IMF Executive Board Concludes 2010 Article IV Consultation with Republic of Azerbaijan

Public Information Notice (PIN) No. 10/58
May 13, 2010

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2010 Article IV Consultation with the Republic of Azerbaijan is also available.

On May 3, 2010, the Executive Board of the International Monetary Fund (IMF) concluded the Article VI consultation with the Republic of Azerbaijan.1


The Azerbaijani economy has withstood the impact of the global financial crisis relatively well, but has not been immune to it. Overall gross domestic product (GDP) grew at an impressive 9.3 percent during 2009, but non-oil GDP growth slowed from 16 percent in 2008 to 3 percent in 2009. The large drop in international oil and other commodity prices caused fiscal and export revenues to fall by more than 30 percent. In addition, a number of state-owned enterprises (SOEs) and banks faced difficulties rolling over short-term foreign liabilities, which triggered a liquidity shortage in the banking system, and contributed to a sharp decline in credit growth. As international commodity prices fell, average annual inflation dropped dramatically from more than 20 percent in 2008 to 1.5 percent in 2009.

The government responded to the crisis with effective fiscal policy measures. First, it limited the budgetary impact of the large drop in oil prices by allowing the oil fund to still transfer the budgeted amount of resources to the state budget. Second, it provided a large capital injection and government-guaranteed loans to help the state oil and aluminum companies stay current on their foreign debt obligations. Third, the government adjusted for the fall in revenues by cutting non-priority spending and by financing only ongoing capital investment projects. As a result, the government managed to keep the non-oil fiscal deficit broadly stable and was still able to increase social spending. The 2010 budget targets a narrowing of the non-oil deficit, while allowing for cuts in profit and income taxes.

The Central Bank of Azerbaijan (CBA) successfully maintained financial stability by keeping the exchange rate stable and injecting liquidity into the banking system. Despite mounting depreciation expectations in early 2009, the CBA successfully intervened to keep the exchange rate pegged against the U.S. dollar, which reduced inflation, prevented further dollarization, and avoided a negative impact on households’ and banks’ balance sheets. To address the tightening of liquidity and credit conditions, the CBA reduced the reserve requirement on deposits from 12 to 0.5 percent and cut the refinancing rate from 15 percent to 2 percent between September 2008 and December 2009. Furthermore, the CBA provided about US$1.1 billion (2.6 percent of GDP) in liquidity support to banks that were faced with temporary liquidity difficulties. Finally, the deposit insurance limit was increased by five times, which helped to restore confidence in the banking system.

Non-oil GDP growth is expected to recover to 4.2 percent in 2010, but downside risks remain. Oil GDP is projected to grow by only 1.3 percent, implying overall GDP growth of only 2.7 percent. Along with the recovery of the non-oil sector and the rise in international commodity prices, inflation in 2010 is expected to increase slightly to 4 percent. Growth will be lower if businesses remain pessimistic or external demand recovers only modestly.

Given that oil production will likely no longer be the main source of growth from now on, the medium-term outlook for the Azerbaijani economy depends strongly on whether non-oil exports, which currently account for only 5 percent of total exports, will be able to take over as the driver of the economy. Realizing this, the authorities are committed to developing a non-oil export strategy that focuses on further improving the business environment.

Executive Board Assessment

Directors commended the authorities’ prudent policy responses to the impact of the global crisis, which helped maintain macroeconomic and financial stability and robust GDP growth. Going forward, the key challenges are to preserve the hard-won stability and diversify the sources of economic growth.

Directors commended the authorities’ adjustment measures in the face of falling fiscal revenues in 2009 and their renewed commitment to fiscal sustainability. They supported the intention not to increase spending in 2010 even if oil prices turn out to be higher than budgeted, given the room to improve expenditure efficiency and the need to significantly reduce the non-oil deficit to secure medium-term fiscal sustainability. Directors commended the authorities on making Azerbaijan the first country to be fully compliant with the principles and criteria of the Extractive Industries Transparency Initiative. They looked forward to greater transparency on the expenditure side and reforms to lower the current expenditure burden and the financial support to state-owned enterprises, cut tax exemptions, and simplify the tax system.

