## _cr14159

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### Exchange — Rate, External Stability, and Competitiveness Assessment
- Background and context
  - Historic gas-sector agreements to implement the Shah Deniz-2 gas project and a debut Eurobond issued last March.
  - Agreements extend cooperation with a BP-led consortium over the next 40 years and enable pipeline construction to deliver Azeri gas to Europe beyond 2018.
  - Oil and gas shares in total exports: 87 percent (oil) and 7 percent (gas); projected could become 60 percent (oil) and 30 percent (gas) as gas production peaks before 2020.
  - Reserves-to-production ratio: oil 22 years; gas 57 years (2013 British Petroleum Statistical Review of World Energy).

- Recent developments, outlook, and projections
  - Non-oil GDP growth: almost 10 percent in 2013; projected strong but slower in 2014–15 due to fiscal consolidation.
  - Oil output: likely flat for a number of years after 2013 stabilization.
  - Inflation: 2.4 percent in 2013; projected low single-digit during 2014–15.
  - Exchange regime: de facto stabilized arrangement; manat appreciated by less than 2 percent relative to the U.S. dollar since November 2010.
  - CBA interventions: reserves increased by about $0.5 billion in Q1 2014 to prevent appreciation.
  - Fiscal highlights:
    - Preliminary 2013 non-oil primary deficit ≈ 45 percent of non-oil GDP (2012 level), above 35 percent sustainability level.
    - Break-even fiscal oil price reduced slightly to $77 dollars per barrel.
    - 2014 consolidated budget implies decline in non-oil fiscal deficit by about 2 percent of non-oil GDP.
    - Overall fiscal surplus declined to 1 percent of GDP; oil fund size stands at 48 percent of GDP.
  - Monetary policy adjustments:
    - Refinancing rate steady Feb 2013–end-Apr 2014; then lowered by 50 basis points to 4.25 percent; interest rate corridor floor at 0.5 percent and ceiling at 6 percent.
    - ADIF interest rate ceiling cut from 12 percent to 10 percent in Aug 2013; private sector credit accelerated, concentrated in personal loans.
    - CBA plans to stop lending to the real economy.

- Banking sector indicators (excluding IBA) — In percent
  - Regulatory Capital to Risk-Weighted Assets: 2011: 21.0; 2012: 19.9; 2013: 21.6.
  - Liquid Assets to Total Assets: 2011: 17.4; 2012: 15.0; 2013: 13.2.
  - Nonperforming Loans to Total Loans (disclosed NPLs): 2011: 5.4; 2012: 5.6; 2013: 4.5.
  - Bank Return on Assets: 2011: 1.3; 2012: 0.7; 2013: 2.0.
  - Bank Return on Equity: 2011: 7.7; 2012: 4.9; 2013: 11.4.
- Regulatory changes: tightened consumer loan procedures, limited loan-to-value of car loans, strengthened provisioning rules and NPL classification; deadline on new capital requirements extended until January 1, 2015 for some banks (~8 percent of system assets).
- International Bank of Azerbaijan (IBA): compliant with capital adequacy ratio but fragile; shareholders’ assembly decided to increase statutory capital imposing about $300 million (about 0.5 percent of GDP) additional burden on the government, potentially doubling if private shareholders do not participate.

- External position and medium-term projections
  - External buffers (CBA reserves and oil fund) ≈ 33 months of import cover.
  - Sovereign foreign assets expected to reach $55 billion, or 64 percent of overall GDP, by 2015; projected decline to about 40 percent of GDP by 2019 as oil fund finances energy-related projects.
  - Planned fiscal consolidation tends to increase the current account surplus, but decline in oil exports (prices soften, production tails off) dominates.
  - Staff macro projections (Current Policies Scenario; annual percentage change; percent of GDP where specified):
    - Overall GDP growth: 2012: 2.2; 2013: 5.8; 2014: 5.0; 2015: 4.6; 2016: 3.5; 2017: 3.2; 2018: 4.0; 2019: 4.2.
    - Non-oil GDP growth: 2012: 9.6; 2013: 9.9; 2014: 8.3; 2015: 7.5; 2016: 5.5; 2017: 5.0; 2018: 5.0; 2019: 5.0.
    - CPI (period average): 2012: 1.0; 2013: 2.4; 2014: 3.5; 2015: 4.0; 2016: 4.3; 2017: 5.0; 2018: 4.9; 2019: 5.0.
    - Overall fiscal balance (percent of GDP): 2012: 4.9; 2013: 1.0; 2014: 0.3; 2015: -3.1; 2016: -4.8; 2017: -6.3; 2018: -6.6; 2019: -6.4.
    - Non-oil primary balance (percent of non-oil GDP): 2012: -45.4; 2013: -45.0; 2014: -43.2; 2015: -41.8; 2016: -40.4; 2017: -38.3; 2018: -36.9; 2019: -34.2.
    - Current account balance (percent of GDP): 2012: 21.8; 2013: 19.7; 2014: 15.0; 2015: 9.9; 2016: 5.6; 2017: 5.5; 2018: 5.0; 2019: 4.6.
    - Oil Fund Assets (US$ billions): Est. 2012: 34.1; 2013: 35.4; 2014: 37.7; 2015: 38.5; 2016: 37.6; 2017: 34.7; 2018: 30.4; 2019: 28.8.

