Baku, Azerbaijan, February 28
By Fakhri Vakilov - Trend:
Better coordination between monetary policy goals and the financing of state projects and programmes are key to Uzbekistan (BB-/Stable) achieving sustainable progress in macroeconomic stability, Trend report, referring to the Fitch Rating's report on Uzbekistan.
According to Fitch, a robust external balance sheet, stemming from the accumulation of international reserves and historically limited use of foreign financing, and low government debt provide headroom for the authorities' ambitious plans to open and liberalize Uzbek economy.
At 41 percent of GDP (Fitch's end-2018 estimate), net sovereign foreign assets are one of the highest among non-investment-grade Fitch-rated sovereigns. Uzbekistan Fund for Reconstruction and Development (UFRD) cash holdings accounted for 42 percent of international reserves in 2018.
"The removal in September 2017 of foreign-exchange controls reduced macroeconomic distortions and improved the economy's ability to absorb shocks without eating into external buffers," said the report.
Fitch expects the authorities to maintain exchange-rate flexibility, with monetary policy focused on the main macroeconomic challenge of reducing inflation, which averaged 17.6 percent in 2018, partly due to soum devaluation after FX liberalization, as well as the removal of price controls.
"The monetary policy framework continues to develop. Uzbek Central Bank is improving its economic forecasting instruments and liquidity management tools, and inflation-targeting is due to be formally introduced by 2021. However, reducing inflation will also depend on effective policy coordination by the authorities," said the report.
"Budgetary policy is relatively conservative, but rapid, directed credit growth and off-budget investment spending through the UFRD (Uzbekistan Fund for Reconstruction and Development) have created domestic demand pressures. Combined with high dollarisation and shallow capital markets, the large role of the public sector in credit provision constrains the effectiveness of monetary policy," Fitch said.
An important part of Fitch’s ongoing sovereign rating assessment will focus on how far policy coordination improves, bringing the rate of inflation down and supporting macroeconomic stability, and progress in broader structural reforms designed to reduce the state's role in the economy and improve the quality of institutions.
Fitch forecasts average inflation to decline gradually to an average of 14.9 percent in 2019 and 14.0 percent in 2020.
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