## _cr05259

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### Executive Summary — Overview and high-level outcomes
- Fund-supported programs over the last 10 years helped Azerbaijan make progress in transition to a market economy, build national institutions, and develop technical capacity in policy formulation and implementation.
- On balance, prolonged use of Fund resources by Azerbaijan was justified.
- Key outcomes and indicators (1994–2004):
  - GDP per capita, in US$: 2931,022
  - Non-oil GDP per capita, in US$: 155714
  - Non-oil exports, mln. US$: 1/475512 (note: excluding a one off sale of oil-drilling equipment to a neighboring country)
  - Poverty ratio, in percent: 2/6040.2 (ratios are for 1995 and 2004, respectively)
  - Oil production, in millions barrels per day: 0.20.3
  - Fiscal balance, in percent of GDP: -6.40.6
  - Annual CPI rate, in percent: 1,78710.4
- Progress: poverty declined to 40 percent in 2004 from about 60 percent in 1994.
- Assessment: national institution building largely completed; transition to market economy advanced; inflation reduced; little progress in export diversification.

### Program objectives (SBA, EFF/ESAF, PRGF)
- SBA (November 1995—November 1996) objectives:
  - Reduce annual CPI to 24 percent in 1996 from 1,787 percent in 1994.
  - Resume output growth and reduce fiscal deficit to 2.6 percent of GDP in 1996 from 6.5 percent of GDP in 1994.
  - Structural agenda: banking sector restructuring, price liberalization, alignment of most domestic energy prices with world market prices, trade reform, hardening budget constraints on public enterprises, privatization of small- and medium-size state-owned enterprises.
- Blended EFF/ESAF (December 1996–December 1999) objectives:
  - Gradual increase in real GDP growth to 8 percent by 1999 in a low-inflation environment.
  - Gradual reduction in annual inflation to single digits using the exchange rate as main instrument of controlling base money.
  - Move overall fiscal position toward balance; complete banking sector restructuring; continue fiscal, trade, exchange system liberalization; finish privatization of remaining medium- and large-size SOEs; revitalize energy sector reforms.
- PRGF (July 2001–July 2004) objectives:
  - Increase real growth rates in the non-oil sector to 9 percent in a low-inflation environment.
  - Prepare to tackle challenges from a significant but relatively short-lived increase in oil revenues.
  - Focus on non-oil fiscal deficit, long-term oil revenue management strategy, elimination of implicit energy subsidies, development of targeted social assistance.
  - Initial program targeted a broadly neutral fiscal stance but subsequently accommodated fiscal expansion and large public sector wage increases.

### Macroeconomic performance and shocks
- SBA results:
  - 1996 inflation decreased to about 20 percent (program objective: 24 percent).
  - Real GDP grew by 1.2 percent in 1996.
  - Rapid disinflation driven by significant fiscal deficit reduction and programmed gradual exchange rate appreciation.
  - External arrears problem persisted; non-observance of performance criterion on non-accumulation of external arrears.
- EFF/ESAF period:
  - 12-month CPI inflation fell to 6.7 percent in 1997.
  - Twin shocks—the Russian crisis (1998) and a decline in oil prices—complicated management.
  - Authorities adopted an overly restrictive policy stance contrary to staff advice, causing CPI level decline by almost 11 percent from mid-1998 to mid-1999 and significant reduction in non-oil real GDP growth during 1998–99.
  - Overall real growth exceeded program projections because of a pick-up in oil production.
- PRGF period:
  - Non-oil GDP growth rates higher than projected; growth initially driven by hydrocarbon sector and oil-related construction, transportation, and services, later more broad-based.
  - Oil-related FDI peaked at 40 percent of GDP in 2004.
  - Authorities generally complied with quantitative performance criteria (non-oil fiscal deficit and net international reserves targets).
  - Central bank fixation on a fixed exchange rate; accommodated surge in capital inflows and increased spending of oil revenues at a fixed exchange rate.
  - Consequences in 2004: rapid growth of money and credit; together with an 80-percent wage increase in the public sector since 2003, inflation rose to double digits by 2004.

### Fiscal policy, definitions, and sustainability
- Initial conditions: cash fiscal deficits at 6.5 percent of GDP in 1994; government unable to pay wages, pensions, utility bills, and external debt obligations on time due to poor revenue performance.
- SBA and EFF/ESAF fiscal outcomes:
  - Fiscal deficit targets met for most test dates.
  - Under SBA: decline from 6.5 percent of GDP (1994) to 2.6 percent in 1996 mainly via expenditure compression; revenue targets not met.
  - Under EFF/ESAF: 1997 fiscal deficit reduced to 1.7 percent of GDP in line with conditionality, but both revenue and expenditure were above targets.
  - Expenditure arrears were recurrent but improved over time.
- Definition shifts:
  - SBA/EFF/ESAF: fiscal deficit relative to GDP, including oil bonuses and privatization receipts.
  - PRGF transition: first two years same methodology; subsequently targeted non-oil fiscal deficit relative to non-oil GDP by excluding all oil revenues (including SOCAR and AIOC, and returns on Oil Fund assets).
  - Limitations: explicit/implicit energy subsidies not reflected; some non-oil revenues from SOCAR included; interest expenditure should have been excluded; inadequate monitoring of SOCAR; absence of consistent historical recompilation.
- PRGF-era performance and composition:
  - All non-oil fiscal deficit targets met under PRGF.
  - Improved non-oil revenue performance, notably VAT.
  - Capital spending increased relative to GDP.
  - Spending on health and education grew in real terms by 14 percent per year on average.
  - Wage bill to GDP ratio on increasing trend; public sector wages increased by about 80 percent since 2003.
  - Non-oil deficit (program definition) increased from 10 percent of non-oil GDP in 2001 to 13 percent in 2004, and projected to increase further to 15.4 percent in 2005.
  - SOCAR retained increasing share of oil revenues and maintained tax arrears; reportedly used additional oil revenues to finance investment, contributing to larger consolidated public sector demand than intended.
- Sustainability assessment and projections:
  - Non-oil primary fiscal deficit (as defined in Box 1) projected at about 30 percent of non-oil GDP in 2005.
  - This projection lies between a conservative scenario based on a $30 per barrel oil price and a baseline scenario based on the most recent WEO oil prices (as of the source).
  - Non-oil primary fiscal deficit needs to start to decline in the medium term once converged with sustainable permanent income on oil wealth.