- Exchange rate and competitiveness (Box 1) — key findings
  - Manat REER appreciated about 78 percent between early 2004 and late 2008; stabilized since.
  - No conclusive evidence of loss of competitiveness: share of non-oil exports to total exports ≈ 5 percent since end of oil boom; Azerbaijan increased share in global non-oil exports.
  - CGER-like methodologies:
    - Macroeconomic Balance (MB): slightly overvalued by 2 percent (MB = 1.8).
    - External Stability (ES): broadly in line with fundamentals (ES = -0.6).
    - ERER approach: 20 percent undervaluation (ERER = -19.5; ERER for 2013).
  - Caveat: ERER approach does not incorporate diminishing oil reserves.

### Fiscal consolidation, risks, and public investment management
- Fiscal consolidation objectives and recommended path
  - Staff recommended cumulative reduction of about 5 percentage points in the non-oil primary deficit over 2014–15.
  - Further adjustment of at least 8 percentage points over 2016–19.
  - Government plans to reduce non-oil primary deficit toward 35 percent of non-oil GDP by 2019.
- Adjustment composition and social protection
  - Main component: cut investment projects with small growth returns; public investment is above optimal path.
  - Tax measures: rationalize tax exemptions, better enforce tax procedures, revamp non-oil tax revenue collection.
  - Protect vulnerable: expand the Targeted Social Assistance (TSA) program; TSA channels about 10 percent of social transfer spending, is well targeted (about half benefits to bottom decile, <1 percent leaks to top decile), but reaches only about 4 percent of the population.
- Public investment management and cooperation
  - Agreement with World Bank and European Commission to complete a PEFA by October 2014.
  - Emphasis on investment selection that supports long-term non-oil export growth and fiscal revenue.

- Fiscal risks and case for a fiscal rule (Box 4)
  - Key quantified risks:
    - US$20 decline in oil price → fiscal balance worsens by 5 percent of GDP and $4 billion withdrawal from the oil fund.
    - 12 percent decline in oil production in 2014 (≈100,000 barrels per day) → similar budget impact.
    - Pension implicit liabilities: funding gap projected to increase to 2 percent of GDP by 2024; NPV ≈ 54 percent of 2012 GDP through 2050.
    - SOCAR net liabilities ≈ 12 percent of GDP in 2013.
    - IBA capitalization burden ≈ $300 million (about 0.5 percent of GDP) over next four years.
    - DSA: gross debt projected from 13 percent in 2013 to 20 percent in 2018 under moderate government investment assumption.
    - Contingent liability shock (one-time increase in non-interest expenditures = 20 percent of banking sector assets) could add 4 percentage points of GDP to debt by 2018.
  - Recommendations:
    - Adopt a rules-based fiscal framework (e.g., structural primary balance rule with price smoothing).
    - Publish a Statement of Fiscal Risks with sensitivity analysis and integrate fiscal risks into medium-term frameworks and DSA.

- Analytical assessment of optimal policy (Box 3)
  - Model: "Silo" model (Cherif and Hasanov, 2012).
  - Optimal investment rate: 15 percent of total revenues.
  - Initial saving in safe assets: 37.3 percent.
  - Gaps: investment gap ≈ 20.5 percent of non-oil GDP in 2014, shrinking to ≈ 4.3 percent in 2018; government consumption gap widening to ≈ 7 percent of non-oil GDP in 2018.
  - Conclusion: rules-based fiscal policy and more moderate investment path recommended.

### Monetary policy, financial sector, and capital markets
- Monetary stance and recommendations
  - CBA kept a neutral stance; lowered policy rate by 50 basis points in late April to 4.25 percent.
  - Staff cautioned against further cuts given risks of fiscal slippage or reversals in soft global food prices.
  - Recommendations to strengthen monetary policy effectiveness:
    - Scale down and discontinue CBA direct lending to the real economy.
    - Publish inflation notes and balance of payments projections.
    - Deepen financial markets to prepare for greater exchange rate flexibility and potential move toward inflation targeting.
    - Improve monetary–fiscal coordination and develop currency risk mitigation instruments.

- Financial sector stability and development
  - Priorities: strengthen bank regulation, provisioning rules, accurate NPL classification, and financial supervision.
  - Implement IMF TA: develop interbank money market, reduce connected lending and large single-borrower exposures, discourage FX exposure to un-hedged borrowers.
  - Consolidation and competition:
    - Encourage market-led consolidation; reduce bureaucratic and judicial barriers to mergers and acquisitions; introduce debt/equity swaps; offer incentives (lower deposit insurance premia or tax advantages).
    - Liquidate or convert banks failing to meet capital requirements by deadline.
    - Restructure IBA to reduce dominance and fiscal risk.
    - Create a private credit bureau; protect creditors’ rights to reduce banks’ costs and support SMEs.
  - Financial depth and credit composition figures:
    - Credit to private sector: ≈ 13 percent of GDP in 2013 (up from <5 percent in 2000).
    - Household lending: ≈ 40 percent of total bank lending in 2013 (from ≈ 9 percent in 2000).
    - Mortgages: ≈ 14 percent of banks’ portfolios in 2013 (up from 8 percent in 2006).
  - Findings: public spending highly correlated with non-oil growth; banking credit not correlated once controlling for public spending and real oil price changes → suggests institutional bottlenecks and limited lending opportunities.

