Uzbekistan
Recent Economic Developments
Author:
International Monetary Fund
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Publication Date:
31 Oct 1997
eISBN:
9781451839777
Language:
English
Keywords:
ISCR; CR; U.S. dollar; market price; broad money; minimum wage; consumer goods; last quarter; interbank market; balance of payments; banking system; private sector
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This paper reviews economic developments in the Republic of Uzbekistan during the 1990s. After several years of high inflation, the thrust of financial policies was shifted toward stabilizing prices and the exchange rate in late 1994, following the introduction of the national currency. In 1995, stabilization and structural reform efforts were intensified, and the authorities’ economic program for 1995 was supported by a first drawing under the IMF’s Systemic Transformation Facility and a rehabilitation loan from the World Bank.

Abstract

This paper reviews economic developments in the Republic of Uzbekistan during the 1990s. After several years of high inflation, the thrust of financial policies was shifted toward stabilizing prices and the exchange rate in late 1994, following the introduction of the national currency. In 1995, stabilization and structural reform efforts were intensified, and the authorities’ economic program for 1995 was supported by a first drawing under the IMF’s Systemic Transformation Facility and a rehabilitation loan from the World Bank.

I. Introduction and Overview

1. Since Uzbekistan’s independence in 1991, its economy has been subject to large macroeconomic shocks resulting from disruptions in the trade and payments systems and the move towards market-related prices for trade. Uzbekistan embarked later man most CIS countries on economic reforms. Only after the introduction of the national currency, the sum, in July 1994, did the authorities introduce a comprehensive stabilization and economic reform program. While the basic features of this program were similar to those of programs established by other CIS countries, the pace of reform chosen by the Uzbek authorities was more gradual than in most.

2. The economic performance of Uzbekistan has differed from that of other CIS countries in important aspects, m particular, the cumulative decline in real GDP in Uzbekistan has been only about 18 percent since independence, and the share of fiscal revenue in GDP has remained high.

3. Several specific features of the Uzbek economy have cushioned the fall in output. First, Uzbekistan was not faced with a tight external financing constraint, unlike most other countries in transition. Second, Uzbekistan had been assigned the role of supplying raw material, particularly cotton and gold, within the Soviet Union, while importing foodstuffs and final goods from other members of the Union. By diverting its easily marketable exports to western markets, Uzbekistan was able to escape to some extent the disruption of trade with traditional trading partners after the break-up of the Soviet Union. Third, because it had specialized as a producer of raw materials, it was saddled with relatively fewer nonprofitable large industrial enterprises that needed to be closed or restructured than most other countries that emerged from the former Soviet Union. Moreover, it had a considerable potential for-establishing new industries to process domestically produced raw materials. Uzbekistan has taken advantage of this through large investments in, for example, the energy sector, and cotton and food processing industries. At the same time, Uzbekistan has not yet experienced serious problems with tax revenue collections, partly because of the smaller decline in GDP and partly because a large share of revenue has been collected through excise taxes imposed on the cotton and gold sectors; also, the moderate pace of reform has not led to the sharp changes in production and marketing arrangements that have adversely affected economic performance in many other transition economies.

4. After several years of high inflation, the thrust of financial policies was shifted towards stabilizing prices and the exchange rate in late 1994, following the introduction of the national currency. In 1995, stabilization and structural reform efforts were intensified, and the authorities’ economic program for 1995 was supported by a first drawing under the Fund’s Systemic Transformation Facility (STF) and a rehabilitation loan from the World Bank. The consolidated fiscal deficit declined, as a percent of GDP, from 6 percent in 1994 to 4 percent in 1995. Inflation, as measured by the 12-month change in the CPI, was reduced sharply from 1,281 percent in 1994 to 117 percent in 1995.

5. With the goal of consolidating the gains made in macroeconomic stabilization and laying the foundation for a sustainable economic recovery, the authorities aimed at intensifying their reform efforts under the 1996 economic program.1 During the first 9 months of 1996, the stance of credit and budgetary policies was tight. Bank liquidity was reduced through open market operations, and the extension of refinance credits was limited. Since March 1996, the Government has issued Treasury bills to banks and non-banks, thus relying less on direct borrowing from the Central Bank of Uzbekistan. Interest rates on both credits and deposits became positive in real terms, and nominal interest rates declined in line with progress on inflation. The consolidated fiscal deficit was limited to less than three percent of GDP during the first three quarters of the year, owing to strong revenue collections and tight control over cash expenditures. However, there was a build up of pension and other expenditure arrears during this period. In the last quarter of 1996, credit and budgetary policies were loosened in response to a poor cotton crop. Largely reflecting net lending operations to the agricultural sector, the overall fiscal deficit was 15 percent of GDP in the quarter and over 7 percent of GDP for the year as a whole. The associated monetary expansion led to a sharp increase in inflation in the fourth quarter of 1996. Nevertheless, inflation for the year was reduced to around 64 percent, or slightly more than half of its 1995 rate. During the first quarter of 1997, the authorities again tightened financial policies. This contributed to a decline in the inflation rate to about 5½ percent per month during the first four months of 1997, compared with 9½ percent per month in the last quarter of 1996.

6. During late 1995 and the first part of 1996, significant progress was made in liberalizing the trade and exchange systems. The number of export commodities subject to bans and taxes was reduced sharply, the maximum and average import tariffs lowered and access to foreign exchange increased. However, in 1996 stagnating exports, high prices for grain imports because of a poor grain harvest in the region, and rapid growth in imports of consumer and investment goods put pressure on the balance of payments, which was exacerbated by the expansionary stance of fiscal and monetary policies in the last quarter. To protect their foreign exchange reserves, the authorities resorted to restrictions on imports and on access to foreign exchange. As a result, large spreads emerged between the exchange rates in the auction, cash bureaus, and curb market. This culminated in the introduction, as of January 1, 1997, of a formal system of multiple exchange rates and exchange market segmentation. In 1996, the external current account deficit widened to almost 8 percent of GDP, after a deficit of only 0.5 percent of GDP in 1995. With regard to the exchange system, the authorities continued to follow a managed float in 1996, with the sum depreciating in the official market against the U.S. dollar by 55 percent in nominal terms, but appreciating on average by 11 percent in real terms over 1995. In relation to the Russian ruble, the currency appreciated on average by 4 percent in real terms during the same period. During the first four months of 1997, the sum depreciated by a further 9 percent in nominal terms against the U.S. dollar in the official market, but appreciated by over 6 percent in real terms.

7. Uzbekistan has followed a cautious policy in the area of structural adjustment, and advances in market reforms remain fragile. In some areas, such as price liberalization and privatization of housing and small-scale enterprises, the authorities have made significant progress. As regards price liberalization, only a few communal services, rents and monopoly products remain subject to control. Prices for oil and oil products are close to, or even exceed, world market prices measured on the basis of import parity at the official exchange rate. Virtually all housing has been transferred or sold to residents, and almost all small-scale enterprises have been privatized. Much less progress has been made in the privatization of medium- and large-scale enterprises, as well as in enterprise and financial sector reform. Also, reforms in agriculture have been limited. State orders remain in effect for cotton and grain, sales to the cotton monopoly are mandatory, and trade liberalization is still incomplete with bans and tariffs being imposed on several agricultural export products.

II. REAL SECTOR DEVELOPMENTS

8. Since 1991, Uzbekistan has faced major challenges arising from both external and internal imbalances in the economy. After expansionary credit policies had led to very high inflation rates in 1992-94, the Government shifted the focus of macroeconomic policy towards stabilizing prices and the exchange rate. As a result, inflation was reduced sharply during 1995 and 1996. Uzbekistan has so far avoided the sharp decline in output experienced in most other CIS countries and open unemployment has remained low. As regards structural reform, significant progress has been made in price liberalization and privatization of housing and small-scale enterprises, although restructuring and privatization of medium- and large-scale enterprises, as well as reform of the agricultural sector, have proceeded slowly.

A. Economic Activity

9. After a cumulative decline of 17 1/2 percent during 1992-95, real GDP grew by 1 1/2 percent in 1996; and in the first quarter of 1997 real GDP was 1.7 percent higher than in the same period in 1996 (Figure 1 and (Table 1). The resumption of growth in 1996 was led by a strong performance in the trading sector, the output of which rose by about 20 percent in real terms, and a recovery in the industrial sector. This offset a decline of 7 percent in agricultural output, mainly because of a poor cotton harvest. Output in the industrial, construction, and other services sectors also grew in real terms in 1996.

Figure 1.
Figure 1.

Uzbekistan: Output and Wages, 1991-96

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Sources: Data provided by the authorities; and IMF staff estimates.
Table 1.

Uzbekistan: Red GDP Growth, 1992-97

(In percent over previous year)

article image
Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

In percent over the corresponding quarter of 1996.

Includes the government sector

10. The agricultural and industrial sectors together accounted for 40 percent of GDP at market prices in 1996. The relative share of the agriculture has been declining over the last several years, while the shares of the transport and communications, trading and other services sectors have increased (Table 2).

Table 2.

Uzbekistan: Sectoral Shares of Nominal GDP, 1992-96

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Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

Includes the government sector.

Agriculture

11. Agricultural production remained relatively stable during the first four years after independence. This, however, masked significant declines in cotton production and productivity which were offset by a strong increase in grain output. In 1996, output in the agricultural sector fell sharply by 7 percent in real terms, reflecting in part adverse weather conditions which seriously affected the cotton harvest as well as a further drop in the productivity of irrigated cotton cultivation (Box 1). In 1996, agriculture also suffered from problems in the supply of inputs, outdated machinery, and a lack of incentives, including delayed wage payments and low producer prices. A more detailed discussion of agricultural sector issues in Uzbekistan is given in Appendix I.

Cotton Cultivation and its Environmental and Social Implications

The heavy use of fertilizers and pesticides in large scale cotton irrigation has resulted in salinization and a decline in soil fertility. Cotton yields declined from 2.7 tons per hectare in 1991 to 2.2 tons per hectare in 1996. Water use in cotton cultivation is excessive due to poor water management and the absence of water fees; cotton growers in parts of the country reportedly use about three to four times as much water as in other countries.

The massive diversion of water from two major rivers (the Syrdarya and the Amudarya) for cotton irrigation has also contributed to the sharp decline in the supply of water to the Aral Sea which is drying up. Once the world’s fourth largest inland sea, it has already lost about a third of its surface area since the 1960s. In addition, the excess irrigation water that is drained off irrigated land is heavily contaminated with mineral salts and fertilizers, polluting the Aral Sea. The fishing industry has collapsed, and human health has also been adversely affected as both the supply and quality of drinking water has worsened. Owing to air pollution through wind-born salts, there has been a large increase in respiratory and other diseases of among the population around the Aral Sea. There has also been a change in the natural climate in the region around the Aral Sea.

The Uzbek Government is committed to move away from cotton monoculture and to increase cotton yields through more efficient use of chemical inputs and water. At the same time, the authorities promote the cultivation of food crops (grains, fruits, and vegetables) on irrigated land. It will also be important to increase water charges and remove other subsidies on inputs so as to increase the efficient use of water and inputs.

A regional program by Kazakstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan is being undertaken to reduce the ecological and social problems associated with the shrinking Aral Sea This program is supported by the World Bank, the UN and other donors. However, the implementation of this program is I slowed down by divergent national interests and the region’s complicated geography. The Aral Sea straddles the border between Kazakstan and Uzbekistan and the Syrdarya and Amudarya flow through four different countries—Tajikistan, the Kyrgyz Republic, Turkmenistan and Uzbekistan.

12. After declining by about 10 percent in 1994, cotton production stabilized at about 4 million tons in 1995, but fell further by almost IS percent to around 3.4 million in 1996 (Statistical Appendix Table 10). The 1996 cotton crop was adversely affected by cooler than usual weather during the summer months and heavy rams in September. Grain production in 1996 increased to around 3.5 million tons from 3.2 million tons in 1995, reflecting the Government’s objective of shifting agricultural production from cotton to grain in order to achieve food self-sufficiency. Production, however, fell significantly short of the official production target of 4.5 million tons as yields on irrigated land remained low in comparison with those achieved by other countries. Other agricultural products were also adversely affected by weather in 1996. In particular, the production of vegetables declined although this may to some extent have also reflected a shift to unrecorded informal sales. Tobacco production was lower in 1996, but is expected to stabilize or increase in the near future with the help of significant foreign investment.

13. The combination of poor weather, which affected forage, and a longer term decline in productivity also reduced livestock sector production in 1996. In recent years there has been a significant drop in the number of animals (e.g., poultry) and in average yields (e.g., milk).2 Recently, a number of state-owned livestock enterprises have experienced financial difficulties that affected production. Official data may, however, fail to cover fully livestock products, which are increasingly being produced and sold by private households outside official marketing channels.

Agricultural policies

14. Agriculture policies in 1996 and early 1997 continued to reflect a high degree of governmental control. Official policy objectives included: (i) the attainment of self-sufficiency in grain and meat; and (ii) development of the cotton sector, with the assistance of a World Bank loan. The latter sector was hindered, however, by a weak incentive structure, including low producer prices.

15. In 1994, state orders were abolished for all goods, except cotton and wheat, for which a program of a phased reduction in state orders and increases in producer prices was introduced. State orders for cotton and wheat were announced officially as 40 percent and 25 percent of the 1996 crops, respectively, while the procurement prices were to be raised to 70 percent and 75 percent of the world market price, respectively.3 As explained in Appendix I, state orders apply to planned rather than actual production. With a much smaller than planned outcome for the harvests, however, state orders for both cotton and wheat were thus much larger than had been announced and farms that did not meet the plan targets had to surrender their total crop at the low state order price. For the 1997 crop, the Government intends to reduce the state order for cotton to 30 percent, while keeping that for wheat unchanged.

16. As a percentage of world market prices, procurement prices ended up being lower than intended due primarily to the depreciation of the exchange rate. In August 1996, the Government announced a producer price for raw cotton of sum 12,500 per ton, equivalent to about sum 39,000 per ton of cotton fiber. At that time, this price amounted to 63 percent of the world market price at the official exchange rate. This price was not subsequently adjusted to offset the depreciation of the currency in the second half of 1996, with the result that farmers received a lower share of the world market price (Box 2). Similarly, the producer price for wheat that farmers received was substantially lower in U.S. dollar terms than at the time when it had been originally set.

uzbekistan: Cotton and Grain State Order Prices in 1996

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Sources: Ministry of Agriculture; staff estimates.

Cotton producer price as officially announced in August 1996.

Most of the 1996 crop will be marketed in 1997.

The higher price refers to an upper limit established in April 1996; the average procurement price paid is not known.

17. The agricultural sector continues to benefit from explicit tax exemptions and implicit subsidies. It is not subject to VAT on sales and major inputs; the profit tax rate is much lower than for other sectors; the electricity tariff paid by farmers is low relative to other sectors; and no fees are charged for water.

Industry

18. Reflecting, in part, the relatively smaller share of industrial enterprises inherited by Uzbekistan compared with other CIS countries, the output decline in the industrial sector has been relatively modest since independence. The production structure in traditional industries has remained largely unchanged because of the limited efforts to reform and privatize medium- and large-scale state owned enterprises (Section II. E and Appendix II). Traditional industrial enterprises are not receiving explicit subsidies but continue to benefit from the absence of a hard budget constraint, access to commercial bank credit at relatively low interest rates, and the provision of foreign exchange at the official exchange rate.

19. Production declines in some subsectors have been offset by increases in others, reflecting the Government’s policy to shift the structure of the economy in a more industrialized direction. The Government views foreign direct investment, especially through joint ventures, as essential in achieving rapid industrialization. Substantial Government-led investment has taken place in priority sectors (e.g., energy) and a number of large-scale foreign direct investment projects have started operation. However, vigorous domestic private sector development is yet to emerge. In 1996, against the background of rising consumer goods imports, industrial sector policy increasingly emphasized import substitution.

