For more information, see Azerbaijan Republic and the IMF

Azerbaijan—Enhanced Structural Adjustment Facility
Policy Framework Paper, 1999–2001

Contents

Tables

Table 1. Azerbaijan: Summary and Timetable for Macroeconomic
and Structural Adjustment Policies, 1999-2001

Policy Area and Objectives

Measures

Implementation

Technical
Assistance

1. Public Sector Reform and Fiscal Policy

 

 

Reorient expenditure priorities

Undertake functional reviews of central ministry level entities; decrease the number of functional ministries, and redefine their roles

June 2000

WB

 

Discontinue budgetary support for entities performing obsolete or inappropriate functions

2001 budget

WB

 

Strengthen cabinet of ministers capacity for policy formulation, coordination; and redesign structure and skill mix

1999-2000

WB

Reform pay, employment, and delivery of services

Submission to parliament of a new civil service law; introduce a severance pay package

June 1999

WB

 

Implement a hiring freeze

January 1999

 
 

Begin to implement a decompressed public sector wage scale

from March 1999

 
 

Conduct a treasury-based staffing review

March 1999

WB

 

Phased reduction of government employment based on the recommendations of the treasury’s staffing review

from mid-1999

 

 

Develop a system to provide monthly data on pay and employment (including private sector)

2000

 

Reorient health and education expenditures

Focus and increase expenditures on primary education and primary health care and maintenance

1999

 
 

Introduce a system of transparent user fees and prohibit and penalize the use of informal fees

2000

 
 

Remove barriers to private sector provision of health and education and establish clear regulations and minimum standards for private institutions

2000

 
 

Develop a free package of basic health services to increase low-income access to health care

2001

 
 

Eliminate norm based calculation of budget requirements in favor of per capita allocation

2000 budget

 

Improve the social safety net

Shift initial responsibility for sick leave benefits from the SPF to employers

1999

 

 

Raise statutory retirement age for men and women by 6 months each year

1999-2001

 
 

Reform pension system to create a two-tier system of (i) basic pension, and (ii) funded pension scheme financed through mandatory individual contributions

2000

 
 

Introduce individual (actual or notional defined contribution) pension accounts for employee contributions; establish a unique identifier code for contributors, and eventually for all persons of working age

2000

 

Improve budget formation, planning, and control

Revise draft law on state budget and submit to parliament, and apply new budgetary procedures during the preparation of the 2001 budget

1999-2000

WB

 

Prepare medium-term financial framework (MTFF) to submit to parliament with 2001 budget

2000

 
 

Establish a macroeconomic policy unit at the Ministry of Finance

1999

KHF/IMF

 

Design institutional arrangements to invest future oil revenues, and to decide on their best use

1999-2000

IMF/WB

 

Clarify relations between government and ANB regarding payments and receipts of interest on mutual claims, and allocation of central bank profits

1999

IMF

 

Develop a multi-year public investment plan (PIP) consistent with the MTFF

1999-2000

WB

 

Improve project evaluation capacity in line ministries

1999-2000

WB

 

Strengthen commitment accounting; introduce a financial planning unit; and computerize the Treasury

September 1999

IMF/WB

Strengthen judiciary reform

Issue implementing regulations to provide enforcement for the bankruptcy law

March 1999

 

 

Establish and appoint the Council of Judges

March 1999

 

 

Present the complete civil and procedural codes to parliament

March 1999

 

 

Approval by parliament of new legislation on law enforcement agencies limiting their role to criminal cases

June 1999

 

 

Prepare a medium-term strategy on judicial and legal reform

1999

WB

Improve financial management

Strengthen fiscal and financial reporting of the government

Continuous

 

 

Make fully operational mandatory procedures for government procurement

September 1999

WB

 

Adopt internationally accepted audit standards and establish a supreme audit institution

1999

 

2. Tax administration and Policy

Reform tax system

Obtain parliamentary approval of the new tax code

June 1999

IMF

 

Move to destination principle of VAT for CIS trade

mid-1999

 

 

Eliminate most remaining exemptions in profit and personal income taxation and introduce international accounting standards to switch VAT and the profit tax to an accrual basis

1999-2000

IMF

Improve tax administration

Improve VAT refunding mechanism by ministry of finance; computerize revenue collection in STI; and, increase training for staff in Large Tax Payer’s Unit

December 1998 - June 1999

IMF

 

Approve legislation to allow the tax inspectorate and the social protection fund to enforce notices of levy and to seize and sell property of tax delinquents

March 1999

IMF

3. Financial Sector Policy

Improve monetary management

Undertake regular open market operations in treasury bills

Continuous

 

 

Allow domestic nonbank financial institutions to participate directly in treasury bill market

1999

 

Strengthen bank supervision

Increase frequency and quality of on- and off-site supervision with more staff and increased training by expatriates

