For more information, see Azerbaijan Republic and the IMF

Azerbaijan—Enhanced Structural Adjustment Facility and
Extended Fund Facility Policy Framework Paper, 1997–2000

Tables

Table 1. Azerbaijan: Summary and Timetable for Macroeconomic and Structural Adjustment Policies, 1998–2000


Policy Area                      Targets Objectives and Measures Strategies and Implementation Technical
Assistance/status

1. Fiscal policy
1.1 Revenue policy Improve the revenue raising capacity and efficiency of the tax system Rationalize depreciation rules for profit tax 1999 Budget
Rationalize the income taxation of dividends and interest 1999 Budget
Make interest and other legitimate expenses fully deductible for the purpose of calculating the base for the profit tax 1999 Budget
Allow fully profit tax deduction for loan provisioning of banks1 1999 Budget
Move to destination principle of VAT and excises for CIS trade 1998-1999 As consistent with intra CIS agreements
Review VAT law to ensure that all business-related expenses are creditable 1999 IMF technical assistance by FAD
Calculate VAT liabilities on an accrual basis 1999 Budget
Base land and property taxes on market values End-December 1998 Timetable for new cadastre may be longer
Reduce employers' payroll tax rate from 35 to 33 percent, and increase employees' contributions from 1 percent to 3 percent 1999 Budget
Allocate 3 percentage points of employers' payroll tax rate (33 percent) to employees' individual pension accounts 1999 Budget World Bank technical assistance to set individual accounts
Allocate the 3 percent employees' social insurance contribution rate to individual pension accounts 1999 Budget
Update Tax Code in order to consolidate various laws, decrees, and regulations to eliminate contradictions and ambiguities and to standardize administrative provisions End-December 1998 IMF technical assistance by LEG
Improve tax administration Develop a common taxpayer identification for STI, SCC, and banks (pass necessary legislation) End-June 1997 In progress
Amend law on Tax Services to provide collection officers with authority to use a variety of tools and techniques to enforce collection End-December 1997

Implement measures to improve excise tax collection on tobacco and alcohol (payment at factory gate or customs) Early-December 1997
Double tax inspectors in LTU through reallocation of staff, and assign 40 percent of staff to auditing End-November 1997
Improve VAT refunding mechanism by Ministry of Finance Continuous
Grant legal authority to the State Customs Administration to perform independent assessment of valuation End-December 1997
1.2 Expenditure Policy Reorient expenditure priorities Eliminate or transfer non-essential tasks to the private sector (e.g., from State Committees) 1998/99 World Bank technical assistance
Implement government employment/pay policy consistent with objective to reduce number of employees while increasing wage incentives for the more productive employees 1998 and 1999 Budgets
Introduce an effective severance pay scheme End-June 1998
Grant targeted subsidies to families hardest hit by increases in the price for communal services and electricity 1997-1998
Consolidate various social benefits into a single categorical/means-tested poverty benefit 1999 Budget
Raise the statutory retirement age for men and women by 6 months each year 1997-2000 Ongoing
Reform the pension system by introducing a two-tier pension structure comprising of: (i) a basic social pension financed by the government on a pay-as-you go basis; and (ii) a mandatory funded pension scheme financed through individual contributions based on their labor income End-December 1998
Introduce individual retirement accounts End-December 1998 World Bank technical assistance
Shift initial responsibility for sick leave benefits from the SPF to employers End-June 1997 Pending
Review eligibility requirements for unemployment compensation End-March 1997 Pending
Improve infrastructure Develop a 3-year public investment program End-June 1997 Draft prepared; World Bank technical assistance
Set annual consolidated budget investment targets for general government 1998-2000
1.3 Fiscal management
      and budget planning
Improve Ministry of Finance's control over public finances and expenditures Integrate all government spending agencies' accounts in the Treasury Single Account End-November 1997 IMF technical assistance by FAD
Make fully operative mandatory competitive bidding procedures for government procurement and the Procurement Regulatory Agency End-March 1998 World Bank technical assistance
Prepare proposals about institutional arrangements to receive future oil revenues, and to decide on their best use End-September 1998 IMF/World Bank technical assistance
Clarify financial relations between government and ANB regarding payments and receipts of interest on mutual claims, and allocation of central bank profits End-December 1998
2. Monetary policy Improve monetary management Allow off-auction interbank trading in foreign exchange for all banks September 1997 Implemented
Remove remaining restrictions on direct interbank trading in foreign exchange End-June 1998
Allow foreign banks to participate directly in the foreign exchange (BICEX), Treasury Bill, and interbank money markets. Also allow non-residents as well as all residents to participate in the Treasury Bill market Early-December 1997
Allow foreign banks to participate in the ANB credit auctions market End-June 1998
Securitize part of outstanding government debt at ANB with a view to developing the stock of Treasury bills From beginning 1998
Be prepared to start open market operations in Treasury bills End-July 1998
Encourage full-fledged collateralized interbank money market
Establish framework for auctions of central bank deposits or ANB certificates to address any capital inflows problem End-March 1998 Fund technical assistance by MAE
Phase out credit auctions in favor of open market operations End-December 1998
Improve banking supervision Increase frequency and quality of on- and off-site inspections by hiring more staff and improving their skills through training and use of foreign experts End-December 1997 In progress
Enforce timetable for fully achieving requirements for loan-loss provisions over 3 years
   Up to 40 percent
   Up to 75 percent
   Up to 100 percent
End-1997
End-1998
End-1999

