2. Lecture outline Soft budget constraint at times of command economy Public Debt of the Former Soviet Union Economic policy in Uzbekistan after 1991 Public investments in Uzbek economy

3. Soft budget constraint at times of command economy Hard budget constraint – expenditures are limited by income Soft budget constraint – income can be transferred from other budgets so that expenditures are not limited to company’s profit

4. Soft budget constraint at times of command economy Price was not determined by supply and demand All companies were stated owned The main instrument of regulating businesses - subsidies Banking credit was not popular Economy was mainly run by heavy industries

5. Soft budget constraint at times of command economy Inflation was hidden since prices did not reflect equilibrium price There was a chronic shortage State decided what to produce and whom to produce. The trade between companies was also planned. Soft budget constraint created little incentive to increase efficiency. The quantity was priority while quality did not meet standards

6. Public Debt of the Former Soviet Union The Former Soviet Union did not have full access to international debt market due to political reasons Nevertheless, starting from 1960 s it borrowed from foreign banks in order to import technology (Popova, G, 2004, “Government credit and debt”, Rostov) In 1980s, when economy was in recession, the government had to sell its gold reserves. These reserves decreased from 2500 tons in mid 1980s to 240 tons in 1991.

7. Public Debt of the Former Soviet Union By 1989 the government budget deficit was 100 billion rubles against internal debt worth 400 billion rubles (Popova, G, 2004, “Government credit and debt”, Rostov). In 1991 external debt amounted to 71 billion dollars. This is partly explained by falling oil prices which were equal to 10 dollars per barrel in 1991 against 30 dollars in 1970s.

8. Public Debt of the Former Soviet Union In 1991 payments on previous loans were due which amounted to 20 percent of the whole public debt. To cover this the government allocated 16 billion dollars in its budget plan (Popova, G, 2004, “Government credit and debt”, Rostov). As a result the main bank for international payments could no longer make transactions due to lack of funds. International banks stopped providing loans without state guarantee. Between 1990 and 1991 7,5 billion dollar credits were attracted under the state guarantee.

9. Public Debt of the Former Soviet Union In 1993 Russian Federation took over the responsibility to pay the entire former soviet union debt. At the same time, Russia gained ownership of all assets of the former soviet union. However, it turned out that assets inherited were not sufficient to meet liabilities. Since Russia could not repay debt on time, it negotiated with London and Paris clubs on rescheduling soviet union debt. In 1996 the debt due to Paris club members amounted to 38 billion dollars. As a result of negotiations Russia achieved that 45 percent of debt should be paid by 2020, and 55 percent until 2115.

10. Economic policy in Uzbekistan after 1991 Uzbekistan gained independence form the former Soviet union in 1991 The country started its way towards establishing market economy. However, the main challenge was to overcome difficulties left as a legacy of the command economy Many post-soviet countries had to attract debt from international financial institutions to buy imports while their own production collapsed.

11. Economic policy in Uzbekistan after 1991 In short period Uzbekistan achieved the level of GDP it had before independence. In fact, it was the first country among former soviet union states to recover its income of the pre-transition period The main economic achievements of Uzbekistan are attributed to model of economic growth. The model defines the government as the leading reformer, which aims at social protection and gradual transition to market economy. Like other transition countries, Uzbekistan attracted foreign debt. However, it did not attract this debt to cover its budget deficit. The whole debt accumulated financed investment and social projects.

12. Economic policy in Uzbekistan after 1991 20012002200320042005200620072008 Debt/GDP56,244,143,737,331,323,117,013,3 Export- import (in mln dollars) 33,5276,4760,810371317,51993,92263,44068,8 Source: Journal “Birja expert”, 2009, N1

13. Deficit/surplus of the government budget Source: Uzbek Economy 2014, Statistical summary, CER

14. Public expenditure in economy The government expenditures were equal to 21,7 percent of GDP in 2014 (Uzbekistan economy 2014, Center for Economic Research) 59 percent of budget expenditures are social expenditures. These amount to 12,8 percent of GDP For investment purposes the government created Fund for reconstruction and development. In 2014 this Fund initiated 15 investment projects worth 439,1 million dollars. The government also provided guarantees for foreign credit institutions. In 2014, the foreign credits attracted under the government guarantee amounted to 607 million dollars. This is 10 percent increase compared to the previous year.

15. Public expenditure in economy The government stimulates economic growth by active fiscal and monetary policies. For example, the government has provided various support for young families, foreign investors and small business in form of tax deductions, subsidies and others. The costs all these projects are paid by the state budget. Active involvement of the government in investment projects imply that in Uzbekistan the fiscal policy aims at increasing productivity. Moreover, to reduce the distortionary effect of taxes, the government is cutting tax rates annually.

16. Thank you for your attention!