Uzbekistan’s economy may be overheating, according to a warning delivered by the country’s central bank.

Central Asia’s second largest economy raced ahead with growth of 8.5% in the first half of this year, bubbling along on strong consumer demand and rising government spending. 

Urging a little more use of the brakes, the Central Bank of Uzbekistan (CBU) said interest rates should stay relatively high and the government should avoid any sudden spending splurges.

Spending, it added, must be restrained to the point where it does not get ahead of the realities of economic output.

The CBU conceded that growth exceeded its estimated potential in recent quarters. Policy has thus been kept tight, despite easing inflation.

The CBU’s warning follows advice put forward by the International Monetary Fund (IMF) in mid-June. The Fund urged Uzbekistan to limit short-term spending increases, cut preferential lending and optimise the management of public investment. While the government expects growth of around 8% this year, the IMF forecast is for 6.8%.

Samigjon Inogamov, director of the CBU’s monetary policy department, told a press conference that with growth outstripping the estimated growth potential, demand-side pressures had mounted, justifying the hold placed on rates.

"In recent quarters, economic growth has been above its potential level. This indicates signs of economic overheating," Inogamov said.

The central bank defines potential growth as the pace of economic expansion that can be sustained using existing production capacity without generating excessive inflationary pressure. Growth above that level typically signals that demand is expanding faster than the economy's ability to supply goods and services to meet it.

The CBU expects full-year growth of between 7.5% and 8% this year, keeping the expansion of GDP well above historical averages. However, the CBU estimates Uzbekistan's potential growth rate at 6-7%, based on data through 2025. Inogamov, however, said that estimate would be reassessed later this year and could be revised upwards if stronger growth continued without generating significant inflation.

"When high growth is achieved through the expansion of economic potential, it does not have a negative impact on inflation," he said.

Inogamov added that annual growth of 9-10% is achievable over the medium term if supported by more productive investment, expanded production capacity and higher labour productivity, allowing the economy to grow faster without fuelling inflation.

The CBU nevertheless warned that aggregate demand remains strong, supported by robust consumer spending and higher government expenditure, particularly on infrastructure and investment projects. These factors continued to create inflationary pressures.

The regulator is jointly assessing the inflationary effects of higher public spending with the economy and finance ministry. While additional fiscal expenditure could raise inflationary pressures in the short term by stimulating demand, officials stressed that infrastructure investment should eventually expand production capacity, easing price pressures over the longer term.

The cautionary comments follow President Shavkat Mirziyoyev's call on July 21 for annual economic growth of 9-10% to improve living standards. They also echo some earlier warnings from the IMF that rapid government spending financed by higher gold revenues could contribute to economic overheating.

Persistently strong domestic demand can also contribute to an appreciation of the real exchange rate, potentially reducing the competitiveness of exporters by making domestically produced goods relatively more expensive on foreign markets.