Professional Documents
Culture Documents
November 2008
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.The Author would like to express his gratitude to the World Bank HQ and the Uzbekistan Country Office,
particularly to Dr. Saumya Mitra, Lead Economist, The World Bank Country Office in Uzbekistan at
Tashkent for providing an opportunity to prepare this paper. The background note and the Questionnaire
express the personal views of the author, which do not necessarily imply the views of the World Bank or
the organizations he is associated with.
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External Debt Management in Uzbekistan
Tarun Das , Consultant, World Bank
CONTENTS
ACKNOWLEDGEMENTS
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External Debt Management by the Government of Uzbekistan:
Policies, Strategies, Techniques, Legal System and Institutional Set Up
And Evaluation of their Processes and Methods
ACKNOWLEDGEMENTS
The Author would like to express his gratitude to the World Bank HQ and
the Uzbekistan Country Office, particularly to Dr. Saumya Mitra, Lead
Economist, the World Bank Country Office in Uzbekistan at Tashkent for
providing an opportunity to prepare this paper.
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External Debt Management by the Government of Uzbekistan:
Policies, Strategies, Techniques, Legal System and Institutional Set Up
And Evaluation of their Processes and Methods.
This is a part of a wider study and an Economic Report being prepared under the World
Bank’s Country Policy and Institutional Assessments (CPIA) for discussion
between the Uzbek authorities and the Bank. The main objectives of the Economic
Report include the following: (i) to develop a common understanding of the
meaning of the criteria used in the CPIA exercise and how they are applied; (ii) to
obtain information and data relating to the criteria that would enable Bank staff to
make updated assessments; and (iii) to discuss with the authorities future policy
steps and reform intentions that would affect CPIA assessments. This approach
would be successful only if, during its course, the authorities presented data and
information on the variables used in the CPIA exercise at a suitably disaggregated
level. It is proposed that the Economic Report be based initially on three set of
questions, (i) debt policy; (ii) trade; and (iii) revenue mobilization. The present
Questionnaire deals with the Debt Management Policies, Strategies, Legal and
Institutional Systems, Techniques and Evaluation of their Processes and Methods.
This chapter of the Economic Report will make an assessment of the impact of debt
management strategy on minimizing budgetary risks and ensuring long-term debt
sustainability. Uzbekistan’s debt burden is manageable with favorable trends of major
debt sustainability indicators (Tables-1.1 and 1.2). The ratio of total debt stock to GDP
declined to 17.6 percent in 2007 and further to 15.4 percent in 2008 from 42 percent in
2003. The debt service ratio (i.e. the ratio of total debt services to exports of goods and
services) declined to around 8.6 percent in 2007 after reaching the maximum at 26.7
percent in 2001. The ratio of total debt stock to exports of goods and services also
declined to 43.5 percent in 2005 after attaining the maximum at 158 percent in 2002. The
ratio of sort term debt to total debt has declined continuously from 10.4 percent in 2001
to 0.9 percent in 2005. Moreover, foreign exchange reserves are being built up rapidly
and stood at $10.2 billion equivalent to 10 months of imports of goods and services at the
end of 2007. But, the shares of concessional and multilateral loans are low as compared
to those for other low income and developing countries. However, the situation does not
pose problems in the near and medium term. The degree and effectiveness of
coordination between debt management and macroeconomic policies will also be
discussed. Adequate and timely information on debt stocks and flows is an important
component of debt management strategy. A dedicated debt management unit should be
able to plan strategy and monitor new borrowing and manage risks. Annex-1 presents
details related to these CPIA criteria. Present paper has four sections. Following section-
1dealing with scope, objectives and terms of reference the study, Section-2 presents a
brief note on basic concepts on external debt and debt sustainability indicators and
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Section-3 presents a brief note on the current state of the Uzbekistan economy. Section-4
presents a detailed questionnaire for all stakeholders of external debt in Uzbekistan.
Table-1.1 Uzbekistan: Trends of Selected Economic Indicators in 2002-2007
Economic Indicators 2003 2004 2005 2006 2007 2008*
Growth rate of Real GDP (percent) 4.2 7.7 7.0 7.3 9.5 8.0
Growth rate of Nominal GDP (percent) 32.0 24.6 29.9 30.4 35.8 23.1
CPI inflation rate (%) official estimate 3.7 3.8 7.8 6.8 6.9 6-8
CPI inflation rate (percent) IMF estimate 7.8 9.1 12.3 11.4 11.9 11.0
