Uzbekistan : Financial Markets Development Program (Subprogram 2)

The program will support regulatory and institutional reforms, including enhancements to financial market infrastructure, by focusing on three key areas: (i) improving market facilitation to streamline financial transactions and services, (ii) increasing demand measures to boost consumer and institutional engagement with financial services, and (iii) enhancing supply measures to ensure a more robust provision of financial products and services. It will contribute to the acceleration of the country's transition toward a market economy by developing its financial market to finance the real economy, which is moving from a state-led and -dominated model to one oriented on the market and the private sector. The program supports the development of capital market instruments to mobilize private sector and sustainable finance.

Project Name

Financial Markets Development Program (Subprogram 2)

Project Number

53161-003

Country / Economy

• Uzbekistan

Project Status

Active

Project Type / Modality of Assistance

• Loan

Source of Funding / Amount

Loan 4472-UZB: Financial Markets Development Program (Subprogram 2)

Source	Amount
Ordinary capital resources	US$ 100.00 million

Operational Priorities

• OP1: Addressing remaining poverty and reducing inequalities
• OP2: Accelerating progress in gender equality
• OP3: Tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
• OP6: Strengthening governance and institutional capacity

Sector / Subsector

• Finance /

Gender

Effective gender mainstreaming

Description

The program will support regulatory and institutional reforms, including enhancements to financial market infrastructure, by focusing on three key areas: (i) improving market facilitation to streamline financial transactions and services, (ii) increasing demand measures to boost consumer and institutional engagement with financial services, and (iii) enhancing supply measures to ensure a more robust provision of financial products and services. It will contribute to the acceleration of the country's transition toward a market economy by developing its financial market to finance the real economy, which is moving from a state-led and -dominated model to one oriented on the market and the private sector. The program supports the development of capital market instruments to mobilize private sector and sustainable finance.

Project Rationale and Linkage to Country/Regional Strategy

Macroeconomic context. Uzbekistan's economy grew by 5.7% in 2022 and 6.0% in 2023, driven by an expansionary fiscal stance, increased fixed investment, and strong private consumption. The poverty rate fell from 17.0% in 2021 to 11.0% in 2023 due to real income growth and safety net expansion. Inflation fell from 11.4% in 2022 to 10.0% in 2023 and was 8.0% as of March 2024 as a result of Central Bank of Uzbekistan (CBU) increasing its policy rates and lower global food and energy prices, although a temporary surge is expected by the end of 2024 because of the increase in administered energy prices. The implementation of stringent macroeconomic policies and structural reforms is expected to gradually reduce inflation in alignment with the 5% target inflation rate of the CBU. The external current account deficit widened to 8.6% of gross domestic product (GDP) in 2023 as a result of an increase in machinery imports, a decrease in remittances (returning to the pre-2022 trend following a surge in 2022), higher foreign debt interest payments, and the repatriation of earnings by foreign firms. Government reforms' especially in energy, privatization, and state-owned enterprises (SOEs)'positively affected the economy. Backed by strong domestic demand, real GDP growth is expected to slow to 5.5% in 2024 and slightly increase to 5.6% in 2025. Fiscal adjustments, moderated bank lending growth, and reversed increases in imports from 2023 are expected to narrow the current account deficit in 2024 and 2025. Global and geopolitical uncertainties: the Russian invasion of Ukraine, fluctuation in commodity prices, and global economic deceleration heighten external risks to Uzbekistan's economy. Ongoing broad monetary policy tightening, higher inflation forecasts, and increased government borrowings have made it more costly for Uzbekistan to access global financial markets. However, Uzbekistan has issued several sovereign bonds, starting from its inaugural Eurobond issuance in February 2019 to its latest in May 2024. The increasing volatility of international financial markets underscores the need for Uzbekistan to strengthen its own financial markets, which is crucial to enable the country to attract private investment and safeguard against global economic fluctuations.

