Tashkent, Uzbekistan (UzDaily.com) -- The Monetary Policy Guidelines reflect the measures to be implemented in the monetary policy, the response of the Central Bank to changes in external and internal economic conditions, approaches to conducting monetary policy and prospects for improvement in 2023 and 2024-2025, the Central Bank of Uzbekistan said in a statement.

This project also includes measures planned for the upcoming years to increase the effectiveness of monetary policy instruments, the transmission mechanism and the communication policy, to improve the money market, to develop analytical and forecasting capacity, the statement said.

The CBU said that in developing the monetary policy guidelines for 2023 and the period of 2024-2025, the emphasis is placed on achieving the main goal set by law - price stability in the economy. In accordance with this goal, special attention is paid to ensuring monetary conditions serving inclusive economic growth and financial stability in our country.

The achievement of the interim inflation target by the end of 2021, in turn, served to shift inflation expectations downward at the beginning of this year. However, since March of this year, the external economic environment has been developing under the alternative (risky) scenario of macroeconomic development, presented in the monetary policy guidelines for 2022 and 2023-2024.

In the context of the rapid acceleration of inflationary processes in the world, a risky situation in the external environment and other factors affecting domestic prices as a result of changes in the global economy and the emergence of demand delayed since the pandemic, creates basis for achieving 5 percent target in the second half of 2024.

The Central Bank will take balanced measures based on the objectives of mitigating the impact of inflation on aggregate demand and economic activity.

Given the increasing uncertainty about future developments in the external economic environment, the growing likelihood of a global recession, and different expectations on prices for basic commodities despite their downward, as well as taking into account changes in domestic economic conditions and the pace of reforms, medium-term macroeconomic forecasts were developed on the basis of 2 different scenarios.

A baseline scenario, taking into account the continuation of macroeconomic development within the existing trends, the persistence of the negative effects of the external environment on the economy of our country at the level of 2022, the continuation and logical completion of the initiated structural reforms, and an alternative (risky) scenario, assuming an increase in external risks and the occurrence of global crisis-recession processes, have been designed.

According to the baseline scenario, growth rates of economic activity and increasing dynamics of investment and consumer demand will remain high in our country.

Fiscal consolidation will begin as a result of structural reforms and the gradual adjustment of regulated prices to market prices, the competitive environment will be improved by reducing the role of the state in the economy and continuing structural reforms, private and foreign direct investment will grow at a high rate.

Although the positive dynamics of economic activity will continue in 2023, the real economic growth is expected to be close to the potential of the economy in the face of emerging external influences and limited financing opportunities.

Particularly, economic growth in real terms is projected to be 4.5-5 percent in 2023, 5-6 percent in 2024, and 6-6.5 percent in 2025.

In this regard, ensuring the growth of the economy within its potential in the following years will largely depend on the logical completion of structural reforms, improvement of the investment and competition environment, reduction of the role of the state in the economy, and an increase in the share of financing through private and foreign investments.

Ensuring macroeconomic stability in our country, achieving a balanced growth of aggregate demand and aggregate supply requires initiation of fiscal consolidation from 2023. For this purpose, maintaining the ratio of fiscal deficit to GDP within 3 percent in 2023, 2.5 percent in 2024, and 2 percent in 2025 plays an important role.

Given the above-mentioned changes in external and internal economic conditions, the factors determining the dynamics of aggregate demand and supply, and inflation expectations, inflation is projected to decrease to 8.5-9.5 percent at the end of 2023, and there are prerequisites for achieving the 5 percent inflation target in the second half of 2024 are emerging.

In this scenario, the main focus of the Central Bank’s monetary policy will be to ensure price and financial stability in the economy. In determining monetary conditions, inflation forecast and inflation expectations will be primarily taken into account.

Given the persistence of inflationary pressure of a diverse nature in the economy and the effects of the external situation in 2023, measures will be taken to form monetary conditions at a “moderately tight” level.

From the second half of 2024, the monetary conditions can be transferred to the “neutral” phase with the formation of the preconditions for achieving the 5 percent inflation target and the growth of confidence in the formation of inflation within the permanent target.

The alternative (risky) scenario of macroeconomic development was designed based on the possibility of a decrease in the external demand, a decline in foreign exchange flows coming in through various channels in the context of increased external risks and a global recession.

In this case, the reduction of aggregate demand is a factor that curbs global inflationary processes and lowers the prices of commodities, while the delay in the adjustment of aggregate supply has a negative effect on the price level in the domestic market.

In this scenario, it is assumed that the structural reforms will be slower than in the baseline scenario, and the regulated prices will be indexed to the level of inflation. In order to stimulate the economy, it is expected that the current high rates of fiscal deficit will be maintained and the start of budget consolidation will be delayed to 2024 and beyond.

With simultaneous occurrence of most of the conditions for this scenario real GDP growth in 2023 is estimated to be around 3-3.5 percent. As economic activity and aggregate demand recover from 2024, real economic growth is projected to reach 4-4.5 percent in 2024 and 4-5 percent in 2025.

The level of uncertainty regarding the end of the effects of risks in a certain period is quite high. Meanwhile, real growth indicators are expected at a relatively higher level due to the non-realization of some risks included in the alternative scenario.

The decrease in regional attractiveness as a result of the increase in external risks and the geopolitical tension in the main trade partner countries may also have a negative impact on foreign investment inflows to our country.

Under the alternative scenario fiscal stimulus is expected to be continued in 2023 to support economic activity in our country. In this case, the start of fiscal consolidation will be delayed for the following years.

In 2023, the ratio of total fiscal deficit to GDP may be around 4-4.5 percent. In 2024, there will be grounds for the formation of this indicator near 3.5 to 4 percent, and around 3 percent in 2025.

Under this scenario, the consumer demand in the economy will be at a lower level compared to the baseline scenario, and given the other factors mentioned above, the inflation rate in the next year is projected to be around 7-8 percent.

Although the inflation rate in 2023 according to the alternative scenario is lower than in the baseline scenario, objective of achieving the

5 percent target may be delayed beyond the second half of 2024 due to the effects of indexation of regulated prices and exchange rate dynamics.

The need of indexation of regulated prices every year and the lagged effects of external risks will cause inflation to be around 6-7 percent in 2024, higher than the baseline scenario, and it is assumed that there will be opportunities to reach the inflation target in the first half of 2025.

When this scenario occurs, the Central Bank will maintain “moderately tight” monetary conditions until the end of the forecast period in order to ensure a balance between price stability and support of economic activity.

The formation of positive real interest rates in the money market makes it possible to reduce pressure of the external risks on the exchange rate.

Along with this, taking into account the possibility of a decrease in foreign exchange flows and pressures on the national currency rate, proposals are formulated within this scenario and effective measures will be taken to reduce pass through effects of exchange rate changes on prices.