IMF REPORT QUESTIONS UZBEKISTAN’S FISCAL TIGHTENING.

According to a recent IMF report (“Republic of Uzbekistan: Recent Economic Developments,” IMF, March 2000), Uzbekistan’s consolidated budget deficit in 1999 came in at only 1.9 percent of GDP. This was below the government’s anticipated 3.0 percent budget shortfall, and suggests that Tashkent is succeeding in its attempts at reducing domestic spending and the demand for foreign exchange. Fewer hot soms and a smaller demand for dollars are necessary conditions for the realization of President Islam Karimov’s goal of liberalizing the foreign exchange market and unifying the exchange rate by the end of this year. But the IMF report also suggests that Tashkent’s finances remain on shaky ground, as nontransparent quasi-fiscal subsidies–including directed lending to key sectors and companies, and the implicit taxation of exports and subsidization of imports via the artificially low exchange rate–remained substantial.

While the 1999 budget originally called for a consolidated budget deficit of 52 billion soms (US$385 million at the official rate), both revenues and expenditures came in below target. Privatization revenues were scheduled to cover some 20 percent of the projected deficit, but Uzbekistan’s unfriendly investment environment scared off potential purchasers of government assets. The government responded to the privatization shortfall by making spending cuts. The remainder of the budget deficit was financed by a combination of central bank credits and bond issues.

While the government’s willingness to cut spending speaks well of its willingness to maintain fiscal balance, the use of bank credits to finance the deficit does not. Moreover, yields on government’s treasury bills have been below the rate of inflation since the middle of 1998. This has been due in part to a lack of alternative financial instruments. Some enterprises and banks that are unable to purchase foreign exchange at the artificially low official exchange rate–and who are unwilling or unable to purchase dollars on the black market have little alternative to T-bill purchases.

The report says that Tashkent is likely to maintain its relatively tight explicit fiscal stance: The 2000 budget aims at a slightly lower deficit than in 1999, with lower revenues and expenditures relative to GDP. However, reductions in the quasi-subsidies seem less likely. Moreover, Uzbekistan’s official budget methodology diverges from international practice in a number of respects. For one thing, interest payments on treasury bills and expenditures financed by foreign borrowing are excluded, while amortization of external debt is included above the line as an expenditure item. The report argues that, if adjustments were made for these factors, the deficit for 2000, as well as for 1998-1999, would be significantly larger than indicated by official data.

Moreover, Uzbekistan’s 2000 budget does not take into account the anticipated liberalization of the foreign exchange market this year. If this occurs, the som is likely to depreciate sharply, inflation will rise, and economic growth will slow, all of which pose substantial risks to government finances. In addition, the negative real yields on T-bills suggest that the bond market may not be able to absorb more government debt, making deficit financing difficult.

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