Economies in Central Asia and the Caucasus, while gradually recovering from the shocks stemming from the COVID-19 pandemic and the Russian invasion of Ukraine, are facing yet another critical challenge: an intensifying debt burden.

Tightening global financial conditions brought about by record level inflation in the United States raised the urgency of reducing debt and ensuring fiscal sustainability in the region.

The economies in the region, except Turkmenistan and Azerbaijan, have rapidly accumulated public debt in recent years, ranging between 25% and over 50% of the gross domestic product (GDP) equivalent as of 2022.

The build-up of debt calls for urgent action on the region’s development finance landscape. The region risks missing out on important investments for inclusive growth due to increasing debt and interest payments.

Countries such as Uzbekistan recognize the importance of reducing public debt. In Uzbekistan, external debt increased markedly from 34% of GDP in 2017 to 58% in 2020. The fiscal authorities responded by embarking on fiscal rules and debt transparency reforms to strengthen economic management.

The Uzbek government introduced in 2020 an annual limit on new public sector borrowing, which restricted newly-signed public external debt and guarantees to $5.5 billion for the year. In 2023, the set limit is $4.5 billion of which $2 billion is to be allocated to budget support and $2.5 billion to investment projects.

 External borrowing limits are an important measure to achieve debt sustainability in Uzbekistan. Their application, however, would need to carefully consider the need to reduce deficits while preserving investments in infrastructure, human capital, and social protection that promote higher and more inclusive growth. 

Uzbekistan and its development partners need to optimize resources for its market transition due to the government’s limited borrowing headroom.

Uzbekistan faces uncertainty, including geopolitical tensions, increased climate risks and water shortages, and other socio-economic shocks, which may necessitate further government borrowing while establishing prudent and sustainable fiscal management. To achieve this, the government needs to implement mutually reinforcing policy actions across Uzbekistan’s economic, social, and environmental goals.

For example, the Uzbek government and its development partners should continue supporting deeper policy reforms, particularly in reducing the dominance of state-owned enterprises in the economy, enhancing public procurement, and minimizing fiscal risk.

As the International Monetary Fund notes, governments in Central Asia and the Caucasus which reduced their fiscal deficits through subsidy and public wage reforms while prioritizing social spending, promoted debt sustainability and higher and more equitable growth.

The limited government borrowing headroom also emphasizes the need to scale up private sector engagement and non-infrastructure regional integration interventions. In fostering private sector development, investments need to be carefully sequenced so that the country’s enabling environment for the private sector, as well as specific private sector transactions are both supported in the long term.

 Pursuing competition in Uzbekistan’s key sectors–transport and energy–will be crucial in successfully transitioning to a market economy. Meanwhile, the country’s regional integration solutions, which largely focus on cross-border infrastructure, would need to be expanded to mitigate environmental risks and bolster trade.

In particular, regional integration interventions in Uzbekistan can scale up support for water resources management and climate proofing, as well as for border enhancement for trade in agricultural products.

 Reducing the debt burden has become imperative in a global economy marred with uncertainty. Minimizing budget deficits should not hold back growth if implemented in tandem with efforts to preserve public investments in infrastructure and social development, especially in promoting sustainable and inclusive growth.