Growth rate of reserve money (%) 26.7 38.7 87.5 36.5 44.9 28.4
Growth rate of broad money supply (%) 27.1 47.8 54.3 36.8 46.1 32.4
Growth rate of net foreign assets (%) 45.6 48.8 44.0 76.3 67.4 35.8
Growth rate of net domestic assets (%) -87.8 -50.5 -28.4 -148 -88.7 -38.4
Growth rate of net claims on govt (%) -1509 -114 -87.0 -145 -78.9 -56.8
Growth rate of credits to the economy (%) 6.9 10.8 15.8 4.3 16.7 30.8
Growth rate of exports of G&S (%) 28.4 28.1 12.0 18.0 40.7 22.1
Growth rate of imports of G&S (%) 8.9 26.8 4.4 13.8 44.3 28.9
As percentage of GDP at current mp
Revenue and grants (as % of GDP) 33.4 32.2 30.8 31.4 31.7 30.6
Expenditure and net lending (% of GDP) 33.9 32.1 31.1 30.9 30.2 31.1
Overall budget balance as % of GDP 0.1 0.6 1.2 2.2 2.1 -0.4
Augmented budget balance as % of GDP 0.1 0.6 1.2 5.2 5.1 5.0
Total Public debt as % of GDP 41.6 35.1 28.2 21.3 15.8 13.5
Public External Debt as % of GDP 38.7 32.0 25.2 19.8 14.7 12.5
Exports of goods & services as % of GDP 37.3 40.5 38.1 37.6 40.4 41.3
Imports of goods & services as % of GDP 30.6 32.9 28.9 27.5 30.3 32.7
Current account balance as % of GDP 8.7 10.2 13.7 17.3 19.2 16.6
FDI as % of GDP 0.7 1.6 0.6 1.1 3.3 3.5
External debt (as % of GDP) 42.0 36.2 29.1 22.7 17.6 15.4
Ext. debt service (as % of exports of G&S) 20.5 17.1 14.1 12.7 8.6 7.6
Ext. debt service (as % of FE reserves) 49.7 35.6 28.0 17.3 11.3 8.1
Memo Items:
GDP in sum trillion 9.8 12.3 15.9 20.8 28.2 34.7
GDP in US$ billion 10.1 11.9 14.2 17.0 22.2 26.6
Nominal GDP per capita (US$) 396 462 543 641 827 977
Nominal GDP per capita (US$ PPP) 1654 1808 1970 2154 2388
Income velocity of money supply (level) 10.5 9.5 8.4 7.6 7.3 6.5
Foreign exchange reserves (US$ Bln) 1.66 2.15 2.90 4.45 7.41 10.1
Forgn. Exch. Reserves (Months of imports) 5.1 6.3 7.4 7.9 10.2 11.8
End-period Exchange rate (UZ Sums/US$) 979 1058 1180 1240 1290
External debt outstanding (US$ million) 4249 4322 4133 3853 3913 4095
Year-End foreign exch. reserves (US$ bln) 1.66 2.15 2.90 4.46 7.41 10.14
Foreign exch. reserves (months of imports) 5.1 6.3 7.4 7.9 10.2 11.6
Exports of goods & services (US$ billion) 3.78 4.84 5.42 5.39 9.00 10.78
Imports of goods & Services (US$ billion) 3.10 3.93 4.10 4.67 6.74 8.67
External CAB (US$ Million) 861 1215 1949 2933 4267 4472
External capital balance (US$ Million) -414 -702 -1191 -1389 -2113 -1741
Population (million) 25.6 25.9 26.2 26.5 26.9 27.2
* Estimated. Source: International Monetary Fund (2008b) Republic of Uzbekistan: 2008 Article IV
Consultation- Staff Report; IMF, Washington, D.C., July 2008.
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Table-1.2: Trends of External Debt in Uzbekistan in 1995-2005 (US$ Million, unless otherwise specified)
Items 1995 2000 2001 2002 2003 2004 2005
Total Debt stock (EDT) 1799 4618 4855 4776 5012 5007 4225.5
Long term debt 1430 4209 4274 4383 4748 4810 4189
Public & guaranteed 1415 3764 3904 4003 4257 4302 3638.5
Private non-guaranteed 15 445 370 380 491 508 550.5
Use of IMF credit 157 127 78 62 43 19 0
Short-term debt 212 282 503 331 221 178 36.5
Principal repayments 149 646 635 581 659 700 782.2
Long term debt 149 581 590 559 636 675 782.2
IMF purchases 0 65 45 22 23 25 0
Interest payments (INT) 96 236 227 180 152 148 172
Long term debt 80 204 206 164 145 141 172
IMF charges 3 9 5 2 1 1 0
Short term debt 13 23 16 14 6 6 0
Total debt service paid (TDS) 245 882 862 761 811 848 954.2
Long term debt 229 785 796 723 781 816 954.2
IMF repurchases and charges 3 74 50 24 24 26 0
Short term debt (interest only) 13 23 16 14 6 6 0
Gross national income (GNI) 13316 13541 11196 9543 10012 11912 13946
Exp.of goods and services (XGS) 3800 3400 3223 3020 3810 3890 5680
Workers remittances 0 0 0 0 0 … …
Imp.of goods & services (MGS) 3840 3198 3379 3023 3247 … …
International reserves (RES) 1867 1273 1215 1400 1659 2146 2895
Current account balance -21 216 -113 117 882 1215 1949
Debt Sustainability Indicators (in per cent)
Items 1995 2000 2001 2002 2003 2004 2005
Total Debt stock (EDT)/ XGS 47.3 135.8 150.6 158.1 131.5 128.7 74.4
Long term debt/ XGS 37.6 123.8 132.6 145.1 124.6 123.7 73.8
Public & guaranteed/ XGS 37.2 110.7 121.1 132.5 111.7 110.6 64.1
Private non-guaranteed/ XGS 0.4 13.1 11.5 12.6 12.9 13.1 9.7
Use of IMF credit/ XGS 4.1 3.7 2.4 2.1 1.1 0.5 0.0
Short-term debt/ XGS 5.6 8.3 15.6 11.0 5.8 4.6 0.6
Total Debt stock (EDT)/ GNI 13.5 34.1 43.4 50.0 50.1 42.0 30.3
Long term debt/ GNI 10.7 31.1 38.2 45.9 47.4 40.4 30.0
Public & guaranteed/ GNI 10.6 27.8 34.9 41.9 42.5 36.1 26.1
Private non-guaranteed/ GNI 0.1 3.3 3.3 4.0 4.9 4.3 3.9
Use of IMF credit/ GNI 1.2 0.9 0.7 0.6 0.4 0.2 0.0
Short-term debt/ GNI 1.6 2.1 4.5 3.5 2.2 1.5 0.3
TDS/ XGS 6.4 25.9 26.7 25.2 21.3 21.8 16.8
INT/ XGS 2.5 6.9 7.0 6.0 4.0 3.8 3.0
INT/ GNI 0.7 1.7 2.0 1.9 1.5 1.2 1.2
Short-term/ Total debt 11.8 6.1 10.4 6.9 4.4 3.6 0.9
Concessional/ EDT 10.4 30.4 30.1 32.7 35.6 37.6 ….
Multilateral/ Total debt 13.7 9.8 10.7 11.9 12.5 14.8 …
Source: (1) World Bank, Global Development Finance 2006 for the years 1995-2004 and ADB for the year 2005.
