The recent publication of the Central Bank of Uzbekistan (CBU) for the ‘Monetary Policy Guidelines’ provided a reminder about the pressures on the expected inflation and the state budget deficit, along with the future expectations and reforms in the development of monetary policy tools and their effectiveness.
Since the published report represents the extensive overview of the current trends and forecasts of both monetary and fiscal policy in the country that are beyond of this article, this following article reporeted by Bakhtiyorjon Yokubjonov, Investment Banking Analyst at Alkes Research, mainly focuses on the expectations and suggestions of CBU on the current state budget deficit and the external financing of the country to support internal demand side of the economy.
The state budget expenditure on the social spheres to support the internal demand of the Uzbek economy has mostly been the one of the most significant compared to other areas for expenditure direction. Especially, the last published 4 quarters regarding the state budget expenditure (starting Q12022, ending Q2 2023), the expenditure directed toward the support of the social spheres accounted on average 50% of the total state budget expenditure.
Apparently, the government seems to be the one of the main body financing the demand side of the economy and currently considering the expansionary fiscal policy in the country.
*State Budget Expenditures values are as of restated to stay consistent and make it comprehensive for the consideration of audience. For the full disclosure on the stated report of the state budget, please refer to Open Budget.
Based on the research analysis of the World Bank on the fiscal policies of 148 countries, the CBU stated that the fiscal policy in Uzbekistan was acyclical, as the state of the fiscal policy was not amended according to the changes and the state of the business cycle of the economy.
And it becomes quite obvious that Uzbekistan has been indeed mostly applying expansionary fiscal policy in the country, that as it can be observed from the table above.
As well as it is recent, the Uzbek government reforms in the energy industry, specifically regarding the state subsidies on the energy consumption of the population, has been a supporting step.
CBU reports the consideration of the international financial institutions (IFIs) that the energy subsidies are indeed the ‘distorting costs at the expense of the lack of smooth run of the market economy mechanisms.
Considering the above-mentioned, the CBU stresses the importance of the liberalisation of energy tariffs to decrease the pressure on the state budget deficit by decreasing the deficit to the ‘neutral rate of 2-3% as the GDP of the country. Eventually that seems to be one of the main factors connected to CBU to meet its target inflation rate of CBU.
The case of Uzbekistan indeed seems to be a bit of an outlier as it can be seen from comparison of Uzbekistan to other CIS and main trading partner countries like Russian Federation, China, Kazakhstan, Turkmenistan and Azerbaijan that the current state energy subsidies of Uzbekistan as of the GDP is the highest among those mentioned countries.
Despite those, CBU states that there should still be the part of energy subsidies to be directed to the certain layers of the society levels. Again the significant decrease in the energy subsidies in a short period of time may cause the concerning trends in the household income and especially in the demand side of the economy, since the CBU indeed references the outpacing trends of the demand side over the supply side of the economy.
That is why it is mindful to process the liberalisation of energy tariffs systematically along with the consideration of all stakeholders in the economy at the levels of society.
Once the energy tariff levels reach a certain price range, not necessarily public investments, but especially the investments from the private markets should take a lead to support and reform the energy infrastructure of the country. Again, approaching a business problem, in this case the energy industry, from the private market side seems to be the best way to improve the quality and viability of the energy resources to the society and other stakeholders of the economy.
That is due to the reasoning that approaching a business problem from the public side does not necessarily always seem to be the optimal approach to solve, simply speaking a ‘business problem’. And it is even attributable to the case that in the public side, the employees, staff and other key beneficiary providers do seem to be undercompensated, unmotivated to fulfil their assigned operations for the best interest of the key direct and indirect beneficiaries in both public and private levels.
In terms of the recent external financing provided by the IFIs, investment attraction policies, CBU states the importance of the export structure of the economy, since the almost one-third of the export comes from mining of gold, at the same time that is making the country as of one of the leading exporter and producer of the gold in the world.
*The export and import structures are as of restated to stay consistent and make it comprehensive for the consideration of audience. For the full disclosure on the stated report of the export and import structures and other foreign-trade-related information, please refer to Statistics Agency.
As it can be seen from the trend of the foreign trade turnover, the portion of the import structure has been on an increasing trend, overpacing the export over the period of the last 5 years of 2019-2023 January-October ended. That is why CBU stresses the importance of the robust export structure as indeed the one-third of it is accounting for the gold.
And it is due to the trends of the interest rates and inflation rates in the main trading partners neighbourhood and other developed countries, since the gold prices have a reasonably concerning exposure to the levels of those global inflation and interest rates.
Most importantly, the CBU considers the increase of the foreign direct investments, internal production potential of private sectors to be the catalysts to meet the forecasted GDP growth in real terms of 5-5.7% in 2024, 5-6% for 2025 and 5.5-6.5% for the further 2026.
As the internal private sector production is considered a more sustainable and robust approach to support the foreign trade activities and the viability of the country in terms of financing its investment projects directed to the key sectors of the economy.
Again, private-sector-way approach indeed seems to be one of the vital supporting option of the state of the key macroeconomic activities and reforms of the country, Uzbekistan in this case, since there is still the gap or maybe quite a big ‘potential’ to grow the private sector of the economy as to even further improve the state budget with the transparent tax system.
For the full disclosure on the stated report of the state budget, please refer to Open Budget.
Since that is due the fact that a significant portion of the state budget revenue flows from direct and indirect taxes and the Uzbek government indeed seems to be quite determined to make significant further reforms in the tax system as well.
A case in point that the recent meeting between representatives of Ministry of Economy and Finance (MEF) and the International Monetary Fund (IMF) regarding the possibility of the technical assistance of IMF to improve the tax policy and system automation of the country along with to develop the regulation, tax risk management and reforms against the presence of the shadow economy.
As the global inflation and interest changes, the external borrowing financed by IFIs comes with higher cost, due to the uncertainty becomes present, along with the growth of the Uzbek economy as there is quite a positive correlation between the growth rate of the economy and the cost of capital as a whole.
But considering lower expected growth rate of the world economy comparatively at the same time to the economic growth in Uzbekistan, the increase or the decrease of the cost of capital provided by IFIs or other related organisations eventually seems to be indeterminate.
That is why the CBU, indeed stresses the importance of fiscal discipline in terms of both state budget revenue and expenditure in order to decrease the exposure to the potential external and internal shocks, which CBU considers as the alternative case scenario.
But again, there are still things that are going to be put in place for the sustainability of the economy from a private sector perspective and it is still mindful to be in the reforms that are coming together for the long-term future period. The next upcoming CBU Board Meeting will take place on December 12, 2023, so the next coming key considerations of the CBU become known in that day’s press release.
Earlier Daryo reported that the Central Bank of Uzbekistan has suggested a plan to cut back on subsidies for energy resources and social expenditures in its monetary policy spanning from 2024 to 2026. The bank anticipates that this proposal will notably contribute to budget consolidation.