### Monetary and exchange rate policies (chronology and outcomes)
- Long-term pattern: de facto fixed or crawling pegs to the dollar; passive monetary policy contributed to inflation/deflation cycles amid large external shocks.
- 1995–97: gradual smooth nominal appreciation versus the dollar (cumulative nominal appreciation 16 percent); inflation below program projections despite breaches of indicative base money targets.
- 1998 Russian crisis: exchange rate fixed; massive capital outflows and banking confidence shocks led to contraction in monetary aggregates and deflation; program NIR targets not met partly because central bank did not let exchange rate depreciate.
- May 1999–June 2002: 7 percent step devaluation in May 1999; June 1999–June 2002 exchange rate allowed to depreciate by 10 percent along smooth path (de facto crawling peg), helping stop deflation.
- Mid-2002–February 2005: de facto fixed exchange rate vis-à-vis the dollar within +/-1 percent band; initially consistent with low inflation, later central bank accommodated capital inflows and oil spending leading to money and credit growth and rising inflation.
- 2005 developments:
  - Staff insisted on allowing the exchange rate to appreciate and sterilizing part of FX inflows when inflation continued to rise.
  - Authorities shifted to an appreciating crawl in early 2005 and increased sterilization; pace initially slow.
  - 12-month CPI rate reached 15.5 percent in April 2005 (above initial program medium-term inflation objective of 2.5 percent and revised program target for 2005 of 5 percent).
  - Administered energy price increases in late 2004–early 2005 added 1.5 percentage points to headline inflation.

### External position and oil-related developments
- Oil production and projections:
  - Oil production was 0.3 million barrels per day in 2004.
  - Projected to increase to about 1.3 million barrels per day in 2011, and to decline thereafter.
- External sector:
  - No balance of payments need in the medium term, but macroeconomic risks arise from rapidly increasing oil revenues and capital inflows.
  - Current account deficit fluctuated in the range of 1 to 35 percent of GDP during 1995–2004.
  - Gross official reserves increased to about $1 billion (about 3 ½ months of non-oil-related imports) at end-March 2005.
  - Government accumulated about $1 billion in the Oil Fund by end-March 2005.
  - External debt amounted to 19 percent of GDP at end-2004, with a large portion concessional.
  - Performance criteria on limiting non-concessional external borrowing were met with comfortable margins.
- Competitiveness and export diversification:
  - Exchange rate policy at times not supportive of export diversification.
  - Non-oil exports declined by 23 percent in dollar terms from 1994 to 1997; plummeted further after Russian crisis and fixed exchange rate maintenance.
  - Mid-1999–mid-2002 REER declined by 30 percent (depreciating crawl) and flattened under de facto fixed exchange rate (mid-2002–February 2005); real depreciation contributed to pick-up in non-oil export growth.
  - By 2004 non-oil exports were only 8 percent above their 1994 level in dollar terms.

### Structural reforms, governance, and institutional developments
- Fiscal structural reforms:
  - Treasury established; tax and customs administrations reorganized; a single treasury account created; new tax code and new budget system law passed.
  - Implementation delays and uneven enforcement of laws/regulations.
- Governance and anti-corruption:
  - Emphasis on governance in conditionality; law on chamber of accounts approved.
  - Persistent reports of corruption, especially in customs; chamber of accounts lacks capacity to assure transparency.
- Oil revenue management:
  - Oil Fund established in 1999; operations generally compliant with transparent fiscal management principles.
  - Only government’s share of PSA oil revenues deposited in Oil Fund; SOCAR tax payments and PSA income taxes made to Treasury—split inconsistent with program focus on non-oil deficit.
  - 2004: authorities adopted long-term oil revenue management strategy targeting constant real spending out of oil wealth.
  - Azerbaijan issued an Extractive Industry Transparency Initiative report in early 2005.
- Non-core fiscal reforms:
  - Targeted social assistance and public sector employment reform included in programs; some progress in targeted assistance for utility payments and public sector employment measures.
- Monetary and financial sector reforms:
  - New central bank law, new commercial banks law, and regulations on credit auctions, interbank and FX markets, and open market operations approved; limited actual use of indirect instruments.
  - Broad money-to-GDP ratio increased to 17 percent of GDP in 2004 from 12 percent in 1995.
  - Banking supervision strengthened; banking system restructuring partial and delayed; of four large public banks only IBA emerged as viable after 1995 crisis; three banks consolidated into one in early 2000 and became fully operational only in 2004.
  - Lack of competition allowed IBA to strengthen market power; smaller private banks not effective competitive pressure.
- IBA privatization:
  - Delays and resistance; by late 2004 negotiations reached dead-end due to management resistance and waning political support.
- Price liberalization, privatization, business environment:
  - Privatization of small-size enterprises completed by 1997; most medium- and some large-size SOEs privatized late 1990s–early 2000s using voucher scheme; land reform completed late 1990s.
  - Corruption and business environment problems persist; 2004 Transparency International report ranks Azerbaijan 140 out of 145 countries.
- Energy sector:
  - Progress fell short of expectations; inefficient resource allocation persisted.
  - Structural benchmarks and performance criteria related to SOCAR and public enterprises not sufficiently effective.
  - Performance criterion on SOCAR’s budget approval introduced only at end-December 2004.
  - Initial PRGF objective of largely eliminating energy subsidies not achieved; inefficient non-targeted energy subsidies crowded out social and investment spending.
- Technical assistance:
  - Since 1995 Fund TA departments participated in more than 80 missions; resident and peripatetic advisors helped build technical capacity.
- Collaboration with other IFIs:
  - Close collaboration with World Bank, EBRD, ADB, and bilateral donors; roles allocated (World Bank lead on privatization, private sector development, infrastructure, regulatory reforms).

