Asian Development Bank, a major lender to Central Asian countries, has published Asian Development Outlook - 2000. The report evaluates the state of development and prospects for Uzbekistan, among others. According to the bank, stable growth in Uzbekistan will require serious structural reform, as well as measures for shielding the public from the problems associated with such reforms.

THE UZBEK ECONOMY IN 1999

According to Asian Development Bank (ADB), de-spite the macroeconomic difficulties and the effects of the Russian and Asian crises, Uzbekistan achieved growth in GDP of 4.4%, the same as a year earlier. Growth in GDP was provided mainly by agricul-ture and industry. Unlike the 1996-1998 period, the weather conditions were conducive, allowing agriculture to expand production volumes, including of cotton - the most important export. Agricultural output rose 5.9% in 1999, compared to 4% in 1998. However, low prices for cotton and gold (the other major export) re-sulted in a slight fall in export earnings.

Industrial output rose by 6.1%, construction by 3.9%. Growth in the service sector also had an effect on real GDP growth, despite the government's strategy of limiting imports of consumer goods, which has held back retail trade. Nevertheless, thanks to services being open to private enterprise, employment in this sector, and the private sector as a whole, significantly increased.

The ADB said the quality of the national budget has also increased as the government continues to work for a reduced deficit. In 1999, the budget ran a deficit of 2.2% of GDP, compared to 3.4% in 1998. At the same time, despite the government's tough monetary policy, average monthly inflation was 1.9%, equal to an annual level of 26%, as in 1998. The main cause of inflation was the rapid devaluation of the sum, by 27.3% in the course of the year.

The balance of payments was also unstable. The fi-nancial and economic crisis in Russia, low cotton har-vest, falling prices for major exports all worsened the balance of payments. In order to fix the situation, the government introduced additional restrictions on imports, toughened access to forex, and increased foreign borrowing, used for financing state investment. In 1999, according to the ADB, the current out deficit increased to 1.3% of GDP, compared to 0.6% a year earlier. The main reason was growth in imports regardless of the import barriers of 10%, compared to a fall of 25% the previous year.

Nevertheless, gold and forex reserves reached $1.2 billion by the end of 1999 (equal to 5.8 months of im-ports) due to a capital surplus of $342 million. The sur-plus was achieved by selling a foreign bank $150 million of gold and loans received on earlier agreements. ADB said that by the end of 1999, the national foreign debt increased to $3.8 billion (25% of GDP), compared to $3.2 billion (24% of GDP) at the end of 1998.

ADB says the debt service ration rose to 11% in 1999, compared to 9% in 1998. According to the bank, there were significant suc-cesses in macroeconomic stabilization, despite the nega-tive external factors. Among the main reforms recently are a 50% increase in state procurement prices for cot-ton and wheat, a debt-write off for agriculture tax ar-rears, and deferral to 2002 of company debts for prod-ucts supplied.

The tax burden on agriculture was also significantly reduced, including by merging some taxes into a unified land tax. Other measures for reducing taxes included a three-year exemption period for newly-formed private farms and agricultural business centers, and information services for private farmers. Uzbekistan's GDP in 1999 came to 2.048 trillion sum. Forecast GDP for 2000 is 2.225 trillion sum. Revenues are to come to 28.2% of GDP (650 billion sum), spending to 32% of GDP (712.4 billion sum, the deficit to 2.8% of GDP.

PROSPECTS FOR 2000

According to the ADB, Uzbekistan has mixed prospects for 2000. According to government announcements and rulings from 1998 and 1999, in 2000 foreign trade and the forex market are to be liberalized, accompanied by structural reform on agriculture and banking. These reforms are expected to benefit the econ-omy. At the same time, the ADB is warning that liber-alization will lead to inflation and will accelerate corpo-rate and banking reform.

If the reforms are carried through, temporary mac-roeconomic problems could result in slowed growth in the short term. However, the ADB says that after structural reform and prices even out, there could be a stable increase in real GDP. GDP growth is expected to slow to 3% in 2000. The move to a single exchange rate (in place of an offi-cial and black market rates) could boost inflation. Budget revenues could also fall, reducing growth. The ADB says the 2000 budget approved by par-liament calls for a budget deficit of 3% of GDP. Ac-cording to the International Monetary Fund, that level is temporary and sustainable.