Continuous

IMF

 

Enforce timetable for fully achieving requirements of loan-loss provisions over 3 years (in progress)

Continuous

IMF

 

Raise banks’ minimum capital requirement: to $1.5 million

to $5 million

January 1999–2001

IMF

 

Review and amend use of new chart of accounts and financial reporting standards by banks

June 1999

 

Improve banking system soundness

Review loan portfolio of Prominvestbank and determine extent of bad loans

March 1999

WB/IMF

 

Submit an acceptable privatization plan for Prominvestbank

June 1999

WB/IMF

 

Offer International Bank for sale

May 1999

WB/IMF

 

Offer Savings Bank for sale

September 1999

WB/IMF

 

Complete privatization of Prominvestbank

2000

WB/IMF

 

Complete privatization or liquidation of Agroprombank

2001

WB/IMF

 

Allow foreign banks to increase statutory capital levels so that share of foreign capital in banking system reaches 30 percent

March 1999

 

 

Adopt a simultaneous payment-versus-payment system (PVP) for foreign exchange transactions on BICEX

1999

IMF

 

Establish a fixed settlement procedures for OICEX and establish PVP system

1999

IMF

4. Privatization

 

 

Improve transparency of privatization process

Introduce modified auction procedures for medium-sized enterprises (mass privatization), and develop SPC procedures for the privatization of large firms

March 1999

WB

 

Approval by Parliament of the privatization program for 1999-2000

March 1999

WB

 

Strengthen dissemination of information on privatization by increasing auction centers and bid reception sites; improve organization of voucher system and voucher pricing mechanism

June 1999

WB

 

Establish a securities commission by Presidential decree

January 1999

 

 

Establish national depository system, an independent share registry, depository, and stock exchange facility

1999

 

Deepen the privatization effort

Prepare for sale 5 large scale enterprises using the assistance of financial advisors retained through the offering of international tender

June 1999

 

 

Expand the role of municipal authorities to include registration of urban real estate; facilitate the establishment of an urban land market by provisioning for the privatization of the land of public enterprises slated for privatization

March 1999

 

 

Issue regulations complementing the accounting law for enterprises to introduce international standards

March 1999

 

 

Privatize enterprises currently under Azercontract and Auto Transport; limit the role of Azercontract to providing procurement services to ministries who lack that capacity

June 1999

 

5. Agriculture

 

 

 

Complete land allocation and the distribution of land titles to private farmers

June 2000

 

 

Prioritization of investments in the irrigation and drainage system and formulate a medium- to long-term investment program

June 1999

WB

 

Establish water users’ associations and implement a cost recovery mechanism

Continuous

 

 

Establish the regulatory and legal framework for the introduction of a market based system of rural financing

June 1999

WB

 

Submit and complete the privatization of remaining 154 enterprises under the MOA to the SPC

December 1999

 

 

Complete the restructuring of the MOA based on the new charter

June 1999

 

 

Complete the liquidation of the Agroincom monopoly

March 1999

 

 

Strengthen the system of agricultural statistics

Continuous

 

 

Encourage private farm advisory services and establish international and local linkages for research, education, and other advisory services

Continuous

 

6. Infrastructure and Petroleum Sectors

 

 

Strengthen the infrastructure sector

Expand household metering of gas consumption

June 1999

 

 

Review all infrastructure services (including rental and transport fees) and introduce a phased plan for eliminating all generalized subsidies

March 1999

WB

 

Quarterly monitoring of implementation of government instructions to cut off service to delinquent customers after 60 days

January 1999

 

 

Restructure the Caspian Shipping Company and demonopolize port and maritime services; introduce new maritime code

December 1999

WB

 

Complete the separation of all construction and maintenance units from the railways and roads department (Azeravtoyol)

December 1999

 

 

Restructure Azerenergy and Azerigas to promote competition within the electricity and gas sectors, and corporatize new entities

1999-2000

WB

 

Establish the ministry of transportation

March 1999

 

 

Obtain passage of the water law and establish the water commission

March 1999

 

 

Obtain parliamentary approval for law on energy and gas; and, establish the national energy agency

1999

 

Petroleum sector reforms

Introduce a legal framework for investors in the oil sector, and, clearly define the government’s role in the sector

1999

WB

 

Complete an audit of SOCAR by international accountants

September 1999

WB

 

Restructure SOCAR and separate major functions

2000

WB

 

Prepare a detailed strategy to rationalize the oil refinery capacity

1999

WB

7. Interenterprise Arrears and Barter

 

 

 

Avoid accumulating budgetary arrears to enterprises

January 1999

 

 

Tax liabilities of enterprises will no longer be allowed to be offset against government liabilities; enterprises will be penalized for non-payment of taxes

1999

 

 

