Baku, Azerbaijan, March 6
By Fakhri Vakilov-Trend:
Flagship reforms implemented in Uzbekistan so far include foreign exchange liberalization, tax reform, and a major upgrade in the quality and availability of economic statistics, Trend reports with reference to IMF.
Uzbekistan has also taken the lead on regional cooperation, key for promoting regional trade and reconnecting the region’s energy and transportation networks.
Excessive credit growth has emerged as a major risk to macroeconomic stability. Rapid credit growth in 2018 financed a surge in imports of capital goods and bolstered investments in housing and infrastructure following decades of underinvestment. Looking ahead, the main macroeconomic stability risk is that a prolonged credit boom will aggravate inflationary pressures and feed into excessive external deficits.
To wit, available potential funding of credit is plentiful: the country has large accumulated financial buffers that could be drawn down; and external lenders seem eager to provide debt financing at favorable terms, as highlighted by last month’s oversubscription of the country’s first sovereign debt issue. While the macroeconomic stability challenge for Uzbekistan is new, the authorities are acutely aware of the need to adjust policies to forestall a boom-bust credit cycle.
Setting priorities for a vast structural reform agenda is another major challenge. Reforms so far have rightly focused on high-impact, broadly popular, and administratively workable priorities, with foreign exchange liberalization being the exemplar of this pragmatic approach. But the reform agenda is expanding rapidly. The authorities recognize the need to prioritize reforms that address the economy’s most damaging distortions first.
Given persistent inflationary pressures, the monetary stance needs to remain tight. The Central Bank of Uzbekistan (CBU) aims to gradually bring CPI inflation back to single digits. After increasing the refinancing rate last year, the CBU needs to keep liquidity in line with the tighter monetary stance, even if such operations are costly. The exchange rate has moved broadly in line with underlying fundamentals, including depreciations in key trading partners.
However, CBU foreign exchange interventions to sterilize liquidity generated by purchases of domestic gold could become more regular and predictable. To facilitate the move to inflation targeting over the medium term, the proposed new central bank law should provide the CBU with sufficient independence to conduct policies effectively.
Moreover, in 2018, the government largely funded rapid credit growth. Pre-reform constraints on credit growth—especially the target of current account surpluses—are no longer binding. To finance a surge in investment, credit to the economy grew by 50 percent in 2018. The government funded and directed a large part of this credit expansion through policy-based lending operations and shifting deposits to banks. Furthermore, about half of overall credit was extended on preferential terms.
Looking ahead, the expansion of credit—both in scope and composition—needs to be contained based on three objectives:
Ensuring macroeconomic stability: Excessive credit growth pushes inflation and the external deficit higher. Bringing credit growth closer to projected nominal GDP growth of about 25 percent during 2019-20 would facilitate growth and job creation while avoiding excessive inflation and external imbalances, in line with Presidential Decree No. 4141 dated January 31, 2019.
Reducing credit misallocation: Directing preferential credits to low-return investments in capital-intensive sectors is not an effective way to create jobs. Phasing out directed credit over the next few years would improve credit allocation.
Increasing transparency: There are good public policy rationales for extending preferential credit, but the subsidy component of preferential credit should be reported in the budget, as is already the case for credit subsidies covered by the Support Fund for Entrepreneurship.
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