### Risks, buffers, and contingency responses
- Risk environment and buffers
  - Risks tilted to the downside; financial buffers comfortable.
  - Key downside risks: slippages in fiscal adjustment; further deterioration of IBA; disruption in oil production or sustained oil-price decline.
  - Quantified sensitivities:
    - 12 percent decline in oil production in 2014 (≈100,000 bpd) could worsen consolidated fiscal balance by 5 percentage points of GDP and, absent spending adjustment, cause an oil fund withdrawal of $4 billion.
    - US$20 decline in oil price has a similar budgetary impact.
  - Upside scenario: if oil price level over last three years is maintained, sovereign government assets could be near 55 percent of GDP by 2019.
- Policy response space
  - Authorities have room to use financial buffers if risks materialize; priority to strengthen non-oil fiscal position and tighten financial supervision.

### International linkages and spillovers (Box 2)
- Oil price as main global channel; export concentration: 94 percent of total exports in 2013 from oil sector.
- Global shock scenario:
  - Sharp slowdown in major emerging economies could reduce global GDP by 1¾ percent and oil prices by almost 20 percent.
  - Azerbaijan’s GDP impact from oil-price fall could be about 1 percent in the first year (similar to MCD oil exporters estimate).
- Trade linkages: non-oil export links to Russia and Turkey average 44.6 percent and 7.5 percent respectively (2007–2011), but non-oil exports represent only 6 percent of total exports.
- Financial exposure: low reliance on external financing; lending by global banks to Azerbaijan small; FDI remains focused on energy sector.
- Geopolitical shocks (Russia–Ukraine escalation) likely limited direct impact; direct impact on exports from lower Russian GDP would affect <3 percent of total exports.

### Business climate, structural reforms, and governance
- Progress and strengths
  - Azerbaijan moved into top 40 in the Global Competitiveness Index; strengths in macroeconomic environment and labor market efficiency.
  - Anti-corruption and service-delivery initiatives: e-government, one-stop window, ASAN centers.
  - Sovereign issuance expected to develop a yield curve and capital market.
- Governance and structural reform priorities
  - Accelerate structural reforms in governance and business climate to diversify economy and attract private non-oil investment.
  - Specific recommendations:
    - Establish effective anti-monopoly policy, including an independent competition agency.
    - Align education reform with market needs and remove higher-education bottlenecks.
    - Advance WTO accession (momentum after new customs code and 11th working party meeting in Feb 2014).
  - Financial market development actions: discontinue CBA direct lending permanently; develop interbank money and FX markets; prepare for inflation targeting and greater exchange rate flexibility.
  - Restructure IBA and reduce its dominance to strengthen monetary transmission and contain fiscal risks.
- Data and statistical improvements
  - Data provision broadly adequate for surveillance but shortcomings remain.
  - Ongoing IMF TA to strengthen GDP, fiscal accounts, and IIP statistics.
  - Authorities to resume compilation and dissemination of IIP by the CBA; staff urged resumption ahead of next Article IV.

### Selected recent performance, projections, and key statistics (selected)
- Output and inflation (annual percent change)
  - GDP at constant prices: 2013 = 5.8; 2014 = 5.0; 2015 = 4.6.
  - Oil sector (GDP growth): 2013 = 0.5; 2014 = -0.1; 2015 = -0.1.
  - Non-oil sector (GDP growth): 2013 = 9.9; 2014 = 8.3; 2015 = 7.5.
  - CPI (period average): 2013 = 2.4; 2014 = 3.5; 2015 = 4.0.
  - CPI (end of period): 2013 = 3.6; 2014 = 3.4; 2015 = 4.5.
- External and fiscal indicators
  - Current account balance (percent of GDP): 2013 = 19.7; 2014 = 15.0; 2015 = 9.9.
  - Non-oil current account (percent of non-oil GDP): 2013 = -19.8; 2014 = -18.8; 2015 = -18.0.
  - Gross official international reserves (US$ millions): 2013 = 13,987; 2014 = 15,987; 2015 (proj.) = 16,487.
  - Oil Fund assets (US$ millions): 2013 = 35,448; 2014 = 37,723; 2015 (proj.) = 38,484.
  - Oil price (US$ per barrel): 2013 = 109.2; 2014 = 102.9.
  - Exports, f.o.b. (US$ millions): 2013 = 32,305; 2014 = 31,675; 2015 (proj.) = 29,824.
- Monetary and financial indicators (selected)
  - Net foreign assets (annual percent change): 2013 = 19.9; 2014 = 16.4; 2015 (proj.) = 3.4.
  - Credit to the economy (annual percent change): 2013 = 8.5; 2014 = 11.2; 2015 (proj.) = 12.0.
  - Credit to private sector (annual percent change): 2013 = 27.6; 2014 = 10.3; 2015 (proj.) = 15.1.
  - Broad money (M3) (annual percent change): 2013 = 15.4; 2014 = 13.9; 2015 (proj.) = 20.0.
  - Share of foreign currency deposits in total deposits (percent): 2013 = 32.9; 2014 = 34.8; 2015 (proj.) = 38.6.
- Balance of payments (US$ millions)
  - Exports f.o.b.: 2013 = 32,305; 2014 (proj.) = 31,675; 2015 (proj.) = 29,824.
  - Imports f.o.b.: 2013 = -10,501; 2014 (proj.) = -11,261; 2015 (proj.) = -12,250.
  - Trade balance: 2013 = 21,804; 2014 (proj.) = 20,415; 2015 (proj.) = 17,574.
  - Current account balance: 2013 = 14,488; 2014 (proj.) = 11,914; 2015 (proj.) = 8,715.