20. Value added in the industrial sector grew by 1.7 percent in real terms during 1996. Growth was strongest in the machine building and metal processing subsector, in part reflecting a substantial increase in the production of automobiles as a joint venture operation with a South Korean company came more fully on stream (Table 3). Production growth was also strong in metallurgy and timber and wood processing. By contrast, there was a slump in the production of a number of consumer goods, including textiles, rugs and carpets, and vegetable oils (Statistical Appendix Table 11).

Table 3.

Uzbekistan: Industrial Production, 1992-97

(Percentage change over the previous year) 1/

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Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

Industrial production is measured as the gross value of production at the previous year’s prices.

Change in percent over the same period of 1996 at constant prices.

21. The Government continued to pursue a policy of energy self-sufficiency in 1996. Production of petroleum products and natural gas, rose significantly during the year, partly due to increased production capacity. With foreign participation and domestic budgetary support, substantial further investment in the sector took place, particularly related to the Bukhara oil refinery, which is expected to become operational in 1997. Electricity production declined slightly in 1996 due to lower exports to neighboring countries which experienced payments difficulties.

Transport and communication

22. Value added in the transport and communication sector declined in real terms by 1 percent in 1996, continuing the trend of previous years. Although the road and railway infrastructure is reasonably well developed, much of the transport equipment such as railway locomotives and wagons and trucks is outdated and in disrepair, resulting in a decrease in the volumes of cargo and passenger transport. Also, arrears mainly owed by domestic state-owned enterprises built up during 1996 in the sector, which affected adversely the financial performance of both trucking and rail companies. However, some of the recorded decline in the transport sector reflected a shift from public sector rail to private sector road transport, which is insufficiently covered in the national accounts.

23. The Government continued to focus on improving telecommunications during 1996. With the assistance of several major foreign telecommunications companies, progress was made in upgrading existing networks as well as installing new technology, particularly in the Tashkent area.

Construction

24. Official data indicate that value added in the construction sector grew by only 0.6 percent in real terms in 1996, after a strong decline in 1994-95. Production may, however, be underestimated in the national accounts as there was apparently an intensification of unrecorded residential housing construction activities following privatization of many houses and apartments, in addition, there are methodological problems in the computation of the deflator for this sector.

Trade and services

25. Growth in the trading and services sector was particularly strong during 1996, especially in the second and third quarters, as the private sector responded to domestic and external trade liberalization and the privatization of retail shops. Increased activity took place in domestic wholesale and retail trading, restaurants and bars, and consulting, auditing, and legal services.

26. The State Committee for Forecasting and Statistics has attempted to include the informal sector in the official national accounts statistics by computing estimates of informal sector production based on expenditure data from the regular Household Budget Survey. These estimates point to a share of the informal sector in GDP of 6 percent in 1995 and 10 percent in 1996. However, deficiencies in the primary data collection methods suggest that the informal sector is likely to be larger.

B. Prices

27. After significant progress in reducing inflation from 1,281 percent in 1994 to 117 percent in 1995, Uzbekistan further reduced inflation during the first nine months of 1996 through tight fiscal and monetary policies. The relative stability of the exchange rate was also a contributing factor and increases in administered prices were moderate. The consumer price index (CPI) increased by 26 percent during the period January-September 1996, but by 64 percent for the year (Statistical Appendix Table 12 and Figure 2).

Figure 2.
Figure 2.

Uzbekistan: Consumer and Wholesale Prices, 1994-97

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Sources: Data provided by the authorities; and IMF staff estimates.

28. During the last quarter of 1996, the prices of a number of important consumer goods rose sharply, as financial policies were relaxed and the currency depreciated (Statistical Appendix Table 13). In addition, excise taxes on some imports were introduced and other existing excises were raised as of October 1, 1996 and administered energy prices were increased in December. As a result, monthly inflation averaged 9.5 percent in the fourth quarter. Inflation remained high in the first quarter of 1997, at an average monthly rate of 5.7 percent. This was partly due to further increases in important food prices (e.g., meat) and occurred despite the continued indirect subsidization of imported grain through the exchange system.

29. The wholesale price index (WP1) increased by 72 percent in 1996, compared with 215 percent in 1995. In the last quarter of 1996, the WPI grew by less than the CPI, partly because the effect of the exchange rate depreciation on prices of imports was not fully captured. Wholesale prices, however, rose quite strongly in December 1996 due to a significant adjustment of administered energy prices (Statistical Appendix Table 14). During the first quarter of 1997, the WPI increased by almost 12 percent.

30. During 1996, movements in the overall GDP deflator were more closely in line with CPI and WPI inflation than was the case in previous years due to improvements in statistical compilation methods (Statistical Appendix Table 15). However, methodological weaknesses remain in the compilation of some sectoral deflators.4

Price reforms

31. Direct price controls were abolished during 1992 to 1995 for most foodstuffs, consumer goods, and services. In 1996, direct price controls still applied to energy, rents, and charges on communal services, public transport, and telecommunication. In addition, the Government continues to control prices of a large number of so-called monopoly products.5

32. In the energy sector, following a major increase in administered prices in April 1996, further price adjustments were introduced as of December 1, 1996, which led to a substantial reduction in cross subsidization from industrial customers to households for gas and electricity (Statistical Appendix Table 16).

  • The electricity tariff for households was raised by 28 percent while the wholesale electricity tariff for industries was maintained unchanged. As a result, the differential between these tariffs was substantially reduced by 85 percent.

  • The wholesale and household tariffs for natural gas were raised by 17 percent and 100 percent, respectively, resulting in a reduction in the differential between those tariffs of 41 percent. Despite these adjustments, the household tariffs for electricity and gas remained much below their domestic cost recovery level (Table 4 and Figure 3).

  • The price of crude oil was raised by 38 percent, leaving the domestic price still below the import parity price of US$1 IS per ton at the official exchange rate.

  • To ensure continued full cost recovery the price of mazut (heavy diesel oil) was raised by 4.7 percent, of diesel fuel by 3.6 percent, and of gasoline by 7 percent at the wholesale level and by 20 percent at the retail level.

Figure 3.
Figure 3.

Uzbekistan: Energy Pricing, 1995-97

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Sources: Ministry of Finance; and IMF staff estimates.1/ Relative to export parity price for diesel, mazut, and gasoline, and to long-run cost recovery price for gas and electricity.
Table 4.

Uzbekistan: Energy Prices, 1996-97

(Ratios) 1/

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Sources: Ministry of Finance; and IMF staff estimates and projections.

Domestic price in US dollars divided by the import parity price for crude oil; the export parity price for diesel fuel, mazut and wholesale gasoline; and the long-run cost recovery price for gas and electricity as established by a EU/TACIS study

33. Communal service charges in Tashkent were raised by 100-280 percent on March 1, 1997 from low levels. Telecommunication charges were increased one month later broadly in line with inflation. For several population groups preferential utility prices continue to exist. For example, in urban areas public sector teachers and health staff receive a 50 percent subsidy on water and gas charges and pay a 50 percent lower tariff on the first 110 kilowatt of electricity used each month.6 In rural areas, the supply of water, gas and electricity remains free for teachers. Preferential utility prices exist for some specific and small target groups (e.g., war veterans). Agricultural farms also benefit from preferential charges, and water provided through the irrigation network has been provided at no cost for farmers (Appendix I).

C. Wages and Employment

34. After declining in 1994-95, wages in the public sector increased sharply in real terms in 1996. Minimum and average wages in real terms fell by about 70 percent and 40 percent, respectively, during 1994-95, before rising by 55 percent and 31 percent, respectively, in 1996. Valued at the official exchange rate, the monthly minimum wage, which is crucial as it sets the pace for increases in all budgetary wages and pensions and allowances, averaged US$10 in 1996, which was close to the peak reached in 1994 (Statistical Appendix Table 17), while the average wage in 1996 was equivalent to US$52, up from less than US$40 in 1994 and 1995 (Figure 4).

Figure 4.
Figure 4.

Baltics, Russia and Other CIS Countries: Average Monthly Wages

(In U.S. dollars, period average)

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Source: National authorities.1/ Dollar wages are based on official exchange rate.

35. Wage differentiation among sectors increased further during 1996. Wage increases were lower in the agricultural, education, and health care sectors than in the computer services and the financial sector (Statistical Appendix Table 18). As a result, qualified personnel from the education, health, and science sectors have been taking up employment in other sectors, often with private enterprises or agencies. Informal employment arrangements have become increasingly important, and wage developments in both the informal sector and formal private sector may diverge from what is shown in the official data.7

Wage policies

36. Wages in budgetary organizations are determined by the Government through the minimum wage and the budgetary wage grid which links remuneration to the minimum wage. This grid was last amended in Jury 1996 when the differential between the lowest and highest wage categories rose from 5.3 to almost 6, and the number of budgetary wage categories was reduced from 28 to 22. Base wages in the public sector are generally supplemented by allowances and bonuses, paid on a monthly, quarterly, and annual basis.8 Total remuneration received by workers is higher than wages reflecting substantial fringe benefits such as health services, housing, meals, and transportation. Reportedly, wage payments for higher level staff in the Government and state-owned enterprises are increasingly supplemented by in-kind payments and allowances for business trips abroad. Wage developments are also affected by the Government’s “wage break” system, introduced in 1994, which regulates the payroll of state-owned enterprises and restricts the increase in the wage bill to 70 percent of the growth in nominal output.9

Employment

37. Of the total population of 23.1 million persons, 8.6 million participated in the labor force in 1996. According to official data, overall employment in the economy has increased slightly since independence (Statistical Appendix Table 17). These data, however, mask significant and probably rising hidden unemployment, or underemployment, in state-owned enterprises and agricultural collectives. Within the public sector, official data show a significant decline in employment since independence but this may reflect that many enterprises are no longer being recorded as part of the budgetary sector. Public sector employment has, however, increased in education and has remained high in health care. Overall, by mid-1996 about 1.7 million persons were employed by budgetary organizations, with the largest numbers in the education and health sectors (Statistical Appendix Table 19).

38. Officially recorded unemployment has remained very low in 1996 (0.4 percent of the economically active population).10 However, it is acknowledged that actual unemployment is much higher. About 240,000 persons were on forced leave in 1995 and 1996 and a survey conducted by the Ministry of Labor in 1995 suggested that about 500,000 persons were effectively unemployed, which would imply an unemployment rate of about 5 percent. At the same time, it was estimated that as many as 1 million persons were underemployed in agriculture in 1995. Many of these may earn incomes from informal activities. Reportedly, unemployment is particularly large in the densely populated Ferghana valley.

D. Saving and Investment

39. The economy’s overall investment rate fell sharply during 1992-94, but rebounded strongly in 1995, reflecting increases in both non-government and government investment (Statistical Appendix Table 20).11 In 1996, government investment continued to increase, reaching a share of GDP almost double that of 1992. In contrast, non-government investment declined in 1996, with the result that overall investment was lower as a percentage of GDP. After declining substantially during 1994-95, foreign saving—equivalent to the external current account deficit—financed an increased share of domestic investment in 1995 and 1996; foreign saving amounted to almost 8 percent of GDP in 1996. Non-government consumption increased in 1996 (Statistical Appendix Table 21). Government consumption in percent of GDP declined sharply from 1992 to 1994, but increased in 1995 and 1996 reflecting, in particular, the net lending undertaken in 1996.

E. Structural Reforms

Enterprise reform and privatization

40. Through 1995, the State Property Committee (SPC) concentrated mainly on the privatization of housing and small-scale enterprises. Houses and apartments were sold to occupants, often at nominal prices, and many small-scale enterprises were transferred mostly to the collectives of employees. Most medium- and large-scale enterprises were incorporated as open joint stock companies.12 In 1996, the SPC continued its enterprise reform and privatization activities with the sale of about 1,800 small scale enterprises, thus largely completing the privatization program for small enterprises (Statistical Appendix Table 22). In contrast, the privatization of medium- and large-scale enterprises continued to lag, as partial shareholdings of only 108 enterprises were sold during 1996. During the period 1993-96, less than 20 percent of the previously existing 11,800 medium- and large-scale state-owned enterprises were partially privatized.13

41. In the transport sector, privatization activities remained limited, in mid-1996, a Cabinet of Ministers resolution reduced the minimum bid for vehicles auctioned to the private sector from 25 percent to 5 percent of the “market value”.14 Through the first quarter of 1997, about 1,700 vehicles of the major state-owned transport enterprise (Uzautotrans) were sold through auctions to the general public, with about 40,000 vehicles remaining. During 1996, the Government reached an understanding with the World Bank to resolve difficulties that had hampered the sale of spare parts and gasoline by state-owned enterprises to private truck owners.

42. In mid-1996, the preparatory phase of the Privatization investment Fund (PIF) scheme was finalized, and implementation started towards the end of the year.15 The objective was to sell at least 30 percent of the shares of about 300 large scale state-owned enterprises to PIFs through auctions. The PIFs seek to raise capital from the general public, supplemented by credits from the Government on preferential terms. The scheme aims at privatizing enterprises in a transparent, broad-based, and equitable way, while at the same time promoting capital market development. It is supported by the World Bank and other donors. In a second phase, 300 additional state-owned enterprises, which are not yet identified, are expected to be privatized.

43. Through April 1997, about 50 investment funds and 60 management companies were established, which raised about sum 55 million from the sales of their shares to 36,000 individuals. A pilot auction for the sale of enterprise shares to PIFs was held in December 1996, and subsequently auctions have been held monthly. Until the end of April 1997, shares of 55 enterprises were sold to PIFs for sum 240 million (about US$4 million). Despite the slower than originally envisaged preparation and implementation, the PIF scheme has been successful in recent months. The scheme is a key component of the enterprise privatization program and is expected to assist in developing secondary trading at the stock exchange.

The bankruptcy law

44. The bankruptcy law, approved by the Parliament in May 1994, was amended in August 1996 to reflect the concept of limited liability of shareholders in joint stock companies. A bankruptcy committee has been established in the State Property Committee that can initiate the legal process to declare an enterprise bankrupt.16 A government commission established under the chairmanship of the Prime Minister is responsible for supervising bankruptcy proceedings and collecting data on affected enterprises. The Economic Courts at regional and national level are responsible for hearing bankruptcy claims. As of end-1996, about 200 complaints had been filed with these courts. In about 130 of these cases the courts declared the enterprises bankrupt. Most of those declared bankrupt were small-scale enterprises. The remaining enterprises were referred for rehabilitation.

Antimonopoly policy

45. During 1996, there were a number of changes in the legal and institutional changes in the area of antimonopoly policy. In mid-1996, the Anti-Monopoly Committee (AMC) was established as a separate unit, taking over the functions exercised by the respective department of the Ministry of Finance. A draft law on antimonopoly policies was submitted to the Cabinet of Ministers in mid-1996 and was passed by Parliament in late December. The new antimonopoly law includes a description of the functions of the AMC and defines both a monopoly enterprise and product. The AMC is responsible for monitoring the prices of monopoly products and approving price increases. An enterprise is considered a monopoly if it has a share in sales of any particular product or service of 65 percent, or more (as opposed to 35 percent, or more, previously). However, the law also stipulates that an enterprise with a market share between 35-65 percent may still be considered a monopoly if certain additional criteria are fulfilled.

46. Under the new law, the following sectors are designated as natural monopolies: oil, gas, gas condensate, natural gas, and coal extraction; pipeline transportation of oil products, and gas; production and transportation of electricity and heat energy; railway transportation; services of transport terminals, ports, and airports; telecommunications; and water and sewage services. An additional Law on Natural Monopolies was approved by Parliament in April 1997, which stipulates in detail the responsibilities of the AMC in regulating natural monopolies.

47. The total number of enterprises officially considered monopolies declined during 1996 and the first quarter of 1997. However, the number of so called monopoly products actually increased during 1996, before it declined again in the first quarter of 1997, owing to a change in the system of defining and classifying individual products (Statistical Appendix Table 23).

III. Public Finance and the Social Safety Net

A. Introduction and Overview

48. Following the loss of transfers from the Soviet Union after independence, the consolidated deficit of the General Government exceeded 18 percent of GDP in 1992. Subsequently, the deficit declined to about 4 percent of GDP in 1995, before increasing to over 7 percent of GDP in 1996 (Table 5).17 The revenues of the state budget have remained at about one third of GDP, showing little sign of the sharply declining trend observed in most other CIS countries. The level of state budget expenditure and net lending was significantly reduced from a high of over 50 percent of GDP in 1993 to about 38 percent of GDP in 1995. In 1996, however, large budgetary credits to agriculture resulted in expenditure and net lending increasing to almost 40 percent of GDP.