According to the ADB, the balance of payments should improve in 2000, continuing through the me-dium term period. This year the current account deficit is to fall to 1% of GDP, mainly due to growth in ex-ports. After the reform program, exports should rise fast, imports will also rise, enabling state-owned compa-nies to modernize. In the medium term, increased de-mand for electricity and industrial goods from neigh-boring countries is also expected. Increased grain har-vests are expected to make Uzbekistan practically self-sufficient, grain imports will be small.

The ADB also expects foreign direct investment to grow in the next few years due to the improved invest-ment climate following reform. After liberalization of the foreign trade and forex markets, in 2000, in 2001 growth is predicted at 4%, with inflation at 20%. The 2001 budget deficit is forecast at 3% if GDP, spending on social se-curity is to grow. The current account deficit is to rise to 2% of GDP in 2001, mainly due to increased imports. Asian Development Bank was set up in 1966 for aiding the eco-nomic and social development of the Asian-Pacific region. The bank's members include 40 countries in the region and 16 European countries. Today ADB is one of the largest international financial in-stitutions with assets of around $100 billion. The ADB has made loans of more than $50 billion. Uzbekistan joined the bank in 1995. Since 1996 the ADB has lent Uzbekistan $267 million for five proj-ects.

ECONOMIC DEVELOPMENT ISSUES

The main expected event for the economy is the planned introduction of a convertible currency by the end of 2000. Convertibility will boost exports and at-tract major foreign direct investment, as well as re-ducing capital flight, which has a negative impact on the economy. The ADB says the signing of an agreement on partnership with the European Union in July 1999 was a serious step to integration into the world economy. In order to stimulate exports, the government reduced profit tax from 35% to 30%. At the same time, deferral of payment of VAT on imported goods for manufac-turing export goods of up to 90 days was also permitted. However, the multiple exchange rate system is still holding export growth and FDI back.

There are also problems with the government's large business privatization program, due to low foreign interest. The main problem remains the government's reluctance to allow foreign investors to take controlling stakes. Other problems in privatization, according to the ADB, include unrealistic valuations, the poor invest-ment climate, low international prices for the products of the businesses up for privatization. Serious worries are also raised by the existing legislation, which is not developed enough to provide shareholder and privatized companies with defenses against state interference in their business.

At the same time, the ADB comments that reform in the financial sector is moving fast, helped by a $25 million loan from the World Bank approved June 1999. The project calls for strengthening management of commercial banks, increasing the Central Bank's super-visory functions, and increasing openness for foreign fi-nancial structures. According to the ADB, the prospects for long-term growth are good. Rich natural resources, huge human resources, and commercial and trade traditions are the basis for successful transition to a fast-growing market economy. Reducing unemployment is a vital step in conditions were there is a continuous influx of workers. According to the ADB, until stable economic growth is achieved, it will be impossible to solve this problem, and the number of families below the poverty line will con-tinue to grow. According to the authorities, in 1998, 23% of the population was below the official poverty line of 910 sum per person per month, less than $5 at the market exchange rate.

In this situation, the main tasks for the government have to be strengthening growth and diverse develop-ment of the economy. Success in those two tasks de-pends on increasing the speed of reform. The current situation in the economy remains difficult. First, despite growth in international cotton and gold prices, the effect is not enough. Increasing currency earnings depends on increasing exports and expanding the range of export goods. Second, the yield of cotton and wheat remains ex-tremely low by international standards. Increasing pro-duction could be achieved by increasing yield, but that would require changes in labor payment, meaning wide-ranging reform of the agricultural sector. Third, says the ADB, a gradual approach to reform has not resulted in any economic disasters, but has not provided strong growth either. Diversification remains low, making fast-growing export-oriented businesses and the realization of the potential of traditional sectors essential. And that requires faster reform.

The ADB sees several risks in the medium term. First, Russian economic recovery is being held back by political instability, casing investor and lender distrust. That could lower demand for Uzbek exports, as 45% is to the former Soviet Union, mainly Russia. Second, there is a risk low pieces for the two main exports - cotton and gold, could cause further delay in reform of foreign trade and forex.

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