ASTANA, May 23 (Reuters) - After liberalising its foreign exchange system, Uzbekistan now needs to restructure its entire economy distorted by the decades of strict currency and price controls, officials from the World Bank and International Monetary Fund told Reuters.
This would involve painful steps such as raising energy prices or shutting down companies unable to adapt to the changing environment - and at the same time taming inflation and improving the business climate.
Hans Timmer, chief economist for Europe and Central Asia at the World Bank urged the government to keep up the pace of pace of reform but acknowledged Tashkent was worried about the effect on jobs.
Juha Kahkonen, deputy director of the Middle East and Central Asia department at the IMF, stressed in a separate interview the need for tighter budget and monetary policies to help curb inflation.
Both officials were speaking on visits to the Kazakh capital of Astana.
Central Asia’s most populous nation of 32 million resumed long-delayed market reforms after President Shavkat Mirziyoyev came to power in 2016 following the death of veteran leader Islam Karimov.
Last year the former Soviet republic ended a system under which a select few companies enjoyed access to foreign currency at half the market price, creating economic distortions.
The foreign exchange reform, in which the Uzbek sum was devalued to 8,100 per dollar from 4,210, has unshackled many companies. But some are struggling, such as sugar refineries which used to import feedstock from as far away as Brazil. The cost of their raw sugar inputs has effectively doubled while the retail price of sugar remains fixed because of its importance to households.
Instead, the government has stepped up imports of refined sugar, making Uzbekistan the biggest buyer of Ukrainian sugar this year.
“There are winners and there are losers.” Timmer said, referring to the sugar industry’s problems. “Apart from reducing preferential treatment of certain sectors and companies, it is important to take away distortions.”
The World Bank this month provided $940 million in financing for four new projects in Uzbekistan, focusing on energy efficiency, horticulture and emergency medical services.
“We have increased our lending to Uzbekistan and there we are pushing the envelope to support the reform momentum.” Timmer said. “It would be wonderful if the current pace of reforms could be sustained.”
At the same time, he said, the government in Tashkent “is very much concerned about the impact of reforms on the labour market” and is likely to tread carefully.
Unemployment is one of Uzbekistan’s biggest problems, with millions of Uzbeks working abroad, mainly in Russia to provide for their families.
Kahkonen said that getting inflation under control was an immediate priority. “It’s close to 20 percent currently and I believe the authorities will reduce it but it requires tighter fiscal and monetary policies,” he said.
Steps also needed to be taken to reduce losses and state subsidies in the energy industry.
In the medium term, an important task is “raising energy prices that are currently at well below cost recovery to close to cost recovery levels”, Kahkonen said.
Restructuring state enterprises is a priority, he said, as well as making the domestic economy more competitive and attracting foreign direct investment.
“Given where Uzbekistan started as a very heavily state-dominated economy with lots of restrictions and regulations there are many things to do, but a good start has been made in price liberalisation, in foreign exchange liberalisation and other things,” Kahkonen said.
Uzbekistan is prepared to privatise its state airline but will keep full control of its gold mines and oil firm, a senior Uzbek official told Reuters last month. (Reporting by Olzhas Auyezov; editing by David Stamp)