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Average Terms of Commitment
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1.2 Debt Sustainability Analysis (DSA) by IMF Staff
The IMF team assessed that the recorded current account surplus
should decline as external statistics improve through proper recording
of the debit items. The IMF staff’s more conservative baseline scenario
based on current policies assumes that GDP growth would slow down
gradually to about 6 percent as export growth slows and the economy
faces capacity constraints, and the current account surplus would
decline gradually to 8 percent of GDP. Then the IMF staff makes the
following standard “two Baseline Scenarios” and “six Bound Tests”:
Baseline:
A. Alternative Scenarios
A1 = Key variables at their historical averages in 2008–132
A2 = New public sector loans on less favorable terms in 2008–133
B Bound Tests
B1 = Real GDP growth at historical average minus one standard deviation in 2009–10
B2 = Export value growth at historical average minus one standard deviation in 2009-104
B3 = U.S. dollar GDP deflator at historical average minus one SD in 2009-10
B4 = Net non-debt creating flows at historical average minus one SD in 2009-105
B5 = Combination of B1-B4 using one-half standard deviation shocks
B6 = One-time 30 percent nominal depreciation relative to the baseline in 20096
IMF staff concluded that under all scenarios and stress tests
the external debt situation of Uzbekistan has low and declining
external and public debt levels, and the debt outlook is
2
Variables include real GDP growth, growth of GDP deflator (in U.S. dollar terms), noninterest current account in percent of GDP,
and nondebt creating flows.
3
Assumes that the interest rate on new borrowing is by 2 percentage points higher than in the baseline, while grace and maturity
periods are the same as in the baseline.
4
Exports values are assumed to remain permanently at the lower level, but the current account as a share of GDP is assumed to return
to its baseline level after the shock (implicitly assuming an offsetting adjustment in import levels).
5
Includes official and private transfers and FDI.
6
Depreciation is defined as percentage decline in dollar/local currency rate, such that it never exceeds 100 percent.
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resilient to adverse shocks. Tables 7–10 from the IMF Report
are reproduced here.
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10
11
12
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Limitations of the IMF Assessment
The present report will make an attempt to fill these gaps on the basis of desk study
as well as field surveys through interviews and designed questionnaires for all the
stakeholders of public debt and external debt.
The organizational structure of the Ministry has been approved by the Resolutions of the
Cabinet of Ministers "On organizational structure of the Ministry of Finance of the
Republic of Uzbekistan" № 59 dated February 11, 1992
According to the assigned tasks the Ministry of Finance within its competence given by
legislation performs the following main functions relating to management of external
debt: “In the framework of state debt management together with the Central Bank carries
out monitoring, counting and servicing of internal debt of the Republic of Uzbekistan,
submits suggestions to the Cabinet of Ministers of the Republic of Uzbekistan about
improvement of the structure of government debt, acts as a government securities issuer,
develops and approves legislative acts for securities issuance, manages external debt,
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develops top parameters of government external loans, prepares and submits guarantees
of the Government of the Republic of Uzbekistan, organizes fulfillment of loan and other
contract obligations to external creditors, carries out records and control over use and
servicing of foreign credits attracted or guaranteed by the Republic of Uzbekistan.”
In the light of above discussions, the present study will have the following objectives:
1. To study the external debt recording and analysis system; and quality and coverage of
external debt statistics;
2. To study the trends of stock and composition of external debt, key external debt
sustainability indicators, currency-maturity-interest mix of external debt, creditor-wise
and borrower-wise classification of external debt;
4. To make a Debt Sustainability Analysis (DSA) of external debt as per joint guidelines
by the World Bank and IMF;
6. To study the sovereign external debt management and the contingent liabilities
relating to external debt;
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2. Basic Concepts of External Debt
Debt sustainability basically implies the ability of a country to service all debts – internal
and external on both public and private accounts- on a continuous basis without affecting
adversely its prospects for growth and overall economic development. It is linked to the
credit rating and the creditworthiness of a country. However, there is no simple answer to
the question- what should be the sustainable or optimal level of debt for a country?
Before discussing various measures for sustainable debt management, it is useful to
clarify certain basic concepts regarding measurement of external debt.
The Guide on external debt statistics jointly produced by the Bank for International
Settlements (BIS), Commonwealth Secretariat (CS), Eurostat, International Monetary
Fund (IMF), Organization for Economic Co-operation and Development (OECD), Paris
Club Secretariat, United Nations Conference on Trade and Development (UNCTAD) and
the World Bank and published by the IMF (2003) defines “Gross external debt, at any
time, as the amount of disbursed and outstanding contractual liabilities of residents of a
country to non-residents to repay the principal with or without interest, or to pay interest
with or without principal”.
This definition is crucial for collection of data and analysis of external debt:
1. First, it talks of gross external debt, which is directly related to the problem of
debt service, and not net debt.
2. Second, for a liability to be included in external debt it must exist and must be
outstanding. It takes into account the part of the loan, which has been disbursed
and remains outstanding, and does not consider the sanctioned debt, which is yet
to be disbursed, or the part of the debt, which has already been repaid.
3. Third, it links debt with contractual agreements and thereby excludes equity
participation by the non-residents, which does not contain any liability to make
specified payments.
4. Fourth, the concept of “residence” rather than “nationality” is used to define a
debt transaction hereby excluding debt transaction between foreign-owned and
domestic entity within the geographical boundary of an economy. Besides, while
borrowing of overseas branches of domestic entities including banks would be
excluded from external debt, borrowing from such overseas branches by domestic
entities would b included as part of external debt.
5. Fifth, it talks of contractual agreements, and excludes contingent liabilities. For a
liability to be included in external debt, it must exist at present and must have
contractual agreement.
6. Finally, the words “principal with or without interest” include interest free loans
as these involve contractual repayment liabilities, and the words “interest with or
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without principal” include loans with infinite maturity such as recently popular
perpetual bonds as these have contractual interest payments liabilities.