Introduce a new chart of accounts and financial reporting standards in line with international accounting standards for commercial banks End-March 1998 In progress
Raise the minimum capital requirement for existing banks to the manat equivalent of: US$1,000,000 End-December 1997
Announce phased increase to minimum of US$5 million by 2001
Improve soundness of existing banking system Implement the restructuring program of the four state-owned banks 1997-1998 In progress
Resolve problem of bad loans portfolio upon successful completion of initial phase of restructuring program, and privatize the banks 1998-1999
3. Enterprise reform Medium- and large-scale privatization Privatize 400 (cumulative) medium-size/large enterprises through voucher auctions or commercial tender End-December 1997 In progress
Establish privatization targets for 1998, including 50 large enterprises End-December 1997 Part of World Bank SAC supervision
Formulate and begin implementing program of privatization by liquidation
Establish a National Share Registry and Depository Agency October 1998 To be made operational
Establish a Securities' Commission End-June 1998
Issue regulations complementing Accounting Law for enterprises to introduce international standards End-September 1998 UNDP technical assistance
4. Agriculture Develop private sector agriculture 1998-2000 Good progress with World Bank technical assistance
Complete the distribution of land titles to private farmers End-June 1998 In progress
Reorganize irrigation management End-December 1997 In progress
Phase out most agricultural concerns End-June 1998
5. Energy Rationalize use of energy Raise gas and electricity prices to full operating cost recovery levels on average October 1997 Implemented
Phase out cross-subsidization in energy prices (electricity, and gas) End-December 1998
Extend gas metering to cover all customers End-September 1999 In progress
Develop a strategy for the rationalization of Azerbaijan oil refineries 1998-1999 World Bank technical assistance
Provide data to IMF on the operations of SOCAR End-December 1997
Reform communal services and phase out subsidies 1999
Spin off noncore activities of energy enterprises (SOCAR, Azerenerji and Azerigaz); and internally restructure them to reflect separability of their business activities 1998-1999 World Bank technical assistance
Establish a proper regulatory environment for natural monopolies 1999-2000
Introduce a Petroleum Law to provide a sustainable basis for foreign investment in oil sector End-December 1998
6. Education Establish government commission to develop a comprehensive reform plan for the education sector, focusing on downsizing, improving efficiency, and partial privatization. End-December 1997
Raise the student/teacher ratio by increasing the class size or increasing the weekly teaching load from the current low level of 12 hours 1998-1999
Allocate budgetary funds on the basis of number of students 1999 Budget
7. Health care Establish government commission to develop a comprehensive reform plan for the health sector, focusing on downsizing, improving efficiency, and partial privatization End-December 1997
Develop regulatory framework for privatization and entry of the private sector in health care 1998-1999
Eliminate 15 percent of hospital beds 1998 some progress
Allocate health budget among institutions according to population rather than according to the number of beds 1998 Some progress
Reform provider payment mechanisms by paying providers on a capitation basis 1998 Some progress
Reorganize health care system to provide universal access to a basic package of medical services 1998-1999
8. Legal framework Establish framework appropriate for market economy Submit a Secured Transaction Law to parliament Early-December 1997
Issue a decree clarifying the debt-service obligations of enterprises during and after privatization. Early-December 1997
Issue implementing regulations for the Bankruptcy Law to provide enforcement measures End-December 1998 World Bank technical assistance
Introduce a new Securities Law End-March 1998
Adopt a new Land Code, including provisions for privatized land of enterprises End-March 1998
Introduce a new draft law on the State Police and Procurators End-June 1998
Introduce new Corporate Law, Civil Code, and Competition Law 1998-1999
9. Trade and exchange
    regime
Further liberalize the trade system Unify import tariff rates at 15 percent and eliminate all exemptions 1997 Budget Modified in May 1997 to include a reduced rate of 5 percent for capital goods and raw materials
Reduce progressively the general tariff rate of 15 percent by at least 5 percentage points 1999-2001
Further liberalize remaining ex ante registration in the case of exports on credit, consignment, and through barter End-December 1997
Introduce new Foreign Trade Charter to meet requirements of WTO accession End-December 1998
10. Government
      restructuring
Align structure of government with the needs of the emerging market economy Reduce number of Ministries and Agencies. Eliminate the state's commercial and industrial activities, while strengthening regulatory and policy-making functions From End-March 1997 Ongoing
11. Reconstruction of
      war-damaged areas
Start rehabilitation of war damaged areas Initiate information campaign on mine-awareness End-March 1997
Undertake social assessments of internally displaced persons End-March 1997 Ongoing
12. Environment Halt and reverse degradation of environment due to industrial pollution, overfishing, and deforestation Formulate and implement a National Environmental Action Plan 1998, 1999 World Bank assistance
13. Statistics Improve the statistical base for economic policy Develop a new statistical program to make the statistical system adequate for policy design, implementation and monitoring End-June 1997 In progress

