recent Economic Developments
Uzbekistan’s GDP growth slowed down to 7% year-on-year (y-o-y) in the first half of 2017 from 7.8% in the first half of 2016, as per official statistics. Key drivers of this still robust rate were services, agriculture, and industry, which were supported by their corresponding 2016–20 sectoral develop¬ment programs.
On the demand side, the main driver of economic growth was investment, including a large public investment program to support real sector development in 2015–19 as well as private and state-owned enterprise (SOE) investments. However, real investment growth slowed to 8.3% y-o-y in the first half of 2017 from 11.8% y-o-y in the first half of 2016.
Private consumption increased slightly in real terms in the first half of 2017 due to stable income growth (despite the acceleration in food price inflation) and a recovery of remittances inflows, which rose by about 30% y-o-y in U.S. dollar terms in the same period. The current account and state budget balances remained in small surpluses in the first half of 2017.
Monetary and exchange rate policies remained largely unchanged in the first half of 2017, helping total banking loans to grow by over 40% y-o-y in that period. On June 28, 2017, the Central Bank of Uzbekistan (CBU) rate was raised from 9 to 14%, given the higher inflation observed since late 2016. Nonperforming loans remained stable at 0.4% in August 2017 as per the CBU estimate, or 2.0–2.5% according to Moody’s estimate.
On September 5, 2017, the CBU allowed the official exchange rate to adjust from UZS4,210 to UZS8,100 per U.S. dollar, helping the official rate to converge with the curb market rate. The existing restrictions on convertibility were removed, widening the private sector’s participation in the foreign exchange market.
The official poverty rate declined from 12.8% in 2015 to an estimated 12.4% in 2016. However, the official unemployment rate was at 5.2% in the first half of 2017, the same as in 2016.
The outlook is predicated on the implementation of the reform agenda, including exchange rate convertibility. If accompanied by complementary market-oriented reforms, this will be an important step in reducing market distortions and encouraging private investment in the economy. Fiscal policy will likely be less expansionary than in the past to help rein in inflation, with budget spending geared toward mitigating the impact of the exchange rate adjustment on the vulnerable population, supporting critical SOEs, and sustaining the public investment program.
On the other hand, monetary policy is expected to be more restrained than in previous years, with the aim of containing inflation from trending up. Meanwhile, a pickup in global prices on the main Uzbek export commodities (e.g., gas, copper, and cotton) in 2017–18 will help reduce the negative trade balance, and the improvement in net remittances will keep the current account in small surplus.
The World Bank’s baseline scenario projects a moderation of growth down to 6.2% for 2017 as investment growth is slowing, and 5.6% in 2018 as transitional adjustments take place. This is due to persistent uncertainties and the fact that remaining rigidities in the economy may not allow for a sufficiently rapid adjustment to take advantage of a more completive exchange rate.
Higher growth should rebound over the medium term (up to 6.3% in 2019), as sustained reform implementation in the second half of 2018 gradually becomes more entrenched, reducing uncertainty and supporting private investment and a pickup of net exports. Private investment is expected to grow faster in the medium term, including foreign direct investment (FDI), which also means a higher outflow of dividends on FDI on the current account balance.
Although data limitations do not allow for poverty projections, it is expected that increased income growth and a revival of net remittances by 2019 will continue the progress made in reducing unemployment and poverty over the near term.