Debt sustainability. The Asian Development Bank (ADB)'s public debt sustainability analysis for Uzbekistan indicates public debt is sustainable, with a low risk of debt stress, despite the impacts of the coronavirus disease (COVID-19) and shocks caused by the Russian invasion of Ukraine (footnote 2). The International Monetary Fund (IMF) concluding statement of its 2024 Article IV mission supports this conclusion: the debt-to-GDP ratio (based on total public and publicly guaranteed debt, comprising public domestic and external debt and public guarantees) increased from 35.3% in 2021 to 36.3% in 2023, but is projected to decrease to 35.7% in 2024 and 34.7% by 2025 (footnote 1). The weighted average maturity of external debt is long-over 9 years. This analysis demonstrates that Uzbekistan's debt sustainability will not be impacted because total public debt, including guarantees, remains moderately low. Public debt mainly consists of long-term loans from international financial institutions, which keeps borrowing costs lowthe weighted average interest rate of Uzbekistan's external debt is 4.4%. Uzbekistan's foreign reserves, including gold, are expected to be 36ドル billion in 2024 and 2025, covering 11 months of imports in 2024 and 10 months in 2025. The government continues to pursue a prudent debt management policy by setting a 5ドル billion ceiling on external borrowing and a SUM25 trillion cap on the issuance of government securities in 2024 to keep its public debt-to-GDP ratio in 2024 and 2025, well below the 60% legal ceiling. The external public debt-to-GDP ratio is currently below 38% and projected to be 37% in 2024 and 2025 (footnote 2).

Development constraints. The following development constraints have been identified and remain relevant to subprogram 2: (i) the finance sector is bank-dominated, with ineffective intermediation; (ii) capital and money markets are underdeveloped, with fragmented and inadequate financial market infrastructure, and an illiquid debt market with limited activity; and (iii) there is ineffective mobilization of savings combined with limited institutional investor participation to address green and sustainable infrastructure financing needs.

The finance sector is bank-dominated, with ineffective intermediation. Uzbekistan's finance sector is dominated by banks and lacks diversification, which stifles intermediation and the mobilization of long-term finance. The economy is overly reliant on bank financing, with banking assets accounting for 61.1% of GDP in 2023. There are 36 commercial banks in the country; 10 are state-owned and account for more than 67% of banking capital and assets. Until 2019, these state-owned banks provided government-directed lending at below-market rates, primarily to SOEs. The financing gap created by the steady decline of long-term government funding must be addressed by an appropriate alternative financial intermediation solution including a robust and adequately regulated capital market because most customer deposits are short-term and insufficient to support the long-term financing critical for infrastructure projects.

Underdeveloped capital and money markets. Uzbekistan's domestic capital market does not play a significant role in financial intermediation and resource mobilization. During subprogram 1, the government provided a good foundation for the development of capital and money markets through the Capital Market Development Strategy. However, market constraints remain. Capital market supervision and development responsibilities are fragmented and have been assigned to different government agencies over the past 3 years, delaying the implementation of adopted strategies. An independent capital market regulator is a condition for Uzbekistan to become a signatory to the International Organization of Securities Commissions (IOSCO) Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information. Moreover, new market instruments are needed to diversify the market and catalyze private sector financing. However, some existing capital market-related laws and regulations are outdated, not cohesive, and do not support a broad range of financial instruments to allow participation by industry stakeholders that have the appetite for them. A new independent agency that adopts a solutions-based approach, and is run by professionals with good gender representation and extensive experience and expertise in financial markets can help Uzbekistan realize its capital market ambitions. Labor force participation rates in Uzbekistan (39.9% for women vs. 72.8% for men in 2023) reflect a stark gender divide, which could be narrowed by strategic recruitment in newly established market regulatory agencies.

Fragmented and inadequate financial market infrastructure. A well-functioning money market is the cornerstone of a resilient financial market and forms the basis of enhanced liquidity, pricing, and long-tenor market instruments. Good financial infrastructure is fundamental to efficient functionality. Under subprogram 1, the government developed road maps for the reorganization of the Uzbekistan Central Securities Depository (UCSD) and integration of trading platforms. However, Uzbekistan still lacks a functional central securities depository to facilitate the electronic transfer, clearing, and settlement of capital and money market instruments. Post-trade operations are done manually, and Uzbekistan lacks an automated clearing system through the CBU real-time gross settlement system, to facilitate real-time delivery versus payment settlement. The reorganization of pre-trade and post-trade infrastructure into consolidated, shared, or linked platforms will lower transaction costs for participants and investors through economies of scale. Listed equities and corporate bonds trade on the Uzbekistan Republican Stock Exchange (UZRSE), which is regulated by the Ministry of Economy and Finance (MOEF), and are settled on the UCSD, with the National Bank for Foreign Economic Activity of Uzbekistan acting as the settlement bank. This approach does not align with IOSCO principles, which require that the central bank (rather than a commercial bank) serve as the settlement bank. Conversely, government bonds and foreign currency trade on the Uzbekistan Republican Currency Exchange, which is regulated by the CBU, and the CBU acts as the settlement bank. Unlisted securities are traded on Elsis-Savdo, an over-the-counter (OTC) trading platform. This trading market infrastructure also does not comply with IOSCO principles for risk management and market infrastructure, which serve as an international benchmark against which the effectiveness of securities regulatory regimes is assessed.

