Press Release No. 13/71

Press Release: Statement at the Conclusion of the IMF's 2013 Article IV Consultation Mission to Azerbaijan

March 12, 2013

An International Monetary Fund (IMF) mission visited Baku during February 27-March 12, 2013, to conduct Article IV consultation discussions. At the conclusion of the discussions, the mission chief for Azerbaijan, Mr. Raja Almarzoqi, made the following remarks in Baku today:

“Through the use of oil revenue, Azerbaijan has become one of the world’s fastest growing economies over the last 10 years. Supported by public spending, growth in the non-oil sector is projected to remain near 9 percent and drive overall GDP growth of 4½ percent in 2013. With increased government spending and the non-oil economy operating at capacity, and unless actions are taken, inflation is set to reach an annual average of 3½ percent.

“The relatively short oil production horizon calls for fast progress toward the government’s 2020 goal of making Azerbaijan a highly competitive economy with sustainable and broad-based growth led by the private sector. This will require decisive changes in the current course of economic policies, focused on improving the efficiency of public spending while reducing its size, strengthening the financial sector, and improving the business climate.

“The mission recommends that the authorities tighten the non-oil fiscal deficit. The 2013 budget is expansionary and creates overheating risks. Plans for continued large deficits in subsequent years, if implemented, would increase Azerbaijan's oil dependence and raise concerns about fiscal sustainability and efficiency. Scaling down government spending, resisting pressures for a mid-year supplementary budget, and guarding against evasion from recent tax amendments would reduce fiscal vulnerabilities while promoting a self-sustaining expansion of private-sector activity. Public investment can be cut without hurting growth if projects are prioritized and their selection and appraisal is done in line with best international practice.

“High oil prices provide an opportunity to cement principles of sound oil revenue management in a new policy framework. This would entail committing to a fiscal rule and strong institutional arrangements to bring public finances to a sustainable level by 2018 in line with the government's objective. Reforms to strengthen non-oil revenue and rationalize public spending would help support the credibility of the new framework.

“In the near term, monetary policy should shift to a more neutral stance and be tightened if signs of demand pressures intensify. The Central Bank of Azerbaijan (CBA) should continue adopting prudential measures to cool down the acceleration in consumer loans. In addition, the CBA should not have any role in future direct lending to the real economy. Over the longer term Azerbaijan would benefit from a more flexible exchange rate as this would improve the economy's ability to absorb shocks. In preparation for a gradual move toward greater flexibility, the authorities need to initiate sequenced reforms to put the pre-conditions in place. Recent IMF technical assistance advice could provide guidance in this process.

“The financial sector needs to be strengthened to support economic diversification. The ongoing capitalization should be used to create a more viable and competitive banking sector. Initiatives to strengthen this sector should be supplemented with supervisory safeguards to guide the capitalization process and contain risks in the system. The restructuring, then downsizing and transparent privatization, of the largest bank IBA will be crucial to contain risks to the stability and efficiency of the banking system. This would also reduce the potentially high costs for the shareholders, including the government.

“The long-run sustainability of the economy requires development of non-oil exports. To supplement the promising “easy service center” (ASAN) and e-government initiatives, the government needs to implement the e-signature, approve a competition code endorsed by an independent international agency, implement the new customs code, and complete WTO accession.

“The mission thanks the authorities for the open and constructive discussions.”