Uzbekistan Rehabilitation

 Rehabilitation Report No: ; Type: Report/Evaluation Memorandum ; Country: Uzbekistan; Region: Europe And Central Asia; Sector: Macro/Non-Trade; Major Sector: Economic Policy; ProjectID: P009129 The Republic of Uzbekistan Rehabilitation Project, supported by Loan 3861-UZ for US$160 million was approved in FY95, and closed on schedule in FY96. The Implementation Completion Report (ICR) was prepared by the Europe and Central Asia Regional Office. The Borrower’s contribution is included as an appendix. The objectives of this Rehabilitation Loan were to support a transitional program of macroeconomic stabilization in conjunction with the IMF, and a specific program of structural reforms necessary to ensure progress toward a more open economy driven by private sector initiative and market signals. An important subsidiary objective was to provide balance of payments support thereby providing the capacity to import critical raw materials, capital goods and spare parts. The structural reform objectives were to be realized through a framework of mutually reinforcing policy measures designed to improve the environment for entrepreneurial activity and investment. A centerpiece of the Government’s efforts was a comprehensive program of privatization encompassing both large and small enterprises, as well as a program to improve the corporate governance of State Owned Enterprises (SOEs). This latter program sought to establish sound commercial operating practices for these SOEs, together with greater managerial accountability and financial discipline. The Government’s structural reform agenda also included a program of price and exchange rate liberalization, subsidy reduction and trade reform, all designed to eliminate distortions in the economy’s incentive structure. Throughout this transition process attempts were to be made to improve the efficiency and targeting of social protection schemes, with a particular emphasis on reforms of the State pension system. The objectives of this loan were not fully achieved. Implementation of a comprehensive structural reform program proceeded more slowly than expected, and key macroeconomic management reforms were reversed. In the latter part of 1996 control over monetary and fiscal policy weakened, and trade and foreign exchange restrictions were reintroduced. The IMF Stand-By program was abandoned which undermined the framework of donor support, including planned Bank follow-up adjustment operations. Despite the breakdown in sound macroeconomic management, progress was made in several areas of structural reform. Governance and financial discipline of State Owned Enterprises improved, and the privatization program made steady progress. By early 1997, about 95 percent of small firms and 96 percent of the housing stock had been privatized. Consumer subsidies were reduced and enhanced targeting of all social benefits greatly improved the efficiency of the social safety net system. Furthermore, continued progress has been made in reducing the pervasiveness of the State procurement systems and in the liberalization of agricultural input and output pricing. The ICR rates project outcome as unsatisfactory, sustainability as uncertain, institutional development impact as partial and Bank performance as satisfactory. OED concurs with these ratings given the reversal in key macroeconomic policy reforms and the dilatory progress in other key structural reform areas. The main lessons to be drawn from this project include: (a) strong and sustained Government commitment to macroeconomic stabilization is needed if sector reforms are to realize their full potential; and (b) reversal of key market liberalization reforms creates considerable uncertainty amongst private sector investors and undermines the credibility of future reform initiatives. The ICR is of good quality, providing a comprehensive review of all aspects of the reform agenda and is candid about the difficulties and delays encountered. An audit is planned.