Recent Economic Developments
Following an economic deceleration in 2017, real GDP growth slowed further to 4.9% in the first half of 2018 (from 7% in the same period of 2017) as total investment growth eased. An acceleration in the inflation rate softened private consumption growth, which rose only modestly in real terms during the first half of the year. Private consumption was largely supported by nominal wage growth (21.4% year-on-year) and rising remittance inflows (15%). Annual consumer price inflation stood at 18.5% in June 2018.
The trade balance posted a deficit in 2017 and the first half of 2018, as a strong growth of imports outpaced the growth of exports by a comfortable margin. The nominal exchange rate had appreciated by 3.7% by September 2018 compared to September 2017, when the CBU opted to pursue a managed float of the currency in the wake of a large devaluation. The CBU raised its policy interest rate to 16% on September 24, 2018, after raising it to 14% at end-June 2017 from the previous 9%.
Although the higher policy rate has acted as a damper on credit expansion, the loan-to-GDP ratio stood at 42% at end-2017 (having risen sharply from 26% at end-2016). According to official figures, nonperforming loans (NPLs) have risen sharply over the past 12 months from 0.8% of total loans in June 2017 to 1.3% in June 2018. Moody’s assessed the NPL ratio at 2.6% for 2017.
The Government drew down on its fiscal buffers at the Uzbek Fund for Reconstruction and Development, a reserve fund, to cover debt burdens at the largest bank and SOEs. The augmented budget deficit for the first half of 2018 is estimated at 0.5% of GDP.
Significant tax policy reforms were announced in June 2018 (effective in 2019), including the transition to a low flat tax from a progressive personal income tax, the elimination of the turnover tax, and a reduction in the unified tax rate and in tax rates on corporate income, property, dividends, and the payrolls of small firms.
Annual GDP growth is expected to remain steady at about 5% in 2018–19 and 5.5% in 2020 as the business climate improves and private investment growth accelerates. Employment creation is expected to be sluggish, given that investment remains below pre-2017 levels and SOEs are dealing with the impact of the economic reforms.
Fiscal activity is projected to become less expansionary as the authorities work to rein in inflation, which nonetheless is expected to remain elevated as more administered prices are liberalized and wages continue to adjust.
Budget revenues are projected to decline, due to the large tax cuts planned for 2019, and spending is expected to be rationalized and better geared toward protecting vulnerable groups. At the same time, pressures to raise civil service salaries will strain the budget. In an effort to reduce inflation to single digits, monetary policy is expected to be tightened further.
The current account surplus is likely to slip into a minor deficit in 2018–20, as import growth continues to outpace that of exports owing to trade liberalization. Pressures on the Russian Federation’s economy will also limit remittance flows to Uzbekistan. However, the risk to external instability is modest due to a comfortable cushion of foreign exchange reserves—equivalent to 20 months of import cover—and moderate levels of external public debt, which is mostly concessional.