### Risk Assessment Matrix — summary (Appendix I)
- Global risks of high concern: surges in global financial market volatility (High; Likelihood: Medium); protracted slower growth in advanced or emerging economies (High; Likelihood: High).
- Medium concern risks include sustained decline in commodity prices and increasing geopolitical tensions surrounding Ukraine.
- Country-specific risks:
  - Oil production risk: Overall Level of Concern: Medium; Likelihood: High; expected impact: undermine growth and fiscal/external positions.
  - Financial sector risks (IBA): Overall Level of Concern: Medium; Likelihood: Medium; expected impact: systemic problems and fiscal costs.
  - Fiscal risks linked to slippages due to 2015 Euro Olympic investment commitments: Overall Level of Concern: Medium; Likelihood: Medium/Low.
  - Escalation of conflict with Armenia: Overall Level of Concern: Medium; expected impact: High.
- Policy responses recommended:
  - Rebuild buffers; strengthen non-oil fiscal position beyond 2014 budget; enhance banking supervision; develop plans to restore IBA to sustainable financial position.

*Source: IMF staff report excerpt — “Exchange Rate, External Stability, and Competitiveness Assessment” and related chapters (content from _cr14159).*

### 1. Exchange

### 1. Exchange — Rate, External Stability, and Competitiveness Assessment

### Background and context
- Since early 2013 the government concluded historic gas-sector agreements to implement the Shah Deniz-2 gas project and tapped international financial markets with a debut Eurobond issued last March.
- The agreements extend cooperation with a BP-led consortium over the next 40 years and enable pipeline construction to deliver Azeri gas to Europe beyond 2018.
- The overarching challenge remains reducing heavy dependence on oil and gas while fostering sustainable private sector–led growth; gas discoveries are estimated at about one-third of the oil wealth.
- Currently, the shares of oil and gas in total exports are 87 percent and 7 percent, respectively; these shares could become 60 percent and 30 percent as Azerbaijan reaches the peak of gas production for delivery to Europe before 2020.
- Reserves-to-production ratio: oil 22 years; gas 57 years (2013 British Petroleum Statistical Review of World Energy).

### Recent developments, outlook, and projections
- Non-oil GDP growth reached almost 10 percent in 2013 supported by high public spending and a rapid increase in consumer loans. Non-oil GDP growth will remain strong albeit somewhat slower in 2014–15, mostly reflecting the recently announced fiscal consolidation process.
- Oil output is likely to be flat for a number of years following stabilization in 2013 that ended two consecutive years of decline.
- Inflation: increased slightly to 2.4 percent in 2013, driven by adjustments to regulated petroleum product prices toward year-end; projected to remain in low single-digit levels during 2014–15 mainly on the back of fiscal consolidation.
- Exchange rate regime: de facto regime classified as a stabilized arrangement and is the key anchor for monetary policy; manat appreciated by less than 2 percent relative to the U.S. dollar since November 2010.
- CBA interventions: CBA increased reserves by about $0.5 billion in the first quarter of 2014 to prevent appreciation.
- Fiscal developments:
  - Preliminary 2013 non-oil primary deficit in percent of non-oil GDP remained at 2012 levels at about 45 percent, above the 35 percent sustainability level implied by the permanent income rule under a conservative scenario of oil and gas production.
  - Spending restraint toward end-2013 and under-execution of some spending contained the deficit; break-even fiscal oil price reduced slightly to $77 dollars per barrel.
  - Parliament approved a consolidated 2014 budget lowering the government-spending-to-GDP ratio and implying a decline in the non-oil fiscal deficit by about 2 percent of non-oil GDP.
  - Overall fiscal surplus declined to 1 percent of GDP; oil fund size stands at 48 percent of GDP.
- Monetary policy:
  - CBA kept refinancing rate steady between February 2013 and end-April 2014, then lowered the rate by 50 basis points to 4.25 percent and decreased the interest rate corridor floor to 0.5 percent and ceiling to 6 percent.
  - In August 2013 ADIF interest rate ceiling cut from 12 percent to 10 percent; private sector credit accelerated thereafter, concentrated in personal loans.
  - CBA has plans to stop lending to the real economy.
- Banking sector (excluding IBA) — selected indicators (In percent):
  - Regulatory Capital to Risk-Weighted Assets: 21.0 (2011), 19.9 (2012), 21.6 (2013).
  - Liquid Assets to Total Assets: 17.4 (2011), 15.0 (2012), 13.2 (2013).
  - Nonperforming Loans to Total Loans (disclosed NPLs): 5.4 (2011), 5.6 (2012), 4.5 (2013). Note: disclosed NPLs are somewhat underestimated, as only the overdue portion of principal and interest is disclosed as NPL.
  - Bank Return on Assets: 1.3 (2011), 0.7 (2012), 2.0 (2013).
  - Bank Return on Equity: 7.7 (2011), 4.9 (2012), 11.4 (2013).
- Regulatory changes: tightened consumer loan procedures, limited loan-to-value of car loans, strengthened provisioning rules and NPL classification; deadline on new capital requirements extended until January 1, 2015 for some banks (about 8 percent of total banking system assets).
- International Bank of Azerbaijan (IBA): largest bank is in compliance with capital adequacy ratio but financial position remains fragile; shareholders’ assembly decided to increase statutory capital over next four years, imposing about $300 million (about 0.5 percent of GDP) additional burden on the government, potentially doubling if private shareholders do not participate.