### Compliance, implementation record, and assessment of outcomes
- Implementation record:
  - SBA (1995–96) successfully implemented with all reviews completed.
  - EFF/ESAF (1996–99) and PRGF (2001–04) had mixed records; both extended by one year due to review delays; EFF/ESAF expired without last review completed; PRGF had reduced access request due to lack of time for sixth review.
- Compliance with structural performance criteria and benchmarks:
  - Mixed compliance; delays, many prior actions, and a sizable share of waivers.
  - Waivers for structural performance criteria: 60 percent.
  - Adequate ownership in areas such as privatization, foreign exchange and trade liberalization, and some fiscal reforms led to better compliance.
  - Weak ownership caused delays in IBA privatization and energy tariff policy revisions.
- Outcomes and indicators:
  - Growth resumed in 1995 and spilled from oil to non-oil sectors, contributing to poverty decline.
  - External debt ratios reduced.
  - Accumulation of about $1 billion in gross official reserves (3 ½ months of non-oil related imports) and $1 billion in Oil Fund assets by end-March 2005.
  - Non-oil primary fiscal balance broadly consistent with long-run objective of constant real spending out of oil wealth.
  - Recent increase in inflation to double digits is worrisome but not hyperinflation as in 1994.
- Program design issues and uncertainties:
  - Quantitative projections subject to great uncertainty; frequent revisions due to transition complexity, unreliable data, oil price volatility, hydrocarbon investments, and external shocks.
  - Despite compliance with 94 percent of quantitative performance criteria, Azerbaijan experienced pronounced deflation/inflation cycle and difficulties in fiscal policy implementation.
  - PRGF conditionality did not ensure effective control on consolidated public sector demand; conditionality on SOCAR’s payments was insufficient.
  - Authorities and staff were late in acknowledging incipient inflationary pressures in 2004; appropriate exchange rate policy advice delayed.

### Lessons, medium-term risks, and policy recommendations
- Principal macroeconomic lesson:
  - Fixed exchange rate pegs combined with underdeveloped monetary tools and weak control over consolidated public finances exacerbate vulnerabilities to large exogenous shocks.
- Medium-term challenges:
  - Ensure sustainable non-oil growth, export diversification, and poverty reduction in a stable macroeconomic environment as oil revenues increase substantially.
- Important macroeconomic risks:
  - Double-digit inflation can persist if authorities delay policy response and increase spending, including wages, in the run-up to the November 2005 Parliamentary elections.
  - Deterioration in macroeconomic situation or slowdown in structural reforms could reverse poverty reduction and curtail non-oil growth.
- Recommended policy priorities for a successor program:
  - Successor Fund arrangement recommended despite no medium-term balance of payments need, given macroeconomic risks and need to avoid resource revenue curse.
  - Greater exchange rate flexibility when appropriate; development of monetary policy instruments; tighter control of consolidated public sector positions.
  - Prudent fiscal management focused on the non-oil fiscal deficit within a long-term oil revenue management strategy; elimination of implicit energy subsidies; development of targeted social assistance.
  - Strict monitoring of SOCAR’s revenues and expenditures; improve quality of expenditure and link budgets to SPPRED and MTEF priorities.
  - Financial sector: foster competition, reduce IBA market power, lower barriers to entry, develop capital markets and supervision.
  - Institutional and sectoral reforms: accelerate anti-corruption enforcement, pass investment and anti-monopoly laws, continue energy and transportation reforms.
- Recommended program vehicle and sequencing:
  - A precautionary Stand-By Arrangement (SBA) appears most appropriate; another PRGF not advised because no balance of payments need and expected GNP per capita increase.
  - Preconditions for a new arrangement: clear demonstration of strong ownership through concrete policy steps, including sustained efforts to reduce inflation, activation of indirect monetary instruments, and strengthened monitoring of SOCAR.
  - Graduation decision to be made upon completion of recommended precautionary SBA; consideration of another precautionary arrangement if authorities seek signaling effect.
- Executive Board view:
  - Directors felt a successor low-access precautionary arrangement or non-financial support would be beneficial; future program focus should include coherent monetary and exchange rate framework, prudent oil wealth management, enhanced SOE monitoring, banking reforms, and improvements to business environment and governance; strong ownership required.

*Source: IMF Ex Post Assessment of Azerbaijan’s Longer-Term Program Engagement (Public Information Notice No. 05/99 and associated report excerpts).*

### Executive Summary ......................................................................................................

### Executive Summary

### Overview and high-level outcomes
- Fund-supported programs over the last 10 years helped Azerbaijan make progress in transition to a market economy, build national institutions, and develop technical capacity in policy formulation and implementation.
- On balance, prolonged use of Fund resources by Azerbaijan was justified.
- Key outcomes and indicators (1994–2004):
  - GDP per capita, in US$: 2931,022
  - Non-oil GDP per capita, in US$: 155714
  - Non-oil exports, mln. US$: 1/475512 (note: excluding a one off sale of oil-drilling equipment to a neighboring country)
  - Poverty ratio, in percent: 2/6040.2 (ratios are for 1995 and 2004, respectively)
  - Oil production, in millions barrels per day: 0.20.3
  - Fiscal balance, in percent of GDP: -6.40.6
  - Annual CPI rate, in percent: 1,78710.4
- Progress: poverty declined to 40 percent in 2004 from about 60 percent in 1994.
- The assessment concludes national institution building has been largely completed, transition to a market economy has advanced, and inflation has been reduced. Little progress occurred in export diversification.

### Program objectives (SBA, EFF/ESAF, PRGF)
- SBA (November 1995—November 1996) objectives:
  - Reduce annual CPI to 24 percent in 1996 from 1,787 percent in 1994.
  - Resume output growth and reduce fiscal deficit to 2.6 percent of GDP in 1996 from 6.5 percent of GDP in 1994.
  - Structural agenda: banking sector restructuring, price liberalization, alignment of most domestic energy prices with world market prices, trade reform, hardening budget constraints on public enterprises, privatization of small- and medium-size state-owned enterprises.
- Blended EFF/ESAF (December 1996–December 1999) objectives:
  - Gradual increase in real GDP growth to 8 percent by 1999 in a low-inflation environment.
  - Gradual reduction in annual inflation to single digits using the exchange rate as main instrument of controlling base money.
  - Move overall fiscal position toward balance; complete banking sector restructuring; continue fiscal, trade, exchange system liberalization; finish privatization of remaining medium- and large-size SOEs; revitalize energy sector reforms.
- PRGF (July 2001–July 2004) objectives:
  - Increase real growth rates in the non-oil sector to 9 percent in a low-inflation environment.
  - Prepare to tackle challenges from a significant but relatively short-lived increase in oil revenues.
  - Focus on non-oil fiscal deficit, long-term oil revenue management strategy, elimination of implicit energy subsidies, development of targeted social assistance.
  - Initial program targeted a broadly neutral fiscal stance but subsequently accommodated fiscal expansion and large public sector wage increases.