To discourage barter transactions, the profit tax will be designed to apply on economic profits rather than on turnover

1999

 

8. Environment

 

 

Reverse environment degradation

Strengthen environmental management through improved legislation, stronger enforcement, and implement priority measures as identified in the National Environmental Action Plan

1999-2000

 

9. Trade and Exchange Regime

 

 

Further liberalize the trade system

Remove the regulation requiring pre-registration of exports

1999

 

 

Reduce the import tariff rate from 15 to 10 percent by 2001

1999-2001

 

10. Reconstruction of War Damaged Areas

 

 

 

Implement rehabilitation strategy consisting of voluntary resettlement, temporary support of basic necessities, and the rehabilitation of physical and social infrastructure. Cost recovery will be based on 5-year forecasts of cash income rather than actual costs.

Ongoing

WB

11. Improve Economic Statistics

 

 

 

Implement the medium-term statistical program

Ongoing

WB/IMF
OECD/UN

 

Improve data on financial markets and external debt, publish main financial and economic indicators monthly; and publish a quarterly review of economic developments by the ANB

1999

 




Table 2. Azerbaijan: Selected Economic and Financial Indicators, 1996-2001


 

 

1996

1997

1998

1999

2000

2001

 

 

 

 

Rev.
Prog.

Prog.

Proj.

Proj.


(Annual percentage change, unless otherwise indicated)

Output, incomes and prices

 

 

 

 

 

 

 

     Real GDP

 

1.3

5.8

8.0

7.0

6.0

6.7

     Real GDP per capita

 

0.7

5.2

7.4

6.4

5.4

6.1

     Consumer price index (Dec. to Dec.)

 

6.7

0.4

0.5

5.0

3.0

3.0

External sector

 

 

 

 

 

 

 

     Exports of goods and non-factor services (millions of US dollars)

 

938

1,150

1,050

1,169

1,390

1,737

     Imports of goods and non-factor services (millions of US dollars)

 

1,764

2,101

2,371

2,677

3,199

3,519

     Real effective exchange rate (Index 1995=100)

 

103.0

109.5

Money and credit

 

 

 

 

 

 

 

     Manat reserve money

 

33.6

35.1

-20.7

10.0

     Manat broad money

 

25.8

29.2

-21.3

14.8

     Velocity of manat broad money

 

2.3

-16.8

29.3

-2.6

 

 

(In percent of GDP, unless otherwise indicated)

Public finances 1/

 

 

 

 

 

 

 

     Revenue

 

17.6

19.7

17.2

19.3

19.9

20.6

          Tax revenue

 

15.7

18.5

15.4

17.2

17.8

18.5

          Nontax revenue

 

1.9

1.2

1.8

2.1

2.1

2.1

     Expenditure

 

20.4

21.4

21.5

22.4

22.3

22.3

          Current expenditure

 

19.2

19.5

19.4

20.0

19.7

19.7

          Capital expenditures (including net lending)

 

1.2

1.9

2.1

2.4

2.6

2.6

     Overall deficit (-) (on a cash basis)

 

-2.8

-1.7

-4.3

-3.1

-2.4

-1.7

Savings and Investment

 

 

 

 

 

 

 

     Gross Savings

 

0.3

9.6

5.0

5.2

6.2

6.8

          General government sector

-1.6

0.2

-2.2

-0.7

0.2

0.9

          Private sector

1.9

9.4

7.2

5.9

6.0

5.9

     Gross investment

 

25.8

33.3

34.8

37.7

44.6

44.6

          General government sector

 

1.2

1.9

2.1

2.4

2.6

2.6

          Private sector

 

24.6

31.4

32.7

35.3

42.0

42.0

     External current account balance

 

-25.5

-23.7

-29.8

-32.5

-38.4

-37.8

External Debt and Debt Service

 

 

 

 

 

 

 

     Public sector external debt, end of year (percent of GDP)

 

16.6

11.7

12.5

16.6

16.8

16.2

          Of which external arrears

 

0.0

0.0

0.0

0.0

0.0

0.0

     Public sector external debt service (percent of exports of GNFS)

 

9.7

7.4

5.1

5.5

10.3

7.7

          Of which interest due (percent of GDP)

 

0.5

0.2

0.4

0.6

0.9

1.0

Gross official reserves, end of year

 

 

 

 

 

 

 

     (In millions of US dollars)

 

214

467

432

590

715

781

     (In weeks of imports of goods and non-factor services)

 

10

12

9

11

12

12

Exchange rate (manat/US dollar; end of period)

 

4,098

3,888

3,860


Sources: Azerbaijan authorities; and IMF staff estimates.

1/ Signature bonuses from oil consortiums and privatization receipts are treated as below- the-line items in the program.