### External position and medium-term projections
- External buffers (CBA reserves and oil fund) amount to about 33 months of import cover.
- Sovereign foreign assets expected to reach $55 billion, or 64 percent of overall GDP, by 2015; projected to decline to about 40 percent of GDP by 2019 as the oil fund finances energy-related projects.
- Planned fiscal consolidation would tend to increase the current account surplus over the medium term, but a dominating influence is a decline in oil exports as oil prices soften and production tails off.
- Staff projections assume moderate returns from energy-related projects but further investment in the oil sector could keep revenues higher than baseline.
- Selected macro projections (Current Policies Scenario; annual percentage change; In percent of GDP unless otherwise specified):
  - Overall GDP growth: 2012: 2.2; 2013: 5.8; 2014: 5.0; 2015: 4.6; 2016: 3.5; 2017: 3.2; 2018: 4.0; 2019: 4.2.
  - Non-oil GDP growth: 2012: 9.6; 2013: 9.9; 2014: 8.3; 2015: 7.5; 2016: 5.5; 2017: 5.0; 2018: 5.0; 2019: 5.0.
  - Consumer price index (period average): 2012: 1.0; 2013: 2.4; 2014: 3.5; 2015: 4.0; 2016: 4.3; 2017: 5.0; 2018: 4.9; 2019: 5.0.
  - Overall fiscal balance (percent of GDP): 2012: 4.9; 2013: 1.0; 2014: 0.3; 2015: -3.1; 2016: -4.8; 2017: -6.3; 2018: -6.6; 2019: -6.4.
  - Non-oil primary balance (percent of non-oil GDP): 2012: -45.4; 2013: -45.0; 2014: -43.2; 2015: -41.8; 2016: -40.4; 2017: -38.3; 2018: -36.9; 2019: -34.2.
  - Current account balance (percent of GDP): 2012: 21.8; 2013: 19.7; 2014: 15.0; 2015: 9.9; 2016: 5.6; 2017: 5.5; 2018: 5.0; 2019: 4.6.
  - Oil Fund Assets (in billions of U.S. dollars): Est. 2012: 34.1; 2013: 35.4; 2014: 37.7; 2015: 38.5; 2016: 37.6; 2017: 34.7; 2018: 30.4; 2019: 28.8.

### Baseline scenario and policy intent
- Baseline scenario reflects authorities’ plans to sustain recent policy changes and tackle fiscal vulnerabilities.
- Government plans to rein in spending, particularly the public investment program, aiming to reduce the non-oil primary deficit to the sustainable level of 35 percent of non-oil GDP by 2019.
- Over the medium term, non-oil GDP growth could be in the 5 percent range if underpinned by fiscal consolidation and supported by non-oil FDI.

### Risks to the baseline and buffers
- Risks are tilted to the downside but financial buffers are comfortable (Annex 1 references).
- Key downside risks:
  - Slippages in fiscal adjustment.
  - Further deterioration of IBA.
  - Disruption in oil production or sustained decline in global oil prices, which would expose fiscal vulnerabilities.
- Quantified downside sensitivity:
  - A 12 percent decline in the assumption for oil production in 2014 (about 100,000 barrels per day) could worsen the consolidated fiscal balance by 5 percentage points of GDP and, absent spending adjustment, result in an oil fund withdrawal of $4 billion.
  - A US$20 decline in the oil price would have a similar budgetary impact.
- Shocks from sharply slower growth in Russia would have a relatively small impact given reduced direct real linkages since the oil boom.
- Impact of U.S. QE tapering expected to be limited due to low reliance on external savings and capital inflows.
- Policy response space: authorities have room to use financial buffers if risks materialize; strengthening non-oil fiscal position and tightening financial supervision are crucial mitigants.
- Upside risk: potential for higher oil prices due to gas-supply disruptions from geopolitical tensions could raise sovereign assets (if oil price level over the last three years is maintained over the medium term, sovereign government assets could be near 55 percent of GDP by 2019).

### Exchange rate and competitiveness assessment (Box 1) — key findings
- Manat REER appreciated about 78 percent between early 2004 and late 2008 during the oil boom; since then it has stabilized.
- No conclusive evidence of a loss of competitiveness: share of non-oil exports to total exports has remained about 5 percent since end of oil boom; Azerbaijan has steadily increased its share in global non-oil exports.
- CGER-like methodologies give a mixed picture:
  - Macroeconomic Balance (MB) approach suggests exchange rate is broadly in line with fundamentals (slightly overvalued by two percent).
  - External Stability (ES) approach corroborates MB: broadly in line with fundamentals.
  - Equilibrium Real Effective Exchange Rate (ERER) approach finds a 20 percent undervaluation (ERER undervaluation has fluctuated between 10 and 20 percent since mid-2000s and is now at levels observed in 2007 and 2010).
- Caveat: ERER approach does not incorporate diminishing oil reserves, an important fundamental that may worsen the fit for Azerbaijan.

- Exchange rate assessment summary table (reported measures):
  - Underlying current account: 4.6-8.6 (range).
  - Current account norm: 5.3-8.9 (range).
  - ER assessment, percent (-: undervalued): MB/ES/ERER = 1.8 / -0.6 / -19.5 (Note: MB and ES approaches measure misalignment in 2019; ERER approach is for 2013).