Table 5.

Uzbekistan: Fiscal Operations of the General Government, 1992-97

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Sources: Ministry of Finance; and IMF staff estimates.

In 1996, the external sector budget was abolished and consolidated into the state budget

49. As part of their stabilization and reform efforts in recent years, the authorities introduced measures aimed at strengthening revenues. In particular, the base of the value-added tax (VAT)—first introduced in 1992—was extended to include wholesale and retail sales in 1993,18 a new land tax and new excises were imposed, and the rates for existing excises on gasoline were increased from 5 percent to 65 percent in 1995.19 In 1996, additional export taxes and excise taxes on imports were introduced on a number of products. As a result, total revenues rose from 29 percent of GDP in 1994 to over 34 percent of GDP in both 1995 and 1996.

50. During the transition process, the level and composition of expenditures changed as the Government attempted to keep the standard of living of the population from falling and to improve the country’s infrastructure. As a result, a large part of total budgetary expenditure has remained concentrated on social spending (i.e., education and health) and investments. However, in 1994, all subsidies on foodstuffs and public transportation were eliminated, and those on housing maintenance, hot water and heating were reduced (Statistical Appendix Table 24). To help the most vulnerable groups of the population cope with the associated price increases, the government granted special “compensation payments” in the last quarter of 1994 as part of its social safety net program. Under this scheme, virtually every adult received a monthly payment which readied sum ISO in December 1994.20 In addition, in late 1994, a new system of “allowances” (cash transfers) for low-income families was put in place and allowances for families with children were increased.

B. Developments in 1996

51. After declining steadily in each year from 1992 to 1995, the overall fiscal deficit widened significantly towards the end of 1996. During the first nine months of 1996 the consolidated cash deficit was limited to about 2 3/4 percent of GDP,21 due in large part to strict cash-flow management and the emergence of pension and other payments arrears. Fiscal policy was, however, relaxed in the last quarter, when there was large budgetary on-lending to the agricultural sector and to the pension system, which was used in part to clear accumulated interenterprise, wage, and pension arrears. As a result, the consolidated deficit for 1996 as a whole reached 7.3 percent of GDP, well in excess of the Government’s target deficit of 3.2 percent of GDP. Revenues were 34.2 percent of GDP, about 0.4 percentage points lower than in 1995, mostly on account of lower cotton excise tax revenues, due to the poor harvest and the gradual phase out of state orders. Other taxes performed well, reflecting in part the limited structural reforms to date, especially the significant central controls continuing to be exercised over the dominant state enterprise sector. Total expenditures and net lending were 39.8 percent of GDP, almost two percentage points higher than in 1995, owing to the net lending to agriculture (3.6 percent of GDP) and clearance of pension arrears at year-end. The deficit was financed from domestic bank sources (6.8 percent of GDP), privatization receipts (0.8 percent of GDP), and the placement of Treasury bills outside banks (0.2 percent of GDP).

52. The 1997 budget, approved by Parliament on December 31, 1996, targets an annual consolidated budget deficit of about 3 percent of GDP. The main new tax policy measures contained in the 1997 budget were: (i) an increase in the standard VAT rate from 17 to 18 percent and the introduction of the lower rate of 10 percent on four food items; (ii) an increase of 50 percent in the property, land, and mining taxes (accompanied by some expansion of the base); (iii) a reduction in the standard profits tax rate from 37 to 36 percent; (iv) introduction of a new “ecological tax” of 1 percent on assets of all nonagricultural enterprises; and (v) introduction of a 0.5 percent tax on gross sales on all enterprises, earmarked for the pension fund. Also, in early 1997, there was a reorganization and consolidation of the main extra budgetary funds. The Social Insurance Fund was renamed as the Pension Fund, and was integrated into the Ministry of Social Protection.22 in addition, the four main extra-budgetary funds (Pension Fund, Employment Fund, Privatization Fund and the Road Fund) will be explicitly shown in the budget accounts as part of the state budget.

Revenues

53. Total revenues of the state budget reached sum 191 billion, or 34.2 percent of GDP in 1996, only 0.4 percentage points lower than in 1995, reflecting mainly the decline in cotton excise tax collection. Cotton excise tax receipts were 2.2 percent of GDP in 1996 compared with 4.3 percent of GDP in 1995, partly as a result of the gradual phase out of the system of state orders. The loss of cotton tax receipts was offset mainly by higher profit tax revenues, which rose from 8.5 percent of GDP in 1995 to almost 10 percent of GDP in 1996. This increase was largely due to the greater collection of arrears at year-end, which was assisted in part by the budgetary on lending referred to earlier. The most important sources of revenue for the state budget continue to be the corporate profit tax, the VAT, excise taxes on fuels, and the personal income tax23 (Statistical Appendix Table 25).

54. The revenues collected through the corporate profit tax were almost 10 percent of GDP and accounted for 29 percent of total state budget revenues. The 1996 budget decree lowered the standard tax rate on profits to 37 percent (down from 38 percent in 1995 and 45 percent in 1991). However, numerous exemptions, sector preferences and tax holidays affect this otherwise buoyant tax. The result is a complex, non-transparent system of corporate profit taxation where the majority of new start-ups and joint ventures can claim preferences. For example, newly created enterprises are taxed at one quarter of the standard rate in the first year of operation, and at one half of the standard tax rate in the second year. Also, joint ventures with more than 30 percent foreign participation in the agricultural processing, food industry, and agricultural inputs and machinery sectors are tax exempt for two years from the date of registration. Joint ventures investing in projects that are included in the Public Investment Program receive a five year tax holiday. For joint ventures established before 1995, an 18 percent tax is assessed on the sum of profits and wages. A profits tax rate of 28 percent is applicable for firms using more than 50 percent of profits for investment, and particular industries or sectors are subject to special, lower rates. For example, profits of agricultural enterprises are taxed at a rate of 3 percent if their profitability was under a certain level. A special exemption from the profit tax, which was granted to commercial banks in 1995, with the purpose of allowing banks to moderns their equipment, was continued in 1996. A detailed description of the tax system is given in Appendix III.

55. Value-added tax (VAT) revenues, equivalent to 6 percent of GDP, represented almost 19 percent of state budget revenue in 1996, and together with the corporate profit tax accounted for almost half of state budget revenues. The standard, single VAT rate was reduced steadily from its introductory level of 30 percent in 1992 to 17 percent in 1996, the lowest standard VAT rate in the CIS.24 As in the rest of the CIS, the VAT in Uzbekistan is applied according to a mixed destination/origin principle. The origin principle is applied to intra-CIS trade, while an imperfect destination principle is applied to other trade.25

56. Collections of excise taxes represented the largest source of revenue in 1996 (29.4 percent of total revenues), with revenues from oil and gas excises being the main item. In 1996, the combined revenues from these excises represented 6.7 percent of GDP or almost 20 percent of state budget revenues. This was the result of the introduction in October 1995 of a 24 percent excise on crude oil and a 42.6 percent on natural gas, the full revenue effect of which was realized in 1996. The average excise rate on the different types of gasoline was 62.5 percent in 1996; the rates of the excises on diesel and kerosene were 60 percent and 70 percent, respectively. In January 1997, the excise tax on crude oil was raised to 62 percent and the excise on natural gas to 53 percent.

57. Revenue from the cotton excise declined sharply in 1996 to 6.3 percent of total revenues, about half the 1995 level. The cotton excise is the revenue accruing to the state budget from the commercialization of cotton. It originates in the difference between the selling (export) price of cotton fiber and the cost of procuring, processing, and transporting cotton under the state order system.26 During most of 1996, cotton excise revenues were the result of the commercialization of the last part of the 1995 harvest; towards the end of the year, revenues were received from the initial shipments of cotton from the 1996 harvest. Revenue from this excise is highly variable, both because of the seasonality of the underlying activity and because of occasional delays in the receipt of export proceeds.

58. The personal income tax yielded about 3.6 percent of GDP (10.5 percent of total revenues) in 1996, slightly more than in 1995. The last major change to this tax was introduced on September 1,1996, when the standard exemption was set at a nominal amount rather than as a multiple of the minimum wage. However, the standard exemption can be changed whenever the minimum wage is modified. No changes in the rates were made in 1996 and the various tax brackets continue to be indexed to the minimum wage.

59. Other minor taxes—taxes on property, land and mining—increased in budgetary importance due to the higher schedule for the land tax introduced in 1995, and the first revaluation of enterprise property since 1992. However, these taxes still represent relatively modest sources of revenue. Also, import tariffs which were reintroduced in the second half of 1995 yielded little revenues, partly due to widespread exemptions on trade with both CIS and non-CIS countries.

60. The stock of tax arrears at end-1996 reached 3.5 percent of GDP, up from 2.5 percent of GDP in 1994 and 1995. This reflected primarily an increase in arrears related to the cotton excise, corporate profit tax and VAT. The arrears related to the profits tax were reduced somewhat in the fourth quarter of 1996, when the State Tax Committee made a special effort to collect overdue taxes. Also large budgetary net lending allowed for the clearing of expenditure arrears and helped some state enterprises pay profits tax arrears as well.

61. A new tax code was approved by the Parliament in April 1996 and will take effect on January 1, 1998. Some important changes to take effect are the following: (i) an increase in the standard VAT rate to 20 percent; (ii) a reduction in the standard corporate income tax rate from 36 to 35 percent; (in) changes in non-standard corporate income tax rates; and (in) a reduction in the number of ‘local taxes’ from 14 to 8.

Expenditures

62. Total expenditures in the state budget and net lending reached sum 223 billion, or almost 40 percent of GDP in 1996,1.7 percentage points higher than in 1995 (Statistical Appendix 26). This was due to the large increase in net-lending from 0.5 percent of GDP in 1995 to 3.6 percent in 1996, all of which occurred in the fourth quarter. Expenditures exclusive of net lending were about 1½ percentage points of GDP lower than in 1995. Within these expenditures, the composition shifted in favor of capital expenditures,27 which reached about 7 percent of GDP in 1996 (compared to about 6 percent of GDP in 1995). This reflected a continued policy emphasis on completing major projects, such as oil refineries, and increasing the share of infrastructure investments in the budget. With regard to current expenditures, there was an increase in cash transfers to the population and health expenditures. National economy expenditures, mostly spending by the Ministry of Agriculture and Water Management, including substantial water and electricity subsidies, increased from 4.3 percent of GDP in 1995 to 4.7 percent of (GDP in 1996, while spending on education remained unchanged at 7.4 percent of GDP. Military expenditures are not reported, but are included mainly in the “other expenditures” category, which declined from 10.5 percent of GDP in 1995 to 7 percent of GDP in 1996.

63. Expenditure is subject to a cash management system that occasionally resulted in sequestration. Expenditure arrears on wages, pensions, and other expenditures in the agricultural sector, which were accumulating through 1996, were largely cleared through the budgetary on-lending at the end of the year. Expenditure arrears in 1996 were mostly arrears to agriculture, and wage and pension arrears. In 1995, they mainly represented delays in payments to suppliers of construction materials used in investment projects.

64. The share of the wage bill in total expenditures has declined from 22 percent in 1992 to 16 percent in 1996 (Statistical Appendix Table 27). During 1996, monthly minimum wages were increased three times: in March from sum 250 to sum 400; in September to sum 550; and in December to sum 600. The wages of budgetary and other state and parastatal organizations were raised in Ike with increases in the minimum wage. The government intends to raise the minimum wage again to sum 900 on July 1, 1997.

65. Following the measures taken in 1994, most direct subsidies to consumption have been eliminated. Two subsidies to the general population remained in 1995-96: the government paid for 50 percent of the costs of housing maintenance, and for 80 percent of heating and hot water costs. Other minor subsidies with little budgetary impact have also continued, such as a 50 percent subsidy on purchases of coal by veterans of the second World War. Direct subsidies to enterprises have also been reduced or eliminated. Although the 1995 budget contained provisions for granting interest rate subsidies of up to one half percent of GDP to state-owned enterprises, no such payments were made in 1995, and information is not available regarding such payments in 1996.

66. The state budget includes three programs of cash transfers to the population (allowances) described below in the social safety net section.

Extra budgetary funds

67. The General Government includes six main extra budgetary funds: the Pension Fund, the Employment Fund, the Fund of the Trade Unions Federation, the Road Fund, the Privatization Fund, and the Business Fund. Specific revenue sources are earmarked to finance the operation of these funds, which may also receive transfers from the state budget.

68. The largest extra budgetary fund is the Pension Fund,28 with total expenditures of about 7½ percent of GDP in 1996 (Statistical Appendix Table 28), of which pension payments were over 6 percent of GDP. Besides being charged with paying old-age, survivor and disability pensions, this fund pays various other benefits, such as childbirth and funeral allowances. Its revenues consist of social security contributions of 37 percent of the wage bill (until 1994, the state budget kept 3.5 percentage points out of the 37 percentage points) Transfers from the state budget to the Pension Fund were made in the first quarter of 1995 when the Fund was responsible for making compensation payments to pensioners; subsequently, these compensation payments were incorporated into the general level of wages and there was no need for further transfers. In the first three quarters of 1996, the overall financial operations of the Fund were roughly in balance, on a cash basis, due in part to the pension arrears which were cleared in the fourth quarter. For the year as a whole, the Pension Fund showed a deficit of 1 percent of GDP. To address the problem of the overall deficit in the operations of the Pension Fund, the Government introduced in 1997 a revenue tax of one half percent on the revenues of all enterprises, the proceeds of which are earmarked for the Pension Fund.

69. The Privatization and the Business Fund are financed with the proceeds from privatization operations. The main objective of these funds is to collect proceeds from privatization and lend those proceeds at preferential interest rates to newly created private firms and to privatized enterprises. (Table 5 reports the balance of the extra budgetary funds excluding these proceeds.)

Social safety net

70. The Government maintains an extensive social safety net, which consists of various benefits, transfers, and allowances. With the dismantling of all remaining subsidies on food and non-food items during 1994, most of the implicit social safety net arrangements have disappeared. The authorities have replaced such subsidies with allowances for low-income families.29

71. Responsibility for social protection is distributed among several ministries. The Ministry of Labor is responsible for employment and wage issues, drafts new laws on social protection, and supervises the activities of the Employment Fund. The Ministry of Social Protection supervises the activities of the Pension Fund. Family allowances and allowances for low-income families are all paid from the state budget.

72. In 1996, there were about 2½ million pensioners in Uzbekistan, including those who received pensions while still working. A large share of pensioners receive the monthly minimum pension, which stood at sum 1,125 (US$20) as of January 1,1997, up from sum 645 (US$18) as of January 1,1996. Some recipients are eligible for additional benefits based on length of service records, earnings while employed, and other criteria such as whether the individual is a war veteran or was employed in a hazardous industry.

73. The Employment Fund is a small fund that finances unemployment benefits and job training programs, with expenditures reflecting a very low level of official unemployment (Statistical Appendix 29). Unemployment benefits paid by the Employment Fund are financed by a 2 percent payroll tax. In 1996, benefits paid remained low, as the number of officially registered unemployed persons receiving unemployment benefits at end-1996 was about 30 thousand. As unemployment increases with the progress in enterprise reform, and as underemployment in agriculture becomes in part open unemployment as a result of restructuring, it is anticipated that this Fund will gain substantially in importance.

74. The Government provided three main types of allowances from the state budget in 1996. Under the first, called material assistance to families with low income, as many as half a million families were entitled to receive up to three minimum wages per month in 1996. The identification of needy families was assigned to local (rayon) governments, which also determined the extent of need. The average allowance under this program readied the equivalent of two minimum wages in 1996. The second type of allowance targeted families with children under 16 years of age. It was also based on the minimum wage: families with one child were entitled to 20 percent of one minimum wage, those with two children to 40 percent, those with three or four children to 80 percent, and those with five or more children to (one full minimum wage. The average family in Uzbekistan has slightly over three children. The third type of allowance is aid for mothers of children under two years of age. Under this program, 376,000 women were considered eligible to receive monthly payments indexed to the minimum wage. By midyear, the allowance was equivalent to about one and a half minimum wages. However, few women appear to have availed themselves of this benefit.

