Helping Uzbekistan Undertake a Historic Social and Economic Transformation

In 2017, Uzbekistan launched a major reform agenda for societal and economic transformation, breaking from its past as a largely state-led, isolated economy. Between 2018 and 2021, the World Bank delivered a total of $2.1 billion to Uzbekistan across four Development Policy Operations (DPOs) to support these reform efforts. Areas of reform included the cessation of forced and child labor, reduction of state dominance in the economy, creation of sustainable jobs in agriculture and other sectors, and advancing gender and disability rights.

Challenge

Uzbekistan embarked on sweeping reforms in 2017, which marked a significant pivot from a centrally planned, state-driven economy toward a sustainable and inclusive market economy.

Despite a robust annual economic growth rate of 5% from 2017 to 2021, Uzbekistan faces ongoing challenges. State-owned enterprises (SOEs) remain dominant in the economy due to a relatively slow privatization process, affecting the private sector's growth and the creation of new jobs. To foster inclusive and sustainable growth, the country needs to dismantle regulations that give SOEs an unfair advantage, restructure state monopolies, and pursue market liberalization.

Approach

The World Bank has been a key supporter of Uzbekistan's reform agenda, providing sustained support over time with the goal of bolstering lasting economic, social, and environmental reforms. Budget financing, targeted to increase the government's fiscal and technical capacity to implement reforms, has contributed to Uzbekistan's efforts in transitioning to a sustainable and inclusive market economy, accelerating growth in the key economic sectors, reducing poverty, creating jobs, and improving citizens' well-being. From 2018 to 2021, the government received $2.1 billion in assistance through four DPOs, which bolstered efforts to achieve an effective and inclusive market transformation.

Reforms facilitated by the DPOs have included the milestone of eradicating forced and child labor, which used to annually involve over two million children and adults. The DPO-supported reforms in Uzbekistan's agricultural sector resulted in the reduction of the state's dominance in the cotton industry and land allocated for cotton cultivation, increased prices paid to farmers for producing cotton and aligned them with world market prices, increased opportunities for the private sector in the cotton industry, improved cotton productivity, and facilitated more efficient use of land and water resources. In March 2022, the International Labor Organization (ILO), which has been monitoring the cotton harvest in Uzbekistan since 2015 under an agreement with the World Bank, stated that the country has succeeded in eradicating systemic forced labor and systemic child labor during the 2021 cotton harvest.

Uzbekistan also has moved toward greater inclusion, criminalizing gender-based violence and expanding women's rights, while also eliminating restrictive internal mobility controls.

Moreover, the country has made significant steps to transform its economy, as it liberalized the foreign exchange rate, removed price controls, ended state-run agriculture, established new energy markets, pushed forward SOE reforms and privatizations, and revamped the tax system.

Results

The reforms supported by this series of DPOs have yielded significant results, with the World Bank's consistent support for these reforms leading to several key changes in the institutional landscape and, in turn, improvements for entrepreneurs, less-advantaged groups, and other stakeholders.

The growth of new and pro-poor sectors has led to unprecedented levels of horticulture and tourism exports, with a substantial increase in non-state foreign direct investment in Uzbekistan. Tourism surged by 2.5 times compared to 2017, reaching $1.3 billion in 2019, within two years of initiating reforms. The horticulture sub-sector has been central to the early turnaround in agriculture, with exports nearly doubled in under three years-from $680 million in 2017 to over $1.2 billion in 2019.

Economic liberalization has accelerated private sector growth, nearly tripling the number of new businesses registered, from less than 33,000 in 2016, to 93,000 in 2022. Additionally, the reform of SOEs has created new private sector opportunities, resulting in the sale of over 1,200 small and medium-sized SOEs since 2019.

Financial intermediation has improved, reducing preferential bank loans to SOEs from 56% in 2018 to 29% of total bank lending in 2023. This has made room for increased foreign investment in the banking sector, which enhanced private sector lending and contributed to the return to single-digit inflation by early 2022.

The government has increased fiscal transparency, transitioning from a predominance of off-budget spending to nearly all expenditures being on-budget and subject to parliamentary oversight. Efforts to increase local engagement and produce citizen budgets have been effective in fostering public ownership of future public expenditures.

The country has also made significant moves on boosting inclusivity, including by eliminating internal mobility restrictions, advancing disability rights, and expanding women's rights and protections as well as addressing issues such as equal pay, maternity leave, and gender-based violence.

Reforms have also sparked a green transition, promoting the adoption of water-efficient and climate-smart agricultural technologies and creating renewable energy markets. These efforts have increased renewable energy generation, from 13% of Uzbekistan's overall energy mix in 2017 to almost 20% in 2023.

Data Highlights

* The World Bank provided $200 million additional development policy financing in response to the COVID-19 pandemic in 2020 to mitigate its economic and social implications in the country.

One World Bank Group in Action

From the outset, DPOs in Uzbekistan have employed a comprehensive World Bank Group approach. The International Finance Corporation (IFC) identified key sectors for market development, such as horticulture, aviation, telecommunications, and chemicals-all of which have seen positive impacts from DPO policy initiatives. Additionally, the collaboration between World Bank and the IFC has been effective in shaping legislation and institutions that govern public-private partnerships, with a particular focus on private sector involvement in renewable energy.

World Bank Contribution

The World Bank provided DPO financing totaling $2.1 billion to Uzbekistan from 2018 to 2021 for implementing crucial social and economic reforms. They comprised both IBRD loans and concessional IDA credits. These DPOs have been the World Bank's key lending instruments used to support critical reforms in Uzbekistan. In the 2018-2021 period, the share of concessional lending through DPOs was around 50%.

Partnerships

Partnerships have been integral to the success of the DPOs in Uzbekistan, having helped unlock substantial additional finance required for implementing crucial reforms through parallel financing support provided by other development partners, including the government of Japan and the Asian Infrastructure Investment Bank.

Moreover, partnerships with United Nations (UN) agencies, including the ILO, the UN Children's Fund (UNICEF), and the UN Development Programme (UNDP), and with bilateral partners, have played a crucial role in strengthening the social, gender, and disability inclusion agenda.

For example, the World Bank and UNICEF collaborated to assist the authorities in developing the Single Registry, a management information system that was set up to improve the delivery of social protection services in Uzbekistan. This registry has simplified access to services and made the social protection system more transparent, resulting in a significant increase in coverage for low-income families and other vulnerable groups across the country, including women and youth.

Looking Ahead

The World Bank Group's Country Partnership Framework for FY2022-2026 aims to support additional transformative reforms in Uzbekistan, focusing on the following priorities: fostering a robust private sector, enhancing the state's market-enabling role, investing in human capital, and building a sustainable and resilient future. The World Bank remains deeply committed to helping the country advance its ambitious reform efforts by offering technical and financial assistance to the government, including through the ongoing DPO program, to sustain reform momentum and propel Uzbekistan toward its 2030 upper-middle-income target.

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