### Macroeconomic performance and shocks
- SBA results:
  - 1996 inflation decreased to about 20 percent (program objective: 24 percent).
  - Real GDP grew by 1.2 percent in 1996.
  - Rapid disinflation was driven by significant fiscal deficit reduction and programmed gradual exchange rate appreciation.
  - External arrears problem persisted; non-observance of performance criterion on non-accumulation of external arrears.
- EFF/ESAF period:
  - 12-month CPI inflation fell to 6.7 percent in 1997.
  - Twin shocks—the Russian crisis (1998) and a decline in oil prices—complicated management.
  - Authorities adopted an overly restrictive policy stance contrary to staff advice, leading to a decline in the CPI level by almost 11 percent from mid-1998 to mid-1999 and a significant reduction in non-oil real GDP growth during 1998–99.
  - Overall real growth exceeded program projections because of a pick-up in oil production.
- PRGF period:
  - Non-oil GDP growth rates were higher than projected; growth initially driven by hydrocarbon sector and oil-related construction, transportation, and services, later becoming more broad-based.
  - Oil-related FDI peaked at 40 percent of GDP in 2004.
  - Authorities generally complied with quantitative performance criteria (non-oil fiscal deficit and net international reserves targets).
  - Continued fixation on a fixed exchange rate regime; central bank accommodated surge in capital inflows and increased spending of oil revenues at a fixed exchange rate.
  - Consequences in 2004: rapid growth of money and credit; together with an 80-percent wage increase in the public sector since 2003, inflation rose to double digits by 2004.

### Fiscal policy and program design issues
- Initial conditions: cash fiscal deficits were running at 6.5 percent of GDP in 1994; government unable to pay wages, pensions, utility bills, and external debt obligations on time due to poor revenue performance.
- Fiscal consolidation under early programs was key to disinflation; however, later loosening of fiscal and income policies contributed to inflationary pressures.
- PRGF design and implementation:
  - The initial PRGF targeted broadly neutral fiscal stance but accommodated fiscal expansion.
  - Fiscal expansion during 2002–03 partly attributable to government financing of investment in the oil and gas sectors; by end of PRGF fiscal expansion was in part justified by sustainability of larger non-oil fiscal deficits in the longer run.
- Macroeconomic lesson: a combination of exchange rate pegs, underdeveloped monetary policy instruments, and lack of effective control on the consolidated public sector position is not conducive to maintaining macroeconomic stability in the presence of frequent, large exogenous shocks.

### Structural reforms and conditionality
- Achievements:
  - Significant progress in fiscal management.
  - Privatization of small- and medium-size enterprises.
  - Trade and price liberalization progressed.
- Shortcomings:
  - Slower-than-expected advances in financial and energy sector reforms, and in improvements in business environment and governance.
  - Structural reform conditionality increasingly focused on Fund core reform areas and critical measures in non-core areas.
  - While conditionality design was broadly adequate, stricter conditionality or follow-up structural benchmarks would have been needed in areas at risk of nominal implementation.
- Implementation record:
  - SBA (1995–96) was successfully implemented with all reviews completed.
  - EFF/ESAF (1996–99) and PRGF (2001–04) had mixed implementation records; both arrangements were extended by one year owing to long delays in completing reviews.
  - The EFF/ESAF expired without completion of the last review because of insufficient progress in structural reforms. Under the PRGF, authorities requested reduced access due to lack of time for completing the sixth review.

### External position and oil-related developments
- Oil production and projections:
  - Oil production was 0.3 million barrels per day in 2004.
  - Projected to increase to about 1.3 million barrels per day in 2011, and to decline thereafter.
- External sector:
  - No balance of payments need in the medium term, yet macroeconomic risks arise from rapidly increasing oil revenues and capital inflows.
  - Gross international reserves and current account outcomes varied over program years (see program figures and tables).

### Lessons and policy recommendations (forward-looking)
- Principal macroeconomic lesson:
  - Fixed exchange rate pegs combined with underdeveloped monetary tools and weak control over consolidated public finances exacerbate vulnerabilities to large exogenous shocks.
- To manage the medium-term challenge of ensuring sustainable non-oil growth, export diversification, and poverty reduction in a stable macroeconomic environment as oil revenues increase substantially, the report:
  - Recommends a successor Fund arrangement despite no medium-term balance of payments need, given the macroeconomic nature of risks and the need to continue Fund core reforms that will help Azerbaijan avoid the resource revenue curse.
  - Implies the need for: greater exchange rate flexibility when appropriate; development of monetary policy instruments; tighter control of consolidated public sector positions; prudent fiscal management focused on the non-oil fiscal deficit within a long-term oil revenue management strategy; elimination of implicit energy subsidies; development of targeted social assistance.

*Source: Executive Summary.*

### 11.      During the SBA and EFF/ESAF, fiscal deficit targets were met for most test

### _cr05259 - 11.      During the SBA and EFF/ESAF, fiscal deficit targets were met for most test

### Fiscal outcomes under SBA and EFF/ESAF
- Fiscal deficit targets were met for most test dates.
- Under the SBA:
  - Targeted decline in the cash fiscal deficit from 6.5 percent of GDP in 1994 to 2.6 percent in 1996 was mainly achieved through larger-than-expected expenditure compression; revenue targets were not met.
- Under the EFF/ESAF:
  - In 1997 the fiscal deficit was reduced to 1.7 percent of GDP, in line with program conditionality, but both revenue and expenditure were above targets.
- Following the Russian crisis and the fall in oil prices during 1998-99:
  - Programs accommodated higher fiscal deficit targets.
  - Actual fiscal deficits were somewhat tighter than assumed under the program in 1998 and in the first half of 1999, reflecting the authorities’ preference for a restrictive policy stance.
- Expenditure arrears:
  - Were a recurrent issue under SBA and EFF/ESAF.
  - Situation gradually improved due to better expenditure management, strengthening of revenue administration, and stricter conditionality on expenditure arrears.