75. The eligibility criteria for the main allowance—for families with children—were changed and tightened on January 1, 1997.30 According to the new rules, the allowance will be paid on the basis of “need” to be established by local governments using a number of criteria, including, inter alia, family income. The allowance now pays 50 percent of the minimum wage to families with one child; 100 percent to families with 2 children; 140 percent to families with three children; and 175 percent of the minimum wage for families with four or more children.

76. In addition to these transfers, the social safety net includes provisions for a number of special benefits to be administered by the ministry of Social Protection, such as free public transporation and medicines for the disabled. A large proportion of those eligible for these benfits did not receive them in 1995 for budgetary reasons; information on the distribution of these benefits in 1996 is not yet available.

Treasury

77. During 1996, the Government took initial steps in establishing a Treasury, as a resident advisor from the Fund began working with the Ministry of Finance. At the aid of the year, the Ministry of Finance issued an order creating the “Department of Monetary Circulation,” and appointed the head of the task force. At this time, the three main issues outstanding are: (i) passing the Law on State Finance and the Treasury Law, (ii) staffing the Treasury Task Force; and (iii) giving the Task Force the necessary budget. The drafting of the Law on State Finance is being coordinated among advisors financed by the USAID. It is expected that these bills will be submitted to Government and then to Parliament for approval in 1997.

Statistical issues

78. Data on the revenues and expenditures of the state budget and the extra budgetary funds are collected by the Ministry of Finance on a monthly basis, and are available with a lag of about three weeks. Only highly aggregated revenue and expenditure data are available on a monthly basis. Quarterly data are generally more detailed and are available three weeks after the end of the quarter.

79. The monthly state budget figures continue to classify expenditures on a functional basis. An economic classification of expenditure is available only on an annual basis, and estimated quarterly figures can be obtained with a delay of one quarter. The 1996 budget decree abolished the external sector budget, which no longer appears as a separate balance in the presentation of the state budget.

IV. Monetary Developments

80. The banking system in Uzbekistan is comprised of the Central Bank of Uzbekistan (CBU) and its 14 branches, five state-owned banks,31 the largest of which are the National Bank of Uzbekistan (NBU) and the People’s Bank, one private bank, and 24 commercial banks. The state maintains some participation in 15 of the commercial banks, while 9 banks have foreign participation. The functions of a monetary authority are performed by several institutions. In accordance with the Central Bank Law passed by Parliament in December 1995, the CBU has the exclusive right to issue bank notes and coins, to regulate the use of foreign currency within the territory of Uzbekistan, to regulate and supervise banks, and to manage the official gold and foreign exchange reserves of the Republic of Uzbekistan. The CBU issues cash, provides deposit and transfer services to the Government, and extends credit to the Government. Since mid-1995, the CBU has purchased at world market prices nearly all gold produced in Uzbekistan.32 The management of international foreign exchange reserves continues to be shared by the CBU and the NBU, although the Ministry of Finance has transferred the management of part of its foreign currency deposits33 held with banks outside Uzbekistan from the NBU to the CBU. The share of Uzbekistan’s international reserves held at the CBU has risen from about one-third at end-1994 to over four-fifths at end-1996.

81. The law “On Banks and Banking Activity” approved by Parliament in April 1996 requires that new banks be established only as joint-stock companies. During 1995-96, 12 new commercial banks were registered and one additional bank was registered during the first quarter of 1997. The domestic lending activity of the banking system remains dominated by the activities of the People’s Bank, Promstroibank, and Pakhtabank.34 Although commercial banks are authorized to accept deposits from households, the majority of these deposits are concentrated with the People’s Bank. Since the lifting in early 1994 of the restriction limiting commercial banks’ holdings of household deposits to no more than their capital, several banks have started to compete actively for deposits. However, the deposits held with the People’s Bank are guaranteed by the state, while other banks are required to establish their own deposit insurance funds. In December 1995, the Cabinet of Ministers issued a decree allowing for an adjustment for past inflation to household deposit accounts and certain long-term insurance accounts that had been held in the People’s Bank as of January 1,1992 and that remained active as of January 1, 1996.35 By July 1,1996, the cut-off date for registering such accounts, the revalued accounts totaled sum 34 billion. Each individual can withdraw 10 percent of the balance in each year starting in 199636 In 1996, more than sum 1.8 billion of these funds were withdrawn, and by mid-April 1997, an additional sum 0.5 billion had been withdrawn.

82. The April 1996 law also addresses issues of bank organization and licensing, prudential regulations, reporting requirements, inspection and audit procedures, and remedial measures in the case of banking difficulties. No single stockholder of a bank, with the exception of the State, can hold shares valued at more that 35 percent of the authorized capital of the bank. In addition, the founders of a bank must remain stockholders for a period of one year from the date of registration. The law requires that the authorized capital of a bank be formed from monetary assets paid in by founders or stockholders, and disallows borrowed or collateralized resources from being used to established the authorized capital of the bank. The law also permits banks to bring overdue borrowers to an economic court37 to have the borrower declared bankrupt; in the case where a bank is liquidated, the law gives individual holders of deposit accounts priority in receiving the proceeds of the liquidation.

A. Monetary Policy

83. Notwithstanding a tight domestic credit policy followed by the CBU, reserve money grew by 225 percent during 1995, or by almost 50 percent in real terms (Table 6). This increase in reserve money was mainly the result of capital inflows, which contributed to an increase in net official international reserves of over US$400 million in 1995. Broad money grew by over 150 percent during 1995, or by almost 20 percent in real terms (Table 7). During the first three quarters of 1996, the CBU maintained a tight policy stance aimed at reducing inflation substantially. Reserve money declined by over 10 percent in real terms, while broad money grew by about 6 percent in real terms. In this period, the CBU was active in the financial markets by issuing certificates of deposits and purchasing credits from banks in the interbank market to soak up liquidity. In addition, in March 1996, the Government started to issue three-month Treasury bills. As of end-December 1996, the outstanding stock of Treasury bills was sum 4.6 billion, of which sum 1.1 billion was sold outside the banking system. As the rate of inflation started to decline, the CBU lowered its refinance rate from 125 percent per year38 to almost 80 percent as of July 1,1996, and further to 60 percent as of August 1, 1996. The refinance rate remained positive in real terms until the upturn of inflation in the last quarter of 1996. As of January 1, 1997, the CBU, lowered the refinance rate to about 46.5 percent per year (3.3 percent per month). Yields on Treasury bills were below the refinance rate and were in the range of 40-50 percent during the year.

Table 6.

Uzbekistan: Reserve Money and Net Domestic Assets of the Monetary Authorities

(in millions of sum, end-of-period stocks)

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Sources: Central Bank of Uzbekistan; Ministry of Finance; and IMF staff estimates.

Valued at current exchange rates.

Gold valued at US$390 per ounce from December 1992-August 1995 and at US$375 per ounce from September 1995 onwards.

Credit to government during the fourth quarter is not equal to the change in outstanding stocks for September and December due to the use of the domestic interpart from the sale of Ministry of Finance foreign assets of sum 4,386mm in October.

Table 7.

Uzbekistan: Broad Money and Net Domestic Assets of the Banking System

(In millions of sum, end-of-period stocks)

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Sources: Central Bank of Uzbekistan; Ministry of Finance; and IMF staff estimates.

Valued at current exchange rates.

Gold valued at US$390 per ounce from December 1992-August 1995 and at US$375 per ounce from September 1995 onwards.

Credit to government during the fourth quarter is not equal to the change in outstanding stocks for September and December due to the use of the domestic counterpart from the sale Ministry of finance foreign assets of sum 4386mm in October.

84. In October 1996, faced with a substantial decline in the cotton harvest39 the government borrowed over sum 20 billion from the CBU (equivalent to 28 percent of reserve money at end-1996) for on-lending to the agricultural sector, followed by additional credits later in the quarter to finance the fiscal deficit. The CBU made only modest efforts to sterilize the liquidity impact of this injection of credit into the economy. As a result, reserve money rose by over 70 percent and broad money by 50 percent during the fourth quarter of 1996, and the rate of inflation increased sharply in November and December. The refinance rate was not adjusted and became negative in real terms. For the year as a whole, reserve money rose by over 90 percent, or by 16 percent in real terms, in spite of a decline in net official international reserves of over US$50 million. Broad money grew slightly more than reserve money in 1996, as the money multiplier increased reflecting, in part, a reduction in the excess reserves held by banks from the level at the end of 1995.

85. Two Presidential decrees issued in late 1995 and early 1996 to counter the problem of interenterprise arrears required a 15 percent prepayment before an enterprise could ship goods to a domestic purchaser or to be exported. Managers of enterprises that did not follow these requirements could be fined or face criminal charges. As a result of these decrees, the demand for formal credit from the banking system increased, replacing, in part, the informal financing (largely interenterprise arrears) that had been provided by enterprises. In turn, banks responded with increased recourse to borrowing from the CBU. The CBU continued to disallow participation in the credit auctions by banks that had overdue credits to the CBU.

86. To counter the impact of the large increase in credit in the last quarter of 1996, the CBU tightened its policy stance during the first quarter of 1997. Reserve money declined by 3 percent, while broad money grew slightly (Figure 5). The CBU stepped up its open market operations in the quarter by issuing certificates of deposit and purchasing credits from banks in the interbank market in an amount equivalent to 10 percent of the stock of reserve money at end-1996. In addition, the Government started to issue six-month Treasury bills along with the three-month bills; more than sum 3.6 billion of Treasury bills (equivalent to 5 percent of the stock of reserve money at end-March 1997) were issued during the first quarter, of which about sum 1.3 billion were held by the non-bank private sector.

Figure 5.
Figure 5.

Uzbekistan: Selected Monetary Indicators, 1992-97

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Source: Data provided by the authorities.1/ Annualized quarterly GDP/end-of-period broad money stock.2/ Broad money/reserve money.

87. After rising sharply in 1994, the money multiplier declined in both 1995 and 1996. The increase in the reserve/deposit ratio during 1995 may have reflected a desire by banks to hold high excess reserves, which suggests difficulties in the payments system. In response to complaints by enterprises that banks on occasion had not been able to provide funds even though the enterprises had the amounts in their accounts, the CBU imposed in early 1995 a liquidity requirement on the commercial banks.40 Measures taken by the CBU to improve the payments system during 1995 and early 1996 allowed for the removal of this requirement in April 1996. In addition, as of June 1, 1996 the CBU reduced the legal reserve requirement from 30 to 25 percent.41 As a result of these two actions, together with the issuance of Treasury bills, the reserve/deposit ratio declined steadily during the first three quarters of 1996, before rising sharply in the fourth quarter in reflection of the large volume of CBU credit issued. With the increase in the reserve/deposit ratio in the last quarter of 1996, excess reserves held by the commercial banks were again large. The currency/deposit ratio increased significantly in 1995 and 1996. The increase k the demand for currency may have partially reflected the freeing up of deposits in the People’s Bank (discussed previously), some continued restrictions on cash withdrawals from banks, as well as a lack of confidence in the banking system.

B. Credit, Deposit, and Interest Rate Developments

88. Banking system credit to the nongovernment sector increased by 72 percent in 1995 and by over 60 percent in 1996.42 ID real terms, credit to the non-government sector declined by 20 percent in 1995 and by a further 3 percent in 1996. Most credits were extended at maturities of less man six months except in the case of the People’s Bank. The short maturity of loan portfolios reflected banks’ risk aversion in an uncertain economic environment, combined with low or negative real interest rates. Interest rates became positive in real terms around mid-1995, but again turned negative in real terms in the fourth quarter of 1996. The maturity structure of the portfolio of the People’s Bank reflects the fact mat the vast majority of its lending is still granted for housing mortgages of 20 years. However, during the last two years, as the People’s Bank has raised interest rates paid on various deposits, it has also been increasing its activities in the interbank market lending funds to other banks for periods of up to six months. A large share of commercial bank credit to enterprises was refinanced by the CBU, mainly for Pakhtabank and Promstroibank (Statistical Appendix Table 30). The ratio of CBU refinance credits to total commercial bank credit to the nongovernment sector rose from 33 percent at end-1995 to about 44 percent at end-1996.

89. In addition to the fact that banks increasingly relied on CBU credit rather than deposit taking to cover their liquidity needs, there are other indications of financial disintermediation in Uzbekistan. Activity in the credit auctions remained low throughout 1996. While this apparent lack of demand for credit in the auctions may in part have reflected higher interest rates (k real terms), it also reflected interbank lending outside the auction. The latter may have increased since the CBU, as part of its prudential norms, disallowed participation in the credit auctions by any bank which has overdue credits to the CBU, or has a history of not repaying credits in a timely fashion to other banks. In order to improve its control over liquidity in the banking system, the CBU issued a decree in October 1995 requiring all interbank lending by branches of banks to go through the credit auctions. However, with progress in improving the functioning of the payments system and the reporting by banks to the CBU, this restriction was lifted in late 1996. The issuance of Treasury bills as of March 1996, gave the banks an alternative source for earning income. The compounded yield on the three-month bills issued during 1996 averaged 50 percent, which was positive in real terms until September 1996.

90. Enterprise and household deposits held at commercial banks increased by 4 percent in real terms during 1995 and by 14 percent during 1996, as inflation subsided and interest rates became positive in real terms towards the end of 1995. The share of foreign currency deposits in the total rose from 24 percent at the end of 1995 to 26 percent at end-1996.

91. Nominal interest rates on bank deposits and credits fell during 1996. The adjustment to lending rates reflected, in part, the reduction in the CBU’s refinance rate and the lower rate of inflation through September 1996. Interest rates on deposits remained positive in real terms during most of 1996. In line with the slowing of inflation during 1996, the People’s Bank, which has become more active in attracting deposits, reduced the interest rates that it offered on various sum deposits. The interest rate paid on certain term accounts was lowered from 10 percent per month to 5 percent per month as of February 1,1996, and the rate paid on demand deposits from 40 percent to 30 percent as of September 1,1996. The lifting of restrictions on commercial banks’ ability to attract deposits has resulted in an increased competition for household deposits. Some banks now pay substantially higher rates than the People’s Bank. Annual interest rates paid on foreign currency deposits during 1996 ranged from 1½ percent for demand deposits to about 4 percent for time deposits, while the rate charged for credits extended in foreign currency averaged about 8 percent. The spread between lending and deposit rates remained high, reflecting, inter, alia, the high reserve requirement, inefficiencies of the payments system, and a risk premium for lending to enterprises.

C. Banking System Reforms

92. During 1996, the CBU and the Government took a number of steps to improve the operations of the banking system. The Uzbek payments system is now fully automated and settlement times have been reduced dramatically. The improvements in the payments system have allowed the commercial banks to improve their liquidity management as they can now access their accounts with the CBU frequently during the day.

93. Starting July 1996, banks have been required to set aside reserves against non-performing loans with new criteria based on risk exposure, the financial condition of the enterprises, and the quality of collateral. In November 1996, the authorities introduced a system of loan classification and loan loss provisioning. This system is largely based on objective criteria, such as the length of time the loan has been in arrears. In addition, clear definitions for classifying loans as “folly secured”, “partially secured” or “not secured” are given. The system also deals with the accounting issues of overdue interest and principal. Other steps taken in the area of banking supervision include requiring all banks to have annual audits performed by international accounting firms, and the setting up a regional and local off-site supervision system based on the early warning “CAMEL” model of the United States.43

94. In November 1996, as part of its supervisory activities, the CBU restricted the lending operations of 17 banks that experienced problems with their loan portfolios. Instructions were issued to these banks that they should concentrate on recovering the principal of overdue loans owed by enterprises. Also, these banks became subject to tightened scrutiny by the CBU. As of April 1,1997, six of these banks had reduced the amount of overdue loans sufficiently so that they were allowed to begin again limited credit operations. In early 1997, a new chart of accounts, consistent with international standards was introduced by the CBU and the commercial banks for the compilation of monetary statistics. The CBU has started working, with assistance from the World Bank, in the area of financial sector reform, with the goals of establishing more transparent and tighter budget constraints on state-owned enterprises and increasing the efficiency of resource allocation to enterprises and households. The three central elements of the authorities’ financial sector reform strategy are: (i) to establish the conditions for the emergence of a competitive and efficient financial sector; (ii) to improve the legal and regulatory environment; and (iii) to develop and implement a strategy for restructuring of sectoral banks.

