Uzbekistan Secures $15 Million Concessional Credit from World Bank to Reform Financial Sector

The World Bank’s Board of Executive Directors has approved a $15 million concessional credit for Uzbekistan, which will finance a five-year project aimed at supporting the government’s efforts to reform the financial sector. The International Development Association (IDA), part of the World Bank Group, will provide the financing at a low interest rate with a repayment period of 30 years and a five-year grace period.

Challenges in Uzbekistan’s Financial Sector

Uzbekistan is transitioning to a market economy, but its banking and insurance sectors face several acute and interconnected issues. The country’s banking sector is dominated by 12 state-owned commercial banks (SOCBs) which account for 86% of total credit to the economy. These SOCBs have traditionally intermediated funds from the government to priority sectors and state-owned enterprises at below-market rates, lacking strong governance and risk management.

• Banking Sector Challenges:
  • Dominance of state-owned commercial banks (SOCBs)
  • Lack of strong governance and risk management
  • Limited credit availability to private sector

Climate-Induced Disasters in Uzbekistan

Uzbekistan is prone to climate-induced disasters such as droughts, lower precipitation levels, and changes in weather patterns. Climate change is expected to increase the frequency and severity of these disasters, which will have a significant impact on the country’s economy and people. The current capacity of authorities, businesses, and citizens to cope with the costs of disasters is limited due to the low penetration of disaster risk insurance.

Government Initiatives to Address Challenges

The government has decided to establish a development bank which will provide financing, guarantees, and insurance support to local exporting firms and companies. The new World Bank-funded project will help the government respond to these challenges by implementing activities that:

• Support SOCBs’ modernization, commercialization, and privatization
• Strengthen financial preparedness for disasters
• Boost the efficiency of the insurance sector
• Improve export and trade financing instruments

Project Objectives

The project aims to contribute to the implementation of the Banking Sector Reform Strategy for 2020-2025, which aims to reduce the state’s direct participation in SOCBs and build a more effective, inclusive, and competitive banking system led by private sector banks. The reforms will create synergies that will improve the efficiency of financial services, contribute to productivity, and boost sustainable growth driven by the private sector.

Impact on Uzbekistan’s Economy and People

The approval of this project marks an important step towards strengthening the country’s financial sector and supporting its transition to a market economy. It is expected to have a positive impact on the country’s economy and people, providing them with access to better financial services and helping to reduce poverty.

• Expected Outcomes:
  • Improved financial services
  • Increased productivity and sustainable growth
  • Reduced poverty and improved living standards