The Central Bank of Uzbekistan has included a dedicated section on the physical risks of climate change in its financial stability review and is developing a climate stress-testing tool for banks. According to the regulator's approach, credit losses may arise from loans issued in regions with heightened climate threats.
Geological and Water Risks
The first identified risk is seismic. The eastern and southern territories of the country are located in an area of high seismic activity, situated at the junction of the Indian and Eurasian tectonic plates. The Central Bank classifies areas such as Andijan, Jizzakh, Namangan, Samarkand, Surkhandarya, Tashkent, Fergana, and Kashkadarya, as well as the city of Tashkent itself, as zones with increased earthquake danger.
The second significant risk is related to water scarcity in the western part of the country. In the regions of Karakalpakstan, Khorezm, Navoi, and Bukhara, precipitation levels are nearly ten times lower than in the southeast. Furthermore, the proportion of moderately and heavily salinized land in Khorezm and Karakalpakstan reaches 41% and 40%, respectively.
Forecasts and Economic Vulnerability
Referencing World Bank estimates, the Central Bank presented a forecast indicating that by 2050, the discharge of the Amu Darya River could decrease by 5%, and the Syr Darya by 15%. Consequently, the annual water deficit in the country is projected to increase from 7 billion cubic meters in 2030 to 15 billion cubic meters by 2050.
The economy demonstrates high vulnerability to water risks, as irrigated agriculture consumes about 90% of the country's water resources. The agricultural sector accounts for 18% of GDP and provides employment for 23% of the population. Reduced crop yields could lead to increased unemployment and falling household incomes, resulting in serious consequences for the quality of bank portfolios.
Additional Threats and Regulator Response
The list of risks also includes flooding in cities and along rivers, as well as landslides. Most cities in the country are classified as high flood risk due to the condition of drainage systems and the spread of impermeable surfaces, although Tashkent and the Syr Darya region fall into the low-risk category. Landslide danger affects 17% of the country's mountainous territory, corresponding to an area of 90,000 square kilometers; 65%–70% of these landslides are caused by snowmelt, precipitation, and groundwater.
The regulator's response will involve conducting a climate stress test, which will allow for the assessment of the impact of physical and transition climate risks on the financial health of banks. This new tool is being introduced for the supervision of Uzbekistan's banking sector, as previously stress testing only covered macroeconomic and credit shocks.