Uzbekistan: Budget 2024 raises deficit to 4% despite political talk of consolidation
Metodi Tzanov
Helping finance professionals understand what is going on in Emerging and Frontier Markets
Uzbekistan's FinMin has presented a draft fiscal framework for 2024 with a headline deficit of 4% of GDP or UZS 52.5tn. This estimate is based on the consolidated revenues and expenditure of the republican budget, the country's development fund, and 18 extra-budgetary funds. It will arguably end up being lower than the actual deficit in 2023, which is expected to reach at least 5% of GDP. At the same time, the original 2023 framework was based on a 3% headline deficit. In addition, Uzbekistan's official development strategy (passed this year) saw a reduction of fiscal deficits to 3% in 2024 and 2% in the medium term. We also remind that a legislative amendment from this year was supposed to cap deficits at 3% of GDP in the future, but the FinMin has not given a direct explanation as to why it chose to breach this rule in the current framework.
Official deficit projections were ultimately exceeded in the last three years and the same is set to happen in 2023. Overall, the political talk of fiscal consolidation seems limited to a narrative at present. This implies risks for 2024 as well, but President Mirziyoyev's agenda clearly takes political precedence at present, so there is little scope for prudence from the government. In line with the more populist aspects of the presidential policy course, next year will see an additional salary hike in the public sector as well as pension indexation. The associated extra spending will total UZS 9.55tn. In comparison, the 2023 budget only entailed a UZS 3.8tn hike, which later expanded to UZS 6.4tn as the president ordered extra stimuli before this year's referendum vote. Overall, next year's social spending will amount to UZS 151.4tn or over 50% of republican budget expenditure.
Macroeconomic assumptions
The government expects GDP growth at 5.6%-5.8% in 2024. This is in line with the most recent forecast for 2023 and also corresponds with major IFI projections. As a whole, the authorities have managed to maintain consistent growth in recent years despite the pandemic and subsequent disruptions related to the war in Ukraine. In this context, the 2024 goal is not unrealistic, though it should be noted that recent years have required unplanned fiscal spending the achieve official targets, which may be a risk in 2024 as well. Apart from the uncertainty related to geopolitical volatility, current forecasts of lower global demand in 2024 also imply potential pressure. The fiscal balance will be particularly vulnerable in case of unfavourable gold and copper prices, strong exchange rate fluctuations, or a drop in remittance inflows caused by a potential crisis in the Russian economy.
External developments can also affect inflation, which is seen at 8-10% at end-2024. Specifically, global dynamics of hydrocarbon and food prices will be key. The Uzbek authorities tend to offer fiscal support to households in case of strong food price spikes, so global market volatility is a fiscal risk in this respect. We also remind that the government plans to liberalise utility tariffs next year, but would likely be dissuaded if severe inflationary pressures materialise. This would maintain elevated spending on energy-related subsidies whilst also reducing revenues. In general, the central bank has indicated it plans to keep a relatively tight stance, which should allow it to achieve the 2024 year-end target under a baseline scenario. At the same time, it should be noted that the bank recently delayed its medium-term inflation target to 2025-2026. It has rejected potential measures to curb domestic consumption, citing risks to macro stability, but we think political considerations are at play, too.
Budget revenues
Consolidated budget revenues are projected at UZS 375tn (28.8% of GDP), up from UZS 310.7tn in 2023. Of that, republican budget revenues will account for UZS 270.3tn, which represents a 16.2% increase relative to 2023. The authorities do not plan amendments to the VAT rate, income tax, or profit tax next year. Receipts are expected to rise, however, especially with regard to VAT. Collection is thus forecast at UZS 74tn, as opposed to UZS 60tn in 2023. Yet, we recall that this year's revenues were originally projected at UZS 64tn, but a revision was forced by the delay of utility tariff reform, lower cotton prices, and weather-related issues during the harvest campaign. In this context, the 2024 projection may be subject to risks, especially if the government postpones tariff liberalisation again. The FinMin thus estimates such a decision would reduce budget revenues by UZS 1.5tn. More generally, the trajectory of import growth suggests an upward push from VAT on imported goods, which seems to be the main factor behind the expected receipt growth in 2024.
In addition, corporate income tax revenues are seen rising by 8.3% in 2024 to a total of UZS 44.3tn. Uzbekistan's largest SOEs account for over a third of all receipts, so their performance will be crucial. Meanwhile, revenues from personal income tax are expected at UZS 38.5tn, which implies a sharp 30.7% increase compared to the 2023 projection. This is mostly due to a planned reform concerning sole proprietors, who are not covered by the 12% tax rate and instead pay a fixed sum. The latter is supposed to increase by 10% as of Feb 1, with the same measure also implemented last year. The most significant tax reform in 2024 is related to excise tax. Receipts are subsequently projected to rise by 38.4%, reaching UZS 22.7tn. Specifically, the FinMin plans to raise the excise tax on ethanol from UZS 7,400 per litre to UZS 14,900, citing efforts to promote healthy living. It will also introduce excise tax on fizzy drinks containing sugar for the same reason (UZS 500 per litre).