Three other concepts- one relating to interest payments, another relating to currency and
another relating to short-term debt need some clarification. While calculating interest, in
general an accrual method rather than the actual cash-flow method is used. As regards
currency, debt is made in different currencies and it is a common practice to convert all
debt in a single foreign currency, say US dollar, and also in domestic currency. In some
cases, debt from non-residents could be denominated in terms of domestic currency. As
per definition of external debt, such debt should form a part of external debt, even though
it may not be fully convertible.
In general, short-term debt is defined as debt having original maturity of less than one
year. However, Southeast Asian crisis highlighted the necessity to monitor debt by
residual maturity. Short-term debt by residual maturity comprises all outstanding debt
having residual maturity of less than one year, irrespective of the length of the original
maturity. Residual maturity concept is distinctly superior to original maturity concept.
External public debt is sustainable when debt services (repayment of principal plus
interest payments) can be paid without resort to exceptional financing (such as debt
relief) or debt restructuring or a major correction in the balance of income and
expenditures. Debt-servicing problems in low-income countries arise when the costs of
servicing public debt become very high, and official creditors (such as international
financial institutions or governments, and donors) do not to provide sufficient new
financing in terms of loans or grants for financing a country’s primary deficit. Although
external official debt is the dominant source of financing, domestic debt is equally
important for a developing country. In general, interest rates on domestic debt are very
high in low-income countries and maturities tend to be short, exposing a country to
significant roll-over and liquidity risks. Unlike external debt, which is mostly
concessional, domestic debt is usually issued at market rates. This implies that costs of
servicing domestic debt depend on overall macroeconomic environment and fiscal
situation of a country.
Debt sustainability is closely related to the fiscal deficit, particularly to the primary
deficit (i.e. fiscal deficit less interest payments). Sustainability requires that there should
be a surplus on primary account. It also requires that the real economic growth should be
higher than the real interest rate. Countries with high primary deficit, low growth and
high real interest rates are likely to fall into debt trap.
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2.3 Debt Sustainability and Current Account Deficit
A current account deficit occurs if imports of goods and services (excluding interest
payments) exceed exports of goods and service plus net transfers. It is often the most
important factor that leads to a rise in external debt. A persistent negative current account
balance is likely to indicate that a country may face an increase in its probability of debt
distress. The standard textbook two-gap theory on the Balance of Payments also states
that high fiscal deficit spills over current account deficit of the balance of payments. Thus
persistent and high levels of current account deficit is an indication of the balance of
payments crisis and needs to be tackled by encouraging exports and non-debt creating
financial inflows.
2.4 Liquidity versus Solvency
One important conceptual issue relates to the distinction between debt service problems
due to liquidity crunch and those due to insolvency. These concepts are borrowed from
the financial analysis of corporate bodies, but there are distinctions between firms and
countries (Raj Kumar 1999). If a firm has positive net worth but faces difficulty to meet
the obligations of debt service, it is considered to be solvent but to have liquidity
problem. When it has negative net worth, it is insolvent.
There is difficulty to apply these concepts to a country, as it is difficult to value all the
assets of a country such as natural resources, wild life, antics in museum, heritage
buildings and monuments. Besides, firms can disappear due to insolvency problems, but
a country cannot become bankrupt nor disappear nor are overtaken or merged purely on
account of financial problems. So we need to consider medium and long term prospects
of a country in terms of growth and balance of payments.
There are broadly two approaches to determine debt sustainability of a country. One is to
develop a comprehensive macroeconomic model for the medium term particularly
emphasizing fiscal and balance of payments problems, and another is to assess
various risks associated with debt and to monitor various debt sustainability
indicators over time. These indicators express outstanding external debt and debt
services as a percentage of gross domestic product or other variables indicating
the strength of the economy. Some commonly used debt sustainability indicators
are given in Table-2.1
On the basis of ratio of PV to GNI and PV to XGS (exports of goods and services), the
World Bank in their report on Global Development Finance 2005 has classified countries
into three categories viz. low indebted, moderately indebted, and severely indebted
countries as indicated in Table-2.2. While PV takes into account all debt servicing
obligations over the life span of debt, GNI indicates country’s total potentials and XGS
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indicates foreign exchange earnings reflecting debt-servicing ability. Countries are also
classified into low and middle income depending on the level of per capita income.
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(gg) Net foreign currency cash flow
(hh) Net foreign currency debt over equity
8. Dynamic ratios (ii) Average interest rate/ growth rate of exports
(jj) Average interest rate/ growth rate of GDP
(kk) Average interest rate/ growth rate of revenue
(ll) Change of PV of debt service/ change of exports
(mm) Change of PV of debt service/ change of GDP
(nn) Change of PV of debt service/ change of revenue
Source: Tarun Das (2006a) and IMF (2003)
Middle income: GNI per Severely Indebted Moderately Indebted Less Indebted
capita between US$766 Middle income (SIMI) Middle income (MIMI) Middle income (LIMI)
and US$9,385
2.7 Stress Tests, Debt Distress and Indicative Debt Service Thresholds
Stress tests are closely related to the debt sustainability indicators and are useful in
identifying major liquidity risks, as well as strategies to mitigate them. Stress tests can be
used to test a variety of scenarios such as the following:
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(b) Indications of debt distress episodes
To assess debt sustainability, debt burden indicators are compared to indicative debt-
burden thresholds. If a debt-burden indicator exceeds its indicative threshold, then a
country is at a higher probability of debt distress. The basic assumption is that a country
with a high debt service burden relative to its repayment capacity is more likely to run
into debt-servicing difficulties. As per joint Fund-Bank empirical studies (IMF 2006)
low-income countries with weaker policies and institutions tend to face debt-servicing
problems at lower levels of debt than countries with sound fundamentals and strong
institutions, because governments with weak institutions and inadequate macroeconomic
policies tend to misuse and mismanage public funds. These countries are also more
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vulnerable to exogenous shocks, such as declines in the international prices of the major
exports or a natural disaster at home, since they lack adequate preemptive measures for
disaster management and mitigation.
