Baku, Azerbaijan, April 3
By Fakhri Vakilov – Trend:
Growth of economy in Uzbekistan is projected higher in 2019 and 2020 on expansion in industry and services, Trend reports with reference to the report of Asian Development Bank (ADB).
ADB's report said that growth of economy in Uzbekistan reportedly accelerated in 2018, inflation jumped, and the current account slipped from surplus into a deep deficit.
"Tighter monetary policy is expected to slow inflation in 2019 and 2020 despite upward adjustments to utility tariffs. The current account deficit will persist but shrink slightly in 2020. Irrigation reform is essential to agricultural sustainability and climate proofing," said the report.
ADB states that growth is forecast to improve further to 5.2 percent in 2019 and 5.5 percent in 2020, boosted by higher infrastructure spending, an improved investment climate, expected gains in exports, and a pickup in agriculture.
"The main risk to macroeconomic stability stems from persistent credit expansion, which could revive inflationary pressure and push the current account further into deficit," said the report.
On the supply side, growth in industry is expected to slow to 5.5 percent in 2019, reflecting slower expansion in the production of machinery and petrochemicals for agriculture, and in mining and quarrying primarily for export and construction, ADB said.
"Industrial sector growth is forecast to recover to 6.0 percent in 2020. Construction is forecast to expand by 9.0 percent each year, sustained by government expansion of urban infrastructure and services. Periodic increases in wages and pensions, and of spending for social assistance, are projected to expand services by 5.5 percent each year by boosting trade and transport. Growth in agriculture is forecast to accelerate to 4.0 percent in 2019, thanks to ample rain and structural reform in cotton and wheat, and 4.5 percent in 2020," the report said.
"On the demand side, growth will come mainly from investment as gross fixed capital formation rises on further improvement in the investment climate and government-led investment to modernize manufacturing, mining, power generation, transportation, and housing. Private consumption is expected to benefit from wage growth. Net exports are anticipated to remain a drag on growth in 2019 and 2020," the bank said.
Asian Development Bank stresses that inflation is projected to decelerate to 16.0 percent in 2019 and further to 14.0 percent in 2020 as lending growth under state programs slows and further streamlining of customs procedures facilitates imports. Inflationary pressure will persist, however, from the lagged effects of a November 2018 rise in energy prices, further hikes to electric power and natural gas prices planned for June 2019, consequent adjustments to wages and pensions, and upward revisions to customs duties on imports.
"The central bank of Uzbekistan will pursue a phased transition to inflation targeting, aiming to reduce it to single digits by 2021. To contain inflationary pressure, monetary and fiscal authorities must coordinate their actions to mitigate the impact of liberalized prices for agricultural products and of protracted growth in credit," the report said.
ADB notes that growth in broad money is forecast to slow to 13.0 percent in 2019 and 12.0 percent in 2020 as growth in credit falls by half to 25.0 percent and then drops to 15.0 percent.
"In 2019, the central bank will limit preferential lending under state programs and further modify capital requirements for commercial banks when extending credit. Considering the continued impact of hikes in 2018 on utility tariffs and further tariff adjustments planned for 2019, the central bank has set its inflationary target at 13.5 percent – 15.5 percent in 2019 and kept its refinancing rate at 16.0 percent in January 2019," the bank said.
Moreover, it envisions developing money market instruments such as short-term deposits, swaps, and repo auctions—and issuing bonds that pay in 1, 3, 6, and 12 months—to manage liquidity in 2019 and 2020 while expanding its sterilization of foreign exchange inflows to keep monetary policy tight.
"The consolidated fiscal balance is forecast to remain at the equivalent of 0.5 percent of GDP in 2019 and 2020.The augmented fiscal deficit is projected to narrow to 2.0 percent of GDP in 2019 and 2020, reflecting the planned reduction in policy guided lending, in particular on-lending by Uzbekistan Fund for Reconstruction and Development, to curb inflationary pressure from credit growth," ADB said.
The report states that as part of tax reform, the government adopted in January 2019 a flat 12.0 percent individual income tax, introduced value-added tax on companies with revenue above 1 billion soum, and reduced the corporate income tax rate from 14.0 percent to 12.0 percent.
Revenue in the consolidated budget is forecast to reach the equivalent of 30.0 percent of GDP in 2019 and 2020 as expenditure, mainly capital spending on infrastructure, remains at 29.5 percent. The restructuring of state-owned enterprises, the major contributors to the state budget, will create challenges for revenue, which the government plans to address through tax reform that brings more private firms into the tax base.
ADB underlines that the current account deficit is expected to remain high at 7.0 percent of GDP in 2019 before narrowing slightly to 6.5 percent in 2020. Exports of goods are forecast to grow by 10.0 percent in 2019 and 12.0 percent in 2020, reflecting expectations of higher gold prices, stable demand for natural gas from China, expanded agricultural exports to the Russian Federation and other neighbors including Kazakhstan, and further processing of cotton fiber into textiles.
Imports of goods are projected to rise by 25.0 percent in 2019 and 20.0 percent in 2020 as demand generated by infrastructure projects and the continued modernization of industry boost imports for these sectors. The risk of wider current account deficits persists as credit growth may further encourage imports of capital goods.
ADB said that external borrowing for state-led development programs is projected to push external debt to the equivalent of 35.0 percent of GDP in 2019 and 2020. Foreign investment will likely increase as well. Uzbekistan received a sovereign rating in December 2018 and issued its first eurobond in February 2019, providing for Uzbek corporations a benchmark for access to international capital markets.
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