V. Balance of Payments

A. Overall Developments

95. After a small deficit of 0.5 percent of GDP in 1995, the current account deficit widened to almost 8 percent of GDP in 1996, or about US$1.1 billion. This was the largest deficit registered by Uzbekistan since 1991, and was due mainly to a substantial increase in the merchandise trade deficit on account of rising imports. The rapid growth of imports reflected, in part, a higher import volume for grams combined with rising world grain prices, the trade liberalization undertaken at the beginning of 1996, a real exchange rate appreciation of almost 11 percent on average in 1996 over 1995,44 and the stronger economic performance of the economy during 1996. Exports in U. S. dollar terms were virtually unchanged from 1995 as lower receipts from cotton exports were offset by higher exports of gold. The capital account surplus was larger in 1996 than in 1995, as loan repayments in 1996 were lower reflecting a shift in the composition of the stock of external debt from short-term towards medium- and long-term. The overall balance of payments in 1996 was in near balance compared with surplus of US$430 million in 1995. The current account registered a deficit of US$113 million during the first quarter of 1997, and gross official international reserves declined by the same amount.

2. Merchandise trade

96. After recording a trade surplus of 3.7 percent of GDP in 1994 and about 2 percent of GDP in 1995, the merchandise trade balance in 1996 turned into a deficit of 6.7 percent of GDP (Table 8). Exports stagnated in U.S. dollar terms at their 1995 level. As in previous years, cotton accounted for almost half of total export receipts. Despite an 8 percent increase in export volume, the value of cotton exports declined slightly as a result of a 9 percent fall in average contract price. Although the world price of cotton declined on average by 18 percent in 1996, the smaller decline in the price of Uzbek cotton exports was largely due to shipments under contracts that had been signed at the end of 1995. In contrast, gold export revenues grew by over one-third due largely to an increase in volume. Energy exports were lower than in 1995, mainly reflecting payment difficulties in traditional trading partner countries that import natural gas from Uzbekistan.

Table 8.

Uzbekistan: Balance of Payments, 1992-1997

(In millions of U.S. dollars)

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Sources: Ministry of Finance; State Committee for Forecasting and Statistics; and IMF staff estimates.

97. Imports increased by 31 percent, or US $1.1 billion in 1996. Imports of foodstuffs doubled compared with 1995 and accounted for 29 percent of total imports in 1996. The volume of food grain imports rose by 22.5 percent in 1996, while the average import price increased by almost 130 percent. The latter was partly due to an unfavorable harvest in the region, particularly in Kazakhstan, which resulted in Uzbekistan importing wheat mainly from non-CIS countries, such as Canada. Associated shipping costs were high, and world market prices, which had risen by 17 percent, were applied. Imports of machinery grew by 34 percent in U.S. dollar terms in 1996 mainly reflecting increased investment activity of joint ventures, as well as continued work on large construction projects, such as the Bukhara and Fergana oil refineries. Imports of joint ventures reportedly accounted for over 30 percent of total imports in 1996.

98. Reflecting the Government’s policy of self sufficiency in energy, and the continued investments in refineries, imports of oil and oil products continued to be negligible in 1996. Uzbekistan became a net exporter of oil and oil products in 1995, and in 1996 these exports reached 447 thousand tons (Statistical Appendix Table 31).

Developments in trade with traditional partners

99. Although close trade links remain between Uzbekistan and other countries of the former Soviet Union, the total value of trade with these traditional trading partners has been declining over the past years, from over 50 percent in 1993-94 to 40 percent in 1995, and to less than 30 percent in 19% (Table 9). In 1996 exports to traditional trading partners declined by over 40 percent, while all major import categories, with the exception of energy, increased by 8 percent. As a result, the trade balance with traditional trading partners deteriorated from a surplus of about $US100 million in 1995 to a deficit of above US$600 million in 1996. The sharp decline in the volume of energy imports in 1995-96 reflected increased domestic production, substitution of domestically produced gas for imported oil, and more effective use of available supplies (Statistical Appendix Table 32). Russia remained Uzbekistan’s main trading partner, followed by neighboring Kazakstan and Turkmenistan (Statistical Appendix Table 33).

Table 9.

Uzbekistan: Trade in Goods and Services, 1993-96

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Sources: Ministry of Finance; State Committee for Forecasing and Statistics; and IMF staff estimates.

Traditional trading partners include the Baltic countries, Russia and other countries of the former U.S.S.R

100. The volume mid value of gas exports in 1996 were about one-half of their level in 1995, mainly due to the inability of neighboring countries to pay. Cotton exports fell to one third of their 1995 level, reflecting a shift in exports away from traditional partners. Nevertheless, natural gas and cotton continue to be the main export commodities in CIS trade. Machinery and equipment imports were the main import items from traditional partners in 1996 and comprised one third of the total value of imports, followed by imports of ferrous metals and wheat (Statistical Appendix Table 34).

Developments in trade with non-traditional partners

101. After recording a surplus each year during 1993-95, Uzbekistan’s trade balance with non-traditional trading partners recorded a deficit of over 2 percent of GDP in 1996. Trade with non-traditional partners increased in US dollar terms by 35 percent in 1996 (Statistical Appendix Table 35) and accounted for over 70 percent of total trade. In terms of the composition of exports, raw materials and processed industrial products (including cotton fiber) constituted over: 70 percent of total exports to these countries (Statistical Appendix Table 36). The value of cotton exports to non-traditional markets increased by 14 percent. These markets received 92 percent of the total cotton exports in 1996 compared with 78 percent in 1995. Imports of machinery and equipment, and foodstuffs (mainly wheat and flour products), increased by over 80 percent in 1996 and continued to represent the large majority of these imports. The largest portion of trade continues to be conducted with European industrial countries. During recent years, machinery imports from Germany, South Korea, Japan and the United States increased, because of project related investments and an upgrading of other facilities.

Other current transactions

102. The statistical coverage of other current transactions in the balance of payments continues to be limited. Information is available only on services related to trade, activities of Uzbekistan Airlines, payments for business trips and partly for tourism in Uzbekistan, embassy payments, and interest payments on external debt. The deficit on the services account narrowed in 1996 due, in part, to a fall in recorded transportation costs relative to 1995. In addition, inflows from tourism increased. Interest payments on external borrowing increased by 70 percent in 1996, reflecting a higher stock of external debt with a larger share comprised of commercial and supplier credits.

Direct investments, external debt and credits

103. Although there was a substantial increase in joint venture companies with foreign participation during 1996, recorded direct foreign investment into Uzbekistan remained low at about US$50 million in 1996.45 At the end of 1995,1,929 joint venture companies were registered with the Ministry of Justice, of which 55 percent had started operations. By end 1996, the number of registered companies had risen to 3,061, of which 61 percent had started operations. In addition, 33 new companies were registered during the first quarter of 1997. Over one half of the economic activity of joint ventures was concentrated in industries and less than 20 percent in trade. Russia and Turkey had the largest number of operating joint ventures in Uzbekistan with over 200 enterprises each, while enterprises’ joint ventures with South Korea had the largest share in the value of production.

104. After reaching over US$1 billion in 1995, disbursements of external credits declined to about US$680 million in 1996.46 This was the total value of credits drawn under 43 individual government-guaranteed contracts. Approximately one-third of the credits were medium-term, with the rest; being long-term. Short term borrowing in the form of prepayments for cotton exports was reportedly a higher percentage of the contract value in 1996 than in 1995. It amounted to US$420 million for the year, of which US$190 million were received in December.47 Net investment credits increased by 12 percent from their 1995 level and accounted for 88 percent of overall credits in 1996. Bilateral credits accounted for almost half of all capital inflows, followed by commercial bank credits (32 percent). Multilateral credits decreased substantially from their 1995 level to 14 percent of inflows.

105. In March 1997 an agreement was reached with Russia for the rescheduling of some US$500 million of debt owed by Uzbekistan. The terms of agreement are for the principal to be repaid over 10 years starting in 1998, with an interest rate equivalent to LIBOR, but limited to no more than 5 percent.

106. Over the last four years, the stock of public and publicly guaranteed external debt have been gradually increasing in U.S. dollar terms (Box 3), but remained relatively stable relative to GDP. The stock of debt, excluding short-term borrowing against cotton exports, reached US$2.3 billion at the end of 1996, or 17 percent of GDP.48 Partly due to stagnating exports in 1996, debt increased to 57 percent of exports of goods and services up from 37 percent during 1993-1995. The structure of external debt has improved in recent years. By end-1996, all short-term debt other than cotton prepayments was fully repaid, medium-term debt accounted for 18 percent of the total outstanding debt and long-term debt for the rest. Bilateral official sources have remained important and debt to commercial banks doubled. Supplier’s credits remained unchanged in 1996. While debt to bilateral creditors still represented almost one half of the total stock, its share has decreased substantially since 1993. In 1996, total debt service fell to about 9 percent of merchandise exports from almost 17 percent in 1995.

Uzbekistan: Stock of Outstanding Public and Publicly Guaranteed External Debt

(millions of U.S. dollars)

Source: Ministry of Finance.

VI. Exchange and Trade System

A. Institutional Background

107. Several government institutions are directly in charge of regulating the exchange and trade system. The Central Bank of Uzbekistan (CBU) is responsible for foreign exchange regulations and the supervision of banks. The Ministry of Foreign Economic Relations is responsible for negotiating trade agreements with nontraditional trading partners as well as agreements denominated in hard currency with traditional trading partners. It is also in charge of implementing foreign trade agreements and external trade policy through issuance of export licences. Direct foreign investment in the form of joint ventures requires approval by the Ministry of Justice. The Republican Monetary Commission has, since June 1996, as its main responsibility the implementation of measures to strengthen control over cash in circulation and the payments system, as well as compliance of economic agents with procedures for conducting foreign currency transaction and for targeted utilization of credits extended to develop priority industries in the economy. It is chaired by the Chairman of the CBU and members include high officials of the Ministry of Finance, CBU, the National Bank of Uzbekistan (NBU) and other official institutions.

B. Trade and Payments System

108. Progress in trade liberalization continued in the first part of 1996, but there were some areas of intensified trade restrictions, such as the introduction of additional tariffs on imports of some consumer goods and raw materials and the requirement for ex-ante registration of import contracts during the second half of 1996. A large part of international trade (about 45 percent on average during 1994-96), including gold and cotton exports and wheat and grain imports, continues to take place through the official channels.

109. The import tariff structure was modified in March and November 1996. In March 1996 the maximum rate was lowered to 40 percent,49 the total number of goods subject to import tariffs was decreased, the number of tariff bands reduced, and the average rate was lowered as more goods were concentrated in the lower bands. In November 1996 although the maximum rate (excluding cars) was lowered from 40 to 30 percent, tariffs were extended to a large number of commodities that had not been subject to import taxes before, and existing duties were raised for other groups of imports. In addition, a 1 percent tariff replaced the zero tariff where applicable. The unweighted average import tariff rose from 16 to 21 percent including cars, and from 12 to 17 percent, excluding cars (Box 4). In addition to the existing basic tariff structure, excise taxes on imports with rates ranging from 20 to 35 percent, were introduced for a small number of consumer goods and passenger cars as of October 1,1996. Also, in October 1996, a limit of US$1,000 for duty-free imports of goods by individuals was introduced. A 15 percent charge applies to the value of such imports in excess of this limit.

Uzbekistan: Import Tariff Regime

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Source: Ministry of Foreign Economic Affairs

A one percent tariff applies to all imports that are not subject to a higher rate

110. Export taxes were revised three times during 1995-96 (Box 5). The number of categories of goods subject to these taxes was reduced from 101 in July 1995, to 89 in March 1996, and then to 73 in June 1996. Although the average unweighted tariff increased from 25 to 27 percent in June 1996, this was due mainly to the elimination of some lower tariffs. However, in October 1996, a 50 percent excise tax on exports of certain consumer goods50 and a 25 percent excise tax on other re-exported goods were introduced

Uzbekistan: Export Tariff Regime

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Source: Ministry of Foreign Economic Affairs.

111. A general requirement for ex-ante registration of import contracts was introduced in October 1996. All import contracts concluded by economic agents of Uzbekistan, regardless of ownership status, are subject to registration with the Ministry of Foreign Economic Relations and with authorized banks. Grounds for denial include, inter alia, a lack of foreign exchange resources or of a conversion license by the importer, a contract price higher than the world market price at the time of signing the contract, the value of the contract exceeds of the amount of internal funds of the importer, and the contract is for purchases of equipment and technologies judged to be economically inefficient or obsolete.

112. Restrictions on imports and exports of certain types of commodities continue to exist. Exports of cereals and bread products, flour, livestock and poultry, meats, powdered milk, tea, antiques, and raw hides are prohibited. Joint ventures operating in the precious metal sector are free to export a portion of their output, corresponding to the share of profits of the foreign participant; otherwise, exports of gold are also prohibited, with the exception of jewelry and collectibles. Exports of nonferrous and ferrous metals, crude oil and related products, and cotton fiber require licences from the Ministry of Foreign Economic Relations, as do imports of medicines, poisons, narcotics, and pesticides. Arms and military materials, precious metals, gems, and radioactive material require licences for both imports and exports.

113. The possibility to conduct barter trade was restricted in August 1996 and is currently allowed only for very limited quantities and under very specific decisions of local municipal councils (khokimiats). A list of exports that are completely excluded from barter trade was issued at the same time51.

114. Uzbekistan is a member of the free-trade zone with the other central Asian countries and is actively seeking membership in the World Trade Organization. The memorandum on the trade regime for the WTO is currently in the second stage of preparation.

C. Exchange System

115. In late 1995, the Uzbek currency was de facto freely convertible for current transactions. Resident and non-resident enterprises and individuals were allowed to purchase and sell foreign exchange at the official auction through authorized banks. However, as balance of payments pressures increased in 1996, the authorities imposed restrictions on access to foreign exchange in the second half of the year, which resulted in an increasingly foreign exchange market. In January 1997, a new foreign exchange system was established by a Presidential decree involving multiple currency practices and a segmentation of exchange markets. The foreign exchange rate system in Uzbekistan currently consists of five markets with different exchange rates: (1) the auction market, or the Republican Foreign Currency Exchange market, (2) the commercial bank retail market, (3) the foreign exchange offices market (cash rate), (4) the interbank market, and (5) the illegal curb market. Until the end of 1996, the official exchange rate was determined on the basis of the exchange rates at which commercial banks bought and sold foreign exchange in the interbank market on days when the rate was not determined in the auction. Since January 1997, the official rate is set as a weighted average of the previous week’s auction and commercial bank rates plus a discretionary factor. The official rate is used for compulsory export-receipt surrender, some strategic imports, as well as for accounting and customs purposes.

116. In April 1994, the Government started to use the Republican Foreign Currency Exchange to conduct weekly interbank auctions to determine the official exchange rate for the sum. In April 1995, the frequency of the auctions was increased to twice a week and, since March 1997 auctions have been held daily. The auction transacts in U.S. dollars only, with the exchange rates for other currencies determined through cross rates in the international market. At the end of 1995, the auction had 16 participating commercial banks and access was granted to 6 additional banks in the first quarter of 1996. Authorized commercial banks are allowed to buy and sell foreign exchange in the commercial bank market and through exchange bureaus at the cash rate. The commercial bank and cash exchange rates are set by the banks, but, for both rates, the deviation from the official exchange rate is administratively limited to a maximum of 12 percent. Commercial banks negotiate the exchange rate for purchases of foreign exchange sales other than under the surrender requirement by exporters. Commercial banks also buy and sell foreign exchange to each other at the interbank market. The volume of transactions on the interbank market continues to be relatively small.