Directors agreed that the authorities’ decision to maintain a stable exchange rate had served the country well during the crisis, by reducing inflation, preventing further dollarization, and avoiding a negative impact on households’ and banks’ balance sheets. They saw continued benefits from maintaining exchange rate stability, noting that the real exchange rate remained close to equilibrium in 2009. Directors broadly concurred that the benefits from more flexibility could be expected to increase in the medium term, as the economy becomes more diversified and more integrated with international capital markets. They saw merit in close cooperation between the staff and the authorities in this area.

Directors commended the authorities’ skilful monetary and financial sector responses during the crisis, including the sharp reductions in reserve requirements and the policy rate, as well as substantial liquidity support to the banking system. Given rising nonperforming loans, albeit from a low level, Directors stressed the need for continued close monitoring of the banking system and strengthened banking supervision. As financial sector health improves and credit growth resumes, the authorities should gradually exit from crisis-related liquidity support so as to limit fiscal risks and prevent a pickup in inflation. Directors encouraged the authorities to press ahead with further reforms to improve monetary policy transmission and access to credit by the non-oil sector, foster banking sector consolidation, and privatize the International Bank of Azerbaijan. They welcomed the strengthening of the Anti-Money Laundering and Combating the Financing of Terrorism (AML/CFT) framework, and looked forward to further progress.

Directors welcomed the authorities’ commitment to developing a non-oil export strategy that focuses on enhancing competitiveness and improving the business environment through further progress with tax, customs, and financial sector reforms. They welcomed the authorities’ continued commitment to join the World Trade Organization.

Azerbaijan: Selected Economic Indicators, 2005–10

  2005 2006 2007 2008 2009 2010




    Prel. Proj.
  (Annual percentage change)

Real economy


GDP at constant prices

26.4 34.5 25.0 10.8 9.3 2.7

Oil sector 1/

65.4 62.0 37.3 6.9 14.8 1.3

Non-oil sector 2/

8.2 12.1 11.3 15.7 3.0 4.2

CPI (end-of-period)

5.5 11.4 19.5 15.4 0.9 4.0
  (In percent of GDP, unless otherwise specified)

Consolidated government


Total revenue and grants 3/

25.1 28.0 28.2 51.1 41.6 48.1

Total expenditure 3/

22.7 27.4 25.9 31.1 34.8 29.9

Fiscal balance 4/

2.6 -0.2 2.6 20.8 6.8 18.2

Non-oil primary fiscal balance (in percent of non-oil GDP)

-12.6 -31.1 -28.3 -38.2 -38.5 -33.8
  (Annual percentage change)

Money and credit


Manat reserve money

7.5 132.6 101.4 48.5 1.7 23.6

Manat broad money

15.8 168.3 107.3 38.2 1.5 18.0

Banking sector credit to the economy

53.0 63.6 96.5 55.6 18.4 10.0

Velocity of total broad money (M3) 5/

5.2 4.8 3.8 3.0 3.1 2.8
  (In percent of GDP, unless otherwise specified)

Balance of payments


Current account balance (-, deficit)

1.3 17.6 27.3 35.5 23.6 25.2

External public debt

12.5 9.4 7.7 6.5 7.9 10.1

Gross official international reserves


In millions of US$, end of period

1,178 2,500 4,273 6,467 5,364 6,653

In months of imports, c.i.f.

1.7 3.2 4.5 7.8 4.8 5.6

Exchange rate


End-of-period (Manat/US$)

0.92 0.87 0.85 0.80 0.80

Real effective exchange rate

(percentage change, "-"=depreciation)

6.8 9.2 9.0 14.3 10.8

Sources: Azerbaijani authorities; and IMF staff estimates.
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/ Includes tax credits allocated to the state oil company.
4/ Includes statistical discrepancy.
5/ Defined as gross domestic demand (excluding hydrocarbon imports) divided by average broad money.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here:


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6220 Phone: 202-623-7100