IMF: Uzbekistan's fiscal position should maintain macroeconomic stability

Finance Materials 6 March 2019 13:32 (UTC +04:00)

Baku, Azerbaijan, March 6,

By Fakhri Vakilov-Trend:

Uzbek government should avoid pro-cyclical spending increase if the revenue over-performs again in 2019, Trend reports with reference to IMF.

Moreover, as external financing is more than sufficient to cover the overall fiscal deficit in 2019, the government should resist pressures to expand expenditures.

The overall fiscal stance in Uzbekistan in 2018 was broadly appropriate. The budget balance based on the government’s definition yielded a surplus of 0.5 percent of GDP, an over-performance of 1 percent of GDP relative to the budget. Additional revenue from foreign exchange liberalization, favorable commodity price developments, and improvements in tax collections, especially at the local government level, was partly saved, providing counter-cyclical support to the economy.

The IMF mission adjusts revenues and expenditures for extra-budgetary flows and policy lending not included in the budget. The resulting overall fiscal balance is staff’s preferred measure to gauge the impact of fiscal policy. In 2018, policy-based lending rose significantly, increasing the overall fiscal deficit to 2,5 percent of GDP, moderately higher than in 2017.

The fiscal stance in 2019 should continue to support macroeconomic stability. The government’s budget balance is projected to shift to a deficit of 0.75 percent of GDP, reflecting the cost of the 2019 tax reform. With a planned decline in policy lending, the corresponding overall fiscal deficit is projected to tighten to 2 percent of GDP, in line with the need to curb credit growth.

Public debt is projected to remain moderate over the medium term, but lower revenue from State Owned Enterprises (SOE) is a risk. Overall fiscal deficits of about 2 percent of GDP would stabilize the public debt at moderate levels (about 30 percent of GDP). If revenues remain constant as a share of GDP, reducing policy lending would open up space for higher spending, including priorities linked to the UN’s Sustainable Development Goals (SDGs).

However, SOEs currently provide a large share of revenues and, as shown by experiences in other transition economies, their restructuring could reduce collections. Expanding the tax net to cover more private sector firms would help compensate such revenue losses.

Enhancing fiscal transparency further would improve the quality of information and strengthen accountability. Including medium-term fiscal projections and risks in the 2019 budget and publication of a citizen’s budget are major achievements. Uzbek government is committed to include all fiscal operations, including off-budget spending of budgetary organizations, in the budget by the end of this year.

It also plans to conduct a comprehensive assessment of fiscal risks, particularly risks related to SOEs, and establish a strong legal framework for Public Private Partnerships (PPPs). The IMF mission welcomes the envisaged publication of the audited balance sheet of the Fund for Reconstruction and Development (FRD).

Additional tax reforms are needed to spur investment and create jobs. The 2019 tax reform appropriately focused on simplifying taxes, reducing labor taxes, and broadening the VAT. But with the standard tax regime expanding from 7,000 to 35,000 firms—tax administration is daunting.

The next reforms should prune tax preferences, equalize labor taxes across firms, and provide efficient incentives for foreign investment in Uzbekistan. Regarding tax administration, measures are taken to reorganize headquarters, establish a large tax payer office, and, in the medium term, the governance of field offices should be strengthened.

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