"Safety margin": why the size of Uzbekistan's external debt is not scary. Expert opinion CERR

Globally, increased government spending due to the coronavirus pandemic reduced GDP and lower tax revenues are pushing governments to borrow heavily as they seek to counter the pandemic. Like most countries in the world, Uzbekistan was forced in 2020 to borrow funds from external sources in order to combat the coronavirus pandemic.

Thus, at the end of 9 months of 2020, the volume of public external debt reached $ 18.5 billion, an increase of 18.8% since the beginning of the year and private external debt - $ 10.3 billion (an increase of 20.8%).

Consequently, the issue of external debt has become one of the most discussed issues in 2020. Some experts are concerned that Uzbekistan's external debt has grown significantly during the coronavirus pandemic. Other experts have pointed out that it would be unwise to allow concerns about debt to deter policymakers from taking the necessary steps to tackle the difficulties and then revive the economy.

Moreover, in the international community, most experts agreed that against the backdrop of a pandemic crisis and a sharp economic downturn in the face of falling commodity prices, a significant reduction in foreign direct investment and trade, the sudden cessation of tourism, the cost of refusing external loans including the loss of wages, job losses and business closures left the economy weaker for an extended period of time.

In particular, Gregory Mankiw, professor of economics at Harvard University, recently expressed his opinion on the rise in external debt during the pandemic: “There are times to worry about the growing public debt. This is not one of them".

So, how much should every citizen of Uzbekistan, as a taxpayer, be concerned about the country's external debt? In this article, we provide objective facts and explain statistics in simple language so that everyone can conclude whether external debt is so terrible, regardless of his / her knowledge of the economy.

Public Debt Concerns

Unlike developed and some developing countries, Uzbekistan attracts borrowings from external sources only for the purpose of financing projects of strategic socio-economic importance, including the development of infrastructure and in turn, servicing the state external debt is carried out at the expense of funds received from the implementation of investment projects Generally, in developed countries, the population is worried about the growing foreign debt of their country and expects tax increases in the future. This is due to the fact that these countries attract external borrowing mainly to finance the budget deficit.

For example, in 2017-2019 two high-speed passenger trains Talgo-250 and four ordinary cars were purchased for $63.2 million at the expense of the state's external debt. At the same time, it would be unfair to argue that the people of Uzbekistan should return $63.2 million spent on the development of the transport system. On the contrary, this debt is serviced by revenues from transport services. Moreover, Talgo-250 high-speed passenger trains serve the population and tourists and create the basis for the development of domestic and foreign tourism.

Aggregate external debt structure

As of October 1, 2020, the total volume of the total external debt of Uzbekistan amounted to$ 28.8 billion, an increase of 19.5% (or$ 4.7 billion) since the beginning of the year. Of this amount, $ 18.5 billion was attracted by the state, and $10.3 billion came from the private sector (Figure 1).

Figure 1. Public and private external debt

Source: Calculations based on data from the Central Bank of Uzbekistan

In turn, public external debt consists of external debt raised on behalf of the government and external debt guaranteed by the government. As of Q3 2020, the balance of external debt raised on behalf of the government amounted to $ 12.7 billion, including Eurobonds in the amount of $ 1 billion, while the volume of external debt guaranteed by the state reached $ 5.8 billion.

In terms of arithmetic calculations, public external debt increased by 36.4% or $ 4.9 billion compared to Q3 2019. As taxpayers, before worrying about these numbers, we need to ask what these resources were spent on? And how much will the welfare of the population change from the implementation of projects financed by these investments?

The answer to these complex questions is much more difficult than simply comparing the totals without analyzing the structure and terms of external debt.

So why did the public external debt increase in 2020?

First, a $ 500 million loan agreement was signed with the Asian Development Bank to support the budget to fight the coronavirus pandemic. The interest rate on the loan is 6 months LIBOR + 0.5%, maturity is 15 years (grace period is 3 years).

Secondly, the Government of Uzbekistan and the International Monetary Fund signed an agreement on the provision of a concessional loan in the amount of $375 million to support the economy (of which $ 125 million at 0%, $ 250 million at 1.05%).

Third, the World Bank agreed to provide a soft loan of $ 100 million at 1.25% per annum to finance the "Obod kishlok" project.