1Defined as the difference between end of year reserves and begin of year reserves adjusted for bad debts written off and actual recoveries during the year.

Table 2. Azerbaijan: Selected Economic and Financial Indicators, 1995–2000


  1995 1996 1997   
Estimate
1998    
Program
1999    
Projection


(Annual percentage change, unless otherwise indicated)
Output, incomes and prices          
   Real GDP -11.0 1.3 5.1 7.0 8.5
   Real GDP per capita -11.6 0.7 4.5 6.4 7.9
   Real per capita consumption -9.3 1.1 0.7 0.4 3.9
   Consumer price index (period average) 411.7 19.8 4.0 5.5 5.5
 
External sector (in terms of US dollars)
         
   Exports of goods and non-factor services at current prices 852 938 1,111 1,504 1,795
   Imports of goods and non-factor services at current prices 1,267 1,764 1,984 2,630 3,227
   Export volume -4.0 15.0 13.3 22.4 23.0
   Import volume -16.0 29.5 16.4 29.9 20.3
   Real effective exchange rate (Index 1995=100) 100.0 125.9 141.2 147.4 151.1
 
Money and credit
         
   Manat broad money 175.2 55.7 19.4 16.6 . . .
   Manat reserve money 190.6 62.7 25.0 15.0 . . .
   Velocity of manat broad money 53.8 -23.8 -6.2 -3.8 . . .
 
(In percent of GDP, unless otherwise indicated)
 
Public finances1
         
   Revenue 15.2 16.2 18.0 19.3 21.4
      Direct taxes 5.4 6.6 5.9 6.1 8.0
      Indirect taxes 4.3 6.4 7.4 7.8 8.7
      Social Security contributions 2.1 2.1 2.5 2.7 3.1
      Oil Royalties 0.0 0.3 1.8 2.1 2.2
      Other 2.7 0.1 0.1 0.1 0.1
   Expenditure 19.5 18.8 20.8 22.3 22.5
      Government consumption 9.1 9.6 11.8 11.8 11.5
      Transfers and subsidies 6.3 7.9 5.8 7.0 7.4
      Other current expenditure 4.1 1.3 3.2 3.5 3.6
      Capital expenditure 0.6 0.5 1.6 1.7 2.1
      Net lending 3.3 0.6 0.3 1.1 0.7
    Overall deficit (-) (on a accrual basis) -4.3 -2.6 -2.8 -3.0 -1.1
         incl. oil funds and privatization proceeds2 5.3 -0.9 -0.9 0.8 0.2
 
Savings and Investment
         
   Savings 2.8 0.0 5.6 6.1 7.2
      General government sector 8.2 -1.5 0.8 2.4 2.3
      Private sector -0.1 1.6 3.4 9.0 5.8
   Gross investment 14.3 23.6 27.2 33.7 39.3
      General government sector 0.6 0.5 1.6 1.7 2.1
      Private sector 13.7 23.1 25.6 32.0 37.2
   External current account balance -11.5 -23.6 -21.6 -27.6 -32.1
 
