THE ROLE OF INTERNATIONAL FINANCE INSTITUTIONS IN THE UZBEKISTAN'S ECONOMY: AN EXAMINATION OF STRUCTURAL REFORMS AND FISCAL RISK

256 Vol. 5, No. 11 – Special Issue (EJMTCS) ISSN: 2181-2861 THE ROLE OF INTERNATIONAL FINANCE INSTITUTIONS IN THE UZBEKISTAN'S ECONOMY: AN EXAMINATION OF STRUCTURAL REFORMS AND FISCAL RISK Ostonaqulov Alisher Abdurashidovich1 Mingliboyev Elyor O‘ktam o‘g‘li2 1 Senior Lecturer of the Department of Finance and Banking, Denau Institute of Entrepreneurship and Pedagogy. tel: +998 93 222 22 17 E-mail: [email protected] 2 2nd-year student of Denov Institute of Entrepreneurship and Pedagogy. tel: +998 88 550 06 08 mrelyormingliboyev2[email protected] https://doi.org/10.5281/zenodo.17518911 Annotatsiya: This research critically examines Uzbekistan's engagement with its principal IFIs, including the World Bank Group (WBG), the European Bank for Reconstruction and Development (EBRD), the Asian Development Bank (ADB), and the International Monetary Fund (IMF), and assesses their impact on the country's economic growth. Additionally, the study seeks to connect macroeconomic stability with ongoing institutional reforms by evaluating fiscal risks associated with state-owned enterprises and PublicPrivate Partnership (PPP) projects. Keywords: Uzbekistan's economy, International Financial Institutions (IFIs), Economic Reforms in Uzbekistan, Macroeconomic Stability, Green Growth and Decarbonization, Debt Sustainability and Fiscal Risks. INTRODUCTION: The advancement of globalization and ongoing economic transformations have increased the significance of collaboration between national economies and International Financial Institutions (IFIs). Since the initiation of economic reforms in Uzbekistan in 2017, the country has prioritized cooperation with IFIs 1 . This partnership has enabled the mobilization of essential financial resources, technical support, and policy guidance necessary for implementing complex institutional and structuralreforms. Currently, IFIs play an expanding role in modernizing Uzbekistan's economy by mobilizing investment flows and promoting macroeconomic stability. These developments necessitate a comprehensive evaluation of IFI performance, with particular attention to both the scale of investments and the sequencing of institutional reforms. The primary advantage offered by IFIs lies in their technical expertise, which supports the design of effective management reform sequences beyond infrastructure investment alone. Disregarding these policy recommendations may result in suboptimal outcomes, even when substantial funding is provided. BASIC SECTION: IFIs' Role and Principal Aims: IFIs primarily engage in Uzbekistan's reform initiatives as policy advisers rather than solely as financial providers. Each institution maintains distinct strategic priorities: 1. IMF: The lead policy adviser whose goal is macroeconomic stability, oversight of fiscal consolidation, and spearheading the sequencing of structural reforms. 2. WBG: The Country Cooperation Program 2022-2026 is committed to a green growth transformation to an inclusive and sustainable market economy with emphasis on energy reform and enhanced institutional governance. Foreign Direct Investment (FDI) attraction and private sector regulation reform in special economic zones are goals of the International Finance Corporation (IFC), which is part of the WBG. 3. EBRD: The 2024 EBRD strategy will enhance competitiveness and facilitate green energy solutions, primarily decarbonization. 4. ADB: Focused on sector development, infrastructure lending, addressing climate change, and building regional transport links under the Central Asia Regional Economic Cooperation (CAREC). Strategic Cooperation Principles: The strategic focus of the alliance has shifted from historical poverty reduction to current priorities such as enhancing institutional governance and advancing a green energy transition. The emphasis of IFIs on green 1 https://www.worldbank.org/en/results/2019/04/12/supporting-economic-and-social-reforms-in-uzbekistanto-create-better-opportunities-for-all-citizens 257 Vol. 5, No. 11 – Special Issue (EJMTCS) ISSN: 2181-2861 growth and decarbonization aligns Uzbekistan with global financial standards, making decarbonization an economic necessity for the country. Uzbekistan has successfully attracted IFIs' interest and support, emerging as one of the leading EBRD financing recipients in Central Asia for four consecutive years. This reflects the institutions' trust in the country's economic potential and the extent of their cooperation. IFIs have made substantial investments in Uzbekistan's economy, with the EBRD providing approximately €4.28 billion and the IFC maintaining a $500 million portfolio as