Macro Analysis /

Uzbekistan: Budget 2022 allows for consolidation, implementation will be key

  • Headline deficit set at 3% of GDP, down from 5.5% of GDP this year

  • Public debt payments rise to UZS 14.3tn, external sources to account for bulk of financing needs

  • Authorities seem committed to fiscal prudence, mid-term stabilisation conditional on implementation of new fiscal rule

20 December 2021

Uzbekistan's parliament passed the fiscal framework for 2022 with a headline deficit of 3% of GDP or UZS 25.5tn. This estimate is based on the consolidated revenues and expenditure of the republican budget, the country's sovereign fund, and 18 extra-budgetary funds. The 2021 deficit is expected at UZS 40.1tn (5.5% of GDP) after several revisions this year, thus next year's framework indicates commitment to fiscal consolidation, which would have a positive effect on Uzbekistan's relations with IFIs and subsequent investment flows. Yet, we remind that the new fiscal rule capping budget deficits at 3% of GDP is currently scheduled to take effect in 2023. In this context, revisions cannot be excluded in 2022, especially given the authorities' recent track record. In 2021, budget expenditure was thus hiked three times by a total of UZS 27tn (ca. USD 2.5bn).

Social welfare will remain a primary expenditure focus, accounting for almost 50% of republican budget spending in 2022. Healthcare and education are the main priorities, with combined spending of almost UZS 70tn. President Mirziyoyev called for salary hikes in these sectors, which will require financing of UZS 12tn. The government also continues its efforts to develop infrastructure, allocating UZS 23.8tn to this aim. As a whole, consolidated budget revenues are projected to rise by UZS 46tn vis-a-vis this year's levels, though the tax burden's increase is limited. Assuming consistent implementation and a baseline risk scenario, this framework will be conducive to sustainability without hampering Uzbekistan's development goals. In the medium term, fiscal prudence should be bolstered by the new fiscal rule and the curb on public and publicly guaranteed debt (60% of GDP).

Macroeconomic assumptions

The government expects GDP growth at 6% in 2022, slightly lower than the 7% rate projected for 2021. In nominal terms, next year's GDP should thus amount to UZS 840tn. In general, the forecast is in line with predictions by major IFIs. The Uzbek economy has shown consistent resilience throughout the pandemic and the government will continue to use fiscal levers, so this goal should be largely attainable. The main downside risks stem from the pandemic and uncertainty regarding new coronavirus variants. In case of escalation, Uzbekistan would be vulnerable due to potential volatility on commodity markets and/or deceleration of economic growth in partner economies. Overall, the authorities expect industrial production (7%) and construction (8.1%) to drive GDP growth in 2022. Agriculture (3.3%) and services (6.5%) will also make crucial contributions. Amid official efforts to boost Uzbekistan's export potential, exports are seen reaching USD 20.5bn after USD 18bn this year. At the same time, import growth will also remain solid amid firm demand conditions.

The central bank (CBU) expects deceleration of CPI inflation in 2022. The latter should reach 9% at end-2022, as opposed to the projected 10% at end-2021. At the same time, we see risks in this respect, particularly concerning next year's plans for tariff liberalisation. We remind that the government intends to liberalise all utility prices over 2022-2023, having delayed these reforms due to the pandemic. According to estimates by Uzbekistan's Accounts Chamber, the hike will increase utility prices by an average of 27% in 2022. Global food prices, imported inflation, and demand-side pressures also amplify inflationary pressures, which may necessitate monetary tightening despite CBU's continued commitment to neutrality. In the medium term, the bank aims to reduce CPI inflation to 5%, while GDP growth is forecast above 6% consistently.

Budget revenues

Consolidated budget revenues are projected at UZS 254.6tn in 2022, a nominal increase of 24%. Revenues to the republican budget are in turn set at UZS 200tn, which translates into 23.8% of GDP. Compared to 2021, this amounts to a UZS 29.1tn increase. While the tax burden will be more or less unchanged vis-a-vis 2021, a strong upward push is expected from VAT collection. The latter should thus total UZS 53.3tn, up 32.3% compared to last year. Around half of that can be traced to VAT on imported goods, which is in line with the trajectory of import growth. The remainder should reflect the post-pandemic recovery of business activity and internal demand conditions. If GDP and industrial output grow in accordance with official assumptions, the estimate will be broadly realistic. In case pandemic developments escalate, necessitating quarantine restrictions and stifling global demand, the government will face fiscal pressures. At the same time, a potential increase of uncertainty would likely boost gold prices, allowing for losses to be mitigated through gold exports.

In addition, FinMin's macroeconomic assumptions underpin projections regarding collection of corporate income tax, turnover tax, and personal income tax. Combined revenues are thus expected at UZS 68.5tn or 8.2% of GDP. Percentage-wise, the biggest increase should come from the turnover tax (55.2%), but the share of corporate income tax is highest at UZS 43.7tn (+13%). Uzbekistan's nine largest SOEs account for around 35% of all tax receipts, which makes their results crucial to fiscal performance. In the SME segment, there are general collection challenges alongside the straightforward pandemic-related risks. The former stem from Uzbekistan's grey economy (estimated at UZS 245tn in 2020), as well as different types of tax fraud.