Fourth, an agreement was reached on attracting concessional loans from the World Bank in the amount of $500 million in order to modernize the agricultural sector of the Republic of Uzbekistan.

In addition, signals from financial markets suggest that the government should have no problem borrowing huge amounts of money on favorable terms, if the money is used correctly and the interest owed remains relatively low.

Moreover, despite a significant increase in external debt in 2020, the annual growth rate (compared to the same period last year) of public external debt slowed from 62% in Q2 2019 to 32% in Q2 2020. This trend will serve to ensure the stability of public external debt in the long term.

In 2020, under a state guarantee, an agreement was signed with the Russian Bank for Foreign Economic Affairs to provide a loan in the amount of 101.3 million euros for the modernization of the Topalangskaya HPP (28.3 million euros), the construction of the Down-Chatkal HPP (38.8 million euros) and construction 2 small Bogishamol HPPs on the Dargam Canal (34.2 million euros). In addition, the State Development Bank of China agreed to provide Uzbekiston Havo Yollari with a loan under a state guarantee in the amount of $309 million for the purchase of three Boeing 787-8 aircraft.

In turn, it should be noted that neither state corporations nor private companies offer state land as collateral against a loan. According to the Land Code of the Republic of Uzbekistan, land is state property - national wealth, subject to rational use, protected by the state and is not subject to sale and purchase, exchange, donation, pledge, except for cases established by legislative acts of the Republic of Uzbekistan.

On the other hand measures taken to reduce the impact of the crisis on health and the economy will ease economic hardship, accelerate recovery and possibly increase economic productivity over the long term, thereby reducing the rise in the debt ratio.

History shows that economic growth can reduce the ratio of external public debt to WFP despite rising debt. For example, at the end of 1946, the US federal debt was $242 billion due to huge expenditures associated with World War II and the debt ratio was 106% of GDP, which is an all-time high. The budget was in deficit for 20 of the next 28 years, during which debt rose 42%, from $228 billion to $344 billion in 1974. But the US economy grew significantly over this period by 552%, so the debt ratio fell from 106% to 23% of GDP.

In general, the coronavirus pandemic has led to an increase in public debt not only in Uzbekistan, but throughout the world. Even the governments of the United States, Europe and other countries have spent trillions of dollars on emergency relief measures to try to contain the health and economic impact of the coronavirus pandemic, while the coronavirus crisis has plunged tax revenues.

Central goverment's debt is expected to rise by about 17% of GDP in advanced economies; 12% in emerging markets; and 8% in low-income countries, compared with pre-pandemic expectations (International Monetary Fund, 2020). At the end of 9 months of 2020, the total volume of public debt (both external and internal) increased by 6.1% of GDP since the beginning of the year (from 30.7% to 36.8% of GDP), which is less than the expected average for 2020 in countries with low incomes.

External debt service

Economists focus not on the absolute level of debt, but on the interest cost of servicing it in relation to the size of the economy. The ratio of total costs of servicing public external debt reached 1.86% at the end of the third quarter of 2020, this figure was 1.33% in the corresponding period of 2019. For the period under review in 2020, the ratio of servicing from the state budget to consolidated budget revenues was 4.92%, which is 1.06 percentage points.

The costs of servicing the public external debt and their sources show that the public external debt remains stable. At the end of 9 months of 2020, the total cost of servicing the public external debt amounted to $756.5 million, which $454.5 million were payments on the principal debt and $302 million were interest payments (Figure 2).

Figure 2. External debt service

Source: Calculations based on data from the Central Bank of Uzbekistan

In 2019, this figure was $759.3 million ($ 452.4 million - repayment of the principal debt, $ 306.9 million - repayment of interest).

It should be noted that the share of expenses for servicing external debt raised on behalf of the government from the state budget is on average 30% of the total servicing of this external debt. In particular, at the end of 9 months of 2020, the cost of servicing the external debt attracted on behalf of the government amounted to $ 383.7 million, which $ 117.6 million or 30.6%, was serviced at the expense of the state budget. For government-guaranteed debt, these indicators were $ 373 million and $ 87.2 million (23.4%), respectively.

Leading Researcher, Center for Economic Research and Reforms

Khalilullokh Khamidov specially for "Podrobno.uz"

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