Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

Republic of Azerbaijan-- Aide Memoire of Staff Visit

Baku, May 2, 2012

An International Monetary Fund (IMF) staff mission, headed by Nadeem Ilahi, visited Baku during April 24-May 2, 2012 to discuss recent economic developments, government policies and future prospects for the Azerbaijani economy.1 The discussions also paved the ground for the 2012 Article IV Consultation mission, tentatively scheduled for October this year. The IMF team met with senior government officials and representatives of the private sector, civil society and the diplomatic community. The mission thanks the authorities for constructive discussions. The following statement reflects the views of the IMF mission.

1. The non-oil economy continued to perform strongly in 2011, and the near-term economic outlook is generally favorable. A 10 percent contraction in oil production in 2011 was almost entirely offset by non-oil growth of 9.4 percent, mainly in construction, and services. Hydrocarbon output is expected to remain unchanged this year, but non-oil GDP could register 6 percent growth and reach its potential level by end 2012, largely supported by public investment spending. Risks to the outlook are largely balanced, and the mission envisages limited direct economic spillovers to Azerbaijan from the Euro Area crisis.

2. Inflation has moderated largely because of a fall in global food prices. Inflation declined sharply from 8 percent in mid-2011 to near 2 percent in March 2012, and is expected to reach 5 percent by the end of the year. While underlying core inflation has broadly stabilized in recent months, increasing government spending and a closing of the non-oil output gap by end-2012 could result in inflationary pressures later in the year. High oil prices have contributed to the current comfortable external position.

3. Prudent fiscal policy would be key in preserving near-term macroeconomic stability. Spending restraint since the middle of 2011 helped contain demand pressures. Going forward, while the approved 2012 budget is expansionary and would result in demand pressures if implemented in full, continued spending restraint would help keep inflation in check. In this regard, the mission recommends keeping the ratio of non-oil fiscal deficit to non-oil GDP at 38 percent, compared to 41 percent in 2011, by moderating the increase in capital spending. The mission welcomes the authorities’ intention of avoiding any supplementary increase in spending this year in response to revenue windfall from a recent and prospective rise in global oil prices.

4. Embarking on fiscal consolidation is key to achieving medium term fiscal sustainability. The flattening of the oil output profile since 2011 is a reminder of the finite amount of Azerbaijan’s hydrocarbon resources, and underscores the need for a path to achieve medium term fiscal sustainability. This would entail reaching a target of 18 percent non-oil deficit to non-oil GDP ratio by 2017. The IMF stands ready to provide technical assistance in this regard, including on pension reforms.

5. Monetary tightening would be warranted if demand pressures emerge, but existing instruments are limited and need strengthening. If fiscal spending is excessive and the non-oil output gap closes sooner than anticipated, then monetary tightening would be needed to keep inflation in check. However, monetary policy, based largely on a de facto stabilized exchange rate, has not been able to dampen inflation volatility. While the authorities agree in principle to allowing greater exchange rate flexibility and moving to an interest rate based monetary policy framework, operational progress has been limited. The mission urges the authorities to redouble efforts to develop a new monetary policy framework, including by deepening debt and capital markets and implementing an effective approach of communicating monetary and exchange rate policies with the public. The IMF stands ready to continue to provide technical assistance for this purpose.

6. Recent government support to the International Bank of Azerbaijan (IBA) has bolstered capital and liquidity for the time being, but a more comprehensive approach is needed to reach a permanent solution. While the government’s recent decision to increase its stake in IBA may have been necessary, it should ensure that this does not run counter to the aim to privatize the bank in an expeditious and transparent manner. CBA’s supervision of the banking system should pay particular attention to IBA as well, and the bank’s external borrowing, which effectively incurs contingent liabilities on the government, should be made consistent with its ability to service its obligations and the government’s overall debt strategy. The mission also believes that to avoid systemic problems and enhance competitiveness in the banking system, IBA should be downsized prior to privatization. A Joint IMF-World Bank Financial Stability Assessment Program (FSAP) update, which will extensively assess the financial system, is expected in the second half of 2012.


Azerbaijan: Selected Economic and Financial Indicators, 2008–13
 
  2008 2009 2010 2011   2012   2013
        Prel.   Proi, Budget 5/   Proi,
 

 

                   

National income

                   

  GDP at constant prices

10.8 9.3 5.0 0.1   3.1 5.0     1.9

   Of which: Oil sector 1/

6.9 14.8 5.0 -9.8   -0.3 -0.3     -2.5

    Non-oil sector 2/

15.7 3.0 7.6 9.4   6.0 9.5     5.5

    Consumer price index (end of period)

15.4 0.7 7.9 5.6   5.0 9.0     6.5

  Consumer price index (period average)

20.8 1.6 5.7 7.9   5.3 7.3     5.8
                     

Money and credit

                   