### Definitions of the Fiscal Deficit (Box 1)
- SBA and EFF/ESAF targeted the fiscal deficit relative to GDP, including oil bonuses paid by foreign oil companies and privatization receipts in financing.
- PRGF transition:
  - First two years: same methodology as SBA/EFF/ESAF.
  - Subsequently: PRGF targeted the non-oil fiscal deficit relative to non-oil GDP by excluding from total government revenues all oil revenues, including those originating from SOCAR and the AIOC, and returns on Oil Fund assets.
  - Rationale: the non-oil primary balance provides a better measure of the fiscal stance and long-run fiscal sustainability in oil-producing countries.
- Limitations of the program definition of the non-oil fiscal deficit:
  - (i) Explicit and implicit energy subsidies were not reflected despite subsidy from poor collection of utility payments being made explicit in the budget starting from 2002.
  - (ii) Oil revenues included some non-oil revenues paid by SOCAR (excises, VAT, profit taxes on downstream activities) because the accounting framework made it impractical to single out separate tax items.
  - (iii) Interest expenditure should have been excluded from the non-oil fiscal deficit.
  - Absence of an effective mechanism to ensure SOCAR’s activities (revenues, expenditure, tax payments) are properly monitored limited the relevance of the program definition.
  - Lack of recompilation of historical numbers based on a consistent methodology made it difficult to analyze justification for the fiscal stance in staff reports.

### PRGF-era fiscal performance and composition
- Compliance with program fiscal targets under the PRGF:
  - Satisfactory: all non-oil fiscal deficit targets were met under the PRGF.
  - Improved non-oil revenue performance, in particular on account of VAT.
  - Government used expenditure sequestration only in 2001 owing to revenue shortfalls.
- Spending patterns:
  - Capital spending increased relative to GDP.
  - Spending on health and education grew in real terms by 14 percent per year on average.
  - Links among the annual budget, the SPPRED, and Medium-Term Expenditure Framework (MTEF) remained weak, reflecting implementing capacity limitations.
  - Wage bill to GDP ratio was on an increasing trend; public sector wages increased by about 80 percent since 2003.
  - Some wage increases occurred during the program interruption in 2004; the program for 2005 accommodated significant public sector wage increases in the context of the 2005 budget.
- Control over fiscal policy weakened somewhat under the PRGF owing to ineffective conditionality on SOCAR’s oil revenue:
  - Non-oil deficit (program definition) increased from 10 percent of non-oil GDP in 2001 to 13 percent in 2004, and projected to increase further to 15.4 percent in 2005.
  - Developments in the non-oil deficit (program definition) did not accurately capture the fiscal stance evolution due to exclusion of energy subsidies and SOCAR’s spending of an increasing share of oil revenues.
  - SOCAR kept an increasing share of oil revenues consistent with the current tax regime and maintained tax arrears; reportedly used additional oil revenues to finance investment, contributing to a larger demand impulse from the consolidated public sector than intended.

### Sustainability assessment and projections
- Non-oil primary fiscal deficit (as defined in Box 1):
  - Projected at about 30 percent of non-oil GDP in 2005.
  - This projection lies between:
    - A conservative scenario based on a $30 per barrel oil price.
    - A baseline scenario based on the most recent WEO oil prices (as of the source).
  - The non-oil primary fiscal deficit would need to start to decline in the medium term once its level has converged with the sustainable permanent income on oil wealth.

### Monetary and exchange rate policies
- Exchange rate regime and monetary policy:
  - For most of the period, exchange rate had de facto fixed or crawling pegs to the dollar; monetary policy remained passive. This contributed to inflation/deflation cycles amid large external shocks.
- 1995–97:
  - Central bank pursued gradual smooth nominal appreciation versus the dollar (appreciating crawl) to achieve disinflation.
  - Cumulative nominal appreciation vis-à-vis the dollar reached 16 percent during this period.
  - Achieved inflation rates were below program projections despite breaches of indicative base money targets; accumulation of NIR was the main counterpart to rapid base money growth.
- 1998 Russian crisis:
  - Exchange rate fixed; combined with massive capital outflows and banking confidence shocks led to contraction in monetary aggregates and deflation.
  - Program NIR targets were not met partly because the central bank did not follow staff advice to let the exchange rate depreciate to stop deflation.
- May 1999–June 2002:
  - Central bank reduced FX interventions in May 1999, leading to a seven percent step devaluation.
  - June 1999–June 2002: exchange rate allowed to depreciate by 10 percent along a smooth path (de facto crawling peg), helping stop deflation.
- Mid-2002–February 2005:
  - Move to a de facto fixed exchange rate vis-à-vis the dollar; from mid-2002 to February 2005 the nominal exchange rate vis-à-vis the dollar fluctuated within a +/-1 percent band.
  - Initially consistent with low inflation; once 12-month CPI exceeded 2.5 percent by mid-2002, the central bank discontinued gradual nominal depreciation and fixed the exchange rate.
  - During 2002–03 staff supported the exchange rate anchor; by 2004 the central bank accommodated increasing capital inflows and higher spending of oil revenues at a fixed exchange rate.
  - Resulting money and credit growth were initially interpreted as financial deepening; rising inflation ascribed to one-off supply-side factors. Staff did not recommend immediate changes in response to significant inflation increase by October 2004; consensus that exchange rate would need modest appreciation in 2005.
- 2005 developments:
  - Staff insisted on allowing the exchange rate to appreciate and sterilizing part of FX inflows when inflation continued to rise.
  - Authorities shifted to an appreciating crawl in early 2005 and increased sterilization; the pace of appreciation was initially slow.
  - 12-month CPI rate reached 15.5 percent in April 2005, well above the initial program medium-term inflation objective of 2.5 percent and the revised program target for 2005 of 5 percent.
  - Administered energy price increases implemented in late 2004–early 2005 added 1.5 percentage points to headline inflation.

### External position
- External strengthening under IMF arrangements:
  - External position gradually strengthened mainly due to increasing oil export volumes and prices.
  - Current account deficits deviated from program projections given volatile oil prices and FDI in the oil sector and FDI-related imports; current account deficit fluctuated in the range of 1 to 35 percent of GDP during 1995–2004.
  - Oil-related imports financed by FDI and rising oil prices during 2000–04 substantially strengthened external position.
  - Gross official reserves increased to about $1 billion (about 3 ½ months of non-oil-related imports) at end-March 2005.
  - Government accumulated about $1 billion in the Oil Fund by end-March 2005.
  - Authorities pursued a cautious external debt strategy; external debt amounted to 19 percent of GDP at end-2004, with a large portion concessional.
  - Performance criteria on limiting non-concessional external borrowing were met with comfortable margins.
- Competitiveness and export diversification:
  - At times exchange rate policy was not supportive of export diversification; staff and authorities’ optimistic judgment on competitiveness and structural reform momentum proved overly optimistic in retrospect.
  - Nominal appreciation under SBA and EFF/ESAF was not considered by staff to undermine competitiveness; non-oil exports declined by 23 percent in dollar terms from 1994 to 1997.
  - After the Russian crisis and maintenance of a fixed exchange rate, non-oil exports plummeted further.
  - Mid-1999–mid-2002 real effective exchange rate (REER) declined by 30 percent (during depreciating crawl) and subsequently flattened under de facto fixed exchange rate (mid-2002–February 2005); real depreciation contributed to pick-up in non-oil export growth.
  - By 2004 non-oil exports were only 8 percent above their 1994 level in dollar terms.