Market data is not easily accessible. Uzbekistan has a sizeable, loosely regulated OTC securities market that does not have publicly available information on the companies whose securities are traded. OTC markets are considered risky because of their weak reporting requirements and lack of transparency, which could lead to fraud. A market surveillance system does not exist, making Uzbekistan's financial market susceptible to manipulative or illegal trading practices. Good corporate governance is fundamental to the improvement of financial intermediation and the deepening of capital markets. State-owned banks dominate Uzbekistan's finance sector and, together with other SOEs, are expected to be active participants in the domestic financial market. Consequently, it is imperative that state-owned banks adopt strong corporate governance rules, including to address gender inequality. Although the UZRSE has undertaken significant steps to improve its operations, it lacks depth (i.e., it has too few investors and companies raising capital). The UZRSE's market capitalization (13ドル.21 billion) is increasing but accounted for only 15% of the country's GDP in 2023, below the equivalent percentage for the stock exchanges of its regional peers (e.g., Kazakhstan at 24%, Poland at 42%, and Viet Nam at 62%). It is small and has low trading liquidity, with only 101 listed companies and an average daily trading volume of about 270,000ドル.

Insufficient and ineffective market infrastructure leads to high transaction costs for investors. Different agencies regulate the trading of equities, corporate and government bonds, currency, and unlisted securities, which are supported by different technology platforms. These must be harmonized. Investor demand is constrained by outdated financial technology that limits access to the markets. Retail investors are hesitant to participate in market activity because of the lack of know-your-customer and digital identification measures seen in more advanced markets. Furthermore, the segment of the population with good earning power, salaries, and savings the prospective ideal average market participants are not incentivized to participate in the market, e.g., through government schemes that could provide capped tax exemptions on dividends, interest, or investment returns.

An illiquid debt market with limited activity. Uzbekistan's government bond market is primarily short-dated. As of December 2023, outstanding treasury bills and bonds totaled SUM26.14 trillion. Of the total of outstanding government bonds, 68% have tenors of 1-5 years. The government bond market does not fully fulfill its role in setting benchmark pricing, and its recently operationalized Debt Management Office (DMO) is building its capacity to function as a fully-fledged treasury operation for government bond market development against a backdrop of limited market activity. There is a lack of legislation to create an enabling environment, and the country lacks a specific time-bound strategy for the issuance of government debt securities that will establish a yield curve (a meaningful benchmark for pricing financial products and a prerequisite for developing the country's capital market and attracting both investors and issuers). The current government bond market operating framework does not promote competitive bidding. Auctions of government bonds are not announced in advance, which prevents investors from preparing for each new issuance. The auction cutoff yields follow the policy rate, reflecting the nascent stage of the market. Regular, increased issuance of government debt could finance various priorities, including national green infrastructure projects (para. 13). The DMO is at an early stage of recruiting professional staff with the expertise required for debt and liquidity management with appropriate segregation of duties, and has not completed its implementation of a recording, monitoring, and reporting system, which are activities typical of a DMO that conducts sound debt management.

Ineffective mobilization of savings combined with limited institutional investor participation to address green and sustainable infrastructure financing needs. The balance between supply and demand in financial markets is crucial to the pricing of securities. The supply of investible funds is limited, preventing Uzbekistan's institutional investors, such as insurance companies and pension funds, from playing a major role in subscribing to government and corporate bonds. On the demand side, insurance companies target deposits and real estate investments because their investment horizon is limited to the average duration (12 months) of their liabilities (i.e., insurance products, including life insurance). Similarly, the national pension fund is off-balance sheet and funded by a pay-as-you-go pension plan operated by the MOEF, requires annual budget transfers to cover deficits and has limited investment capability, with only about SUM5.5 trillion of 'free funds' . Its contribution to the capital market is limited, because its major investments are short-term debt securities of the CBU and the MOEF. The pensions regulatory framework must be addressed for it to become sustainable and to actively participate in the capital market. Uzbekistan's insurance companies are insufficiently capitalized, with their operations supported by outdated technology and manual processes; consequently, they are falling behind on international good practices, and are unprepared for market participation.

