Uzbekistan’s economy has been resilient in a difficult external environment, characterized by weak economic activity in the euro area and Russia and low energy prices. Following solid growth performance—8.1% in 2014, real GDP increased by 7.5% in the first quarter of 2015. Strong public investment has shielded the economy, so far, from the slowdown experienced by other countries in the region. The external position continues to be strong, and inflation has softened to around 9% through April 2015, owing to lower-than-anticipated administered price increases.

However, the difficult external environment, in particular, the drop in oil and gas prices and spillovers from economic slowdown in major trading partners are taking a toll on the external sector. Notably, gas and machinery exports were negatively affected. Remittances fell by 14% in 2014 and 45% for the first quarter in 2015, compared to the corresponding periods of the previous year. The authorities have continued their policy of gradual nominal depreciation of the sum, which has been slower than that of most major trading partners.

Fiscal policy remains prudent while the monetary policy stance is accommodative. The fiscal outturn in 2014 registered a surplus (0.3% of GDP) on account of higher-than-projected excise taxes and efforts to streamline recurrent spending. By contrast, the augmented fiscal surplus, which includes the Fund for Reconstruction and Development, narrowed (1.6% of GDP) on account of weaker commodity revenue. The 2015 budget foresees a deficit of 1% of GDP, while the budget execution through the first quarter of 2015 registered a balanced outturn, owing to lower-than-budgeted spending. On the monetary policy front, the Central Bank of Uzbekistan cut its policy rate, the refinance rate, to 9% in January 2015. Through end-March 2015, both reserve money and broad money increased, slightly above the annual target rates.

IMF Executive Directors welcomed Uzbekistan’s strong growth in recent years and the authorities’ prudent macroeconomic management, which has yielded healthy fiscal balances, large external buffers, and low public debt. However, the risks posed by a weak external environment and low international energy and commodity prices require vigilance and appropriate macroeconomic policies. Continued and determined efforts are also needed to promote a more diversified, private-sector-led economy that can generate productive jobs and sustain inclusive growth.

Directors supported a looser fiscal stance in the near term, while ensuring medium-term sustainability. In this regard, executing planned expenditures and reallocating revenue over-performance to social safety nets and pro-poor spending would support growth. Looking further ahead, Directors welcomed the authorities’ newly adopted industrial modernization program. They underlined the importance of ensuring high-quality spending by addressing absorptive capacity constraints and adopting strong project appraisal and procurement policies. They also recommended establishing a credible medium-term budgetary framework to better manage resource revenue and the public investment program.

Directors urged the authorities to stand ready to tighten monetary policy if needed to contain inflationary pressures. To reduce inflation to sustainable single digits in the medium term, they considered it important to upgrade the monetary policy framework and better align it with monetary aggregates targeting, as well as manage excess liquidity in the system. Directors also emphasized the importance of greater exchange rate flexibility to address rising pressures on the current account, and encouraged the authorities to move gradually toward foreign exchange liberalization and eliminate exchange restrictions as appropriate.

Directors noted that the banking system remains stable and well capitalized, and urged the authorities to continue to strengthen the regulatory and supervisory framework. They noted the need to relieve banks of noncore functions and to phase out directed lending in order to deepen financial intermediation.

Directors welcomed the authorities’ commitment to structural reform and the progress they have made thus far. They underscored the importance of sustained and timely implementation of the reform agenda to promote broad-based, inclusive growth. They welcomed the authorities’ recently announced strategy to strengthen corporate governance and accelerate privatization, and looked forward to its effective implementation. Further reforms to improve the business climate and foster economic diversification would be important, as are policies to increase labor market flexibility and improve labor skills.

Directors stressed the importance of improving the availability, timeliness, and quality of key macroeconomic and social data. In this regard, they encouraged Uzbekistan to join the General Data Dissemination System.