Uzbekistan's transition from a planned economy to a market-based system has been a gradual process marked by slow progress, development challenges, and a complex reform agenda. The Asian Development Bank (ADB) has played a pivotal role in supporting this transition through its 2019-2023 country partnership strategy (CPS).

ADB's extensive portfolio of projects in Uzbekistan, totaling $10.9bn, has focused on private sector development, reducing economic disparities, and promoting regional cooperation. While ADB's support has been relevant, effective, and likely sustainable with satisfactory development impacts, project efficiency remains a concern.

Development challenges and ADB support 

Slow Progress in Shifting to a Market Economy: Uzbekistan's transition to a market economy has been slow, with state-owned enterprises (SOEs) continuing to dominate key sectors. This has limited job growth, with employment contributing only 6% to GDP per capita growth from 2010 to 2019. The agriculture sector remains dominant in the country's GDP, while the services sector lags behind its regional counterparts.

Ambitious Reforms: In 2016, the Government of Uzbekistan initiated a series of economic and social reforms to promote international engagement, reduce state control, and increase the role of the private sector in the economy. These reforms included currency exchange rate adjustments, liberalization of prices, and easing capital account restrictions. The government now aims to reduce the dominance of SOEs and increase competition in key sectors.

Fiscal Management Reforms: To strengthen economic management, the government introduced fiscal rules and debt transparency measures. These measures included an annual limit on new public sector borrowing and the allocation of external debt for reducing the state budget deficit and investment projects.

Environmental and Water Shortage Risks: Uzbekistan faces climate risks and water shortages, which are significant threats to its market transition. The country's freshwater supply is expected to decline by 25% by 2030, with substantial economic and environmental consequences. The government is actively working to address these challenges through water conservation technologies and irrigation infrastructure modernization.

ADB's support: Uzbekistan's National Development Strategies, especially the 2017-2021 and 2022-2026 plans, focused on promoting a vibrant market economy and inclusive development. ADB's country partnership strategy (2019-2023) supported Uzbekistan's transition by concentrating on three key areas: private sector development, reducing economic and social disparities, and promoting regional cooperation and integration.

Validation of the final review

The validation is based on the CPS Final Review (CPSFR) and includes an assessment of the strategy's relevance, effectiveness, and overall performance.

Relevance of the CPS: The CPS was found to be relevant to both Uzbekistan's development needs and ADB's Strategy 2030. It aligned with government priorities of promoting inclusive economic growth and private sector development, which resonated with ADB's strategic objectives. The strategy covered a broad range of sectors, supporting three main CPS objectives: private sector development, reducing disparities, and regional cooperation and integration.

Appropriate Mix of Modalities: The CPS effectively used a variety of lending modalities, including policy-based lending (PBL), investment projects, and technical assistance (TA). PBLs played a crucial role in promoting private sector development, while investment projects in sectors like energy and finance contributed to private sector growth. The use of different modalities allowed for flexibility and support for reform objectives.

Flexibility During the Pandemic: The CPS demonstrated flexibility during the COVID-19 pandemic, with adjustments made to project priorities to address urgent economic, social, and health impacts. While some deviations from the planned portfolio affected the intensity of reducing disparities and climate change mitigation, they were deemed necessary in response to the pandemic's unprecedented challenges.

Collaboration with Development Partners: ADB collaborated closely with international financial institutions and other development partners in Uzbekistan. This collaboration helped coordinate efforts and attract significant co-financing, enhancing the impact of the CPS. ADB's role as the leading development partner in Uzbekistan was instrumental in donor coordination.

Performance and Outcomes: Private sector development was a key focus of the CPS, and ADB-supported reforms and projects contributed to this objective. Most of the CPS outcome indicators related to private sector development were on track or likely to be achieved, particularly through PBLs and investment projects in sectors like energy, finance, and transportation.

Efforts to reduce disparities had mixed results. While some indicators related to rural and urban services and road connectivity fell short of their targets, the CPS effectively improved railway connectivity and supported social protection during the pandemic.

Persistent Systemic Challenges: The CPSFR report identifies persistent systemic challenges affecting project readiness and efficiency in Uzbekistan. These challenges include prolonged procurement processes, weaker contract management, and delays in project implementation. Notably, eight out of 11 completed projects were rated as efficient, but EIRRs for some projects did not meet initial projections due to higher costs and lower-than-expected benefits.

Economic Internal Rates of Return (EIRRs): The CPSFR report discusses the EIRRs of completed projects and highlights discrepancies between ex-ante projections and ex-post calculations. While some projects outperformed the ADB's minimum EIRR threshold of 9%, six of the projects had lower ex-post EIRRs, primarily due to factors like increased capital costs and lower traffic growth. The report suggests the importance of reassessing financial sustainability evaluations at project completion.

Project Readiness Issues: These issues are primarily attributed to cumbersome government approval procedures, understaffed project implementation units, and delays in procurement. Changes in leadership and institutional restructuring within ministries have also disrupted project execution.

Government Commitment to Reforms: These reforms are supported by the Asian Development Bank (ADB) through Policy-Based Loans (PBLs) in various sectors, including energy, finance, and public sector management. These efforts are aimed at improving corporate governance and attracting private sector investments.