### International linkages and spillovers (Box 2) — key findings
- Oil price is the essential channel linking Azerbaijan to the global economy.
- Export concentration: 94 percent of total exports in 2013 from oil sector.
- Global shocks:
  - A sharp slowdown in major emerging economies could reduce global GDP by 1¾ percent and oil prices by almost 20 percent.
  - Azerbaijan’s GDP impact from an oil-price fall could be similar to MCD oil exporters estimate, about 1 percent in the first year.
- Trade linkages:
  - Non-oil export linkages to Russia and Turkey average 44.6 percent and 7.5 percent respectively (2007–2011), but non-oil exports constitute only 6 percent of total exports.
- Financial exposure and resilience:
  - Financing needs are low by international standards due to external and fiscal surpluses.
  - Lending by global banks to Azerbaijan’s financial sector is small; corporations rely mainly on own resources.
  - About 40 percent of the oil fund portfolio has maturity between one and five years; higher global interest rates would temporarily change the book value of the oil fund but could benefit it over time.
  - Exposure of capital markets is nil given underdevelopment.
  - FDI focused on energy sector expected to remain strong due to new gas developments.
- Geopolitical shock (Russia–Ukraine escalation) likely to have relatively small impact due to substantially declined real linkages to Russia since oil boom; direct impact on exports from lower GDP growth in Russia would affect less than 3 percent of total exports (about half of total non-oil exports).
- Financial sector direct exposure mainly through small SOFAZ assets and the Russian subsidiary of IBA; migrants’ remittances from Russia are relatively small.

### Policy priorities and implications highlighted
- Improving competitiveness is a top policy priority agreed with authorities.
- Authorities view public infrastructure spending as critical to ease physical constraints, improve business climate, and raise productivity of private investment.
- Key policy actions implied or taken:
  - Fiscal consolidation to reduce non-oil primary deficit toward sustainable 35 percent of non-oil GDP by 2019.
  - Tighten financial supervision, strengthen bank regulation (capital, provisioning, NPL classification), and limit risky consumer lending.
  - Preserve exchange rate peg with adequate external buffers (CBA reserves and oil fund).
  - Use oil fund and financial buffers prudently to cushion shocks while implementing structural reforms to diversify away from oil dependence.

*Source: IMF staff report excerpt — “Exchange Rate, External Stability, and Competitiveness Assessment” (content from _cr14159 - 1. Exchange).*

### 9.      Pursuing the planned fiscal consolidation should not significantly dampen growth and

### 9.      Pursuing the planned fiscal consolidation should not significantly dampen growth and

### Fiscal consolidation and the non-oil fiscal position
- Staff welcomed the approved 2014 consolidated budget but noted sustained further efforts are needed to bring the non-oil fiscal position to the sustainable level implied by the permanent income rule.
- With energy revenues set to sharply fall off, staff warned of a rising overall deficit and depletion of oil fund balances over the medium-term and emphasized the importance of not delaying adjustment.
- Recommended fiscal adjustment path:
  - A cumulative reduction of about 5 percentage points in the non-oil primary deficit over 2014–15.
  - A further adjustment of at least 8 percentage points over 2016–19.
- Adjustment composition and social protection:
  - Cutting investment projects with small growth returns as a main component of the adjustment should not hurt growth markedly, as public investment is well above the optimal path (see Box 3).
  - Measures could include rationalizing tax exemptions, better enforcing tax procedures, and revamping non-oil tax revenue collection.
  - Efforts needed to streamline current spending while providing resources to expand the Targeted Social Assistance (TSA) program to reduce shock impacts, including recent fuel price increases, on the most vulnerable groups.
  - The TSA channels about 10 percent of social transfer spending; it is well targeted (about half the benefits to the bottom decile and less than one percent leaking to the top decile) but benefits reach only about 4 percent of the population.

### Authorities’ actions and public investment management
- Authorities committed to consolidating the non-oil fiscal position and plan to further reduce transfers from the oil fund in the 2015 budget as signaled in medium-term indicative targets presented to parliament.
- Agreement with World Bank and European Commission to complete a PEFA by October 2014 to strengthen control over public spending and guide prioritization and efficiency of public investment.
- Staff noted investment selection should place more emphasis on long-term growth of the non-oil export sector and fiscal revenue, supported by a strong public investment management system.

### Fiscal risks and the case for a fiscal rule
- Staff highlighted risks from the absence of a fiscal rule given oil revenue volatility and an unsustainable level of public investment; additional fiscal risks stem from heavy oil dependence of the consolidated budget, the pension system, and government activities outside the budget.
- Recommendation: adopt a rules-based fiscal framework (e.g., a structural primary balance rule with price smoothing) to entrench fiscal discipline, mitigate oil-revenue volatility, and promote intergenerational equity.
- Suggested publishing a statement of fiscal risks as part of the budget process to highlight threats to macro stability and the government’s net asset position and to foster fiscal risk–reducing actions.

### Box 3 — Azerbaijan: In Pursuit of Optimal Fiscal Policy (key quantitative findings)
- Model applied: the "Silo" model (Cherif and Hasanov, 2012), a finite horizon precautionary saving-investment model under uncertainty; consistent with IMF’s Sustainable Investing Tool used in the 2013 Article IV Consultation.
- Optimal policy prescriptions from the model:
  - Optimal investment rate: 15 percent of total revenues.
  - Saving in safe assets (initially): 37.3 percent.
- Gaps between projected and optimal paths:
  - The gap between projected and optimal investment is around 20.5 percent of non-oil GDP in 2014, shrinking to around 4.3 percent of non-oil GDP in 2018.
  - Government consumption is higher than optimal and the gap is expected to widen to around 7 percent of non-oil GDP in 2018.
- Conclusion: calls for a rules-based fiscal policy framework and a more moderate investment path to increase investment efficiency and sustain non-oil growth benefits.