It should be noted that in 2019-2021 the FinMin engaged in a comprehensive tax reform designed to alleviate the tax burden on businesses, which has more than doubled collection levels when compared to 2018. Yet, we see moderate risks of enterprises (particularly SMEs) sliding back into the grey area if incentives materialise due to difficulties caused by the crisis. So far this year, fiscal performance has not been hampered by such challenges, though the consistency and quality of official recovery policies will be crucial in this respect. Meanwhile, the authorities will hike excise duties on alcohol and spirit as of Jun 1, which will bolster excise duty collection. The latter should reach UZS 15tn (+16.4% relative to 2021), of which the above-mentioned categories account for UZS 2.1tn. Tobacco (UZS 2.3tn), fuel products (UZS 3.4tn), and natural gas (UZS 4.8tn) are the other main items. As commodity prices recover, the FinMin also projects a UZS 1.7tn increase of revenues from subsoil user tax, which should total UZS 17.4tn.

Budget expenditure

The consolidated budget sets expenditure at UZS 280.1tn, up 14% compared to 2021. Next year's republican budget also entails a UZS 24tn spending hike relative to the revised 2021 budget, to a total of UZS 214tn or 25.6% of GDP. As outlined, social welfare (UZS 105.5tn) is the main expenditure item accounting for 49.1% of total spending. Of the UZS 105.5tn, almost UZS 70tn is allocated for education and healthcare. Spending on the former is set at UZS 46.9tn, which reflects upcoming salary hikes and initiatives aimed at increasing access to education. Healthcare expenditures will total UZS 22.8tn, including salary hikes as well. The authorities have also allocated UZS 2.7tn to increase supplies of medicines and vaccines, while UZS 1.7tn is meant for preventive measures against the spread of COVID-19. Overall, the combined spending on salary hikes in the two segments will amount to around UZS 12tn or 1.5% of GDP.

In addition, benefit payments will account for 12.3% of social welfare spending (UZS 13tn). Relative to 2021, this translates into a 31% increase on the back of more extensive support for families, people with disabilities, and elderly citizens. Meanwhile, spending on the economy will equal UZS 24.3tn or 11.3% of republican budget expenditure. The category mainly includes state support for agricultural projects, as well as some initiatives to improve regional infrastructure. Next year's spending on infrastructure will total UZS 23.8tn (2.8% of GDP). In order to maintain stable economic growth, the government has additionally allocated UZS 26.8tn (3.2% of GDP) for development spending. Of that, UZS 9tn will be absorbed by ministries, while the remainder will go to specialised funds.

Public debt payments will amount to UZS 14.3tn in 2022, which includes UZS 10.2tn for principal payments and UZS 4.1tn interest. This is a significant increase compared to last year, when the total stood at UZS 10.8tn. Based on the average UZS/USD rate (11,321), next year's payments will thus amount to around USD 1.3bn, while public debt is expected to rise from 41.5% of GDP at end-2021 to 45.2% of GDP at the end of 2022. We remind that public debt levels have surged in recent years, exceeding 40% of GDP currently, as opposed to the 10% of GDP seen five years ago. In order to manage the debt stock, the authorities are implementing curbs that will cap public debt (including guarantees) at 60% of GDP. Overall, public debt levels are projected to exceed 50% of GDP by end-2023, but should still be sustainable in the near- and medium term.

Financing needs in 2022

The government will need to finance a consolidated budget deficit of UZS 25.5tn in 2022, as well as principal debt payments totalling UZS 10.2tn. External borrowing will remain the main source of funding, accounting for 66% of the overall financing needs (UZS 23.7tn). It will include IFI loans and eurobond issuance for a total of UZS 13tn, while the remaining UZS 10.7tn will be acquired in the shape of other loans for development funding. Domestic sources will in turn contribute UZS 12tn, divided into UZS 6tn from domestic bond issuance and UZS 6tn in the form of privatisation revenues. The former is somewhat higher than last year (UZS 5tn), which corresponds with official efforts to develop the domestic market. Meanwhile, revenues from privatisation were not used in 2021, when the government relied on surplus funds instead. The 2022 estimate is in line with privatisation plans, which stipulate that 770 SOEs will be subject to full or partial privatisation.


Overall, the 2022 budget can allow the authorities to consolidate public finances despite consistently ambitious development goals. Yet, it is important to note that this assessment is conditional on expectations that the framework will be implemented in its current shape. Based on recent developments, we cannot exclude revisions with potential to delay consolidation. Ultimately, medium-term fiscal prudence will depend on whether the new fiscal rule will indeed come into effect in 2023, supplemented with sufficient guarantees to prevent arbitrary exceptions. The government's efforts to manage debt levels are a favourable development, which should be conducive to sustainability and stable credit ratings for Uzbekistan.

Predictably, the greatest downside risks are related to pandemic developments. If new coronavirus variants lead to global restrictions and stifled demand, the authorities will face fiscal pressures. This is due to the fact that next year's budget retains significant development programmes and fiscal levers. Most of the consolidation offered is thus based on economic recovery and greater tax collection, as opposed to a more frugal stance on spending. If emergency financing is required, the government can rely on fiscal buffers, while also limiting some non-essential expenses. So far Uzbekistan's economic resilience has persisted through the crisis, which has positive implications in this context.

In addition, potential pandemic-related volatility would likely raise gold prices, allowing the authorities to at least partly compensate losses through gold sales. All in all, public finances would arguably remain relatively stable next year in case a negative scenario materialises, though medium-term sustainability goals could be hampered. Given the government's interest in expanding cooperation with IFIs and opening up the local market, we expect it to retain a general commitment to fiscal prudence. In this context, even if the 2022 budget ends up undergoing expansionary changes, a gradual consolidation strategy will likely be in place afterwards.