TOPIC OF THE WEEK: Uzbekistan is on course to tame its fiscal excesses
Uzbekistan's Ministry of Finance has presented a draft fiscal framework for 2025 with a headline deficit of 3% of GDP or UZS 49.3tn (US$ 3.7bn). This estimate is based on the consolidated revenues and expenditure of the state, the country's development fund, and 18 extra-budgetary funds. It will arguably end up being lower than the actual deficit in 2024, which is expected to reach slightly above 4% of GDP.
While official deficit projections were ultimately exceeded in the last four years (2021 to 2024), including because of higher spending related to the pandemic and the 2023 presidential elections, 2024 has marked the first year in that period when the government made efforts to address its fiscal woes. The series of tariff hikes implemented since late 2023 have sharply reduced the amount of gas subsidy, while a broader expenditure optimization has contributed to a restrained expenditure policy, which is set to lead to a 2pp reduction in the expenditure-to-GDP ratio from 2023 to 2025 vs a broadly constant revenue-to-GDP ratio. The smaller gas subsidy alone will thus account account for 1.3% of the 2% improvement in the headline fiscal deficit from 5% of GDP in 2023 to 3% of GDP in 2025. The recent significant upward revision of nominal GDP will explain an additional 0.4% of that improvement.
While the planned fiscal consolidation is welcome, there are the usual risks of pursuing ad-hoc spending initiatives that could worsen the overall picture. Given the government's recent track record, we would not be surprised to see unplanned fiscal stimuli throughout the year. The fiscal balance may also be vulnerable in the case of unfavorable gold and copper prices, strong exchange rate fluctuations, or a drop in remittance inflows caused by a potential crisis in the Russian economy. Government debt is manageable, but the interest costs of servicing the debt are rising fast.
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