Solid economic growth but elevated inflation and budget deficit
Uzbekistan is estimated to have grown by 5.5% this year, driven by private consumption and increasing investments. Foreign trade has also increased, imports by 25% in 10M2023 and exports by 32%, although the latter is primarily due to rising gold exports. Foreign transfers, from which Uzbekistan benefited last year, have fallen but are still at a high level, estimated at USD 11 bn for the full year. However, due to lower foreign transfers the current account deficit has widened to around 4.3% of GDP. Inflation fell to 8.8% yoy in November but is expected to rise again and remain over 9% in the coming years. The budget deficit is estimated to be around 5% of GDP this year, which is significantly higher than initially planned. Although this does not jeopardise fiscal sustainability, the deficit shows the need to quickly continue the reforms that have been started, in particular the increase in energy tariffs and privatisation.
Solid economic growth
The economy grew by a high 5.8% in 9M2023 and is estimated to grow by 5.5% for the whole year. Growth was driven by private consumption which increased by more than 6% in the first half of the year. Even so, consumption growth slowed down compared to 2022. This was likely connected to declining transfers from Russia. Investments, on the other hand, increased their growth dynamics, rising by almost 12% yoy in 9M2023. This was mainly due to stronger spending for machinery and equipment.
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Growth was broad-based across all sectors. Services and manufacturing sectors increased by 6.5% and 6.4% in 9M2023, respectively. The difficult energy supply situation in the manufacturing sector at the beginning of the year and accompanying production losses could thus be compensated for over the course of the year. The agricultural sector grew by 4.1% in 9M2923, thus below economy average but gained growth momentum compared to the previous year. For 2024 and 2025, a similarly high, solid growth rate of 5.5% is expected for the whole economy. It will continue to be based primarily on rising private consumption.
Inflation likely to stay elevated
Inflation in Uzbekistan was on a downward trend this year, decreasing from 12.2% in January to 8.8% in November compared to the same month last year. How[1]ever, the trend is slow and not uniform. The strong increase in tourism, particularly from Russia, is causing prices for hotels and restaurants to rise. Forecasts see an elevated inflation of above 9% also for 2024 and 2025. Inflation will be driven by growing consumption, high fiscal spending and rising wages in the coming years.
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Normalisation of international transfers
After a record high in international transfers last year, the situation has normalised in 2023. According to the Central Bank, international transfers are expected to reach USD 11 to 11.5 bn. This is much more than in 2021, but a significant decline compared to 2022.
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The decline can be explained by the elimination of one off effects, such as the influx of Russians to Uzbekistan but was also caused by the decline of the Russian rouble against the US dollar as most Uzbek labour migrants are still working in Russia. The lower inflow of foreign currency contributed to the depreciation of the Uzbek som against the US dollar by almost 9% in 11M2023. However, this is in line with relatively high inflation. Another consequence of decreased foreign transfers is a widening of the current account deficit. The IMF estimates the deficit to be 4.3% of GDP in 2023 after a current account deficit of only 0.7% of GDP in 2022.
Growth in foreign trade
Foreign trade has grown strongly this year. Goods imports increased by 25% yoy in 10M2023 and amounted to USD 28.5 bn. Imports increased mainly due to higher imports in the machinery sector connected to higher investments but also due to higher imports of fuel and natural gas. Uzbekistan imported more gas than it exported in this period. Exports increased even more strongly, by 32% yoy in 10M2023 and amounted to USD 16.1 bn. They grew mainly due to higher gold sales. Gold exports more than doubled, reaching USD 6.9 bn. Thus, they accounted for almost 43% of total goods exports. If gold were excluded from the statistics, goods exports in Uzbekistan would be at the same level as last year.
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There was also a strong growth of service exports, which increased by 20% yoy in 10M2023. The increase is primarily due to growth in tourism services, which rose by 40%. ICT exports also developed very dynamically, growing by 49%. These developments are likely connected to tourism from Russia and Russian IT specialists now working in Uzbekistan.
Elevated budget deficit
Uzbekistan’s budget reached a deficit of 5.7% of GDP in 6M2023. According to the initial budget, the deficit was not to exceed 3% of GDP. The higher than expected deficit is linked to emergency spending for the energy crisis at the beginning of the year and higher social spending for minimum wages and pensions. On the other hand, revenues were also impacted by the VAT cut. For the whole year, the deficit is likely to be around 5% of GDP. Deficits are expected to decline in the coming years only slowly due to rising costs of social protection. The public debt level is just over 36% of GDP and thus still very moderate. The relatively high deficit does not threaten fiscal sustainability. However, due to globally increased interest rates, debt service costs are likely to rise in the future.
Conclusion
The economy in Uzbekistan is developing very robustly and growth is expected to remain high in the coming years. At the same time, the relatively high and persistent inflation and the unexpectedly high budget deficit show macroeconomic vulnerabilities. In order to increase resilience and continue the economic success story of recent years, the reform processes should be continued. This primarily concerns firstly raising energy tariffs to cost covering levels, thereby enabling a more efficient use of resources, and secondly reducing the role of the state in the economy. More private companies and competition would also lead to a reduction of inflation in the future.