Thus, the indicative debt-burden thresholds8 depend on a country’s quality of policies and
institutions, measured by the Country Policy and Institutional Assessment (CPIA) index
of the World Bank (see Table 2.3). The CPIA grades countries according to their
economic management, structural and social policies as well as public sector
management and institutions. The index is updated annually.
Table 2.3 Indicative Thresholds for Debt Sustainability Indicators
(in percent)
For example, if the policy regime and institutions of a country is assessed as “Poor” by the World
Bank CPIA, then the debt service to exports ratio for this country should be kept below 15
percent. If debt service ratio exceeds 15 percent, the country would face problems for servicing
debt. If the policy regime of a country is considered to be “Medium”, the country can have debt
service ratio up to 20 percent. If the policy regime for a country is assessed as “Strong”, the
country’s debt/service ratio can go up to 25 per cent. Other indicators have similar interpretations.
However, IMF concludes that the indicative debt burden thresholds are indicative
benchmarks for making a debt sustainability assessment based on a forward-looking
analysis of debt and debt-service trends, and not intended to be rigid ceilings. In a similar
vein, it is neither expected nor suggested, that countries with low debt ratios borrow up to
their thresholds.
A country faces an episode of debt distress if it cannot service its debt without resort to
exceptional financing (such as debt relief) or a major future correction in the balance of
income and expenditures. The joint WB/IMF DSA framework classifies countries
according to their probability of debt distress into four broad categories:
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All debt indicators are well below the relevant indicative debt burden thresholds.
Alternative scenarios and stress tests do not result in indicators breaching thresholds in
any significant way.
The baseline scenario does not indicate a breach of thresholds. Alternative scenarios and
stress tests show a substantial rise in the debt-service ratio over the projection period. As
a consequence, the debt-service ratio may reach its indicative threshold, while debt-stock
ratios may breach them.
The baseline scenario indicates a breach of debt stock and/or service ratios over the
projection period. This is exacerbated by the alternative scenarios/stress tests.
Current debt stock and service ratios are in significant and/or sustained breach of
thresholds.
2.8 Policy framework and Institutional Set up for External Debt Management
International experiences and practices of management of external debt, public debt and
associated contingent liabilities by leading public debt offices bear many valuable lessons
for developing countries in the process of strengthening their debt management capacity.
Many countries - mainly advanced and some emerging market economies - have set up
integrated public debt offices and are successfully managing their sovereign debts. In
most countries where debt offices have been set up, there is clear evidence of moving
towards fiscal consolidation. There has also been a significant change since late 1980s in
the institutional structure, the role and style of functions of public debt management
towards risk management. This has been enabled by institutionalization of the debt office
with an in-house risk management culture, as a specialized institution, staffed with
professionals and market specialists. The role of such debt offices, in many instances,
gradually transformed into treasury operations on the lines of those performed by
investment banks, corporate houses and foreign exchange management by central banks.
Within the debt office, middle office emerges as the risk manager, which formulates and
advises on the debt management strategy and also develops benchmarks for assessing the
risk-cost trade off of the portfolio.
The primary requirement for a debt office is to bring the size of public debt at sustainable
levels. Without sustainability of debt, risk management would not have much impact
towards insulating the debt portfolio from systemic risks. The main risks that need to be
managed for the sovereign debt portfolio are foreign currency risk, interest rate risk,
credit risk, liquidity risk, refinancing risk, operational risk and payments and settlement
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risk. Many debt offices have addressed management of market risks like currency and
interest rate risk by establishing a risk management framework for the sovereign debt in
an asset-liability management framework.
The institutional structure for public debt management, world wide, could be broadly
characterized into two categories – setting up of a centralized public debt office and
scattered debt management responsibilities. The former category of a centralized debt
office, which has been the showcase for countries currently strengthening their debt
management capacity, is mainly found in advanced countries and a few emerging market
economies. For these countries, there has been a preference to locate the debt office as a
separate entity under the Ministry of Finance or within the mainstream Ministry. There
are also some instances of locating the debt office outside the Ministry as an autonomous
agency, but with a Memorandum of Understanding (MOU) signed between the Ministry
of Finance and the Public Debt Office. This institutional mechanism is usually,
safeguarded, by public debt legislation or legal statutes.
Although, independent set-up for the Public Debt Office and the Ministry of Finance are
regarded as somewhat separate watertight compartments for locating the debt office, in
reality, however, there is a very thin dividing line between the two. The Ministry of
Finance always exercises some measure of control over the operations of the debt office,
irrespective of its location. This is unavoidable because it is the liability of the
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Government that is to be managed by the debt office. Therefore, even among the most
independent set-ups like National Treasury Management Agency of Ireland and the
Swedish National Debt Office which are entrusted with day-to-day management
responsibilities, the Ministry of Finance determines the policy, sets the operational
guidelines and the benchmarks under which the debt office is required to operate.
2.9 Capability Building for Management of Public Debt and Contingent Liability
Continual upgrading of the information and communications technology (ICT) and the
professionals engaged in the management of public debt and contingent liabilities is
essential for maintaining debt sustainability over time. Once the public debt management
responsibility is centralized and a computerized debt recording system functions
efficiently, the main challenge is to develop a risk management office (or middle office).
Building a sound risk management capability within a sovereign debt management
operation can take several years given the experiences of even the developed countries
like Belgium, Colombia, Ireland, New Zealand and Sweden. However, there is no
uniform model which holds good for all countries and at all times. The system needs to
be country-specific and owned by the respective government and cannot be imported
directly from other countries.
Given that risk management skills are a scarce resource and training staff in this area is
very expensive, a strategy needs to be developed to hire new staff with these skills and to
have an intensive training program for existing staff. Appropriate wage-income policies
and succession plan also need to be formulated to retain these staff given their obvious
marketability or to replace a staff in the case of need. The manager or the head of the
middle office should also have strong technical and public policy skills.
