Strong growth clouded by growing twin deficits
Uzbekistan’s economy has grown strongly by 6.0% in 2023 and is expected to grow by 5.4% this year. Inflation is expected to increase to above 10% in 2024 due to the recent increase of energy tariffs.
Goods imports and exports both grew by 26% in 2023. The increased trade deficit together with declining remittances led to a high current account deficit of 8.6% of GDP in 2023. The current account deficit was accompanied by a relatively high budget deficit of 5.5% of GDP. The so-called twin deficits might pose a threat to macroeconomic stability in the long term if the dynamics should continue.
One important measure to reduce the budget deficit was the adjustment of energy tariffs for households in May-24. The measure is unpopular, temporarily increases inflation and needs to be accompanied by social support. Nevertheless, it was an urgently needed step to ease the burden on the budget.
Strong economic growth
The economy grew substantially by 6.0% in 2023. Growth was driven by investments, which accelerated to high 22.1% yoy reflecting higher investments in machinery and equipment as well as in infrastructure. Private consumption continued to grow, but growth decelerated to 6.1% yoy from 11.1% yoy in 2022. This is connected to declining remittances from Russia, which showed record levels in 2022 due to a strong Russian rouble and a high number of labour migrants.
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Growth was broad-based across sectors. Services grew by 6.8 yoy, manufacturing by 6.7% yoy in 2023. The agricultural sector grew by 4.1%, below economy average but stronger than in 2022.
In 2024, the economy is forecast to grow by a solid 5.4%. In 3M2024, GDP growth of 6.2% was reported. Investments played again a key role, increasing by 74.5% compared to the same period in the previous year according to the statistics agency. Private consumption is also to remain a growth driver despite the fact that inflation is likely to limit households’ income growth.
Elevated inflation
Inflation declined from 12.2% yoy in Jan‑23 to 8.8% in Dec-23. This decline reflected falling global commodity and food prices but was also the result of a tight monetary policy and regulatory measures like exemptions from customs duties and value-added tax for essential food products. However, the downward trend in inflation was interrupted in May-24 when inflation jumped to 10.6%. The main reason was a significant increase of energy tariffs for households. As a result, inflation is expected to stay above 10% this year and to fall below 10% only in 2025 again.
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Growth in foreign trade
Foreign trade has grown strongly in 2023. Both imports and exports of goods have grown by around 26% yoy. While imports totalled USD 35.6 bn, exports amounted to USD 19.2 bn. The trade deficit increased to USD 16.3 bn.
Imports increased mainly due to higher imports of machinery connected to high investments but also due to higher fuel and natural gas imports. Exports increased mainly due to higher gold sales, which almost doubled to USD 8.2 bn and accounted for 42% of total goods exports in 2023. Without this increase in gold sales, goods exports in Uzbekistan would be at the same level as in 2022.
In 3M2024, imports increased slightly by 2% yoy. Goods exports grew by 10% yoy, while gold and non-gold exports had a comparable growth rate.
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Elevated current account and budget deficit
The current account deficit increased to 8.6% of GDP in 2023. The development was driven by the widening of the trade deficit as well as a drop of remittances from migrant workers. Remittances amounted to around USD 11 bn decreasing from a record value of USD 16.9 bn in 2022.
The budget deficit also increased in 2023 and amounted to 5.5% of GDP. The higher than planned deficit was caused by emergency spending for fuel and energy infrastructure in winter as well as social spending and energy subsidies.
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The current account and budget deficit, together also called twin deficits, might threaten the macroeconomic stability in the long term. If the dynamics continue, this is also true for Uzbekistan despite a still very moderate public debt of 36% of GDP in 2023 and high international reserves of around 9 months of import cover.
The authorities seem to be aware of that and are striving to gradually reduce the budget deficit. According to current forecasts, the deficit is expected to decline to 4% of GDP in 2024 and to 3% of GDP in 2025. The current account deficit is also expected to decrease gradually.
Conclusion
The Uzbek economy has been able to maintain a strong growth rate last year. However, the growing twin deficits are clouding the positive picture. The relatively high budget deficit is also the result of the fact that necessary reforms, in particular energy tariff reforms, have been postponed several times. Despite the negative short-term impact on inflation, the gradual abolition of energy subsidies is urgently needed to ease the burden on the state budget, increase energy efficiency and enable investment in the ageing energy infrastructure. This must be accompanied by support measures to vulnerable households to cushion the impact on poverty and increase acceptance.