As part of the reform, the excise tax on cigarettes and other tobacco products will also be hiked by 12% and the FinMin estimates the price of a pack of cigarettes will increase by UZS 601 as a result. Starting from Jul 1, the tax on domestically produced alcohol will be hiked by 5% as well. In terms of fuel, no changes will be made regarding gasoline that fits environmental safety standards (91-octane and higher). Conversely, the excise tax on 80-octane gasoline will be hiked by 12%, which implies the price of one litre will rise by UZS 88. Methane prices will also increase by UZS 84 per litre as of Apr 1. Another novelty related to Uzbekistan's green agenda concerns owners of heavy vehicles (10 tonnes and more). They will have to pay UZS 1.65mn per year and these revenues will be used to finance road construction.
Recommended by LinkedIn
Budget expenditure
The consolidated budget sets expenditure at UZS 427.5tn (32.8% of GDP), up from UZS 380.9tn in 2023. Republican budget expenditure is projected at UZS 279.6tn, which is 9.5% higher than this year's total. As outlined, social welfare is the main expenditure item in the budget. Apart from the increased spending on wages and pensions, hikes are also planned in education and healthcare. Spending on the former is projected at UZS 69.1tn (from UZS 60.6tn), with the increase of funding spread across preschool education, school education, and higher education. This is in line with the president's reform agenda and is also formalised in the official development strategy. Healthcare expenses are in turn forecast at UZS 33.4tn after UZS 28.4tn in 2023. We remind that President Mirziyoyev has ordered expansion of the guaranteed medical insurance as well as increased financing for treatment of certain infectious diseases and disability conditions. It should also be noted that both segments will benefit from the public sector salary hikes, which is reflected in the data.
Meanwhile, spending on the economy will increase by almost UZS 600bn (to UZS 24.8tn) on the back of more extensive expenditure related to water resource management. This is not surprising as Uzbekistan faces long-term water shortage risks and also suffers harvest yield losses due to inefficient water distribution. A more significant spending hike (by UZS 2.1tn) is planned in law enforcement and public administration, where the general fiscal stimuli have a notable impact as well. Assuming the planned utility tariff hikes are implemented, spending on gas subsidies will decrease almost twofold in 2024. Moderation (by UZS 3tn) will also be registered with regard to spending on state development programmes. Fixed capital investment will actually increase in 2024, but the overall decrease reflects reduced spending on projects initiated by citizens under two specialised state programmes.
Public debt payments will amount to UZS 48.7tn next year, divided into UZS 32.3tn for principal debt payments and UZS 16.4tn for interest payments. In 2023, these volumes stood at UZS 19.2tn and UZS 8.3tn respectively. A similar upward trajectory has persisted in recent years due to the authorities' extensive borrowing. We remind that public debt is officially capped at 60% of GDP as of this year. The current fiscal framework also pledges 'measures' to keep it below 50% of GDP in the medium term, though there is no specific explanation of what these measures will entail. We do not expect public debt levels to exceed 40% of GDP in the short run, but it should be noted that the government's management strategy still is not particularly clear.
Financing needs in 2024
The authorities will need to finance a consolidated budget deficit of UZS 52.5tn alongside principal debt payments in the amount of UZS 32.3tn. In addition, UZS 11.3tn will be required to fund state support programmes for businesses and mortgage extension. A large share of the respective financing will come from external sources (UZS 43.6tn). IFI loans are thus expected at UZS 31.8tn, while the remainder will come in the shape of other loans for development funding. Domestic sources will in turn contribute UZS 38.6tn, which predominantly reflects bond issuance (UZS 25tn) and revenues from privatisation (UZS 10tn). The overall balance between external and domestic sources is relatively equal. With regard to risks, there is a level of uncertainty concerning privatisation receipts as the sale of large state assets has often been delayed in recent years.
Conclusion
As a whole, the 2024 budget continues to delay fiscal consolidation in favour of the president's agenda, which has certain populist aspects. Given the government's recent track record, we would not be surprised to see unplanned fiscal stimuli throughout the year, possibly forcing yet another revision of the annual deficit projection. At present, the FinMin has indicated it will aim to keep deficits within 3% of GDP as of 2025, but there are no guarantees preventing further arbitrary exceptions. The cap on public debt is a positive measure and debt levels will remain relatively low in the near term. More generally, however, the authorities do not seem to have a comprehensive management strategy for the medium- and long term.
As outlined, we think the greatest fiscal risk is related to unplanned spending initiatives, which has even been acknowledged by the FinMin itself. Apart from that, softer global demand and/or consistently tight monetary conditions globally could put pressure on fiscal performance. In general, the uncertainty related to the war in Ukraine persists as well, whereby escalation of the conflict would affect commodity prices, inflation dynamics, and supply chains, all of which would inevitably hurt Uzbekistan. The risk of reduced remittance inflows in case of a crisis in Russia is highlighted above, though it should also be noted that potential large-scale returns of migrant labourers would also require increased spending on unemployment benefits. In a worst-case scenario, they may even cause internal instability due to the lack of sufficient job opportunities on the domestic market.