Foreign exchange regulations

117. The system of reviewing applications for foreign exchange on a priority basis was revoked in October 1995. During the first half of 1996, transactions for which foreign exchange could be obtained at the auction exchange rate from centralized foreign exchange resources included payments for imports of machinery, equipment and parts, imports backed by patents,52 repatriation of profits, payments of dividends and interest, payments on loans, and all bona fide current transactions. However, a priority system for conversion reemerged in the second half of 1996, at first informally. During the fourth quarter of 1996, a CBU measure established that access to foreign exchange through the auction was no longer provided for 28 categories of imported consumer goods.53 In addition, the previously existing system of “patents” for imports was abolished in November 1996 and was replaced with licences issued by the CBU.54 These licenses are granted on the basis of a priority system.55 56 Authorized commercial banks determine a quota for foreign exchange for each licence holder based on the value of import contracts and monthly projections of sales. Banks are responsible for the timely conversion of sums into foreign exchange within the established quotas at an exchange rate which can differ by up to 12 percent from the official rate.

118. An explicit system of multiple exchange rates for current transactions was introduced on January 1,1997. Under this system, certain importers and transactions—such as industrial exporters who import modem technology, raw materials and assembly parts for their own needs; payments for the servicing of investment project debt, government and government-guaranteed debt—have priority access to centralized foreign exchange resources through the auction. By contrast, foreign exchange for imports of certain consumer goods can be obtained only at the more depreciated commercial bank rate, and for other consumer goods only through the illegal curb market.

119. Twenty-two banks operate foreign exchange bureaus that conduct cash transactions with residents and non-residents. For the most part of 1996, no formal restrictions existed on purchase of cash foreign currency by individuals for current transactions, such as travel. Since October 1996 only two banks, the National Bank of Uzbekistan and Promstroibank, have access to the official auction in order to supply their bureaus. This resulted in a decline of eligible bureaus from 95 to 37, of which 23 are located in Tashkent. All other exchange bureaus provide foreign exchange to the population within the limits of their own foreign currency resources. Under the existing regulations, licenses can be issued to non-bank entities to open exchange bureaus and in March 1997, the CBU issued a protocol clarifying the procedures for non-bank entities to open bureaus. However, at present all existing bureaus are owned by commercial banks.

120. Export proceeds are subject to compulsory surrender requirement at different rates. The full amount of centralized-export proceeds from gold and cotton subject to state orders are surrendered to the Central Bank at the official exchange rate and constitute the largest source of official foreign exchange. Until end-1996, 30 percent of non-centralized export receipts from non-CIS countries and 15 percent of receipts from exports to CIS countries were surrendered to the Central Bank at the auction rate. Since January 1997,30 percent of all non-centralized foreign exchange proceeds is surrendered to commercial banks at the official exchange rate, which has remained close to the auction rate.

121. Legal entities are not permitted to import and export foreign bank notes, while banks can do so only with the permission of the Central Bank. Residents and nonresidents can import any amount of foreign currency bank notes and corns, provided that they are declared upon entry into the territory of Uzbekistan. However, as of October 1,1996, a 2 percent fee is imposed on amounts imported in excess of US$5,000 or its equivalent. Exports of foreign bank notes in excess of US$500 by residents are prohibited, unless official permission is obtained.

122. Nonresidents are permitted to export any amount of foreign bank notes, which has been legally imported into the country. Since October 1,1996, if the amount of foreign currency to be exported by a non-resident is below the previously declared imported amount by more than US$2,000, a 30 percent fee is levied on that portion which is not accounted for by receipts of sale to exchange offices or by other documents confirming the legality of then-use. No restrictions exist on the import and export of domestic bank notes.

123. As of January 1,1997, all commercial banks were granted the permission to extend credits or foreign currency from their own resources and to determine freely the interest rate on such credits. Previously, credits granted in foreign exchange were concentrated in the National Bank of Uzbekistan, the largest commercial bank in Uzbekistan, where is government owned.

124. Both residents and nonresidents can open only one sum and one foreign currency account at commercial banks in Uzbekistan. However, residents cannot open foreign currency accounts abroad, unless they have a permit issued by the CBU.57 Residents’ sum and foreign currency accounts may be credited with any sum or foreign currency amounts, and both types of accounts are convertible. Balances on sum accounts can be converted at the auction or at commercial banks. Balances can be transferred abroad on the basis of an application in the case of individuals and in the case of legal entities upon presentation of a valid contract establishing the bona fide nature of the current transaction (for which the transfer is requested).

125. Nonresidents’ sum accounts may be credited with any amount brought into, or legally transferred or acquired in, Uzbekistan. Balances in those accounts may be transferred to other sum accounts in Uzbekistan, withdrawn for sum bank notes, or transferred abroad upon presentation of documents showing the bona fide character of the proceeds. Foreign currency accounts may also be opened by nonresidents, on the presentation of an identification document and a customs declaration showing the amount of foreign currency imported into Uzbekistan.

B. Exchange Rate Policy and Exchange Market Developments

126. The authorities have followed a managed floating exchange rate system since the introduction of the sum in July 1994.58 During the first half of 1996, the sum remained relatively stable against the U.S. dollar in the official market, fluctuating in the range of 36-38 sum per dollar but appreciated by 15 percent in real term during that period (Figure 6). In early July, the cash exchange rate depredated sharply and the spread between the official and the cash rates remained large through late August, with the rate deviating from the auction rate by as much as 25 percent in late August. The margin between the official and the curb market rates widened as well. While maintaining the official exchange rate unchanged, the CBU increased sales of official foreign exchange and warned banks and exchange rate bureaus about non-competitive behavior. By September, the spread between the official rate and the cash rate had narrowed to 7 percent. However, the curb market rate remained about 50 percent more depreciated than the official rate.

Figure 6.
Figure 6.

Uzbekistan: Exchange Rate Developments, 1995-97

Citation: IMF Staff Country Reports 1997, 098; 10.5089/9781451839777.002.A001

Sources: Central Bank; State Committee for Forecasting and Statistics; information provided by commercial banks and other market participants; and IMF staff estimates.1/ An upward movement indicates appreciation.2/ Trade-weighted official exchange rates deflated by consumer price indices.

127. In the second half of 1996, increased pressures on the balance of payments and the exchange rate emerged, fueled by strong import demand, including from the relaxation of financial policies. The authorities responded by intensifying exchange and trade restrictions in an attempt to achieve their dual objective of preserving a high level of official international reserves and a stable exchange rate. This led to an increased fragmentation of the exchange markets, and the spread between the cash and official exchange rates widened to 30 percent in October. Since November 1996, this spread has been administratively limited to no more than 12 percent. The currency was depreciated in the official exchange market against the U.S. dollar by 40 percent in several steps from mid-October to end-December 1996 During 1996 as a whole, the auction determined exchange rate for the sum against the U.S. dollar depreciated by 55 percent in nominal terms, but appreciated by almost 3 percent in real terms. The official rate was depreciated by a further 11 percent over the first five months of 1997. However, the spread between the official and curb market exchange rates widened to over 150 percent in the first quarter of 1997.

APPENDIX I: Agriculture: Production and Marketing1

1. Agriculture in Uzbekistan is managed through a highly administered system. The Government’s current objective is to improve the performance of the sector through stricter enforcement of administrative directives, introduction of higher yielding technology, and gradual improvement in producers’ incentives.

2. The Government has recently undertaken several measures in pursuit of the objectives. In response to the relatively poor harvest in 1996, a number of administrators at the oblast, rayon, and farm levels were replaced. New technology for production of cotton under plastic sheeting has been introduced on 13 percent of the cotton area for 1997. The technology is intended to increase yields moderately, and to shorten the vegetative period for cotton so that successor crops in the rotation can be planted earlier in the fall. Advance payments (prefinancing for contractual deliveries of cotton and wheat) to provide working capital are reported to be higher in 1997 and more dependable than in 1996. The preliminary purchase prices for wheat and cotton for the 1997 crop are not appreciably higher than in 1996, but these are expected to be adjusted later in the year. Various forms of internal leasing and share holding have been introduced within collectives on an experimental basis. The weather was favorable in the winter, and spring field work was reported to be moving well. There were, however, reports in May 1997 of adverse rains.

3. The decline in agricultural production since independence has been less than in other countries of the region. The traditional system of supply continues to deliver inputs, although there are concerns about maintenance of machinery, quality of seeds, and occasional shortages of fertilizer and fuels. In the cotton and grain sectors, product continues to move through the processing plants. The fruit and vegetable sectors are liberalized for internal trade, and commerce in the local markets is active. At the same time, the efforts to improve agricultural performance through stricter administration, new technology, and only limited adjustments in incentives have entailed relatively high costs with only modest gains.

Pricing and Marketing

4. The Government has retained a system of planned production targets for wheat and cotton, combined with state orders for their marketing. Other products are formally free of mandatory orders for production or marketing, although state control of the planted area for the two main crops implies a high degree of centralized decision making regarding planting of other crops linked through recommended crop rotations. A draft Law on Soil Fertility is under consideration by Parliament, and likely to be voted upon in the fall of 1997, that would make adherence to particular crop rotations mandatory. For wheat and cotton, both production targets and state orders are mandatory.

5. The forecast production for 1997 for cotton (4 million tons) and wheat (4.1 million tons) constitutes the aggregate production plan, which is allocated at the regional and district levels. Based on the regional level plan, local officials encourage firm enterprises to enter into contracts with procurement organs for the total quantity of wheat and cotton corresponding to the planned yields on the planned areas. The production plan at the territorial level is thus translated into contractual commitments for delivery at the farm level, requiring farms to deliver the entire amount of their planned cotton production. Contractual commitments for wheat are, in general, less than planned production, since some wheat is retained for use on the firm. Of the total contractual commitment, a portion is designated as the state order quantity. In 1996, the state order proportion of total targeted output was 40 percent for cotton and 25 percent for wheat. According to Article 3 of Decree No. 295 of the Cabinet of Ministers dated August 22,1996, producers of cotton are required to deliver the full contracted amount, not just the state order quantity. Those who fulfilled the targets for procurement are paid a higher price for 60 percent of their delivery. Those who do not fulfill procurement contracts receive the state order price for all of their delivery. The state order price was sum 12,500 per ton of raw cotton. At an exchange rate of sum 55 per U.S. dollar at end 1996, the procurement price converted to fiber basis represented approximately 43 percent of the world price of fiber. Most of the 1996 crops will be exported only in 1997.

6. In 1996, aggregate production of cotton fell 15 percent short of actual production in 1995, and 16 percent short of planned production for 1996. Many producers did not meet their farm level production plans, and hence did not have the right to receive prices higher than the state order price. For this reason, approximately 63 percent of the 1996 crop was sold at the procurement price of sum 12,500 per ton of raw cotton.

7. Cotton producers able to receive the higher price marketed their above-plan cotton directly through the state processing firm (Uzgoskhlopkopromsbyt) in 1996. This monopoly collects all cotton and processes it in 135 state-owned ginneries. An alternative arrangement was developed in 1995 under Decree No. 390 of the Cabinet of Ministers of October 7, 1995. According to this procedure, producers are to enter into a three-way agreement with the state processing firm and the foreign trade organization (Uzoptbirzhetorg) created under the Ministry of Foreign Economic Relations. The producer receives the local currency equivalent of the world price for fiber after deduction of costs of processing and international marketing. Uzoptbirzhetorg was created to act on behalf of producers, since it was thought that the latter would lack the expertise, information, and experience to market cotton on their own account. This system was reportedly not used in 1996, and producers who had above-plan cotton simply received a higher price from Uzgoskhlopkopromsbyt. Marketing of above-plan cotton through Uzgoskhlopkopromsbyt in 1996 was mandatory. It has not yet been determined whether marketing through Uzgoskhlopkopromsbyt will be mandatory for 1997.

8. Producers receive a portion of oil after processing, and distribute this as payment in kind to employees. The costs of processing and handling are estimated in 1996 to have been about 27 percent of the value of fiber. The farm level price for above-plan sales was thus 73 percent of the world price compared to 43 percent through state orders. The difference, or 30 percent of the value, can be considered a rough approximation of the transfer from the cotton sector to the budget and economic agents in the processing and marketing sector for each ton of cotton marketed under state orders2. The actual transfer may have been higher, as producers required to market through Uzgoskhlopkopromsbyt may not have been in a strong position to negotiate for the full world price for cotton produced in excess of state orders.

9. According to Decree No. 37 of the Cabinet of Ministers of January 25, 1996, wheat producers were required in 1996 to sell 1.95 million tons (50 percent of planned production of 3.9 million tons). Reportedly, the state order price was initially set at sum 3,240 per ton, but later on capped at sum 4,800. Additional quantities could be sold to the state at a higher procurement price, called the negotiated price. The remainder of the crop was either retained on the farm for distribution as wages in kind, kept by households that produced the crop on household plots, or sold on the free markets. In 1996, producers sold 1.9 million tons of wheat to the state (70 percent of actual production), and it is likely that most of this was sold at the state order price.

10. Marketing of livestock products, fruits, and vegetables takes place outside the system of state orders. Eighty-three percent of meat production now originates in the household sector and the reminder is from livestock operations privatized in ways that produced operations considerably smaller than their predecessors in the collective sector. Many of these household and small private producers prefer to market their products directly to consumers for cash, rather than face delays in payment from processors. A large proportion of meat, fruits, and vegetables is thus marketed directly to consumers for cash or bartered locally.

Foreign Trade and Import Substitution

11. Uzbekistan’s foreign trade policy is oriented toward import substitution. In agriculture, Uzbekistan is a traditional a exporter of cotton, fruits, and vegetables, and an importer of grain, meat, dairy, and sugar. The emphasis on import substitution is reflected in a commitment to achieve domestic self- sufficiency in wheat. More recently, President Karimov added the objective to achieve domestic self-sufficiency in meat and milk. The domestic consumption need for wheat is informally reported to be approximately 4.1 million tons. Production in 1996 was 2.7 million tons, with estimated imports of 1.4 million tons. Planned production in 1997 is 4.1 million tons, which would imply very low or negligible net imports for food purposes. Agroclimatic conditions are reported to have been favorable for the winter wheat crop, and yields in 1997 are officially forecast to be higher than average. In order to achieve planned production on the reported wheat area of 1,500 hectares, average yields nationwide would have to reach 2.7 tons per hectare. This yield is not unreasonably high for irrigated winter wheat under good agronomic management, but it exceeds the best recent yields (1995 and 1996) by about one third. If a more moderate but still good yield of 2.3 tons per hectare is assumed, then aggregate production of wheat would be approximately 3.5 million tons, with imports of approximately 0.6 million tons.

12. The program of domestic self-sufficiency in meat and milk requires imports of concentrate feed. Between 1991 and 1996, aggregate production of feed in equivalent units declined by approximately two thirds, from 3.5 million standard tons to 1.2 million standard tons. At the same time, the number of cattle increased slightly, from 5.1 million head to 5.4 million head in 1996. Numbers of sheep and goats have remained roughly constant, and those of pigs and poultry have declined. The quantity and composition of feed currently available is insufficient to support adequate productivity. Milk yields per cow in 1991 were on the order of 2,000 kilos, and fell to approximately 1,000 kilos in the enterprise sector in 1996. The decline continued in the first quarter of 1997.

13. At present, the legal framework discourages exports and trade in agriculture in general. By Presidential Decree of January 21, 1994, exports of nine major agricultural products are forbidden: flour and meal from state resources; animals and birds; meat, including by-products; butter; dry milk; tea; sugar; and ethyl alcohol. Exports of cotton and cotton by-products require licenses, as do exports of animal skins, silk cocoons, vegetable oil, cotton seed, jute fiber, fermented tobacco, wool and wool by-products, mixed feed, and wine. Many of the commodities that are licensed are also subject to export taxes in the range of 10-50 percent.

14. According to a decree issued in 1996, 15 percent of the value of exports must be prepaid prior to shipment of the goods out of the country. Although fruits and vegetables are the least regulated agricultural commodities, and can be exported without either license or export tax, this prepayment provision severely curtails the ability of local small- and medium-scale producers to sell fresh produce on the urban markets of neighboring countries, and in Russia’s central and western Siberian cities.