A robust financial market enhances the supply of simple (plain vanilla) and alternative financial instruments. Uzbekistan's capital market must be deepened to attract investors with varying investment strategies and interests. Innovative systems must accompany this to facilitate the distribution of funds and mitigate operational risk. There is no local green and sustainable bond market in Uzbekistan that could finance infrastructure projects with positive climate and environmental benefits, while supporting the country's net zero emissions ambitions. Institutional investors promote the growth of market capitalization in the equity market, and their participation across the maturity spectrum of the government bond yield curve is critical to supporting market development. A diverse investor base also lowers cost and volatility in market yields.

Strategic alignment. The government adopted its medium-term plan, Development Strategy for the New Uzbekistan 2022-2026, and its long-term plan, Uzbekistan 2030 Strategy, which prioritizes the country's transition toward a social market economy. Both strategies recognize the central role played by the banking sector and financial markets in fostering this transition, reinforcing the policy actions achieved under subprograms 1 and 2, and ADB's non-sovereign operations that support micro, small and medium-sized enterprises, agriculture borrowers, microfinance institutions, and trade and supply chain finance. The Uzbekistan 2030 Strategy tasks the government with modernizing and developing financial markets to better address the financing needs of the real economy, which is moving away from an economy led and dominated by the state toward a model that is market-oriented and led by the private sector. The underdeveloped financial market has contributed to ineffective mobilization of savings, with gross domestic deposits at 15.1% of GDP, lower than the Commonwealth of Independent States average of 30.1% of GDP, and Poland (62.2%) and Viet Nam (23.3%) in 2021. The introduction of market-based instruments, backed by a sound enabling environment for competitive financial markets, will mobilize private sector financing and help the private sector become a key driver of sustainable economic growth. The government prioritized structural reforms to (i) commercialize SOEs, including privatization of state-owned banks; and (ii) increase the private sector's contribution to sustainable economic growth. Recent progress includes the (i) approval of sound monetary policies; (ii) privatization of Ipoteka, one of the country's largest banks; (iii) implementation of strong supervision; and (iv) accurate assessment of asset quality (footnote 1). Finally, accelerating finance sector reforms, as outlined in the Uzbekistan 2030 Strategy, will support local capital market development.

ADB's Strategy 2030 prioritizes the development of the finance sector and financial markets to support sustainable economic development by creating an enabling environment for private investment. It also contributes to the operational priorities (OPs) of (i) OP1: addressing remaining poverty and reducing inequalities; (ii) OP2: accelerating progress in gender equality through reforms that enhance female participation in the governance of financial markets; (iii) OP3: tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability through reforms that support the issuance of green bonds; (ii) OP6: strengthening governance and institutional capacity through specific institutional strengthening reforms. The private sector is identified as a key driver of economic growth and a source of employment generation during Uzbekistan's economic transition, and a strategic area for ADB's support in the current country partnership strategy (CPS) for Uzbekistan, and its upcoming CPS for 2024-2028. Following the Joint Multilateral Development Banks Methodological Principles for Assessment of Paris Agreement Alignment, the operation has been assessed as aligned with the goals of the Paris Agreement.

B.Policy Reform, ADB's Value Addition, and Sustainability

Programmatic approach and reform accomplishment. In October 2021, ADB approved the programmatic approach and a policy-based loan of 100ドル million for subprogram 1. A programmatic approach, consisting of subprograms 1 and 2, with a post-program partnership framework (PPPF) added in subprogram 2, enables ADB to partner with the government to sequence reforms over the medium-term required to develop Uzbekistan's financial market. It will focus on (i) improving market facilitation, (ii) increasing demand measures, and (iii) enhancing supply measures. All 14 prior actions for subprogram 2 were accomplished.