External Debt and Debt Service
         
   Public sector external debt, end of year 15.1 15.4 14.0 16.2 17.3
   Public sector external debt service 2.4 2.6 2.5 1.7 1.4
      Of which: interest due 0.3 0.5 0.5 0.5 0.8
 
Gross official reserves, end of year
         
   (In millions of US dollars) 119 214 422 565 631
   (In weeks)3 5.0 8.0 15.0 16.0 16.0
 
Exchange rate (manat/US dollar)
4,416 4,301 3,996 3,835 3,759
 
Nominal GDP (In millions of US dollars)
2,777 3,443 4,112 4,799 5,652

Sources: Azerbaijan authorities; and IMF staff estimates.
1Revenue and expenditure figures in 1994 and 1995 are not fully comparible to later years due to the inclusion of the Foreign Exchange Fund which was dissolved in March 1995.
2Signature bonuses from oil consortiums and privatization receipts are treated as below the line item in the program.
3Imports of goods and services, excluding operations of oil consortia.

Table 3. Azerbaijan: Income and Social Indicators, 1995–2000


    1995 1996 1997 1998 1999
   
  Unit of Measure Program

Population
   Population (mid-year) thousand 7,487 7,535 7,575 7,620 7,666
   Population growth rate (annual average) percentage change 0.8 0.6 0.5 0.6 0.6
   Urban population percent of total 54 . . . . . . . . . . . .
 
Poverty
         
   Headcount index1 percent of population 68 . . . . . . . . . . . .
 
Income
         
   GDP per capita US-Dollars 371 457 543 630 737
   Official wage (monthly average) US-Dollars 13 20 31 37 46
   Real labor compensation index 1994=100 90.8 90.4 94.9 95.8 99.2
   Employment (annual average) thousand 2,837 2,886 2,941 2,960 2,983
 
Social Indicators
           
   Life expectancy at birth years 71 . . . . . . . . . . . .
   Infant mortality rate per thousand 26 . . . . . . . . . . . .
   Illiteracy (population age 15+) percent of total 3 . . . . . . . . . . . .
   Gross primary school enrollment
         (population in school age)
           
      Male percent of total 91 . . . . . . . . . . . .
      Female percent of total 87 . . . . . . . . . . . .

Sources: Azerbaijan authorities; and World Bank and IMF Staff estimates.
1Percent 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, 1995–2000


  1995   1996   1997   1998   1999   2000 1998-2000
Total    

  (In millions of US dollars)
 
Requirements
621 1,037 1,231 1,551 1,940 2,492 5,984
   Financing of the non-interest current
      account deficit, excluding official transfers
392 880 921 1,328 1,798 2,267 5,393
   Scheduled interest 7 17 21 24 44 56 124
   Scheduled amortization 29 70 81 56 16 38 110
   IMF repayments1 0 0 0 0 16 46 62
   Reduction in external payments arrears (+) 76 25 0 0 0 0 0
   Change in ANB gross official reserves 117 95 208 143 66 86 295
 
Resources
327 884 1,088 1,435 1,862 2,493 5,790
   Official project grants 81 86 50 31 25 20 76
   Official project loans 14 19 62 156 179 128 463
   Private direct investment (net)2 282 661 929 1,189 1,588 2,275 5,051
   Other private capital (net)3 (51) 118 48 60 70 70 200
 
Financing gap
295 153 143 116 78 (0) 194
 
Exceptional financing disbursed
295 153 0 0 0 0 0
   Use of IMF resources 101 71 0 0 0 0 0
   World Bank program assistance 30 31 0 0 0 0 0
   Other bilateral and multilateral assistance 72 0 0 0 0 0 0
   debt rescheduling or cancellation 92 51 0 0 0 0 0
 
Exceptional financing committed
0 0 143 96 38 0 134
   Use of IMF resources 0 0 108 61 38 0 99
   World Bank program assistance 0 0 35 35 0 0 35
   Other bilateral and multilateral assistance 0 0 0 0 0 0 0
   Debt rescheduling or cancellation 0 0 0 0 0 0 0
 
Residual financing gap
0 0 0 20 40 0 60
   
(In percent of GDP)
Memorandum items
   Financing requirements 22.4 30.1 29.9 32.2 34.1 38.2 31.6
   Official financing 3.4 3.1 6.2 5.9 4.3 2.3 4.8
   Private financing 8.3 22.6 23.7 25.9 29.1 35.9 25.3
   Residual financing gap 0.0 0.0 0.0 0.4 0.7 0.0 0.3

1Including repurchases.  
2Including oil signature bonuses.
3Including errors and omissions.

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