### Box 4 — Azerbaijan: A Framework for Managing Fiscal Risks (key quantitative findings and measures)
- Four key sources of fiscal risk identified:
  - Exposure to adverse oil sector developments:
    - A US$20 decline in the oil price assumption for 2014 could worsen the fiscal balance in percent of GDP by 5 percent and entail a withdrawal of $4 billion from the oil fund.
    - A 12 percent decline in the assumption for oil production in 2014 (about 100,000 barrels per day) would have a similar budget impact.
  - Implicit pension liabilities:
    - The funding gap of liabilities inherited from the Soviet regime is projected to increase to 2 percent of GDP by 2024.
    - The NPV of these liabilities through 2050 was estimated in the order of 54 percent of 2012 GDP.
  - Activities of the State Oil Company (SOCAR):
    - Since 2008, SOCAR’s net liabilities (including trade credits and excluding tax payments) doubled, reaching about 12 percent of GDP in 2013.
  - Activities of the systemic, largely state-owned bank (IBA):
    - IBA holds about a third of the assets and loans of the banking system.
    - The new capitalization plan approved by shareholders will bring an additional burden of about $300 million (about 0.5 percent of GDP) to the government over the next four years.
- Recommended fiscal risk management actions:
  - Disseminate a "Statement of Fiscal Risks" with sensitivity analysis to oil-related shocks and quantifying contingent liabilities.
  - Integrate fiscal risks into fiscal analysis, the medium-term fiscal framework, and public debt sustainability analysis (DSA).
    - Under a moderate government investment assumption, the DSA projects gross debt to GDP rising from 13 percent in 2013 to 20 percent in 2018.
    - A contingent liability shock entailing a one-time increase in non-interest expenditures equivalent to 20 percent of banking sector assets (about half of assets held by IBA) could add 4 percentage points of GDP to the stock of debt by 2018.
  - Adopt a legal framework requiring sensitivity analysis to key assumptions and an annual statement of fiscal risk as part of the budget process.

### Monetary policy: anchoring inflation expectations and policy stance
- Staff supported the CBA’s intention to keep monetary policy neutral and welcomed recent measures to slow consumer lending; the exchange rate arrangement remains the anchor of monetary policy.
- CBA actions and staff advice:
  - During the mission, the CBA planned to retain a neutral stance given expectations for stable and low inflation amid tighter fiscal policy, soft international food prices, and slowing consumer credit growth.
  - In late April the CBA lowered the policy rate by 50 basis points, citing low inflation expectations and the need to diversify the economy and boost investment.
  - Staff cautioned against further policy rate cuts given risks of fiscal slippages, implementation problems with measures to slowdown consumer lending, or potential reversals in soft global food prices.
  - Monetary tightening would be warranted if fiscal consolidation slippages caused demand pressures.
- To strengthen monetary policy effectiveness, staff recommended:
  - Strengthening the interest rate transmission mechanism by scaling down and discontinuing the CBA’s direct lending to the real economy, including to non-financial public entities.
  - Publishing inflation notes and balance of payments projections, and deepening financial markets to prepare for greater exchange rate flexibility over the longer term.
  - Improving monetary–fiscal coordination and developing currency risk mitigation instruments to facilitate a move toward inflation targeting and greater exchange rate flexibility.
- CBA plans:
  - Sustain unwinding of directed lending; expects directed lending to continue declining over the next couple of years.
  - Launch an action plan by the summer to prepare for greater exchange rate flexibility over the medium term, based on IMF TA advice.

### Financial sector: stability, deepening, and competition
- Regulatory and stability priorities:
  - Staff encouraged the CBA to further strengthen banking sector regulations despite a relatively underdeveloped banking sector and the government’s strong financial position.
  - Recent measures to strengthen provisioning rules and require accurate classification of NPLs are positive steps; further regulatory strengthening is needed.
  - Implement IMF TA recommendations: develop the interbank money market, reduce connected lending and exposure to single large borrowers, and discourage banks from taking on foreign-exchange exposure to un-hedged borrowers.
  - A thorough assessment of financial stability and development aspects will be carried out in the upcoming 2015 FSAP update.
- Increasing competition and consolidation:
  - The ongoing capitalization process provides an opportunity to encourage consolidation: reduce bureaucratic and judicial formality for mergers and acquisitions, introduce debt/equity swaps, and offer incentives (lower deposit insurance premia or tax advantages).
  - Banks failing to meet new minimum capital requirements by the newly established deadline should be liquidated or converted into non-bank financial institutions.
  - Restructuring the largely state-owned IBA to reduce its dominance is a priority to achieve a level playing field.
  - Measures to increase competition in interest margins (e.g., a private credit bureau) and protect creditors’ rights would help reduce banks’ costs and support private sector–led growth, particularly for SMEs facing high borrowing costs.
- CBA observations and deadlines:
  - CBA noted exposures of banks to foreign exchange risks are well contained given the low share of external debt liabilities in bank balance sheets (below 20 percent).
  - CBA indicated it is unlikely to extend the January 1, 2015 deadline for the minimum capital requirement and anticipated only a few banks might not meet the new capital requirement by end-2014.
- Financial depth and credit composition (key figures):
  - Credit to the private sector increased from just under 5 percent of GDP in 2000 to around 13 percent in 2013.
  - Household lending rose from around 9 percent of total bank lending in 2000 to around 40 percent in 2013.
  - Mortgages comprised about 14 percent of banks’ portfolios in 2013, up from 8 percent in 2006.
- Findings on finance and non-oil growth:
  - Time series regressions found public spending is highly correlated with non-oil growth, whereas credit from the banking system was not correlated when controlling for public spending growth and real changes in oil prices.
  - The absence of a link between finance and non-oil growth may reflect lack of adequate lending opportunities and institutional bottlenecks; policies should sequence financial development reforms while managing associated risks.

