Press Release: IMF Approves Combined ESAF/EFF Financing for Azerbaijan
December 20, 1996
The International Monetary Fund (IMF) today approved a combination of two credits for Azerbaijan totaling the equivalent of SDR 152.1 million (about US$219 million) to support the government's economic program for 1996-99. Of this amount, SDR 93.6 million (about US$135 million) are available under the enhanced structural adjustment facility (ESAF)1, and SDR 58.5 million (about US$84 million) under the extended Fund facility (EFF)2.
In 1995-96, Azerbaijan successfully implemented two IMF-supported stabilization programs. In 1996, the annual rate of inflation declined to under 20 percent from over 400 percent in 1995, and economic recovery appears to have started as Azerbaijan's gross domestic product is estimated to increase by about 1 percent with respect to the previous year. Fiscal policies remained tight, and the fiscal deficit declined from 4.3 percent of GDP in 1995 to 1.4 percent of GDP through September 1996. However, structural reforms, an important component of the new program, lagged.
Medium-Term Strategy and the 1996/97 Program
Azerbaijan's medium-term program builds on the macroeconomic progress already made and is designed to prepare the country for the prospective oil boom as oil production is projected to double by the turn of the century and to quadruple shortly thereafter. Key macroeconomic targets over the medium term are to achieve an annual growth rate of 5 percent in 1997, rising to 7-8 percent in subsequent years; and a reduction in the annual rate of inflation to 6 percent by 1999. The external current account deficit is expected to widen to 24 percent of GDP in 1999 from 19 percent in 1996, largely reflecting rising oil-sector imports of capital goods over the period. To these ends, the general government deficit is targeted to decline from 2.7 percent of GDP in 1996 to 0.5 percent of GDP by 1999, and a tight monetary policy will be maintained, which should also bolster confidence in the domestic currency. The program includes a strengthening of structural reforms and improvements in the social safety net.
Within this medium-term framework, the 1996/97 program aims at an annual GDP growth of 5.1 percent, a further decline in the annual rate of inflation to 9.1 percent, and a narrowing in the external current account deficit to 15.9 percent of GDP. To attain these objectives, the deficit of the general government is targeted to decline to 2.0 percent in 1997, primarily based on higher revenues, as expenditure levels have already been cut significantly. Tax revenues will finance most of the current government expenditure, while external resources will be directed to finance capital investment and to service the foreign debt.
The program envisages a further strengthening of structural reforms. The highest priority areas are banking reform, privatization, and termination of the government's heavy involvement in production and trade. In particular, enterprise restructuring associated with large-scale privatization is central to enhancing financial discipline and economic efficiency. Small-scale privatization is expected to be completed by end-June 1997 and, by end-September 1999, 70 percent of state enterprises are due to be privatized. Steps to reduce the government's heavy involvement in production and trade have already been taken, with ownership and governance reforms being supplemented through improvements in the legal framework. Several new laws, particularly in the area of property rights and commercial rules, including the bankruptcy law, are to be adopted during the first year of the program. In addition, Azerbaijan is expected to complete its trade liberalization process during the program period.
Addressing Social Needs
Azerbaijan will continue to reform the social safety net to provide adequate assistance to the most vulnerable groups of the population. By end-June 1997, all remaining cash compensation and pension arrears will be eliminated. Meanwhile, the government is considering a comprehensive reform plan to establish a financially secure and fair pension system. Eligibility requirements for unemployment compensation will be reviewed to improve the efficiency of the Employment Fund, which will be restructured to focus on retraining, job search counseling, and public relief works.
The Challenge Ahead
Ensuring balanced and sustained growth will require a significant increase in investment. While foreign direct investments through international oil consortia will play a major role, the accumulation of business savings to support non-oil investments will be crucial to attain Azerbaijan's growth objectives.
Azerbaijan joined the IMF on September 18, 1992; its quota3 is SDR 117.0 million (about US$168 million); its outstanding use of IMF credit currently totals SDR117.0 million (about US$168 million).
Sources: Azerbaijan authorities; and IMF staff estimates and projections.
1 The ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5-year grace period.
2 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4- year grace period, and the interest rate, adjusted weekly, is about 4.2 percent.
3 A member's quota in the IMF determines, in particular, the amount of its subscription, its voting
weight, its access to IMF financing, and its share in the allocation of SDRs.