Press Release: IMF Approves in Principle Three-Year PRGF Loan of US$100 Million for Azerbaijan Republic
July 2, 2001
The Executive Board of the International Monetary Fund (IMF) today approved in principle a three-year loan of SDR 80.5 million (about US$100 million) under the Poverty Reduction and Growth Facility (PRGF)1 to support the government's economic program and effort to alleviate poverty.
A final decision by the IMF Executive Board is pending discussion of the Azerbaijan Republic's Interim Poverty Reduction Strategy Paper (I-PRSP) by the World Bank Executive Board, which is scheduled for July 5, 2001. The final IMF decision will enable Azerbaijan to draw SDR 8.1 million (about US$10 million) under the PRGF loan from the IMF.
"In recent years, Azerbaijan has achieved strong growth and low inflation. Growth has stemmed mainly from the oil sector. Achieving sustained growth in other sectors is a central policy objective, and critical to an effective attack on poverty, which is widespread. In this connection, the vigorous continuation of structural reforms, and improved governance, will be essential.
"The authorities have strengthened fiscal policy and plan to keep the budget deficit small. Steps have already been taken, and more are planned for next year, to bring quasi-fiscal activities into the budget, notably those involving subsidies to the energy sector. Directors regarded the large subsidies for the energy sector as highly inefficient and as needing to be addressed urgently. An Oil Fund is to be established, whose operations will need to be closely coordinated with the state budgets. The authorities are committed to ensuring that the operations of the Oil Fund are transparent. They plan to use Oil Fund revenues cautiously, and in a manner consistent with both the Poverty Reduction Strategy and the Medium-Term Expenditure Framework currently being developed.
"To strengthen governance regarding the handling of public money, the planned reforms in the Customs Committee must be fully implemented. The activation of the Chamber of Accounts-the country's supreme audit institution-and the government's intention to expand its authority to include all budgetary and extra budgetary organizations will also be key in the implementation of the government's intention to expand its authority.
"Regarding the trade regime, the authorities have eliminated ad hoc tariff exemptions and are committed to making further changes in tariffs over the program period. The authorities intend in the near future to accept the obligations under Article VIII, section 2, 3 and 4 of the Fund's Articles of Agreement.
"The authorities have prepared an Interim Poverty Reduction Strategy Paper. Broad participation in the preparation of a full Poverty Reduction Strategy Paper will be essential," Mr. Fischer said.
Azerbaijan's macroeconomic performance remains strong, with continuing high growth and low inflation, in part as a result of the positive effects of high oil prices. In 2000, real GDP growth reached 11 percent, with the non-oil economy growing by 13 percent. These trends continued during the first quarter of 2001, with an overall growth rate of 8 percent compared to a year earlier. Annual inflation remained moderate at 1.6 percent in the 12-month period ending in April.
The new economic program has three main objectives: maintenance of macroeconomic stability, improvement of governance, and growth of the non-oil related sectors of the economy. The macroeconomic framework for 2001-04 envisages annual real GDP growth of 8.5 percent, while CPI inflation is targeted to stabilize at 2.5 percent. Given the importance of maintaining expenditures and the non-oil deficit at a sustainable level, the fiscal target for the program is to keep the consolidated deficit at or below 1 percent of GDP. Investment is expected to increase substantially over the program period, mainly through investment in the oil and gas sectors rising more than threefold. This is expected to increase the external current account deficit sharply to a peak of almost 30 percent of GDP in 2003. Throughout the program, the current account deficit will mostly be financed by foreign direct investment. Although medium-term projections are promising, they are subject to a high degree of uncertainty, because they are related to oil price developments, and the planned investments in infrastructure for extraction and export of gas and oil.
The authorities intend to keep fiscal policy tight in 2001, with the consolidated fiscal deficit projected to be 0.5 percent of GDP. Excluding oil revenues, the deficit is expected to be 9.2 percent of GDP, up from 7.3 percent in 2000. The 2001 budget reflects important shifts in expenditure composition, including efforts to increase health and education spending, improve utility consumption budgeting, decompress the wage scale, and ensure sufficient funds are available to cover payments on government-guaranteed loans. The government is also undertaking a number of administrative reforms to strengthen expenditure policy and management, as well as tax and customs administration, and is set to develop a comprehensive anti-corruption program in 2001 to enhance governance.
On the issue of maintaining the Oil Fund, the authorities pledged that strong steps would be taken to ensure close coordination in the planning, execution, and monitoring of the Oil Fund and state budgets. In addition, guidelines for the management and investment of Oil Fund assets were established, designed to ensure both that these assets are managed prudently and that information about the investment of these funds be made public on a regular basis. The authorities have committed to annual external audits of the Oil Fund, the results of which will be made public.
In the first program year, Azerbaijan faces a likely balance of payments financing gap of US$50 million, which will be filled by the proposed arrangements with the IMF and World Bank. The financing gap could rise substantially in 2003 and 2004 depending on oil price movements and developments with regard to the major oil and gas sector projects.
Monetary policy will continue to aim for low inflation, while maintaining a sufficient level of international reserves. For purposes of assessing the adequacy of reserve coverage the reserves of the Azerbaijan National Bank (ANB) will be separated from the balances of the Oil Fund, which will belong to the government. In 2001, gross international reserves are expected to increase, which, combined with the projected decline in the ANB's international liabilities, leaves room for a modest increase in the rate of growth of credit to the economy compared to 2000. No significant change in the real exchange rate is anticipated over the program period. To improve the health and competitiveness of the banking sector, the ANB is in the process of implementing a number of reforms of the commercial banking system. Azerbaijan currently has a moderate trade regime and the authorities are committed to making it more liberal through tariff code reform.
The authorities plan to make no major changes in the social safety net in 2001. Over time, however, they will seek changes to the implicit subsidy system involving utilities and implement a system of explicit subsidies for the truly needy.
The Azerbaijan Republic joined the IMF on September 18, 1992. Its quota2 is SDR 160.9 million (about US$200 million). The Azerbaijan Republic's outstanding use of IMF credits totals SDR 158 million (about US$197 million).
Table 1. Azerbaijan: Selected Economic and Financial Indicators, 1999-2005
1 On November 22, 1999, the IMF's concessional facility for low-income countries, the Enhanced Structural Adjustment Facility (ESAF), was replaced by the Poverty Reduction and Growth Facility (PRGF), and its purposes were redefined. It was intended that PRGF-supported programs will in time be based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a poverty reduction strategy paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies to foster growth and reduce poverty. At this time for the Azerbaijan Republic, pending the completion of a PRSP, a preliminary framework has been set out in an interim PRSP, and a participatory process is underway. It is understood that all policy undertakings in the interim PRSP beyond the first year are subject to reexamination and modification in line with the strategy that is to be elaborated in the PRSP. Once completed and broadly endorsed by the Executive Boards of the IMF and World Bank, the PRSP will provide the policy framework for future reviews under this PRGF arrangement. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½ year grace period on principal payments.2 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 allocation of SDRs.