Sectoral Finance

15. The financial condition of the agricultural sector remains weak. On January 1, 1997, farm enterprises owed sum 53 billion to their suppliers, in taxes and payments to the pension fund, and to their employees. Of this amount, approximately sum 9.2 billion was owed to the fuel complex, sum 5.1 billion for fertilizer, and sum 8.7 billion for wages. In turn, enterprises were owed sum 12.9 billion for products delivered. Because many of the farm enterprises were unable to settle their debts, the Ministry of Finance assumed sum 10 billion of debts of farm enterprises and rescheduled it over a two-year period. In addition, the pension fund and social benefit fund rescheduled farm debts of sum 15 billion over a three-year period. Although these debts were not formally written off, the rescheduling under conditions of relatively high inflation implied a substantial reduction.

16. Very little financing of agricultural production takes place through bank credit to agricultural enterprises. The main instrument for financing of working capital at present is the system of advance payments for cotton and wheat. Advances are also available for producers of fruits and vegetables who wish to contract for sale of their products. According to Decree No. 41 of the Cabinet of Ministers of December 13, 1996, by February 1, 1997 farms were to enter into contracts for future delivery of cotton to Uzgoskhlopkopromsbyt, and to receive 30 percent of the value of contracts based on the procurement price of 1996 (sum 12,500 per ton). By July 1, 1997 the price for the 1997 harvest is to be determined, and in July and August a second advance payment of unspecified magnitude is to be granted.

17. The state budgets for 1996 and 1997 contained no substantial direct subsidy for agriculture, but large on-lending took place in late 1996. In 1996 farm enterprises were exempted from payment of VAT on fertilizer and fuel, and the tax exemption is estimated to have been equivalent to sum 6.5 billion (1.2 percent of GDP). The state retains major financial responsibility for operating and maintaining the irrigation system. Operating costs were reported approximately sum 18 billion in 1996 and capital costs at approximately sum 5 billion.

18. The total value of agricultural production in 1996 was sum 179 billion at current prices. An approximate accounting of transfers into and out of the agricultural sector through the marketing system and the budget for 1996 is shown below:

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Land Reform and Farm Structure

19. The farm sector currently consists of the following components: (i) large-scale collective structures; (ii) dekhkan (peasant) farms, established as independent family-based entities outside the collectivist framework; (iii) household plots of the rural population. The large-scale collective structures are the successors of former collective and state farms (kolkhozes and sovkhozes) that have undergone reorganization into non-state units, in the process of reorganization, virtually all state farms have been transformed into cooperatives (shirkat farms), so that today 98 percent of agricultural production originates in the non-state sector.

20. Few of the large-scale collective structures have retained significant livestock units. The latter were spun off from the former collective and state farms in 1994-95, either as closed share holding structures owned by their members, or as smaller privately owned operations. The large-scale crop producing farms hold about 80 percent of arable land and are responsible for virtually all cotton and most of the grain produced in Uzbekistan, livestock production, on the other hand, is concentrated mainly in household plots, while the large-scale collectives and the dekhkan farms account for less than 20 percent. The household plots also account for most of the fruit, potato, and vegetable production. The contribution of dekhan farms to agricultural product is still marginal (at about 2 percent).

21. The large-scale crop-producing farms are undergoing various forms of internal reorganization. The most common form appears to be an association of semi-autonomous subdivisions, in which each subdivision is responsible for cultivating a certain land area, while farm machinery and other farm services are usually maintained centrally as a shared or cooperative facility. The subdivisions are not organized as legal entities and do not have separate bank accounts. As a result, all their links to the outside world go through a central administrative organ representing the management of the former collective farm. The semi-autonomous subdivisions, like the enterprise as a whole, are responsible for fulfillment of production targets and state orders.

22. A recent development involves an experiment intended initially for 26 enterprises, but likely to be expanded to additional farms. Collectively owned assets other than land will be assigned to individuals in the form of paper shares, representing a fraction of the balance sheet value of the assets. Assignment of asset shares lead to a creation of a so-called “association of shareholders,” which in the future will probably encompass all large-scale farms in Uzbekistan. In general, the distribution of asset shares is not accompanied by a parallel process of allocation of land plots to individuals. Some large-scale farms, however, are experimenting under this model with forms of organization in which individuals or small groups of individuals lease land from the collective farm and assume full responsibility for production on this leased land, while remaining members of the collective.

23. Land in Uzbekistan is owned by the state and allocated to individuals under various kinds of short- and long-term tenure, such as 10-year leaseholds, 49-year leaseholds, use right, and permanent inheritable use right. Land cannot be purchased or sold, but use rights and leaseholds can be auctioned under some circumstances. The State Property Committee has managed a small auctioning program of use rights to small plots of land for agricultural purposes.

APPENDIX II: Enterprise Reform and Privatization

1. In the first stage of privatization in Uzbekistan, the Government concentrated on privatizing housing and small-scale enterprises. In the second stage, the Government focused mainly on corporatization, including the conversion of closed joint-stock companies into open joint-stock companies,1 and the partial privatization of medium- and large-scale enterprises. Significant progress was made in reducing the shares held by the state in corporatized enterprises to an average of about 30 percent by end-1995. This policy was implemented by the State Property Committee (SPC) through selling stocks owned by the state through the Republican Stock Exchange and financial investment funds.

2. The State Property Committee incorporated and partially privatized a total of 1,915 enterprises in 1996.2 About 1,260 of these enterprises were established as open joint stock companies, 420 were sold to private individuals, and 238 small-scale commercial units and social sector entities (e.g., polyclimics) were transferred to private sector enterprises. The transfer and sale of small-scale enterprises had been largely completed by the end of 1996, as 94 percent of all previously existing state-owned small-scale enterprises had been transferred or sold to other owners, including in many cases employee collectives. Small-scale enterprises primarily comprised general retail outlets, cinemas, drug stores, procurement centers for agricultural products, and agricultural markets.3

3. Progress in the corporatization and partial privatization of medium- and large-scale enterprises has been more limited. During the period 1993-96, only 19 percent of the total number of previously existing medium-scale enterprises and 17 percent of large-scale enterprises had been corporatized and partially privatized by the SPC. In December 1996, the Government announced that it intended to incorporate and partially privatize about 1,000 additional medium- and large-scale enterprises in 1997. The sale of shares of medium-and large-scale enterprises by the SPC was not always carried out in a transparent manner, and some shares were transferred to special funds with unknown ownership structure. Also, shares were sold to associations that were related to, or controlled by, Government ministries. Although the management of corporatized and partially privatized enterprises is de jure autonomous, in many cases Government control remained important

4. The typical ownership structure that has evolved for corporatized medium- and large-scale enterprises was as follows: a 25 percent share was retained by the Government (SPC), a 26 percent share was sold to employee collectives, and a 49 percent share was in principle available to the general public, including foreign investors. However, an analysis of the restructuring of some major state-owned enterprises suggests that the Government’s direct or indirect control remained larger than indicated in the typical structure, as many shares that were available to the public had not yet been sold (Box A1).

5. In 1996, the SPC continued to provide financial and other technical assistance to corporatized and partially privatized enterprises through the Business Fund. This fund is largely financed through privatization revenues4 and provides credits to small and medium-sized enterprises on concessional terms (15-35 percent interest, 2-5 years grace period, up to 10 years repayment period), largely financed from privatization revenue. During 1996, this fund extended sum 2.5 billion in credits. Promoted by the SPC, a Chamber of Commerce was established in 1996, which also provides lending at concessional terms to small- and medium-scale enterprises, also financed in part from privatization revenues.

Two Examples of Enterprise Incorporatization and Privatization

One of the largest and most prominent state-owned enterprises in Uzbekistan is the aircraft manufacturing company TAPOICH. It was corporatized in the first half of 1996 as an open joint stock company with an authorized capital of sum 3.4 billion, of which 51 percent remained under the ownership of the State Property Committee. The Ministry of Foreign Economic Relations and the National Bank of Uzbekistan each took over 10 percent of the capital, while 15 percent of the capital were assigned to the employee collectives. The remaining 14 percent of the stock has been available to the general public through the stock exchange, but by end-March 1997 most of these shares had not been sold and were still retained by the SPC.

The Tashkent Tractor Plant is another large state-owned enterprise, which was corporatized as an open joint stock company in 1996 with an authorized capital of sum 1.5 billion. The following ownership structure evolved: 40 percent were retained by the SPC, 15 percent were taken over by the employee collective, 3 percent by the (government-owned) Promstroibank, 5 percent by a (government-owned) association of agricultural machinery repair services, and 37 percent of the shares were made available to the general public through the stock exchange. However, by end-March 1997 most of these shares were still held by the SPC.

Sources: State Property Committee; and Republican Stock Exchange.

The Privatization Investment Fund (PIP) Scheme

6. The preparatory phase of the Privatization Investment Fund (PIF) scheme was finalized in mid-1996, and implementation started towards the end of 1996. The objective of this scheme, which is supported by the World Bank and other donors, is to privatize large-scale state-owned enterprises in a transparent, broad-based, and equitable way, thereby promoting capital market development. The PIF scheme builds on the experience with privatization programs in other transition countries, such as the Czech Republic.

7. Under the PIF scheme, individuals are eligible to buy a certain number of so-called Public Participation Shares (PPSs) in investment funds, the PIFs.5 The PIFs, in turn, are expected to buy shares of state-owned enterprises slated for privatization through auctions. For the first implementation phase 310 profitable enterprises were selected, and the same number is to be covered in the second implementation phase. Through the auctions, 30 percent of the shares of these enterprises are to be sold to PIFs. The PIFs are eligible to purchase additional enterprise shares at the stock exchange, subject to the restriction that the shares of any single enterprise not exceed 10 percent of the total value of assets of a PIF. The availability of additional shares in the open market is also limited to the extent that employee collectives and the Government continue to hold shares.

8. For each PPS sold, a PIF can obtain credit from the Government in an amount equivalent to the value of five PPSs, thus leveraging the capital the PIFs can use to buy enterprise shares. Government credit is available at preferential terms, with an average nominal interest rate of two thirds of the CBU’s refinance rate and a total repayment period of 7 years, including a four year grace period during which no interest accrues. Budgetary financing for these credits is expected to be provided through the World Bank’s Enterprise Reform Loan.

9. The preparatory work for this scheme was finalized in mid-1996 when a resolution was passed by the Cabinet of Ministers to establish the PIF scheme and the bankruptcy and other laws were amended.6 In collaboration with the World Bank, 310 of the most profitable state-owned enterprises were selected for the first implementation phase, including a number of potentially profitable enterprises in “strategic sectors” such as cotton ginning. An intensive advertisement campaign was started to familiarize the public with the scheme and promote investments in PPS. Training activities were carried out. PPS are offered through the branch networks of two commercial banks, the People’s Bank and the Turon Bank, and stock shops of the Republic Stock Exchange (Box A2).

10. In August 1996, the first PIFs and management companies were licensed, and by the end of April 1997, a total of 51 PIFs and 60 management companies were established. The sale of PPS to the general public started in November 1996. At end-April 1997, about 36,000 individuals had purchased shares for a total value of sum 55 million.7 A pilot auction for the sale of enterprise shares was held in December 1996, with shares of four enterprises sold to four PIFs. Subsequently, monthly auctions took place and by end-April 1997 shares of 55 enterprises have been sold to participating PIFs for sum 240 million (US$4 million). While PIFs provided about sum 40 million from their own resources, the Government provided sum 200 million of credit.

The Republican Stock Exchange

The Republican Stock Exchange (RSE) was established in 1994 and is located in Tashkent. It has associated offices in all 12 regions, which are linked through a computerized system. Some 400 enterprises were listed at the RSE at end-1996, although active trading was limited to a much smaller number of companies, including a few banks (e.g., Pakhtabank). Shares can be bought from one of about 60 so called stock shops operated by the RSE, or from one of the 170 licensed stock brokers.

Sales at the RSE rose strongly in nominal terms in 1996 to sum 2.8 billion but remained small relative to the size of the economy at 0.5 percent of GDP. In addition, off-market sales of shares worth about sum 2.3 billion took place in 1996. Interest in buying and trading shares at the RSE has so far been limited, but it is expected that stock trading would receive a boost through the PIF scheme. So far, the primary supply of shares has been significantly higher than demand, as only about 10 percent of offered shares have found buyers. Secondary trading of shares has also been limited up to now.

Related to the stock exchange is the National Stock Depository (VAKT) which was also established in 1994. At the end of 1996, about 4,200 companies were registered at the VAKT. However, there have been difficulties in maintaining up-to-date records on share ownership of enterprises as significant off-market share transactions take place.

Sources: Republican Stock Exchange; and World Bank.

Privatization of Real Estate

11. During 1996, the SPC continued to sell and lease commercial real estate property and incomplete construction projects. Generally, real estate is sold through the Republican Real Estate Exchange (Box A3). In addition, about 10,000 plots of land for non-agricultural commercial use were transferred by the Government to individuals or enterprises under long-term leasing arrangements. All land remained under the ownership of the Government, and progress in leasing agricultural land was limited in 1996 (Appendix I). Following the Law on the Privatization of State Housing in May 1993, about 96 percent of all houses and apartments have so far been sold, often at low nominal prices, to occupants and are now officially privatized.

The Republican Real Estate Exchange

The Republican Real Estate Exchange (RREE) was established in 1994 as a joint stock company with the SPC as the main shareholder. Since 1994, the RREE has been the main instrument to privatize commercial and residential property owned by the SPC, including hotels, restaurants, shops, petrol stations, farms, houses, and apartments. At the RREE, trading sessions and auctions are carried out to sell state-owned real estate objects to the general public (primary market). In addition, exchange trading sessions take place in which brokers and individuals can trade real estate objects (secondary market), although most secondary sales take place on the private housing market without the involvement of the RREE.

At the end of 1996, about 300 brokers from more than 100 brokerages were registered at the RREE. During 1996, about 15,000 objects were sold for a total value of sum 1.4 billion, compared to sales of 13,000 objects with a value of about sum 1.2 billion in 1995. The RREE generally charges the seller a commission fee of 10 percent on the final sales price. All bidders have to make a 10 percent refundable down payment prior to participating in an auction.

Source: Republican Real Estate Exchange

APPENDIX III: Uzbekistan: Summary of the Tax System as of January 1,1997

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Standard rate was reduced on January 1,1997 from 37 to 36 percent.

Changed thresholds from 1996.

Introduced in January 1997.

On December 27,1996, the Social Insurance Fund was renamed “Pension Fund” and brought under the Ministry of Social Protection.

The contributions on wages by employees were revised on January 1,1997 from 1.0 percent to 1.2 percent

Increased on January 1,1997.

Introduced in 1997. All the rates were raised from the 1996 level.

Effective April 1,1996.

Table 10.

Uzbekistan: Production of Selected Agricultural Products, 1992-96

(In thousand tons, unless stated otherwise)

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Source: State Committee for Forecasting and Statistics.
Table 11.

Uzbekistan: Production of Selected Industrial and Other Products, 1992-96

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Source: State Committee for Forecasting and Statistics.
Table 12.

Uzbekistan: Consumer and Wholesale Price Inflation, 1994-97

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Sources: State Committee for Forecasting and statistics; and IMF staff estimates.
Table 13.

Uzbekistan: Consumer Prices, 1995-97

(Monthly percentage change)

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source: State Committee For forecasting and Statistics.
Table 14.

Uzbekistan: Wholesale Prices, 1996-97

(Monthly percentage changes)

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Source: State Committee for Forecasting and Statistics.
Table 15.

Uzbekistan: GDP and Sectoral Deflators, 1992-97

(In percent over previous year or same quarter of previous year)

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Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

Includes the government sector.

Table 16.

Uzbekistan: Selected Energy Prices, 1994-97 1/

(In sum per unit)

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Sources: Ministry of Finance; and IMF staff estimates.

Prices include VAT and excise taxes, if applicable.

Table 17.