2.10 International Best Practices for Policy Framework and Institutional Set Up
25
for External Debt Management
As regards policy framework, international best practices for the management of external
debt leads to the following broad conclusions:
(b) Debt management strategy is an integral part of the wider macro economic
policies that act as the first line of defense against any external financial shocks.
So debt management policies need to be well coordinated with fiscal policies,
monetary policies, financial and capital market policies and overall macro-
economic policies.
(c) As regards institutional set up, nearly all of the autonomous debt management
offices have adopted an organizational structure similar to that in leading
corporate treasury and investment banks. They divide functional responsibilities
for managing transactions into different offices within the debt management
organization and established procedures to ensure internal control, accountability,
checks and balances. Usual practice is to establish separate front offices, middle
office, back office and head office, as explained earlier.
(d) International best practices also indicate that debt management offices generally
form a part of the Ministry of Finance, although the management of external
assistance from the IMF is the joint responsibility of the Ministry of Finance and
the Central Bank. A few developed countries have set up independent debt offices
outside the Ministry of Finance for management of both domestic and external
debt. However, a developing country will need a number of years before
migrating to such an independent system.
(e) Almost all the developing countries donot allow sub-national governments (states,
provinces, corporations, municipalities etc.) to borrow directly from external
sources, although public sector enterprises are allowed to borrow directly from
external sources, preferably without government guarantees.
(g)
(f) There is need to have a cautious approach on external short-term credit. In many
developing countries, like India, government does not resort to any short term
borrowing from external sources, although the public sector enterprises and the
private sector companies are allowed to borrow short-term credit externally
subject to certain conditions and prudential limits.
(g) For an emerging economy like Uzbekistan, it is better to put a limit on private
commercial borrowing with short and medium maturity.
26
(h)
(h) Big bullet loans are bad for small economies like Uzbekistan as these can create
refinancing risk and roll over problems in future.
(i) It is not enough to manage the government balance sheet well, it is also necessary
to monitor and make an integrated assessment of national balance sheet and to put
more attention on surveillance of overall debt- both internal and external, private
and public. During the last financial and foreign exchange crisis towards the end
of the last decade, in each of the major Asian crisis economies, viz. Indonesia,
Korea and Thailand, weakness in the government balance sheet was not the
source of vulnerability, rather vulnerability stemmed from the un-hedged sort-
term foreign currency debt of the private sector comprising commercial banks,
finance companies and corporate sector.
(j) It is not sufficient to manage the balance sheet exposures, it is equally important
to manage off-balance sheet exposures and contingent liabilities.
(k)
(l) It is necessary to adopt suitable policies for enhancing exports and other current
account receipts (tourism earnings and remittances) that provide natural hedge
and the means for financing imports and debt services.
(l)
(m)Detailed data recording and dissemination are pre-requisites for an effective
management and monitoring of external debt and formulation of appropriate debt
management policies.
(m)It is vital that external contingent liabilities and short-term debt are kept within
prudential limits.
(o) It is also necessary to strengthen the legal, regulatory and institutional set up for
management of both internal and external debt.
(p) A sound financial system with well developed debt, money and capital markets is
an integral part of a country’s debt management strategy.
27
3. Uzbekistan- Current Economic Performance and Outlook7
3.1 Economic Performance and Poverty
The country achieved an average growth rate of nearly 8 per cent during 4 years 2004-
2007 with peak at 9.5 per cent recorded in 2007 (Table 3.2), compared to an average
growth rate of only 4.2 percent during 1999-2003. The increased productions and exports
boom of cotton, automobiles, gas, and metals served as the main drivers of growth
supported by favorable weather conditions and high world prices of cotton and metals.
Uzbekistan economy usually does well when the weather conditions are favorable and
international commodity markets are buoyant.
Higher growth coupled with a sharp decline in the population growth rate from 2% in the
1996-99 to 1.2% in 2000-07, led to an increase of annual per capita GDP growth, from
2% in the late 1990s to 6% in 2004-06 and 8% in 2007. Despite high economic growth,
employment generation and private consumption lagged behind and the incidence of
poverty remained wide-spread, as poverty ratio had been relatively growth-inelastic. This
implies that the so-called trickle down effects of high growth have been uneven, slow and
delayed in the case of Uzbekistan. A study made by Mckinley and Weeks (2007)
concluded that, although the growth performance of Uzbekistan in the post-independent
era was better than for similar former Soviet Union Republics (Table 3.1), there are
untapped potentials for achieving faster trend growth rates, and if more broadly based,
such growth could bring dramatic gains in employment and poverty reduction.
Table 3.1: Comparative Economic Performance of Uzbekistan, Annual GDP Growth (%)
Countries 1991-1994 1995-1999 2000-2006 1991-2006
Central Europe -3.3 3.2 4.5 2.1
Baltic states -11.7 4.8 8.0 2.1
Other Soviet Republics -15.4 0.2 9.2 0.3
Uzbekistan -6.8 1.1 5.1 0.9
Source: Mckinley and Weeks (2007)
7
This section is primarily based on (a) the Uzbekistan Country Brief 2008 prepared by the World Bank
(July 2008); (b) the ADB Country Report on Uzbekistan prepared by Iskandar Gulamov and Kiyoshi
Taniguchi of the Uzbekistan Resident Mission, ADB, Tashkent, for the real sectors; and (c) International
Monetary Fund (2008b) Republic of Uzbekistan: 2008 Article IV Consultation- Staff Report; IMF,
Washington, D.C., July 2008, for the financial and external sectors.