### Structural reforms (introductory note from source)
- The document transitions to a section titled "Fiscal structural reforms" following the monetary, exchange rate, and external position discussions.

*Source: _cr05259 - 11.      During the SBA and EFF/ESAF, fiscal deficit targets were met for most test*

### 23.      Despite implementation delays, there was substantial progress in fiscal reforms

### 23.      Despite implementation delays, there was substantial progress in fiscal reforms

### Fiscal reform implementation and outcomes
- SBA and EFF/ESAF conditionality focused on establishment of the treasury, reorganization of the tax and customs administrations, and improvements to expenditure management.
- Under the PRGF:
  - Reorganization of the tax and customs administrations were largely completed.
  - A single treasury account was established.
  - A new tax code and a new budget system law were passed.
- Implementation timing: many reforms were implemented with delays; implementation of laws and regulations related to fiscal management was uneven.

### Governance in fiscal management and anti-corruption
- Strong emphasis on governance in program conditionality.
- Under the PRGF:
  - Performance criteria, benchmarks, and prior actions implemented to improve governance in customs and government procurement.
  - A law on the chamber of accounts (the government’s supreme audit institution) was approved, providing a legal basis for improved governance.
- Remaining issues:
  - Surveys in the local press continue to report important corruption issues in connection with government operations, in particular in customs.
  - The chamber of accounts does not have capacity to assure transparency in fiscal operations.

### Preparation for management of oil revenues
- Oil Fund established in 1999 to preserve oil wealth for future generations.
- Design of Oil Fund operations is generally compliant with principles of transparent fiscal management.
- Treatment of oil revenues:
  - Only the government’s share of oil revenues from production sharing agreements (PSA) is deposited in the Oil Fund.
  - SOCAR’s tax payments and PSA’s income taxes are made directly to the Treasury.
  - This split is not fully consistent with the program focus on the non-oil deficit; staff urged consolidating all oil revenues in the Oil Fund, but the government resisted.
- 2004: authorities adopted a long-term oil revenue management strategy targeting constant real spending out of oil wealth.
  - Strategy focuses fiscal policy implementation on the non-oil primary balance and calls for avoiding sharp changes in the fiscal stance.
  - Authorities have started to approve a medium-term path for non-oil deficits in the context of the annual budget process.
- Azerbaijan was the first oil-producing country to issue an Extractive Industry Transparency Initiative report in early 2005.

### Non-core fiscal reform areas included in programs
- Targeted social assistance and public sector employment reform were included in EFF/ESAF and PRGF measures and conditionality due to their critical importance for program objectives.
- Progress:
  - Some reform of central government administration.
  - Establishment of some targeted assistance for utility payments.
  - Measures related to large segments of public sector employment, including health and education, were included in conditionality and implemented under the EFF/ESAF.
  - Structural benchmark for end-March 2005 envisaged preparation of a timetable for public sector employment reform under the PRGF, which was implemented.

### Exchange and trade system reforms
- Substantial progress in trade and exchange liberalization under the three Fund arrangements.
- Structural performance criteria and benchmarks were appropriately sequenced and largely implemented in a timely manner.
- Under EFF/ESAF:
  - All exchange restrictions under Article XIV were removed.
  - Substantial progress made towards adoption of Article VIII status.
- Under the PRGF: authorities accepted obligations of Article VIII, Sections 2(a), 3, and 4.
- Current trade system: free of non-tariff restrictions and has a relatively low average tariff of 6 percent.

### Monetary and exchange rate framework; financial sector reforms
- Laws and regulations approved to develop indirect instruments of monetary policy and strengthen central bank independence, including:
  - A new central bank law.
  - A new commercial banks law.
  - Central bank regulations on credit auctions, the interbank credit and foreign exchange markets, and open market operations with treasury securities.
- Actual use of indirect instruments of monetary policy has been limited.
- Financial sector outcomes:
  - Broad money-to-GDP ratio increased to 17 percent of GDP in 2004 from 12 percent in 1995.
  - SBA and EFF/ESAF, and World Bank SAL, focused on strengthening banking supervision and banking system restructuring.
  - Significant advances in improving banking supervision and its enforcement; contributed to exit of smaller non-viable banks.
  - Banking system restructuring was implemented only partially and with substantial delays.
  - Of four large public banks, only International Bank of Azerbaijan (IBA) emerged as a viable bank following the 1995 crisis; restructuring of the other three banks completed in early 2000 when they were consolidated into one bank, which started to operate as a full-fledged bank only in 2004.
  - Lack of competition allowed IBA to strengthen market power substantially; smaller private banks were not able to exercise effective competition pressures.

### IBA privatization and banking sector policy conditionality
- Implementation of conditionality on IBA privatization (with EBRD participation) was delayed repeatedly due to resistance from vested interest groups controlling IBA.
- By late 2004, negotiations on IBA privatization reached a dead-end due to insufficient cooperation from IBA management and waning political support.
- Program conditionality focus on reducing entry barriers and stimulating smaller banks is appropriate but was included too late, partly because of unrealistic expectations on IBA privatization.

### Price liberalization, privatization, and business environment
- Significant increase in size of the private sector achieved under Fund programs.
  - Privatization of small-size enterprises completed by 1997.
  - Most medium- and some large-size state-owned enterprises privatized in late 1990s to early 2000s using a voucher scheme.
  - Land reform completed in the late 1990s.
- Corruption and business environment:
  - Corruption continues to hamper economic development.
  - Issues related to corruption and business environment included in SBA and EFF/ESAF conditionality, but excluded from structural benchmarks and performance criteria under the PRGF due to World Bank involvement.
  - Many laws and regulations passed (including anti-corruption law and streamlined business registration procedures), but actual implementation limited, in part owing to lack of commitment from highest political authorities.
  - 2004 Transparency International report ranks Azerbaijan 140 out of 145 countries included in the survey.

