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Uzbekistan|business|October 24, 2017 / 02:41 PM
Uzbekistan's economy driven well by domestic demand in 2017: WB

AKIPRESS.COM - Uzbekistan’s economy in 2017 has performed well, driven by domestic demand, according to the World Bank’s latest Regional Economic Update.

The outlook is favorable, given the authorities’ initial steps to ensure convertibility of the foreign exchange and the improving external environment. Going forward, the adequate implementation of the comrehensive market-oriented reform agenda announced in late 2016 will be key to sustain inclusive and robust growth.

GDP growth slowed to 7 percent y/y in H1 2017 from 7.8 percent in H1 2016, according to official statistics. Growth was broad-based, reflecting the 2016-20 sector support programs. On the demand side, the main driver of growth was the large public investment program for 2015-19, which supported various sectors (e.g. transport, housing, and utilities) as well as investment by the private sector and SOEs.

However, real investment growth slowed to 8.3 percent y/y in H1 2017 from 11.8 percent y/y in H1 2016. Private consumption increased slightly in H1 2017 due to stable income growth, (despite the acceleration of food inflation) and a rise in remittances by 30 percent y/y in US dollar terms with the recovery of the Russian economy. Households in the bottom 40 percent of the income distribution are expected to benefit from the recovery of remittance inflows. Food inflation negatively affected net buyers, particularly among households in the bottom 40 percent for whom food accounts for 61 percent of total consumption. Uzbekistan’s mostly mitigated the impact of lower prices of its export commodities in 2014-16 through the expansion of export volume. This trend continued in H1 2017, albeit at a decelerating rate, despite the growth pick up in Russia and China, Uzbekistan’s key trade partners.

Imports also grew, as lower import prices boosted demand for imported goods, resulting in a small trade deficit. Overall, the current account achieved a small surplus due to the recovery in remittances. Still, the economy’s slower growth of both GDP and investment in H1 2017 suggest a broader weakening of the domestic economy, also evidenced by a slowing TFP growth. During H1 2017
—as in previous years—public investment remained robust, but current expenses were cut. To support economic activity, the authorities reduced direct taxes while increasing property and excise taxes in January 2017.

The government also launched a privatization program and sold 169 SOEs in H1 2017. This resulted in an overall fiscal surplus in H1 2017. Monetary and exchange rate policies remained largely unchanged in H1 2017, and the Uzbek som depreciated at a slightly faster rate compared to H1 2016. The policy rate remained at 9 percent in H1 2017, helping total banking loans grow by 29
percent y/y, and total banking deposits grow by 25 percent y/y in the first quarter of 2017.

On June 28, 2017, the Central Bank of Uzbekistan (CBU) raised the policy rate to 14 percent, given the higher inflation observed since late 2016 and rising inflation expectations due to the announced foreign exchange reform. Non-performing loans (NPLs) appear to have remained relatively stable at 0.4 percent according to the CBU, while Moody’s assessed NPLs at 2.0-2.5 percent in August 2017. On September 5, 2017, the CBU allowed the official exchange rate to adjust from 4,210 UZS to 8,100 UZS per US dollar, helping converge the official rate with the curb market rate, and establishing a framework to allow it to float thereafter.

The authorities also announced the removal of restrictions to exchange rate convertibility, including the surrender requirements (by which firms were mandated to sale a portion of their export revenues to the CBU at the official exchange rate), widening private participation in the foreign exchange market. Although validation is not possible due to lack of access to official micro data, the official poverty rate declined from 12.8 percent in 2015 and an estimated 12.4 percent in 2016, driven by robust economic growth, small business development, and targeted social safety net. The distribution of income has become more equitable over time, and the official Gini coefficient fell from 0.39 in 2001 to 0.29 in 2013. However, the official unemployment rate was at 5.2 percent in H1 2017, same as in 2016.

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