Uzbekistan’s economic transformation since late 2016 has been impressive. Over the last four years, the government has made great strides in improving the livelihoods of citizens by implementing a robust reform agenda.
As our first Public Expenditure Review in 15 years has documented, Uzbekistan has increased budget transparency, improved the management of public finances, simplified the tax system, and reduced the tax burden – remarkably ambitious steps with positive and tangible benefits.
The mere fact that an expenditure review took place at all is worth noting, given that the last one occurred in 2005. Even more impressive, however, was the trajectory of government financing that was revealed by this review.
Increased budget transparency and access to data
Recognizing that transparency is vital for both effective governing and building citizens’ trust, the government of Uzbekistan made decisive steps in this area as part of its fiscal reforms.
Until recently, publicly available data was scarce – making it difficult for citizens to understand how their taxes were spent. In response to this, the authorities implemented the recommendations of the IMF’s Enhanced General Data Dissemination System (e-GDDS), resulting in data now being published on both the national statistics webpage and on that of the IMF.
Perhaps even more encouraging was the series of steps taken to increase citizen engagement and strengthen the legal framework for the budgeting process. Starting in 2018, the Ministry of Finance began publishing the Citizens’ Budget, a document that explains in plain language the government's priorities, the composition of government resources, and overall government spending.
In 2019, the authorities took the unprecedented step of presenting a set of medium-term macroeconomic and fiscal projections, as well as assessing fiscal risks requiring government attention.
Finally, the 2020 budget was the first to be adopted through a law rather than a presidential resolution, highlighting the growing role of Uzbekistan’s Parliament in the budgetary process.
Bringing into the budget of extrabudgetary funds (EBFs)
Prior to the start of reforms in 2016, more than half of government spending was listed as carried out outside the budget, whether by extrabudgetary funds (EBF) or off-budget accounts.
Today, 23 of these EBFs are consolidated into the 2020 budget – including the Uzbekistan Fund for Reconstruction and Development (UFRD). This is substantial progress, although the process is taking time and some 25 EBFs still exist, along with 20,000-30,000 off-budget accounts of budgetary organizations (such as ministries, agencies, schools, hospitals, and others).
While this move to reduce spending outside of the budget is a step in the right direction, more needs to be done. More than one-third of the country’s spending is still done through EBFs and off-budget accounts. Investments financed by international financial institutions are still not included in the budget, nor are the quasi-fiscal expenditures by state-owned enterprises.
Chart: Consolidated General Government Spending, 2018 (in percent of GDP)
Tax cuts, simplified taxes, and more efficient tax collection
When deciding to improve the country’s taxation system, the authorities in Uzbekistan opted for a bold, expansive program – a move that seems to be paying dividends.
The thrust of the reform has been on reducing the tax burden on citizens and enterprises, unifying the rates of the personal income and social taxes to 12 percent, rationalizing VAT payments, and reducing the number of taxes and mandatory payments. Individual property taxes, the dividend tax, and the unified tax for micro and small enterprises were also reduced.
Despite these reductions in rates, improved compliance meant that revenues increased by more than a third in 2019 – contradicting many naysayers and demonstrating that well-designed reforms can achieve their targets.
Building on success
Given the success of this reform agenda, the government of Uzbekistan would be well served by sustaining the pace of change while prioritizing its efforts.
First, consolidating all off-budget spending into the budget will enhance transparency, increase efficiency, and improve efficacy in spending. Improving public finance management will also strengthen this reform agenda.
Second, a better budget preparation process, the implementation of robust public sector accounting procedures, and the introduction of proper public internal controls and audits will bolster this area.
Third, on public investment management, the main policy focus must be on the strengthening of the institutions that identify, develop, appraise, execute, and monitor infrastructure projects, including those financed through PPPs.
Finally, the tax system needs to be more predictable and less complex. Although the Tax Code lays out the key tax bases and rates for personal income tax and VAT, other tax rates have been set by the government in annual budget resolutions (law for 2020). Further tax reform remains a priority to improve the attractiveness of Uzbekistan for investment.
The bold reform agenda which began in 2016 has increased transparency in government spending, reduced spending outside of the budget, and improved taxation and tax collection. Efforts to improve the efficiency and the results of spending in many areas, including agriculture, irrigation, education, and finance, to name just a few, are following. Our forthcoming review of public spending – PER2 – will reflect on the outcomes of these policy reforms.