When the programmatic approach and subprogram 1 were approved in 2021, the government agreed to accomplish 11 policy actions for subprogram 2. Of the 11 original policy actions, 8 were retained, 2 were modified (policy actions 2.9 and 2.10), 1 was partially completed (policy action 2.1), and 3 new policy actions and 1 policy sub-action were added, resulting in a strengthened subprogram of 14 policy actions. The new actions were (i) policy action 2.7 on digital identity verification of retail investors and tax exemption regulations pertaining to individual investment accounts; (ii) policy action 2.8 on approving the Public Debt Law, which includes a strategy for the issuance of green and social government bonds; (iii) policy sub-action 2.13(c) on the payment of dividends and bond coupons directly to the UCSD for onward distribution to shareholders and bondholders, which strengthened the supply measures reform area by enabling cost- and time-efficiencies and reducing operational risk; and (iv) policy action 2.14, which supported a pilot 100ドル million green bond issuance. Policy actions 2.9 and 2.10 (renumbered as policy actions 2.11 and 2.12) were modified to reflect better the sequence of introducing fundamental changes to pensions and insurance frameworks to facilitate their active participation in the capital market, starting with analysis and consultation and followed by regulation. Policy action 2.1 on the submission of the Capital Market Law to Parliament was partially completed in that it has not yet been submitted to Parliament because more time was required to prepare and consult on the law. The prior stage of submission to the Cabinet of Ministers was achieved, and thus the language for this policy action was revised to reflect its current status. However, during the PPPF period, the government will publish the Capital Market Law after Parliament's approval, and approve implementing regulations, demonstrating their commitment to completing the policy action. Five new outcome indicators were added, and one outcome indicator was replaced, making a total of eight outcome indicators in subprogram 2. The expected development results have not changed. To ensure the sustainability of the reforms beyond program completion, nine PPPF policy reforms were added to the program's Policy Design and Monitoring Framework (PDMF), targeted for completion from July 2024 to December 2026 (paras. 19, 21, and 22). These will form the basis of a new banking and capital market reform program in 2026.

Reform area 1: Market facilitation improved. Reforms in this area supported the efficient mobilization and allocation of resources by defragmenting and streamlining market infrastructure and strengthening the capital market legal framework. Subprogram 1 provided foundational regulations and systems such as the multistakeholder capital market development strategy, a time-bound road map for the integration of trading platforms and the reorganization of the UCSD, gender mainstreaming policies for the State Asset Management Agency (SAMA) to enhance female representation on boards, and the UZRE's gender policy that included minimum requirements for female representation in management as well as equal remuneration and training across the organization. Under subprogram 2, five policy actions were achieved. The government transferred capital market regulatory responsibilities to the National Agency for Prospective Projects (NAPP). This new, fully operational, autonomous, and dedicated government agency will ensure effective market development and independent supervision. This will harmonize and defragment oversight responsibilities and the legal framework for capital markets. As one of its first priorities, the NAPP prepared and submitted to the Cabinet of Ministers a draft Capital Market Law, which consolidates fragmented capital market-related laws and regulations and introduces new market instruments. The NAPP has about 100 staff, 34% of whom are women; the female staff at the NAPP include 1 department director (out of a total of 3), 3 division heads, 12 senior analysts, and 10 junior analysts. To streamline and improve market infrastructure, the government established the UCSD as a joint stock company regulated by the NAPP, and opened its correspondent account at the CBU, directly linking it to the interbank payment system. This facilitates secure and timely securities settlement. Females make up 42% of the UCSD staff, with women holding 39% of management positions; UCSD follows a training calendar for employee career development.

To streamline post-trade operations, the CBU provided UCSD access to its real-time gross settlement system, enabling automation of delivery versus payment settlement of securities transfers. Further, to increase market access and transparency, the UZRSE and the NAPP integrated and published market data on the unified corporate information portal (openinfo.uz) and stock exchange website (uzse.uz). In addition to these reforms, unlisted securities began trading on the UZRSE, which increased the transparency of the OTC market. To prevent manipulative and illegal trading, thereby ensuring market integrity, the NAPP and the UZRSE implemented a market surveillance system. The government has made progress in empowering women and promoting gender equality by implementing policies aimed at increasing the representation and leadership of women in government and the private sector. This includes legislative measures to ensure significant participation of women in politics and initiatives to support women entrepreneurs. To further enhance market transparency and improve corporate governance in line with good practice, SAMA implemented a policy (i) requiring appointment of one female director on the supervisory board of at least 20 publicly listed SOEs; (ii) mandating that all SOE supervisory boards follow gender equality principles aligned with the Organisation for Economic Co-operation and Development guidelines for promoting gender equality; and (iii) integrating gender equality principles into SOE corporate governance rules, with an action plan and regular compliance monitoring mechanisms in place. PPPF targets under reform area 1 include the publication of the Capital Market Law after Parliament's approval, and the approval of implementing regulations; the consolidation or linking of the two trading platforms and depositories to streamline market infrastructure; and UCSD's implementation of the delivery versus payment process for settling trades, and its processing of corporate transactions.