28
Table 3.2 Uzbekistan: Trends of Selected Economic Indicators in 2002-2007
29
National poverty ratio (defined as percentage of persons consuming less than 2,100 kilo-
calories per day) declined by only 1.7 percentage points from 27.5% in 2001 to 25.8% in
2005 (Table 3.3). Poverty reduction was uneven in rural and urban areas. While urban
poverty ratio declined from 22.5% in 2001 to 18.3% in 2005, rural poverty ratio remains
more or less invariant around 30 percent over the same period. Consequently, the
difference between the poverty ratio in urban and rural areas grew from 8% in 2001 to
almost 12% in 2005. The rural population makes up 64.4% of the total population but the
proportion of the disadvantaged population living in rural areas is 74.7%.
30
As judged by the World Bank’s poverty line of 2 USD per day, around 45% of the Uzbek
population lived on less than 2 USD per day. Income inequality as judged by Gini
coefficient also remained high at 36.8 percent in 2003. The share of the lowest 10 percent
of the households in income or consumption was only 2.8%, while that of the highest
10% of the households was 29.6%.
As in many developing states, the most vulnerable groups in terms of poverty are rural
inhabitants, families with many children, the disabled, the unemployed, people with
lower level of education and households with women breadwinners. A common
characteristic of poor families is that the head of household is unemployed and they have
many children. Even employment does not always guarantee protection from poverty, as
50% of the poor families have an employed household head. However, being
unemployed sharply increases the potential for poverty.
A recent survey further revealed that “income-poor” in Uzbekistan can be “asset rich”.
For example, over 98 per cent of the population owns a house or flat, 86 per cent have
plots of land, 87 per cent have a TV set, 38 per cent have a refrigerator and 12 per cent
have a car.
Uzbekistan has relatively high levels of fiscal freedom (88%), business freedom (67.8%),
and labor freedom (72.1%). The top personal income tax rate is moderate, the top
corporate tax rate is low, and overall tax revenue equals little more than 20 percent of
GDP. The labor market is flexible. Licensing and bankruptcy procedures are costly, but
opening a business is easy, and the average tariff rate is moderate.
31
3.3 Strengths, Weakness, Opportunities and Threats (SWOT)
Uzbekistan achieved a real GDP growth rate of 9.5% in 2007, supported by a growth of
6.1% in agriculture value added, 12.1% in industry, and 26.6% in services. Despite
deteriorating soil quality, rising grain harvests, higher world prices for cotton, and
increasing productivity from privatization of agricultural cooperatives helped agriculture
to grow by 6.1% in 2007.
Industrial growth was aided by increased production and exports of metals, gas, and
automobiles. Metals, country’s largest single export, received significant govt.
investment in recent years. Gas export volumes increased by 18%, and secured a 40%
gain in export prices. Overall, fuel and energy sub-sector grew by 10.1%. Automotive
industry output increased by 27%, driven by substantial government support through
various tax exemptions and subsidies.
Growth in services stemmed from increased revenues from gas transit, substantial
Russian-led investments in the communications, and significant construction activities in
housing and infrastructure.
High inflation remained as a major problem for both the government and the Central
bank. Although the official estimate of the Consumer Price Index (CPI) based inflation in
2007 was 7%, the IMF estimated CPI inflation at 12.3%8, caused by a marked expansion
in the money supply, increases in administered prices, public sector wage rises, and
unproductive expenditure related to the general election. The authorities responded by
further tightening the monetary and fiscal discipline, reducing the pace of sum
depreciation, and limiting the pass-through of higher international food prices through
administered prices.
8
The divergence between official estimate of inflation (6.8%) and the International Monetary Fund (IMF)
estimate (11.4%) was almost the same in 2006. In general, IMF estimate of CPI inflation is about five
percentage point higher than the official estimate of CPI inflation. IMF states that its estimates are
consistent with other available information, including producer prices, GDP deflators, wage increases,
growth in monetary aggregates, and utility price increases.
32
Table-3.4 SWOT Analysis of the Uzbekistan Macro-economy
1. Sustained high GDP growth averaging around 8% since 2004.
2. Cotton, metals, gas, construction are the leading sectors.
Strengths 3. Favorable fiscal situation, with overall fiscal surplus in recent years.
4. Strict monetary discipline
5. Declining ratios of public debt to GDP (estimated 13.5% in 2008)
6. Enabling environment for FDI and public-private partnership.
7. Favorable fiscal reforms with simplified rules and tax cuts.
8. Improvement in budgeting system and planning with introduction of
medium-term budgeting, adoption of GFSM-2001 budget classification
and switch to standard accounting and auditing rules.
Internal environment
33
Threats 1. Economy is heavily dependent on external trade of a few items, whose
prices are volatile and subject to global business cycles.
2. Overall GDP growth and government revenue remain vulnerable to terms
of trade shocks trigged by possible sharp declines in international prices of
cotton, metals and gas in future.
3. Business environment is not so favorable and doing business in Uzbekistan
is not easy due to restricted trade and business practices.
4. Balance of payments remains vulnerable to future risk of further hardening
of global prices of food grains and petroleum products
5. Foreign investment is officially welcome, but opaque bureaucracy and
political interferences create disincentives for FDI inflows.
Balance of payments situation remained very comfortable for recent years. Uzbekistan
always maintained an external current account surplus, which amounted to $4.3 billion in
2007, amounting to 19.2% of GDP, aided by commodity exports boom and significant
rise in remittances. Exports of gold, cotton, and energy (mainly gas), accounted for 56%
of total exports of goods in 2006 and also performed well in 2007 due to strong external
demand and soaring international prices in 2007. As one of the world’s largest producers
and exporters of gold, Uzbekistan benefited from the metal’s record prices in 2007.
Remittances represent another significant foreign currency source, and come primarily
from Uzbeks working in Kazakhstan and the Russian Federation.
Foreign Exchange Reserves increased to a record level at $7.4 billion, equivalent to 10.2
months of imports of goods and services at the end of 2007. Because of a conservative
external borrowing policy followed by the govt, external debt to GDP ratio declined to
17.6% of GDP by end-2007.
