Growth of external debt in connection with measures to mitigate the impact of the pandemic

Recently, various, often mutually opposing opinions have begun to appear on social media regarding the growth of public debt in connection with external borrowings aimed at mitigating the effects of the pandemic. It should be noted that the concerns expressed by some authors regarding the growth of external debt are not new: these issues have been actively discussed, including in the media, throughout the last year.

The results of the discussions, as well as a thorough review of the recommendations of leading experts, were also reflected in the Law on the State Budget of the Republic of Uzbekistan for 2020 adopted in December last year. In accordance with article 16 of the Law for 2020, the maximum total amount of external borrowing is attracted on behalf of or under the guarantee of the Republic of Uzbekistan in the amount of $ 4 billion. Article 17 of the same Law approved the maximum amount of development of attracted external borrowings for the implementation of state targeted programs and repayable from the State budget in the amount of 1.5 billion dollars.

According to information from the Ministry of Finance, the volume of external debt raised on behalf of the government of the Republic of Uzbekistan or under its guarantee as of January 1, 2020 is estimated at $ 15.6 billion and amounts to 27.0 percent of GDP.

Of this amount, $ 7.5 billion falls on international financial institutions, $ 7.1 billion on financial institutions in foreign countries, and $ 1.0 billion on international sovereign bonds. External debt mainly falls on the following industries:

fuel and energy sector - $ 4.5 billion;

transport industry and logistics - $ 2.1 billion;

agricultural sector - $ 1.9 billion;

housing and utilities - $ 1.8 billion;

chemical industry - $ 0.9 billion;

education and healthcare - $ 0.6 billion;

bank deposits - $ 0.9 billion;

other areas - $ 2.9 billion.

In 2019, external debt grew by $ 5.7 billion, or by 57.8 percent. Of this amount, $ 2.5 billion were borrowed by the government and $ 2.2 billion under the guarantee of the government. The total public debt, including external and internal, last year amounted to $ 17.6 billion.

Despite the relatively rapid growth in external debt observed in recent years, it remains low in comparison with indicators from other countries. Thus, Fitch Ratings in its report published in April of this year, notes that public debt of 30.5 percent/ 30.5 percent’ public debt remains below the current median for “BB” (46 percent of GDP). At the same time, the external liquidity indicator, projected at 410 percent in 2020, is one of the strongest among comparable issuers in the BB category.

Currently, the relevant ministries and departments are working to implement the Decree of the President of the Republic of Uzbekistan dated April 22, 2020 No. PP-4691 “On measures to attract external assistance funds to support the population, budget, basic infrastructure and business entities during the period of coronavirus infection”.
      This Decree states that preliminary agreements have been reached with international financial institutions on the provision of soft long-term loans in the amount of  $ 3 billion and € 150 million. It is noteworthy that the present amount is below the budget limit for total external borrowing in the amount of
$ 4 billion. Attracted external borrowing is planned to be directed to the following goals:

1. Strengthening the healthcare system ($ 277.5 million dollars);

2. Support for entrepreneurship and the banking system ($ 700 million);

3. Support for the state budget and the Anti-Crisis Fund under the Ministry of Finance ($ 1.7 billion and € 150 million);

4. Ensuring the smooth functioning of utilities and energy enterprises ($ 300 million).

It is obvious that the issues of attracting external borrowing should be considered in the context of the current situation and measures taken to address the effects of the coronavirus pandemic. It is known that in the country as a result of quarantine restrictions on the movement of people, the volumes of production and provision of services at 196 thousand enterprises have significantly decreased. Accordingly, tax revenues decreased by 30-40 percent in a number of regions, and in some areas and cities – by more than 50 percent. There were risks of non-repayment of loans in the amount of 3.6 trillion. UZS by foreign trade enterprises, 650 billion UZS in the transport and logistics sector, 180 billion UZS in the field of catering, 90 billion UZS in the hotel business.

In response to the challenges associated with the spread of the pandemic, оn March 19, the President signed a decree “On priority measures to mitigate the negative impact on the economy of the coronavirus pandemic and global crisis phenomena”. In accordance with the Decree, an Anti-Crisis Fund of 10 trillion UZS was created. Sum, the main areas of use of which are:

financing of measures to combat the spread of coronavirus infection;

supporting entrepreneurship and employment;

expansion of social support for the population;

ensuring the sustainable functioning of sectors of the economy.

In the nearly two-month period since the signs of the spread of the pandemic were discovered, enormous practical work was done to mitigate its impact on the economy and welfare of the population.

The volume of government spending was significantly affected by the natural disaster that occurred on the night of April 28, the main blow of which fell on the Alat and Karakul districts of Bukhara region, as well as a breakthrough in the Sardoba reservoir in Syrdarya region on May 1. In Bukhara region, the disaster damaged more than 38.0 thousand houses, as well as 847 social facilities and crops throughout the region. About 90.0 thousand people from Syrdarya region were evacuated to safe areas from 24 neighbourhoods of Sardoba, Oqoltin and Mirzaobod districts. In both areas, significant damage was done to agriculture, manufacturing, services and infrastructure.

In the above report, Fitch Ratings indicates the presence of currency risks associated with servicing external debt. At the same time, the timely transition to inflation targeting, launched by the Central Bank this year with the goal of gradually reducing inflation to 5 percent in 2023, allows this risk to be reduced to an acceptable level. It is expected that the risk will also be largely offset by measures already taken to support state-owned enterprises in manufacturing sectors, support entrepreneurship and employment, and macroeconomic stabilization.

Dr. U.Saidiev head of sector

Center of economic research and reforms, Uzbekistan