Reform area 2: Demand measures increased. During subprogram 1, the government (i) prepared a draft public debt law and endorsed it for submission to the Cabinet of Ministers, (ii) established an e-'know your customer legislative framework to facilitate the onboarding of new retail investors and enhance retail investor demand through identification verification for remote account opening, (iii) approved a revised staffing plan to strengthen the DMO's expertise and capacity, (iv) reduced the dividend tax rate to encourage investor participation and enhance investor demand for corporate securities, and (v) submitted a draft law on insurance activities to Parliament to facilitate insurance market development through effective regulatory mechanisms and prudential supervision. These measures were advanced under subprogram 2 through seven policy actions. The NAPP approved a fintech regulatory sandbox regime to facilitate capital market access and authorized at least one market participant to apply the regulations. In addition, and to improve market participation of retail investors, the NAPP (i) approved a regulation on procedures for digital identity verification that has been implemented by one investment intermediary in the market; and (ii) submitted to the Cabinet of Ministers regulations for the opening of individual investment accounts with provisions for tax exemptions on interest, income, or capital gains arising from their invested savings. Following its approval by the Cabinet of Ministers after subprogram 1, Parliament approved the Public Debt Law, which includes a strategy for the issuance of government bonds to finance green (environmental) and social projects. These plans will bolster Uzbekistan's fledgling green bond market and create a foundation for the issuance of other thematic bonds (e.g., social, sustainability, and sustainability-linked bonds). These will support the financing of green and sustainable infrastructure projects that contribute to the country's nationally determined contribution (NDC) through measures set out in the Paris Agreement, and contribute to private sector development by enabling the catalyzation of much-needed private sector capital.

To support the effective bidding of primary market participants, the MOEF published a 12-month auction calendar, while to develop a government bond yield curve, the government consolidated its debt issuance by issuing 3-, 5- and 10-year bonds. Following this, and to build institutional capacity for debt and liquidity management, the MOEF staffed the DMO with 20 technical professionals, and implemented a debt recording system. Starting with capacity-building exercises, the MOEF commenced collaboration with the United Nations Development Programme (UNDP) on its Gender Equality Seal Programmean initiative that supports government agencies and public institutions to protect and advance women's rights and gender equality, guiding them to meet global standards and benchmarks while aligning with national and international commitments. This marked a significant milestone for Uzbekistan, and contributed to an overall increase of women in government leadership positions, from 27% in 2017 to 35% by 2023. The government's efforts and commitments are reflected in the gender representation of the newly established DMO at the MOEF, where 6 of the 20 technical staff are women, including 4 in middle management. To improve the effectiveness and sustainability of the pensions regime using a cross-regulatory approach, the MOEF issued a policy note that (i) analyzes current and forecasted pension contributions and options, such as universal and employer-sponsored pension schemes for government and SOEs; (ii) based on the analysis proposes potential regulatory reforms to existing pension schemes, such as the establishment of a new regulatory body; and (iii) assesses and proposes changes to the regulatory framework, including gender disparities. Finally, to align the insurance industry's regulations and systems with international best practices, the President approved a resolution of the President that mandates further development and enhancement of the insurance sector through (i) an increase in paid-up capital requirements for insurance companies, (ii) the use of digital contracts, and (iii) the use of management information systems for the internal operations of insurance companies. The digitalization of the insurance industry will be transformative and result in cost and time efficiencies. To sustain policy actions achieved in reform area 2, PPPF targets include updating the MOEF's strategy to assess outstanding issuances and the opportunities arising from and benefits of reducing fragmented issuances, approving regulations for the opening of individual retirement accounts with provisions for tax exemptions and employee stock ownership plans, and issuing a policy on the assessment of private or hybrid pension schemes.