### Energy sector reforms and fiscal implications
- Progress in energy sector reform fell short of program expectations, maintaining inefficient resource allocation.
- Structural benchmarks and performance criteria related to monitoring and auditing of SOCAR and other public enterprises were not sufficiently effective due to “nominal” implementation.
- Performance criterion on SOCAR’s budget approval was introduced only at end-December 2004, despite SOCAR’s critical macroeconomic importance.
- Despite some reduction in energy subsidies through energy price increases and better collection on energy tariffs, the initial PRGF objective of largely eliminating energy subsidies has not been achieved.
- Consequence: social and investment spending was crowded out by inefficient non-targeted energy subsidies.

### Technical assistance (TA)
- Since 1995, Fund TA departments (FAD, LEG, MFD, and STA) participated in more than 80 missions.
- A number of resident and peripatetic advisors assisted authorities in building technical capacity.
- TA contributed to development of technical capacity in policy formulation and implementation virtually from scratch.
- Track record in implementing Fund TA recommendations mirrored trends in compliance with structural conditionality to which they were often linked.

### Collaboration with World Bank and other IFIs
- Close collaboration between the Fund and the World Bank over the last 10 years.
  - World Bank led in privatization, private sector development, infrastructure, sectoral policies, and regulatory reforms.
  - In shared responsibility areas, close collaboration and mutually reinforcing conditionality on energy tariff adjustments, utilities reforms, fiscal management, banking legislation and supervision, and priorities in financial sector reforms in FSAP context.
- Some Fund conditionality (e.g., budget formulation and expenditure management) could have been streamlined given World Bank involvement.
- Fund took lead where World Bank assigned low priority or saw need for longer implementation periods (e.g., public sector employment reform; targeted social assistance).
- Fund staff collaborated closely with EBRD, Asian Development Bank and bilateral donors on structural reforms in financial sector, restructuring of energy companies, and fiscal management.

### Assessment of outcomes and program conditionality
- On balance, prolonged program engagement with Azerbaijan appears justified and beneficial.
- Macroeconomic outcomes and indicators:
  - Growth resumed in 1995 and gradually spilled over from oil to non-oil sectors, contributing to significant decline in poverty.
  - External debt ratios reduced.
  - Accumulation of about $1 billion in gross official reserves (3 ½ months of non-oil related imports) and $1 billion in Oil Fund assets by end-March 2005.
  - Non-oil primary fiscal balance broadly consistent with long-run objective of keeping spending out of oil wealth constant in real terms.
  - Recent increase in inflation to double digits is worrisome, but country does not face hyperinflation as in 1994.
- Structural reforms advanced unevenly:
  - Strengthening of national institutions (central bank, tax administration, ministry of finance).
  - Significant progress in fiscal reforms, privatization of small- and medium-size enterprises, and trade and price liberalization jointly with World Bank.
  - Slow progress in financial and energy sector reforms, and problems with business environment and governance raise doubts over medium-term growth sustainability in non-oil sectors.
- Program design and uncertainty:
  - Quantitative projections were subject to great uncertainty; major macroeconomic parameters and policy recommendations were frequently revised.
  - Uncertainties stemmed from transition complexity, lack of reliable data, oil price volatility and hydrocarbon investments, and external shocks (e.g., war in Chechnya and the Russian crisis).
  - Exogenous shocks were accommodated through adjustors to quantitative performance criteria, program reviews, changes in definitions of performance criteria, and augmented financing (e.g., CCFF).
  - Despite compliance with 94 percent of quantitative performance criteria, Azerbaijan experienced a pronounced deflation/inflation cycle and difficulties in fiscal policy implementation.
- Inflation target deviations and program design issues:
  - Deflation under EEF/ESAF mainly attributable to authorities not following staff advice on exchange rate policy in response to 1998–99 shocks.
  - Significant increase in inflation under PRGF occurred despite compliance with most quantitative performance criteria and agreement on exchange rate anchor, suggesting program design deficiencies.
  - Authorities and staff were late in acknowledging incipient inflationary pressures in 2004; appropriate exchange rate policy advice was delayed.
  - Program assumption that a “modest” exchange rate appreciation in 2005 would offset inflationary effects of fiscal relaxation and large public sector wage increases appears overly optimistic.
  - PRGF conditionality did not ensure effective control on consolidated public sector demand.
  - Even when inflationary pressures were diagnosed, authorities hesitated to appreciate the nominal exchange rate beyond a “modest” level due to concerns about competitiveness and banking system stability.
- Fiscal target design issues:
  - Recurrent expenditure arrears under SBA and EFF/ESAF undermined relevance of deficit targets; situation improved as conditionality on expenditure arrears was strengthened under EFF/ESAF.
  - Problems with oil revenue collection persisted; ineffective conditionality on oil revenues and failure to monitor SOCAR’s activities did not help.
  - PRGF conditionality could have included a quantitative performance criterion on SOCAR’s payments to the budget to prevent a larger consolidated public sector demand impulse.
  - The end-December 2004 structural performance criterion on approval of SOCAR’s budget was a step in the right direction but long overdue.
  - A more thorough analysis of the impact of recommended medium-term fiscal expansion under PRGF on the equilibrium REER should have been undertaken if competitiveness was an overriding concern.
- Structural conditionality focus:
  - Increasing focus on Fund core reform areas and critical measures in non-core areas following the 2002 review of conditionality.
  - Some streamlining occurred, but overlapping conditionality with the World Bank (e.g., fiscal management reforms) could have been further streamlined.

*Source: _cr05259 - 23.      Despite implementation delays, there was substantial progress in fiscal reforms*

### 43.      The track record of compliance with structural performance criteria and

### _cr05259 - 43.      The track record of compliance with structural performance criteria and

### Track record of compliance
- Compliance with structural performance criteria and benchmarks was mixed.
- Delays in completing reviews under the EFF/ESAF and PRGF, a large number of prior actions, and a sizable share of waivers for structural performance criteria––60 percent––reflected uneven ownership and weaknesses in implementation capacity.
- Adequate ownership in areas such as privatization, foreign exchange system and trade liberalization, and some fiscal reforms led to better compliance with deadlines and contributed to achievement of program objectives.
- Weak ownership caused implementation delays in IBA privatization and revisions in energy tariff policy; ambitious reforms in these areas were not implemented on initial schedules and were replaced with more realistic measures over longer periods.
- Conditionality focusing on adoption of laws, regulations, and plans (some fiscal measures related to governance and reform of energy enterprises) was not effectively implemented in the absence of follow-up conditionality, undermining desired outcomes.
- Implementation capacity improved due to extensive technical assistance from the Fund and other donors.

