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Uzbekistan: World Bank Says Assistance Depends On Pace Of Reform

World Bank directors gathered recently in Washington to discuss the bank's assistance strategy for Uzbekistan. Pledging as much as $350 million in loans over the next three years, bank officials urged the government in Tashkent to accelerate the pace of macroeconomic and structural reforms. RFE/RL correspondent Antoine Blua spoke to the bank's country manager for Uzbekistan. He says making the currency convertible remains a key objective.

Prague 25 March 2002 (RFE/RL) -- World Bank officials are advising Uzbekistan to quicken the pace of economic reform.

At a strategy session at the bank's headquarters in Washington, D.C., officials urged the Central Asian nation to focus on making its currency convertible and improving conditions for trade. They also emphasized the need to liberalize agricultural policies and overhaul the country's judicial and regulatory framework for private and financial sector development.

David Pearce is the World Bank's country manager for Uzbekistan. He tells RFE/RL the bank's strategy envisages two possible lending schemes depending on how quickly the Uzbeks make progress: "There are two scenarios. One provides for lending up to $150 million over the next three-year period, and another scenario foresees lending up to $350 million during the same period. And which of those two scenarios materializes will, of course, depend upon the processing of particular projects, but more importantly on the government's implementation of its declared reform program."

Pearce says the first case assumes continued gradual implementation of structural reforms and no deterioration in the current macroeconomic framework. The second case, with its considerably higher payoff, assumes that the structural reforms in five key areas will be accelerated.

Of the five areas of reform, the most important, Pearce says, concerns the liberalization of the country's foreign exchange and trade regimes.

Transforming the Uzbek "som" into a convertible currency, he adds, is a declared objective of the Tashkent government as well as a feature of the country's agreement in January with the International Monetary Fund (IMF) on economic and financial policies.

Pearce says the Uzbek government is aiming to achieve account convertibility -- in other words, allowing banks, business, and private individuals to exchange foreign currency -- by the middle of 2002.

At an annual cabinet review in February, Uzbek President Islam Karimov said major steps toward convertibility had been taken in 2001 and suggested the goal would be achieved this year. But Pearce says it is difficult to say when the convertibility process may actually be completed.

"As of right now -- mid-March -- it's unclear whether the measures that are needed to achieve current account convertibility are indeed being implemented fully. And therefore, it's unclear whether this goal is going to be even technically feasible by the middle of the year," Pearce says.

Pearce says the changes recommended in the Tashkent-IMF memorandum will have some negative effects in the short term, but positive consequences in the medium and long term: "I mean, there is a mix of positive and negative influences of these reforms, these changes, which will need to be estimated quite carefully. That indeed would be the objective of IMF, World Bank, and other cooperation with the [Uzbek] government."

One such short-term negative consequence, Pearce says, is the risk of a currency devaluation, which would force businesses with foreign debts to get more soms. Pearce says the Uzbek banking system will need to have a strategy in place to avoid this potentially destabilizing situation.

Furthermore, the switch to a convertible currency could trigger an increase in inflation, a situation that will hit especially hard those -- like civil servants and pensioners -- living on fixed incomes. As a result, Pearce says, temporary measures must be taken to finance social welfare programs to help those sectors of the population affected by the switch.

Pearce says Tashkent's agreement with the IMF provides the proper framework for progress on the convertibility issue. But he says the World Bank, in determining which loan scenario to endorse, will be looking for additional reforms in areas of what he calls the "real economy" -- agriculture and finance, privatization, and public utilities.

"An IMF program is indeed an important element -- or condition, if you like -- for enhanced or expanded World Bank rapport. But it's not itself sufficient. There needs to be, in our view, improved reforms in these other areas," Pearce says.

Pearce cites the need for a reduced government role in Uzbekistan's agricultural system. He also says that pegging the price of agricultural products, particularly cotton and wheat, to international standards will have long-term benefits in both the farming sector and incomes in rural areas. Tashkent currently controls all aspects of grain and cotton production -- from granting loans to crop rotation to water supplies. Economists say the system has left the agricultural sector plagued by inefficiency and dwindling harvests.

At the same time, Pearce says, Uzbekistan has to make progress in privatizing both the banking system and state-owned enterprises like public utilities: "That's the kind of agenda of reforms that we at the World Bank are particularly interested in and would be happy to provide additional support once we're assured that the government intends to move ahead."

Pearce says the modest parameters of the World Bank's assistance strategy do not reflect Uzbekistan's relative importance in the region but says more sweeping assistance will not be offered until certain reform achievements have been made -- most notably, a convertible currency.

Pearce says the bank's assistance strategy is the product of a year-and-a-half-long dialogue between bank officials and Uzbek authorities. But, he says, areas of disagreement remain:

"I guess the main issue is that everybody concerned -- the Uzbek government, the World Bank, the IMF, the international community, I guess -- agrees on the basic objective of where the country is intending to go. Where there is disagreement is on the timing -- the timetable for that, the pacing, the sequencing of the exchanges -- and that's been the case since, I guess, the mid-1990s," Pearce says.

Pearce says the question now on many minds is whether the new international focus on Central Asia in the wake of 11 September will provide fresh impetus and resources for Uzbekistan to move forward with its reforms.

According to Pearce, the World Bank's total commitment to Uzbekistan since it joined the international lender 10 years ago amounts to some $500 million. This includes some $40 million in loans approved in March to help finance the Bukhara and Samarkand Water Supply Project.