Reform area 3: Supply measures enhanced. Reforms in subprogram 1 introduced money market instruments such as repurchase agreements and currency swaps and issued revised rules for equity and corporate bond market listing and delisting to increase the number of listings to broaden the financial markets. The two policy reforms under subprogram 2 continued to strengthen the supply side of the market through impactful market interventions. To enhance the supply of financial instruments, NAPP developed regulations for the establishment of mutual funds and exchange-traded funds; to broaden and deepen the capital market, SAMA and the MOEF completed initial public offerings (IPOs) and secondary public offerings (SPOs) of three SOEs on the UZRSE; and to facilitate efficient market operations and reduce operational risk, the NAPP prepared and submitted to the Ministry of Justice a regulation that allows the payment of dividends and bond coupons directly to the UCSD for onward distribution to shareholders and bondholders. Finally, as a precursor to subsequent issuances and the emergence of a local green and sustainable bond market, the MOEF supported a pilot green bond issuance by a local state-owned commercial bank: in August 2023, Sanoat Qurilish Bank completed a private placement of a 100ドル million 5-year Eurobond, which was subscribed by several international financial institutions. This inaugural green bond issuance provides Uzbekistan with a timely opportunity to participate in and learn from regional and global sustainable finance ecosystems. Demand for green bonds and other sustainable finance instruments is growing, and Uzbekistan could build on this progress and innovation to develop a domestic sustainable capital market, enabling issuers to secure direct financing for investments that respond to long-term environmental and social challenges. A typical next step is the adoption of national standards and taxonomies. Subsequently, these policy actions, together with those in reform areas 1 and 2, will provide significant opportunities for Uzbekistan to expand its sustainable finance market and for private sector (corporate bond) issuers to incorporate environmental, social, and governance considerations into their operations. The PPPF under reform area 3 will continue to enhance financial market supply when (i) NAPP approves and publishes regulations for the issuance of real estate investment trusts; and (ii) (a) the NAPP publishes a regulatory framework and rules for issuing green sukuks in the local bond market; and (b) issues an environmental, social, and governance bond framework to support issuances in the local market.

ADB's value addition. The program was informed by ADB's experience in supporting the design and implementation of programs that facilitate government-owned financial market reforms across its developing member countries, including Uzbekistan, in subprogram 1, and ADB's private sector financial institution transactions (footnote 13). The program also benefits from ADB's experience in Uzbekistan, which helped identify reforms that needed to be adapted from international best practices in key areas of financial market development (upstream), establishing conditions that lead to private investments (downstream). ADB provided capacity, legal, and technical support to the government to implement complex reforms in insurance, pension funds, capital market regulation, and market infrastructure through targeted technical assistance (TA) approved in subprogram 1. The program complements other ADB finance sector operations in Uzbekistan, including the Small and Medium-Sized Enterprises Development Program, and the upcoming Inclusive Finance Sector Development Program. Together, they synergize and diversify the sector by broadening access to finance, improving trade facilitation and digitalization, promoting private sector participation, and developing market-oriented reforms. The program benefitted from ongoing assessments and diagnostics under ADB's regional TA for Azerbaijan, Mongolia, and Uzbekistan, which draws lessons from the region's varied experiences, focusing on the development of local currency government and corporate bond markets. ADB coordinated effectively with other development partners on finance sector programs and initiatives (para. 25) to deliver a unified reform package to the government.

Lessons. The program incorporates lessons from ADB's Independent Evaluation Department's evaluation of finance sector projects in Uzbekistan, which recommended (i) engaging the government proactively in policy dialogue and sharing international best practices in the region to help policymakers gain a solid understanding of the constraints, and how they can be addressed for long-term sector development; (ii) giving more attention to addressing demand-side constraints, including providing greater access to markets; and (iii) complementing financial i

Impact

Project Outcome

Description of Outcome

Progress Toward Outcome

Implementation Progress

Description of Project Outputs

Status of Implementation Progress (Outputs, Activities, and Issues)

Geographical Location

Nation-wide

Safeguard Categories

Environment

C

Involuntary Resettlement

C

Indigenous Peoples

C

Summary of Environmental and Social Aspects

Environmental Aspects

Involuntary Resettlement

Indigenous Peoples

Stakeholder Communication, Participation, and Consultation

During Project Design

During Project Implementation

Contact

Responsible ADB Officer

Ainabe, Benita

Responsible ADB Department

Sectors Group

Responsible ADB Division

Finance Sector Office (SG-FIN)

Executing Agencies

Ministry of Economy and Finance

Timetable

Concept Clearance

16 Jul 2019

Fact Finding

01 Jul 2024 to 05 Jul 2024

MRM

30 Aug 2024

Approval

31 Jul 2024

Last Review Mission

-

Last PDS Update

31 Jul 2024

Funding

Loan 4472-UZB