Substantial current account surplus and foreign direct investment inflows put upward
pressure on the exchange rate of Uzbek sum. The central bank intervened in the foreign
exchange market to prevent a nominal appreciation of the sum, against the US dollar,
continuing a policy aimed at boosting exports. During 2007 the “sum” depreciated by
about 4% against the dollar.
34
The policy of checking taxpayers’ bank accounts by the tax authorities undermines
confidence in banking. As a part of anti-inflationary efforts, the central bank puts limit on
the volume of cash that depositors may withdraw, which induces greater holdings and
transactions in cash.
3.7 Fiscal Situation and Reforms
Fiscal policy was prudent in 2007 and the outcome was better than budgeted. The
consolidated general government budget recorded a surplus of 2.1% of GDP in 2007,
marginally lower than 2.2 percent in 2006, due to deceleration in revenue growth and rise
of expenditure caused by an increase of wages and pensions twice in 2007, by 25% in
August 2008 and by 20% in November 2008, although these were counterbalanced by
some moderation in planned capital spending. The augmented fiscal surplus, combining
the consolidated government and the Fund for Reconstruction and Development (FRD),
remained unchanged around 5 percent of GDP compared with a budgeted deficit of 1
percent of GDP.
The strong budget performance in the past 2 years was driven by tax reforms, growing
customs receipts, and increases in utility prices. However, still more revenue
strengthening is required as the Govt is committed to raise all public sector wages,
pensions, and social benefits by 150% by 2010, relative to 2006.
Fiscal Reforms
Fiscal and financial reforms progressed further in 2007-2008. There was a concerted
effort to increase bank capitalization. Treasury modernization continued under the
ongoing technical assistance project, as did tax reforms. Further the restructuring of
“shirkats” into private farms was completed. According to the World Bank’s Doing
Business 2009 Report, Uzbekistan improved its ranking and jumped from the 145th place
in 2007 to 138th place in 2008 thanks to establishing a private credit bureau and a public
credit registry to share credit information among financial institutions. These measures
have significantly improved access of population to credit resources. The report also
notes that adoption of new Tax Code and decrease of tax burden resulted in decrease of
income tax and single tax payment in 2007.
In Jan 2008, Parliament approved a revised tax code. As a part of policies to reduce the
tax burden, the rate of unified tax for micro- and small enterprises was reduced from 10%
to 8%, and the rate of corporate income tax for banks was lowered from 17% to 15%.
The new code also introduced an excess profits tax for “subsurface users” extracting or
producing cathode copper, cement, polyethylene granules, and gas. The tax rates are 60%
for cathode copper and 75% for all other commodities. The taxable base for the excess is
defined as the difference between the price set by legislation and the selling price.
35
accounts. The major medium-term challenge is to consolidate all government fiscal
accounts into a single account, including those of the Government’s extra-budgetary
funds.
A Reconstruction and Development Fund (RDF) was established in 2006 with capital
targeted to reach $1.0 billion by 2010.It had already reached $1.2 billion at end-2007
because of a strong budgetary position. Eight high-priority investment projects have
been approved for financing from RDF funds in 2008, mainly in the chemical and
hydrocarbon sectors. RDF’s role in these projects will focus on procuring capital goods.
36
3.8 Medium Term Economic Forecasts
Assuming that world prices of gold, cotton, and gas would stay buoyant over the next
couple of years, there would be no destabilizing factors either at home or abroad, and
there would be no monsoon failures, economic prospects of Uzbekistan in the near and
medium terms are considered to be bright. According to the assessments made by the
IMF, risks to the 2008 economic outlook of Uzbekistan appear to be limited with strong
growth prospects of its major trading partners. Despite downside risks, international
commodity prices are expected to remain buoyant. The Uzbek economy remains
insulated from the global financial crisis because of its limited integration with the world
financial markets. The IMF Staff analysis suggests that a 10 percent decline in
international commodity prices would lead to a reduction of the Uzbekistan current
account surplus and government revenues by only 1 percentage point of GDP each.
According to forecasts made by IMF, healthy external demand and surging commodity
prices, coupled with greater remittances and import controls, are expected to keep the
current account surplus at 16.8% in 2008 and 12.9% in 2009.
The medium term outlook is also favorable. The authorities target 8-9 percent export-led
growth over the medium term, which appears to be feasible. These ambitious targets will
be achieved through consolidating macroeconomic stability, modernizing various sectors,
improving physical and social infrastructure, attracting more FDI, enhancing the role of
private sector and public-private partnership.
Since 2004 the Uzbekistan economy had been buoyant with high economic growth and
surplus on both domestic and external current accounts. But, it has also led to various
development challenges such as how to contain the inflationary pressures, how to sustain
high growth with strict monetary discipline and fiscal prudence, how to promote
equitable growth and to raise the levels of living of all citizens, how to eradicate poverty
and unemployment at a faster speed, and how to create enabling environment for public-
private partnership and international cooperation in the development process.
The authorities have made significant progress in macroeconomic adjustment, but have
further scope for improving the macroeconomic policy mix, particularly in regard to anti-
inflationary measures and movement towards full convertibility of Uzbek Sum on current
account transactions. The reforms backlog suggests that the economy is underperforming,
although it is now moving along a higher growth profile. If the structural reforms needed
for private sector-led growth are carried out to their logical ends, Uzbekistan can become
37
one of the most dynamic economies in central Asia and can achieve still higher growth
along-with faster reduction of poverty and unemployment.
Favorable economic conditions with large foreign exchange reserves, a low level of
external debt, and positive fiscal balance put the government in a comfortable position to
push through long-awaited reforms aimed at deepening industrial diversification, banking
and trade liberalization, and private sector development. The authorities are in a position
to exploit the present growth momentum and substantially expand reform initiatives in
order to secure sustainable high growth for the longer term.
38
ANNEX-1:
39
Selected References
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Das, Tarun (2000) Sovereign Debt Management in India, pp.561-579, in Sovereign Debt
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40
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41
The Heritage Foundation (2008) Uzbekistan Economic Freedom Indices, Washington
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42
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43