of August 2023. The majority of financial assistance has targeted poverty reduction programs, contributing to lower poverty rates alongside robust economic growth 2 . Spending on the social protection system has increased from 0.57% to 1.33% of GDP, aiming to sustain high levels of social support despite IMF-imposed requirements for debt and deficit restraint. Epicentre of Strategic Funding Areas: Investment is primarily directed toward strategic sectors that are also exposed to significant risks: 1. Energy Transformation: One strategic sector where the World Bank is financing a 250 MW solar power plant and a 63 MW Battery Energy Storage System for grid stabilization and utilization of renewable energy, along with the upgrade of 6,000 km of distribution networks. 2. Agriculture and Water Management: In 2018, 22% of XMI spending was allocated to agriculture, significantly exceeding the global average. This allocation demonstrates a focus on rural poverty alleviation and water resource management, although these efforts may conflict with green objectives due to the substantial greenhouse gas emissions associated with agriculture. 3. Financial Sector: A significant milestone in banking sector privatization was the acquisition of Ipoteka Bank by Hungary's OTP Group in 2023. Analysis Despite macroeconomic achievements, structural challenges continue to limit the realization of Uzbekistan's economic potential. The dominance of state institutions (DUKs) and the slow pace of banking sector reforms are significant obstacles. DUKs control nearly half of GDP, restricting competition and private sector development, while state-owned banks dominate lending, limiting access to credit for small and medium-sized enterprises (SMEs). The continued presence of these challenges indicates significant institutional inertia, complicating the economic environment. The privatization of Ipoteka Bank is unlikely to serve as a catalyst for broader reforms among large state-owned banks. broader reforms in behemoth state banks. External Debt and Fiscal Risks Assessment: The IMF's Debt Sustainability Analysis ranks Uzbekistan as low-risk for external direct debt. However, the key fiscal risks are shifting away from direct debt to indirect exposures in terms of DUKs and PPPs, with stress tests estimating risks of 14.1% of GDP 3 . This means that in order for Uzbekistan to get the most cooperation from IFIs, improving governance and sequencing of reforms are essential prior to additional investments. There must be efficient risk management for PPPs in conjunction with public investment planning and fiscal analysis. CONCLUSION: Enhanced cooperation with IFIs has facilitated Uzbekistan's economic transformation, supporting macroeconomic stability, poverty reduction, and targeted investment in strategic sectors. However, progress in the next phase (2026-2030) will depend on improving institutional quality, as the continued dominance of the state and state-owned banks undermines private sector competitiveness. Although traditional external debt risks remain low, contingent liabilities from DUKs and PPPs present significant, unaddressed fiscal risks. Foydalanilgan adabiyotlar: 2 European Bank for Reconstruction and Development (EBRD). (2018). Uzbekistan Country Strategy. EBRD. 3 International Monetary Fund (IMF). (2022). Republic of Uzbekistan: 2022 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Uzbekistan. IMF Country Report No. 22/198. Washington, D.C.: International Monetary Fund. 258 Vol. 5, No. 11 – Special Issue (EJMTCS) ISSN: 2181-2861 1. Abu Bader, S., Abu Qarn, A.S., 2008. Financial development and economic growth: the Egyptian experience. J. Policy. Model. 30 (5), 887–898. 2. European Bank for Reconstruction and Development (EBRD). (2018). Uzbekistan Country Strategy. EBRD. 3. International Monetary Fund (IMF). (2022). Republic of Uzbekistan: 2022 Article IV Consultation—Press Release; Staff Report; and Statement by the Executive Director for the Republic of Uzbekistan. IMF Country Report No. 22/198. Washington, D.C.: International Monetary Fund. 4. Xu, F., & Wubishet, A. (2024). Analysis of the impacts of financial development on economic growth in East Africa: How do the institutional qualities matter? Economic Analysis and Policy, 82, 1177–1189. 5. World Bank. (2022, May 24). Uzbekistan and World Bank Group to Boost Cooperation with New Country Partnership Framework for the Period 2022–2026. World Bank. https://www.worldbank.org/en/news/pressrelease/2022/05/24/uzbekistan-and-world-bank-group-to-boost-cooperation-with-new-country-partnershipframework 6. https://www.worldbank.org/en/results/2019/04/12/supporting-economic-and-social-reforms-in-uzbekistanto-create-better-opportunities-for-all-citizens.