*Key numeric/statistical notes from compliance discussion*
- Waivers for structural performance criteria: 60 percent.

### Lessons from ten-year Fund engagement (summary of paragraph 44)
- Longer-term program engagement contributed substantially to nation building and transition to a market economy; transition was more complex and longer than expected and the reform agenda remains incomplete.
- Rapid growth of non-oil output in recent years was key to reducing poverty; structural reforms need to accelerate to ensure growth sustainability as the oil-related investment boom is expected to end soon.
- A combination of exchange rate pegs, underdeveloped monetary policy instruments, and lack of effective control on the consolidated public sector position is not conducive to maintaining macroeconomic stability amid frequent, large exogenous shocks.
  - Program design, monitoring, and quantitative conditionality should have embedded incentives and mechanisms for timely adjustment to shocks.
- Fund programs improved fiscal policy formulation and implementation ahead of projected significant increase in oil revenues, but scope remained to:
  - Improve definition of the non-oil primary fiscal balance;
  - Strengthen conditionality on SOCAR’s operations; and
  - Link better budgeted expenditure to SPPRED and MTEF priorities.
- Competitiveness and lack of progress in export diversification should have been analyzed more thoroughly; where competitiveness was a concern and structural reforms were slow, staff and authorities should have explored tighter fiscal policy by end of PRGF to limit real appreciation pressures.
- Structural reform conditionality design was broadly adequate, but stricter conditionality or follow-up structural benchmarks were needed where there was risk of nominal implementation—particularly governance issues and restructuring of energy enterprises.

*Poverty and macroeconomic progress statistics cited*
- Poverty declined to 40 percent in 2004 from about 60 percent in 1994.

### Medium-term challenges and risks (paras 45–47)
- Medium-term challenge: ensure sustainable growth of non-oil output, export diversification, and poverty reduction in a stable macroeconomic environment as oil revenues are projected to increase substantially.
- Important macroeconomic risks remain:
  - Double-digit inflation can persist if authorities delay appropriate policy response and increase spending, including wages, in the run-up to the November 2005 Parliamentary elections.
  - A deterioration in the macroeconomic situation, particularly if structural reforms slow, would negatively affect non-oil output growth, curtail employment opportunities, and reverse poverty reduction trends.
- Although there is no balance of payments need, a Fund-supported program would be beneficial to strengthen credibility of macroeconomic policies and signal support for growth-promoting structural reforms; Fund involvement is justified by macroeconomic risks and the need to continue core reforms to benefit from the forthcoming oil boom and avoid the resource revenue curse.

*Explicit timing and event references*
- November 2005 Parliamentary elections.

### Recommended focus for a Fund-supported program (paragraph 48)
- Monetary and exchange rate policy:
  - Sustained disinflation requires development of a new operational framework for monetary and exchange rate policies.
  - Coherence between the exchange rate regime and macroeconomic and structural policies is essential for successful disinflation.
  - The Fund should assume primary responsibility for these issues.
- Fiscal policy and oil revenue management:
  - Focus on improved definition of the non-oil primary balance in the context of the authorities’ long-run oil revenues management strategy.
  - Implement strict monitoring of SOCAR’s revenues and expenditures.
  - Improve quality of expenditure to derive benefits from increased spending out of oil wealth.
  - Reform efforts should aim to raise social expenditure, establish targeted social assistance, further improve budget formulation, enhance transparency, and reduce energy-related subsidies.
  - The World Bank is better placed for primary responsibility on broader fiscal and social reform areas; the Fund could focus on one or two key elements of these broader reforms.
- Financial sector reforms:
  - Foster competition, innovation, and growth in the banking system.
  - Curtail market power of the only large bank through reduced barriers to entry and a more favorable business environment to enable growth of smaller private banks and eventual return of foreign banks.
  - Subject the IBA to anti-monopoly regulations, prudential regulation compliance, and eventual privatization.
  - Develop capital markets and their supervision.
  - The Fund should focus mainly on banking system stability and supervision; additional support from bilateral donors and IFIs should be mobilized for other reforms.
- Institutional and sectoral reforms:
  - Accelerate effective enforcement of the anti-corruption law, pass the new investment law and anti-monopoly law, and continue reforms in energy and transportation sectors.
  - The World Bank should lead these areas, but the Fund should consider including one or two key measures related to governance and corruption in program conditionality.

### Recommended program vehicle and sequencing (paras 49–50)
- A precautionary stand-by arrangement (SBA) appears the most appropriate vehicle to address policy challenges; another PRGF arrangement is not advised because there is no balance of payments need and GNP per capita is expected to increase significantly during the next couple of years.
- Preconditions for a new Fund arrangement:
  - Authorities must demonstrate a strong commitment to address previous implementation weaknesses and strengthen ownership of policies.
  - Negotiations on a new arrangement should only be initiated upon clear demonstration by the authorities of strong ownership through concrete policy steps, including:
    - Sustained efforts to reduce inflation rates;
    - Activation of indirect instruments of monetary policy; and
    - Strengthening of monitoring of SOCAR.
- Graduation decision:
  - The decision about eventual graduation from Fund programs should be made upon completion of the recommended precautionary Stand-By Arrangement.
  - If authorities remain interested in Fund engagement for signaling effects, consideration could be given to another precautionary arrangement.

*Relevant policy conclusion from Executive Board assessment*
- Directors felt a successor low-access precautionary arrangement with Azerbaijan, or some form of non-financial support, would be beneficial given macroeconomic risks and the need to continue core reforms.
- Directors stressed future program focus should include development of a coherent framework for monetary and exchange rate policies, prudent management of oil wealth, enhanced monitoring of state-owned enterprises, banking system reforms, and improvements to the business environment and governance; strong ownership of reforms is required for successful implementation.

*Specific numeric/formal references retained from the source in this summary*
- Waivers for structural performance criteria: 60 percent.
- Poverty: 40 percent in 2004; about 60 percent in 1994.
- Event: November 2005 Parliamentary elections.

*Italic line:* _Source: IMF Ex Post Assessment of Azerbaijan’s Longer-Term Program Engagement (Public Information Notice No. 05/99 and associated report excerpts)._

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2005/_cr05259.pdf_