Operation and Maintenance (O&M): The government is making efforts to enhance O&M in infrastructure sectors such as energy, transport, and water supply and sanitation. The focus on improving tariff structures in the energy sector, the installation of smart meters, and the promotion of private sector participation in renewable energy projects reflect these efforts. However, challenges remain in achieving comprehensive and sustainable road asset management and effective irrigation system maintenance.

Likely Sustainability of ADB Support: The CPSFR report assesses the results of ADB operations in Uzbekistan as likely sustainable. Ongoing projects incorporate activities to enhance sector operation and management, reflecting the sustained commitment of the government to sector development. Reforms, capacity building, and the focus on private sector involvement indicate a positive trajectory for the country's sustainable development.

Development Impact Assessment: The CPSFR indicates that ADB's contribution to development in Uzbekistan is satisfactory based on partial achievement of the country's development goals. While there have been notable improvements in GDP per capita, there have been challenges in reducing unemployment and the poverty rate. The ADB projects have made modest contributions to the national goals.

Achievement of country development goals

• Poverty Reduction: The proportion of the population living below the national poverty line increased slightly, making the achievement of the target challenging. A change in methodology contributed to this increase.
• GDP Per Capita: Uzbekistan exceeded the target of GDP per capita increase, reaching $2,258 in 2022.
• Unemployment Rate: The unemployment rate, initially on track to reach 6.0%, rose back to 9% in 2022.

Contributions to Development Impacts: ADB has contributed to development impacts in various sectors. Notable contributions include improved capacity in executing agencies for energy projects, reduced travel time in transport projects, enhanced access to financing through finance projects, and support for private sector development and better State-Owned Enterprise (SOE) governance.

Progress in Crosscutting Objectives: ADB's CPS in Uzbekistan emphasized crosscutting objectives. A country knowledge plan was developed and updated to align with the CPS goals. ADB supported the government in areas such as promoting solar energy, strengthening road maintenance capacity, and assessing possible accession to the Eurasian Economic Union.

Gender Equality and Climate Change: ADB's efforts to promote gender equality resulted in a higher percentage of projects classified as effectively gender mainstreamed. Additionally, ADB's support in sovereign and non-sovereign operations contributed to mitigating climate change and aligning national policies with green economy transition.

Overall Performance Assessment: ADB's performance in Uzbekistan was considered satisfactory, with a focus on strengthening relationships with key ministries and executing agencies. The government demonstrated commitment to reforms, but challenges in project selection and management persist. ADB's role in the resident mission was crucial, but further strengthening may be necessary, particularly in handling the growing private sector portfolio.

Overall Success of the Country Program: The country program was assessed as overall successful on the borderline. It was found to be relevant, effective, and likely sustainable. While the achievements were satisfactory, efficiency was rated less than efficient due to systemic challenges related to project readiness.

Self-Evaluation: The quality of the CPSFR was assessed as satisfactory, providing a comprehensive view of Uzbekistan's macroeconomic conditions and ADB's support. The report highlighted implementation efficiency issues, but these were not fully reflected in the efficiency rating. Some inconsistencies in data and findings were noted.

Key issues, lessons, and recommendations 

The lessons and recommendations presented in this report address various aspects of ADB's operations in Uzbekistan and aim to enhance the effectiveness and impact of future initiatives.

Key Issues:

Complex and Challenging Reforms: Future reforms in Uzbekistan are expected to be more complex and challenging, particularly in reducing the dominance of State-Owned Enterprises (SOEs) and increasing competition in key sectors.

Uncertainty and Economic Shocks: Growing uncertainty in the world economy, geopolitical tensions, and other socio-economic shocks may necessitate further government borrowing, posing challenges to fiscal management.

Climate Change and Water Shortages: Uzbekistan faces climate risks and water shortages that threaten its growth. Addressing these issues requires regional collaboration, which has been limited mainly to cross-border infrastructure investments.

Lessons:

Vulnerability to Climate Change: Uzbekistan's vulnerability to climate change warrants more robust support from ADB.

Regional Collaboration for Climate Change: Solutions for climate change in water, energy, and land use require regional collaboration.

Need for Improved Education: Uzbekistan requires more secondary schools and higher-quality education to enhance human capital.

Robust Assessment of Development Impact: ADB interventions need a more explicit and robust assessment of development impact on people.

A Consolidated Reform Agenda: A consolidated and consistent reform agenda is necessary for ADB's budget support.

Project Readiness Criteria: The government should adopt project readiness criteria in collaboration with development partners.

Recommendations:

Strengthen Policy Coherence: ADB should provide adequate technical advice and innovative financing modalities to support Uzbekistan's market transition and cope with potential shocks.

Combine Upstream and Downstream Support: ADB should maintain a combined and reinforcing presence for key sectors promoting the market transition, integrating policy-based loans (PBLs) with investment projects and enhancing collaboration between sovereign and non-sovereign operations.

Deliver Regional Integration Solutions: ADB should extend regional cooperation and integration interventions beyond infrastructure sectors, addressing issues related to climate change, water resources management, and trade facilitation, to optimize cross-border infrastructure investments.

Written by Khadicha Abdurashidova

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