Uzbekistan: Labor Market Indicators, 1992-96 1/

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Sources: State Committee for Forecasting and Statistics, Ministry of Labor; and IMF staff estimates.

Data covers only the public sector, including budgetary organizations and state-owned enterprises.

At the official exchange rate

Table 18.

Uzbekistan: Average Monthly Wages in the Public Sector, 1992-96

(In sum per month)

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Source: State Committee for Forecasting and Statistics.
Table 19.

Uzbekistan: Employment in the Public Sector, 1992-97

(In thousands of persons)

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Source: State Committee for Forecasting and Statistics

Average monthly data available for January-August only.

Excludes agricultural collectives.

Table 20.

Uzbekistan: Saving and Investment Balances, 1992-96

(In percent of GDP)

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Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

General government expenditure, net’ lending and extrabudgetary funds minus investment.

General government revenue minus current expenditure, net lending and extrabudgetary funds.

Equivalent to the external current account deficit.

Table 21.

Uzbekistan: Household Income and Expenditure, 1992-96

(In millions of sum)

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Sources: State Committee for Forecasting and Statistics; and IMF staff estimates.

Including other income.

Table 22.

Uzbekistan: Incorporatized and Partially Privatized Enterprises, 1992-96

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Sources: State Property Committee, State Committee for Forecasting and Statistics; and IMF staff estimates.

Includes large enterprises.

Table 23.

Uzbekistan: Monopoly Enterprises and Products, 1995-97 1/

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Sources: Ministry of Finance; and Anti-Monopoly Committee.

Officially defined as enterprises and products with a market share of 35 percent or more at January 1,1996, and 65 percent or more thereafter.

Monopoly enterprises or products in a local administrative area.

Table 24.

Uzbekistan: Budgetary Subsidies, Tranfers, Allowances, and Net Lending, 1992-96

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Sources: Ministry of Finance; and IMF staff estimates.

Excludes compensation payments of sum 100 in October 1994 and sum 150 per month starting November 1,1994 for employees in budgetary institutions, registered unemployed receiving unemployment benefits, and mothers with small children.

Comprises both flour for bakeries and for rations to population.

Comprises budgetary transfers for modernization of vehicles during the second half of 1994; tariffs cover operating costs for urban transport

Includes transfers from the state budget to the Social Insurance Fund.

Payments to single mothers, free food for children under 2 years of age, and for pensioners.

Support for low-income families is administered by local authorities.

Table 25.

Uzbekistan: Revenues of the State Budget, 1992-96

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Sources: Ministry of Finance; and IMF staff estimates.

Revenue from excises on fuels is included in “other” in 1994.

From 1996, property, mining and land taxes are included in this item.

In 1996, external sector budget was abolished and consolidated into the state budget.

Revenue items of the old external sector budget, included in 1996 into the state budget.

Table 26.

Uzbekistan: Expenditures and Net Lending of the State Budget, 1992-96

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Sources: Ministry of Finance; and staff estimates.

In 1994-96, defense and safety expenditure is included in “other expenditures”.

Table 27.

Uzbekistan: Economic Classification of Expenditures, 1992-96

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Sources: Ministry of Finance; and IMF staff estimates.

Estimate, based on the authorities’ presentation of’ economic classification’ for the year.

An unidentified part of the relative fall in current expenditures after 1993 is an artifact due to changes in reporting, which resulted simultaneously in an increase in “others”

For 1994 and 1995, the Ministry of Finance reports here the same amount it reports as “Investment” in the state budget table.

Table 28.

Uzbekistan: Operations of the Pension Fund, 1995-1997

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Source: Pension Fund.
Table 29.

Uzbekistan: Operations of the Employment Fund, 1995-1997

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Source: Employment Fund.
Table 30.

Uzbekistan: Central Bank Credit by Sector and Bank

(In millions of sum)

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Source: Central Bank of Uzbekistan.
Table 31.

Uzbekistan: Crude Oil and Oil Products Energy Balance, 1992-96

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source: State Committee for Forecasting and Statistics.
Table 32.

Uzbekistan: Non-Oil Energy Balances, 1992-96

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Source: State Committee for Forecasting and Statistics.

Calculated as domestic sources plus imports minus exports minus stockbuilding minus losses.

Table 33.

Uzbekistan: Direction of Trade with Traditional Trading Partners, 1992-96 1/

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Source: State Committee for Forecasting and Statistics.

Traditional trading partners include the Baltic countries, Russia and other countries of the former U.S.S.R.

Export and import figures do not reflect adjustments for service transactions, and for exports and imports not included in the trade data, as well as other adjustments.

Table 34.

Uzbekistan: Total Trade with Traditional Trading Partners, 1992-96 1/

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Source: State Committee for Forecasting and Statistics.

Traditional trading partners include the Baltic countries, Russia and other countries of the former U.S.S.R.

Exports for 1992 obtained as residual.

Export and import figures do not reflect adjustments for service transactions, and for exports and imports not included in trade data, as well as other adjustments.

Includes unclassified items. Derived residually
1

The authorities’ economic program for 1996 was supported by a second drawing under the STF and by a Stand-By Arrangement from the Fund.

2

See Appendix I for details.

3

State orders for cotton and grain were reduced from 67 percent of the 1994 crops to 60 percent and 50 percent of the 1995 crops, respectively. The procurement prices for the 1995 cotton and grain crops were set at 50 percent of world market prices.

4

The State Committee for Forecasting and Statistics has requested technical assistance from the IMF to improve the calculation of sectoral deflators and to construct export and import unit price indices.

5

See Section II. E.

6

Government staff who now work in different sectors, but had been employed either as a teacher or in the health sector worker for 15 years or more, are also eligible for these subsidies.

7

For example, there reportedly is an active informal market for casual laborers in Tashkent, where wages of sum 200 or more per day were paid in early 1997.

8

All cash allowance and bonus payments are reflected in the average public sector wage data; year-end bonuses explain why monthly average wages in December are usually much higher than in November and January. For more details on the basic features of the Government’s wage policies see the IMF Country Staff Report on Uzbekistan 1996.

9

Since 1996, the wage bill restriction is no longer applied to enterprises with a foreign capital share exceeding 50 percent, and a special commission could grant exemptions to other enterprises. Effective January 1,1997, industrial enterprises with a foreign capital share are no longer subject to the wage bill restriction.

10

Similarly, the number of officially recorded vacancies remained insignificant.

11

It should be noted that these data differ from official data which show significantly higher ratios of investment to GDP of about 26 percent during 1991-94 and 33 percent of GDP in 1995 and 1996. As the officially available data likely overestimate investment by government and state-owned enterprises, alternative estimates have been made by the government using data from the fiscal accounts, the balance of payments, and the Household Budget Survey.

12

An enterprise is considered incorporatized when it is established as a closed or open joint stock company.

13

The Government considers a joint stock company “privatized” when shares have been transferred from the SPC to other government entities or the private sector (see Appendix II for further details).

14

“Market value is officially defined in terms of replacement costs, which tends to result in unreasonably high values for old vehicles.

15

For more details on the PIF scheme see Appendix II

16

This process can also be initiated by creditors.

17

The consolidated balance of the General Government is the sum of two balances: the balance of the state budget (the local currency budget) and the balance of the extra budgetary funds. The hard currency budget (also called the external sector budget) was abolished at the end of 1995 and consolidated into the 1996 state budget.

18

Strictly speaking, the VAT no longer applies to wholesale and retail trade since February 1994. These activities are subject to a special “tax on the gross income of trading organizations,” which aims as combining VAT and profit taxation in one instrument. It is designed to yield at least as much as the VAT would. See section VI.6 in Appendix III, Summary of Major Taxes.

19

Excise rates are quoted on a tax-inclusive basis.

20

The state budget made compensation payments to employees of budgetary organizations and to individuals targeted for assistance under certain government programs (e.g., students receiving stipends from the budget). Indirectly, the state budget also shouldered one half of the compensation granted to other employed individuals, through a special tax credit given to enterprises. Compensation payments to pensioners were made by the Ministry of Social Maintenance from the revenues of the Social Insurance Fund.

21

Including privatization proceeds worth some 0.8 percent of nine-month GDP, which is treated as financing.

22

Decree No.459 of the Cabinet of Ministers “On the Establishment of the Pension Fund Under the Ministry of Social Protection, Republic of Uzbekistan”, December 27, 1996.

23

By the end of 1995, excise taxes were being levied on sales of crude oil, gasoline, kerosene, diesel and natural gas.

24

In 1997, the standard rate was raised to 18 percent, and a lower rate of 10 percent was introduced on four food products. When the new Tax Code (which was passed by Parliament at end-April 1997) takes effect on January 1,1998, the standard rate will be raised to 20 percent.

25

Under this imperfect destination rule, exports to non-CIS countries are exempt from the VAT, but are not zero-rated. Imports from outside the CIS are not assessed the VAT upon entry, but this tax “catches up” with them as they are subject to further processing in Uzbekistan.

26

The cotton excise is collected from the state trading organizations engaged in the export of cotton fiber.

27

Caution is needed in interpreting the figures on investments, as they are likely to include an unidentified component of current expenditures (e.g., operations and maintenance).

28

Previously named the Social Insurance Fund.

29

As noted above, during the first two months of 1995, monthly compensation payments were paid for all adults.

30

Decree of the President of the Republic of Uzbekistan “On Improvement of Government Support for Families with Children” (December 10,1996); and “Provisions for Assigning and Disbursement of Allowance to Families with Children Under 16”, Resolution of the Cabinet of Ministers No.437, December 10, 1996.

31

Two of these banks, Asakabank and Zaminbank, were established by a Presidential decree in 1995 to support the activities of the Uzbek joint venture with the Daewoo corporation of south Korea and the mortgage of real estate, respectively.

32

While the CBU has the right to purchase all gold produced, it can and does, transfer this right in the case of small purchases to the private sector.

33

These deposits are included in the official international reserves of Uzbekistan.

34

Formerly the Agroprombank.

35

Although the decree covers all such household deposits held with commercial banks, the vast majority is at the People’s Bank. These accounts were increased by a factor of 4,000, about the amount of inflation during the period 1992-95. Interest is paid on these accounts at the same rate as that paid on demand deposits.

36

The financing for this comes from the state budget, including part of the CBU’s profits transferred each year to the budget. Only the 10 percent of the total deposits that can be withdrawn each year is financed, and, therefore, recorded in the monetary accounts.

37

These courts, established at both the regional and national levels, have the responsibility for hearing bankruptcy claims brought by creditors.

38

The CBU refinance rate had been at this level since August 1995.

39

See Section II for more details.

40

Under this requirement, the banks were to maintain on their correspondent accounts with the CBU 30 percent of all settlement (or current) accounts held with them.

41

The legal reserve requirement is not remunerated and applies only to deposits in local currency.

42

This excludes the credit to the agricultural sector, which was channeled through the budget.

43

This model is used to determine the financial condition of a bank by rating it on a scale from one to five (one being the highest) in five basic areas. These areas are capital adequacy, asset quality, management, earnings and liquidity. The five component ratings are subjectively weighed to arrive at an overall CAMEL rating for the bank, that is then used to determine the degree of regulatory attention and resources that will be devoted to the bank. A rating of five, for example, indicates that the bank is likely to fail in the near future.

44

For description of the exchange rate policies see section VI.3.b.

45

This is partially due to misclassification of some intercompany debt transactions as external credits, as well as lack of precise information on actual equity capital and reinvested earnings.

46

“Excluding disbursements from the Fund.

47

Cotton prepayments are not shown as capital flows in the balance of payments nor are they included in the stock of debt figures because reconciliation between the payments and corresponding export flows is difficult due to the large number of existing contracts. Instead, these flows are reflected in the error and omissions entry in the balance of payments.

48

Excludes the IMF. Short-term debt is defined as debt with a maturity of one year or less, while long-term debt is defined as debt with a maturity of more than 5 years.

49

Excluding cars which are subject to a 100 percent import tariff.

50

The list of goods includes refrigerators and other kitchen appliances, audio and video equipment, and vacuum cleaners.

51

This list of 49 categories of goods includes items such as foodstuffs, raw and intermediate materials, and energy products.

52

According to this system, retail traders and individuals were required to obtain a permit (“patent”) in order to gain access to the auction to purchase foreign exchange for payments for imports of consumer goods and related services, and semi-finished goods.

53

These imports included, among others, soft and alcoholic drinks, tobacco, confectionery, synthetic fiber clothes, tableware, carpets, fabrics, and jewelry.

54

The patent system was established in October 1994, and required retail traders and individuals to obtain a license (patent) to gain access to foreign exchange on the auction for imports of consumer goods and related services. The patents needed to be obtained only once by each applicant (for a nominal fee of US$10) and were automatically granted, provided that the applicant could produce a registration certificate and a bank statement certifying that both a sum and foreign currency account had been opened in the name of the applicant. A US$100 registration fee is payable by previous patent holders and US$2,000 by new importers in order to obtain a CBU licence.

55

Resolution of the Cabinet of Ministers of the Republic of Uzbekistan No. 405 “On Increasing the Efficiency of Usage of Centralized Foreign Resources for Purpose of Import of Consumer Goods”, November 21, 1996.

56

Companies selling consumer goods with a priority right for conversion include supermarkets, large and medium sized foreign subsidiary enterprises and joint ventures, wholesale trading companies specializing in certain types of consumer goods such as medicines and medical equipment, and specialized organization providing services for the diplomatic corps.

57

For instance, such a permit can be issued in the event that a resident individual is to stay abroad for an extended period of time or a representative office is opened abroad.

58

The sum became the sole legal tender in Uzbekistan in November 1994, and all settlements between residents and nonresidents (or between residents) in foreign currency on the territory of Uzbekistan are now prohibited, with very few exemptions.

1

This annex is based on materials prepared by Karen Brooks and her colleagues from the World Bank on the basis of information gathered in Uzbekistan over the period April 23-May 23, 1997.

2

If calculations are based on the more depreciated commercial bank exchange rate, or on a rate closer to the curb market rate, these transfers would have been much higher.

1

An enterprise is considered as corporatized when it is registered as a joint stock company. Closed companies are those for which shares are reserved for the state (or employees), while open companies are those for which shares can be offered for sale to the general public.

2

The Government considers an enterprise privatized when it has been corporatized as a joint stock company and when some, or all, of its shares have been transferred by the SPC to other entities, including ministries and affiliated associations, government-owned banks, collectives of employees, and the private sector.

3

Small, medium, and large scale enterprises are defined, primarily, based on the number of employees (up to 250,250-500, above 500 employees); however, other criteria, such as the value of fixed assets and of physical output, are also used for classification purposes.

4

For more background information on this fund see the IMF Staff Country Report Uzbekistan 1996.

5

PPS can only be bought against cash; an individual can buy up to 100 shares for sum 100 in any one PIF, for a total investment equivalent to about US$240 at the average annual exchange rate for 1996. Purchases of PPS is equivalent to buying shares in a mutual fund.

6

Cabinet of Ministers Resolution No. 220 of June 18, 1996 “On Measures to Organize the Activity of Investment Funds.” The bankruptcy law was amended to incorporate the concept of limited liability, i.e., to limit the potential liability of investors for the debts of a joint stock company in which they invest.

7

Including the funds of PIF founders, the capital base of all PIFs was sum 64 million at end-April 1997.

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Cover IMF Staff Country Reports
Uzbekistan: Recent Economic Developments
Author:
International Monetary Fund
Volume/Issue:
Volume 1997: Issue 098
Publisher:
International Monetary Fund
ISBN:
9781451839777
ISSN:
1934-7685
Pages:
113
DOI:
https://doi.org/10.5089/9781451839777.002
Figure 1.

Uzbekistan: Output and Wages, 1991-96
Figure 2.

Uzbekistan: Consumer and Wholesale Prices, 1994-97
Figure 3.

Uzbekistan: Energy Pricing, 1995-97
Figure 4.

Baltics, Russia and Other CIS Countries: Average Monthly Wages

(In U.S. dollars, period average)
Figure 5.

Uzbekistan: Selected Monetary Indicators, 1992-97
Figure 6.

Uzbekistan: Exchange Rate Developments, 1995-97