UZBEKISTAN: IMF ROSY ON UZBEK ECONOMY

UNCLAS SECTION 01 OF 02 TASHKENT 001536 SIPDIS SENSITIVE SBU DELIBERATIVE PROCESS DEPT FOR SCA/CEN AND EB E.O. 12958: N/A TAGS: ECON EFIN EAID EINV ETRD KCRM SOCI UZ SUBJECT: UZBEKISTAN: IMF ROSY ON UZBEK ECONOMY REF: a) TASHKENT 591, b) TASHKENT 951 ¶1. (SBU) SUMMARY: On December 18 Sena Eken from the IMF told the Tashkent diplomatic community that the Uzbek economy had performed strongly with 9.4 percent GDP growth in the first nine months of ¶2008. Although Uzbekistan is not immune from the world financial crisis, the IMF predicts that its relative isolation will allow for continued strong growth in 2009, perhaps by as much as 7 percent. The official GOU position is that this is an ideal opportunity for increased foreign investment. END SUMMARY -------------- -------------- THE IMF RECAPS UZBEKISTAN'S 2008 PERFORMANCE . . . -------------- -------------- ¶2. (SBU) Six months after its Article IV consultations with Uzbek Government officials (ref A),the IMF was back in Tashkent in early December to review economic developments in 2008 and assess the outlook for Uzbekistan for 2009. On December 18 Sena Eken, Assistant Director of the IMF's Middle East and Central Asia Department, briefed Tashkent's diplomatic community on the conclusions reached by her IMF team. ¶3. (SBU) Quoting Uzbek Government statistics, Eken said economic performance had remained strong with 9.4 percent GDP growth during the first nine months of 2008. Eken pointed to increased external demand for Uzbek exports, increased investment, and increased consumption supported by wage growth and remittances as reasons for this strong performance. Remittances nearly doubled in 2008 as compared with 2007. High commodity prices -- in particular for cotton, gold, and energy -- contributed to a large current account surplus. Eken noted that an IMF technical assistance program had caused Uzbekistan to revise its current account surplus downward but that at 13 percent of GDP, it remains quite high. Foreign exchange reserves continue to accumulate, albeit somewhat more slowly than in the past, and are now equal to about eleven months of imports. Whereas 2008 ushered in the global credit crunch, for Uzbekistan it brought a 38 percent increase in credit available to the Uzbek economy. ¶4. (SBU) Eken said inflation remains high and should be 13 percent overall for the year. Inflation for food, gas, and services is much higher, however, ranging anywhere from 20 to 40 percent. This has been accompanied by a sharp increase in wages and salaries. -------------- . . . AND LOOKS FORWARD TO 2009 -------------- ¶5. (SBU) The IMF remains upbeat on Uzbekistan's economic outlook for 2009. Eken said the world financial crisis will affect Uzbekistan through decline in prices for its commodity exports, overall weaker demand for Uzbek exports, and decline in remittances. Neverthless, the IMF expects Uzbekistan's GDP to grow by 7 percent in 2009. The external account surplus will decrease slightly but will still amount to 7 percent of GDP. Lower import prices should have a favorable influence, and inflation should decrease. Although remittances are likely to drop by half, this will put them back only to their 2007 level. Since Uzbekistan is not integrated with the financial markets of developed countries, it is not likely to suffer in a major way from credit constraints. Eken said the IMF had cautioned the GOU against increasing protectionist measures in response to the financial crisis. ¶6. (SBU) Eken continued that the GOU is putting together a series of measures to increase internal consumer demand. These include tax reductions, wage increases on the order of 30 percent, and support for small and medium enterprises. As it has ever since independence, the GOU will pursue a policy of import substitution. The GOU will put an emphasis on large government projects as a means to create jobs. ¶7. (SBU) Eken said Uzbekistan is taking steps to increase confidence in the banking system and enhance the role of banks in economic activity, for example through subsidized loans to targeted sectors. The IMF has recommended that the GOU remove noncore functions from banks and facilitate the availability of cash. Eken commented that the IMF continues to hear stories of exchange restrictions but that the GOU denies these reports and says increased domestic production is decreasing demand for imported consumer goods. (COMMENT: Representatives of Proctor and Gamble have reported it now takes up to 270 days for profits to be converted from soum to dollars, and other importers of consumer goods have reported similar dramatic delays. End Comment) ¶8. (SBU) Eken concluded by saying the GOU is proud that it has protected its economy from the world crisis. The official GOU position is that foreigners should take advantage of this opportunity and increase their investments in the Uzbek economy. -------------- COMMENT -------------- ¶9. (SBU) The IMF is still subject to an agreement whereby the Uzbek Government provides them with economic data under the restriction that these data are for internal IMF use only. As is its standard practice, the IMF focuses its attention on macroeconomic fiscal parameters and neither intends nor attempts to analyze the social and political impacts of economic policies. ¶10. (SBU) During the post-briefing discussion, one economist in attendence highlighted this point by commenting on the incongruity of increasing surpluses in a country where the people live so poorly. Indeed, although the IMF may be correct that the Uzbek economy is rosy from the macroeconomic point of view, living conditions for the average Uzbek remain difficult in the extreme (ref B). Sena Eken could respond only that the GOU interprets concepts such as "controlling money supply" in a literal, almost childlike manner. It is our opinion, however, that the key word for the GOU is "control" -- control of all aspects of the economy and of its citizens. If the GOU believes running surpluses to the detriment of the living standard of its citizens helps it maintain that control, that is what it will do. NORLAND To view the entire SMART message, go to URL http://repository.state.sgov.gov/_layouts/OSS SearchResults.aspx?k=messageid:fb74cf65-3b48- 4229-99d8-d38490e86481