State Support: Effective, Targeted and Limited

The IMF’s mission statements are a favoured resource among economic and financial professionals due to their ability to clearly and succinctly articulate significant structural changes and a country’s performance over a defined period.

As one of the most influential and authoritative institutions, the IMF’s opinions carry weight with major investors worldwide. However, characterising Uzbekistan as dependent on the IMF would not be accurate. The proportion of the Fund’s support and SDRs in the country’s reserves is insignificant compared to financing from other development institutions. Consequently, the information the IMF provides about our country holds even greater significance and value.

I am keen to examine the latest IMF statement and the IMF press release about the visit to Uzbekistan alongside readers. The IMF convention necessitates regular mandatory discussions and consultations with countries concerning the development of their economies. Logically, a country seeks assistance from the Fund when required. In that case, it must furnish information and access to enable the IMF to make an informed and prompt decision regarding the financing.

Decrease in inflation and poverty rate

The IMF staff has identified a significant reduction in inflation and poverty rate. Internal factors, such as the high value of currency, and external factors, including the decrease in the cost of imported food and energy, have been recognised as contributing to these developments. Notably, the poverty rate has experienced a substantial decline, decreasing from 17% to 11% within two years.

In such circumstances, people will suggest checking the food prices in local markets and the living conditions in remote areas to gain insights. However, it is important to recognise that the cost of specific items in local establishments does not solely determine inflation. Instead, it is based on diverse products, some of which may not be personally consumed, and across various marketplaces within different regions. Furthermore, different forms of inflation, including consumer inflation, industrial goods inflation, tariffs, and others, must be considered. Therefore, an increase of 20% in the price of a specific product does not necessarily indicate an 8% inflation rate, as it lacks consideration for price variations in other locations or changes in transportation tariffs.

The poverty rate calculation is a technical indicator for macro-level analysis and decision-making. It is important to note that this metric does not inherently align with a “decent standard of living” concept and should be approached accordingly. A notable distinction arises from regional characteristics, such as varying salary levels across different areas. This, coupled with income distribution inequality, can result in disparities in the perceived impact of overall income and expenditure increases. For instance, a reported 5% average increase in income may conceal considerable disparities wherein more wealthy individuals experience a 10% income growth while others observe stagnant or declining income levels. Thus, the precision of relevant data is indispensable for comprehensively assessing income distribution inequalities. The IMF report advocates enhancing the targeting of social benefits, exemplified by the directive to restrict electricity consumption. This intervention prioritises aid provision to the most vulnerable consumers, encouraging reduced consumption through tariff adjustments among more wealthy demographic segments.

Positive measure

The recent tariff increase has been regarded as a positive step in the ongoing reforms. However, it is essential to acknowledge that this measure may contribute to inflationary pressures. Consequently, it is recommended that the Central Bank remain prepared to contemplate adjusting the current 13.5% key interest rate in response to the escalating inflation. The IMF’s potential support could be a significant influencing factor in determining this course of action.

Furthermore, permitting exchange rate flexibility could serve as a risk mitigation strategy. In the event of heightened demand for currency due to a persistent trade deficit, consider elevating the exchange rate and increasing the cost of currency acquisitions to temper the demand. Given the recent adjustment of the soum, the inflationary risks arising from the increased prices of imported goods is highlighted. The decision by the Central Bank to maintain the exchange rate implies an increased likelihood of a future adjustment. Additionally, the IMF’s emphasis on fostering the local capital market is viewed as a favorable measure to enhance liquidity management efficiency.

The adjustment of the key interest rate will wield a substantial influence on the evolution of the banking sector, a role underscored in the conclusion as pivotal for maintaining stability. This underscores the significance of privatisation, decreased concessional lending, and a more conservative approach to reserve accounting. An illustrative case is the notable escalation in non-performing loans (NPL) exhibited by a bank acquired by foreign investors, precipitating a reassessment of reserves. It stands to reason that comparable, if not more pronounced, increases in the authentic NPL of other state-owned banks may eventuate.

Economy risks

The observed weakening of banks’ balance sheets and the concurrent increase in reserves, representing the portion of loans at risk of default and potential losses to banks, is a significant risk to the nation’s economy. Other risks are associated with state support to state enterprises, active participation in PPP projects, and the non-commercial objectives of state enterprises.

Overall, the emphasis is on fostering commercial activities wherever possible, implementing an effective system for assessing results and reporting to mitigate or anticipate risks. State support is urged to be effective, targeted, and limited. A case in point is the cement sector, where non-transparent and uncontrolled allocation of support led the industry to the verge of collapse.

There is an expressed need to separate state agencies, companies, and associations’ commercial and regulatory functions. The IMF provides an impartial overview of the country’s economic development, highlighting present risks and potential future ones. Consequently, these conclusions hold significant value for officials, businesses, investors, and the general public who are unaffiliated with financial markets.