Table 3. Azerbaijan: Income and Social Indicators, 1994-2001


 

Unit of Measure

 

1994 1995 1996 1997 1998 1999 2000 2001

Projections

Population

 

 

 

 

 

 

 

 

 

 

Population (mid-year)

thousand

 

7,431

7,487

7,535

7,575

7,620

7,666

7,712

7,758

Population growth rate (annual average)

percentage change

 

0.9

0.8

0.6

0.5

0.6

0.6

0.6

0.6

Urban population

percent of total

 

53.2

53.0

52.7

52.5

...

...

...

...

 

Poverty

 

 

 

 

 

 

 

 

 

 

Headcount index 1/

percent of population

 

...

68

...

...

...

...

...

...

 

Income

 

 

 

 

 

 

 

 

 

 

GDP per capita

US-Dollars

 

246

371

445

509

564

629

692

767

Official wage (monthly average)

US-Dollars

 

12.7

14.2

20.8

35.5

37.3

39.1

41.1

43.2

Employment (annual average)

thousand

 

2,851

2,837

2,895

2,900

...

...

...

...

Social Indicators

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Public expenditure

Percent of GDP

 

 

 

 

 

 

 

 

 

     on health

""

 

...

1.8

1.4

1.6

1.8

...

...

...

     on education

""

 

...

3.9

3.7

4.2

5.2

...

...

...

     on social safety net

""

 

8.6

5.0

5.8

5.5

6.2

...

...

...

     on defence

""

 

...

3.6

2.2

2.3

2.3

...

...

...

 

Life expectancy at birth

years

 

74

74

74

75

...

...

...

...

Infant mortality rate

per thousand

 

25

23

20

19

...

...

...

...

Illiteracy (population age 15+)

percent of total

 

3

3

...

...

...

...

...

...

Gross primary school enrollment

 

 

 

 

 

 

 

 

 

 

(population in school age)

 

 

 

 

 

 

 

 

 

 

     Male

percent of total

 

91

91

...

...

...

...

...

...

     Female

percent of total

 

87

87

...

...

...

...

...

...


Sources: Azerbaijan authorities; and World Bank and IMF Staff estimates.

1/ Percent of population below the "food only" poverty line; see World Bank, Azerbaijan Poverty Assessment, June 1996 (15601 AZ).




Table 4. Azerbaijan: External Financing Requirements and Sources, 1996-2001


  1996 1997 1998 1999 2000 2001 1999-2001

 

Actual Actual Rev.
Prog.
Prog. Proj. Proj. Total

 

(In millions of US dollars)

Requirements

1,037

1,301

1,305

1,785

2,286

2,402

6,473

     Financing of the non-interest current
      account deficit, excluding official transfers

880

962

1,286

1,563

2,018

2,202

5,782

     Scheduled interest

17

7

17

27

50

62

139

     Scheduled amortization

70

78

37

22

42

31

95

     IMF repayments 1/

0

0

0

16

52

41

108

     Reduction in external payments arrears (+)

-25

0

0

0

0

0

0

     Change in ANB gross official reserves

95

253

-35

158

125

66

349

 

Resources

884

1,155

1,265

1,611

2,286

2,402

6,299

     Official project grants

86

55

23

23

17

13

53

     Official project loans

19

53

87

114

185

119

418

     Private direct investment (net) 2/

661

1,093

1,077

1,385

1,974

2,160

5,519

     Other private capital (net) 3/

118

-46

78

89

110

110

309

 

Financing gap

153

145

41

174

0

0

174

 

Exceptional financing disbursed

153

145

41

0

0

0

0

     Use of IMF Resources

71

110

41

0

0

0

0

     World Bank program assistance

31

35

0

0

0

0

0

     Other bilateral and multilateral assistance

0

0

0

0

0

0

0

     Debt rescheduling or cancellation

51

0

0

0

0

0

0

 

Exceptional financing committed

0

0

0

174

0

0

174

     Use of IMF Resources

0

0

0

132

0

0

132

     World Bank program assistance

0

0

0

42

0

0

42

     Other bilateral and multilateral assistance

0

0

0

0

0

0

0

     Debt rescheduling or cancellation

0

0

0

0

0

0

0

 

 

 

 

 

 

 

0

Residual financing gap

0

0

0

0

0

0

0

 

Memorandum items

(In percent of GDP)

     Financing requirements

32.6

33.7

30.4

37.0

42.8

40.4

40.1

     Official financing

8.1

6.6

3.5

6.5

3.8

2.2

4.2

     Private financing

24.5

27.2

26.9

30.6

39.0

38.1

35.9

     Residual financing gap

0.0

-0.0

-0.0

-0.0

0.0

0.0

-0.0


Sources: Azerbaijan authorities; and IMF staff estimates.

1/ Including repurchases.

2/ Including oil signature bonuses.

3/ Including errors and omissions.




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