  Net foreign assets

47.2 -18.5 34.6 68.7   49.1 78.7     13.4

  Net domestic assets

5.0 63.4 13.5 2.8   6.5 -10.2     38.6

  Domestic credit

24.5 42.2 8.4 7.9   1.1 -9.3     22.4

   Of which: Credit to private sector

47.6 25.6 6.6 18.1   12.8 10.2     18.8

  Manat base money

48.5 1.7 31.6 29.4   30.3 39.6     19.5

  Manat broad money

27.2 9.9 34.8 32.5   30.2 42.9     22.4

  Total broad money

25.5 16.6 21.9 32.1   30.3 39.6     22.3

  Foreign currency deposits ratio to broad money

24.3 28.7 21.2 20.9   21.0 19.0     20.9

  Velocity of total broad money (M3) 3/

3.0 2.9 2.7 2.5   2.0 2.2     1.9
                     

External sector (in US$)

                   

  Exports f.o.b.

43.8 -31.0 25.5 30.3   2.0 2.0     -5.7

   Of which: Oil sector

44.3 -31.5 25.7 30.9   0.5 0.5     -7.4

  Imports f.o.b.

25.3 -14.0 3.6 50.7   -1.2 11.3     5.8

   Of which: Oil sector

-17.6 -34.2 19.6 35.5   -0.9 -0.9     78.6

  Export volumes

6.4 6.2 -1.4 -3.3   1.4 1.4     -3.4

  Import volumes

17.0 -5.4 -4.0 38.2   -1.9 10.6     6.1

  Terms of trade

26.1 -28.6 27.1 30.7   9.5 9.5     -4.0

  Real effective exchange rate

21.4 14.0 1.1 2.0      
                     
  (In percent of GDP, unless otherwise specified)    
                     

Gross investment

19.8 18.9 19.0 21.6   19.5 23.8     18.9

  Consolidated government

13.2 12.7 12.7 16.4   11.2 18.2     9.9

  Private sector

6.6 6.3 6.2 5.3   8.3 5.6     9.0

   Of which: Oil sector

2.9 2.0 2.0 2.2   3.2 3.0     3.0

Gross domestic savings

64.4 49.1 53.7 55.3   49.6 50.5     42.0

Gross national savings

55.3 42.6 48.0 48.7   44.9 46.0     38.1

  Consolidated government

33.5 19.8 27.7 30.0   23.7 22.6     19.5

  Private sector 4/

21.8 22.7 20.3 18.6   21.3 23.4     18.6

Consolidated central government finance

                   

  Overall fiscal balance

20.3 7.2 15.0 13.6   12.5 4.3     9.6

  Non-oil primary balance, in percent of non-oil GDP

-39.2 -37.9 -37.6 -41.2   -38.1 -49.5     -34.2
                     

External sector

                   

  Current account (- deficit)

35.5 23.7 29.1 27.0   25.5 22.2     19.2

  Foreign direct investment (net)

-1.2 0.3 0.2 1.4   -5.2 -5.0     -3.3

  Public and publicly guaranteed external debt outstanding

6.5 8.0 7.5 7.5   8.8 8.3     8.6
                     

Memorandum items:

                   

  Gross official international reserves (in millions of U.S. dollars)

6,467 5,364 6,400 10,400   15,400 18,400     17,450

  Nominal GDP (in millions of manat)

38,006 34,579 41,526 50,069   53,025 55,963     57,304

  Nominal non-oil GDP (in millions of manat) 2/

17,431 18,322 21,492 25,187   28,034 30,053     31,494

  Nominal non-oil GDP (in millions of USD) 2/

21,761 22,814 26,935 32,024   36,004 38,597     41,274

  Nominal GDP per capita (in U.S. dollars)

5,213 4,792 5,718 6,955   7,407 7,817     8,103

  Nominal GDP (in millions of U.S. dollars)

46,378 43,017 51,743 63,439   68,100 71,874     75,097

  Oil Fund Assets (in millions of U.S. dollars)

11,219 14,900 22,766 29,800   37,375 31,073     45,138

  Population (mid-year, in millions)

8.9 9.0 9.0 9.1   9.2 9.2     9.3

  Exchange rate (manat/dollar, end of period)

0.801 0.803 0.798 0.787   0.779 0.779      
 

Sources: Azerbaijani authorities; and Fund staff estimates and projections.

1/ Includes the production and processing of oil and gas.

2/ Includes the transportation of oil and gas (except transportation through the western route), as well as the export tax paid by the state oil company.

3/ Defined as gross domestic demand (excluding oil sector-related imports) divided by average broad money.

4/ Historical data includes statistical discrepancy.

5/ IMF staff estimates of the macroeconomic framework consistent with the authorities’ approved budget.


1 The IMF team included Ms. Albino-War, and Messrs. Almarzoqi and Shahmoradi.



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