### Key statistics, scenarios, and simulations (selected)
- Fiscal adjustment targets:
  - About 5 percentage points reduction in the non-oil primary deficit over 2014–15.
  - At least 8 percentage points further adjustment over 2016–19.
- Box 3 optimal targets:
  - Optimal investment rate: 15 percent of total revenues.
  - Initial saving in safe assets: 37.3 percent.
  - Investment gap: around 20.5 percent of non-oil GDP in 2014; about 4.3 percent of non-oil GDP in 2018.
  - Government consumption gap: around 7 percent of non-oil GDP in 2018.
- Box 4 fiscal risk magnitudes:
  - US$20 decline in oil price → fiscal balance worsens by 5 percent of GDP and $4 billion withdrawal from the oil fund.
  - 12 percent decline in oil production (≈100,000 barrels per day) → similar budget impact.
  - Pension funding gap projected to increase to 2 percent of GDP by 2024; NPV ≈ 54 percent of 2012 GDP through 2050.
  - SOCAR net liabilities ≈ 12 percent of GDP in 2013.
  - IBA capitalization burden ≈ $300 million (about 0.5 percent of GDP) over the next four years.
  - DSA projection: gross debt from 13 percent in 2013 to 20 percent in 2018.
  - Contingent liability shock (one-time increase in non-interest expenditures = 20 percent of banking sector assets) could add 4 percentage points of GDP to debt by 2018.
- Monetary policy action: CBA lowered the policy rate by 50 basis points in late April.

*Source: IMF staff analysis as presented in the content unit.*

### 19.      The authorities noted ongoing efforts to improve the business climate. Azerbaijan

### _cr14159 - 19.      The authorities noted ongoing efforts to improve the business climate. Azerbaijan

### Business climate and governance: recent progress and remaining gaps
- Azerbaijan "continues to move up in the Global Competitiveness Index list" and is "within the top 40."
- Strengths cited: "macroeconomic environment and labor market efficiency."
- Anti-corruption and service-delivery initiatives in place: "e-government," "one-stop window," and "easy service centers (ASAN)."
- Ongoing and planned anti-corruption actions:
  - Legislative initiative to "establish and develop a national mechanism for asset recovery, including possible amendments to the Criminal Procedural Code."
  - The "fourth assessment by MONEYVAL began in October 2013 and is ongoing."
  - Plan to conduct an "AML/CFT risk assessment during 2014."
- Sovereign issuance effects:
  - "Successful sovereign issuance will contribute to the development of a yield curve and support the development of the capital market and the financing of companies in the non-oil sector."
  - Historical context: "Prior to March 2014, bonds from the State Oil Company of the Azerbaijan Republic (SOCAR) were the country's only benchmark-sized international bonds. SOCAR issued bonds in February 2012 and March 2013."

### Structural reforms, competition, and diversification
- Staff assessment of priorities:
  - "Accelerating structural reforms in governance and the business climate is critical to diversifying the economy and promoting private non-oil investment."
  - Low ranks on governance-related indicators from World Bank and World Economic Forum surveys indicate "considerable scope for improving government effectiveness and widening anti-corruption efforts."
- Specific policy recommendations to improve competition and investment climate:
  - "Put in place an effective anti-monopoly policy, including by creating an independent competition agency."
  - Ensure "ongoing education reform brings curricula in line with market needs and removes the existing bottlenecks in higher education."
  - Combine reforms with "World Trade Organization (WTO) accession over the near term to facilitate the opening of new markets."
- WTO accession process status: "This latter process seems to be gaining momentum following the adoption of the new customs code in line with WTO requirements and the 11th meeting of the working party in February 2014."

### Financial sector, monetary policy, and capital markets
- Monetary and market-development observations and recommendations:
  - Current monetary policy stance "is appropriate if supported by prudent fiscal and financial sector policies."
  - Inflation pressures "are likely to remain subdued if the authorities’ plans to tighten fiscal policy and cool down consumer credit growth are fully implemented."
  - "Monetary tightening would be warranted if demand pressures arise in the event of slippages in the fiscal consolidation plan or a reversal in soft global food prices due to regional tensions."
  - Required actions to strengthen monetary policy and markets:
    - "Discontinuing the CBA’s direct lending on a permanent basis."
    - "Decisive progress to develop the interbank money and foreign exchange markets in line with past IMF technical assistance."
    - These would "facilitate a move toward inflation targeting and pave the way for adopting greater exchange rate flexibility over the medium term."
- Banking-sector resilience and financial deepening:
  - Recent CBA measures "to strengthen banking regulations will help ensure correct capital needs."
  - Further actions needed:
    - Reduce exposure of banks to "connected lending and to un-hedged borrowers."
    - Encourage "market-led consolidation of banks without extending the new deadline to meet the capital requirement."
    - Create "a private bureau to promote competition in interest margins."
    - Protect creditors' rights to "help banks reduce their costs."
    - Ensure a level playing field by "further reducing the IBA’s dominance in the system."
    - "Restructuring the IBA is also needed to help strengthen the monetary transmission mechanism and contain the associated fiscal risks."

### Fiscal policy and medium-term sustainability
- Fiscal strategy and recommendations:
  - "Continued efforts to rein in government spending are needed to reduce fiscal vulnerabilities and achieve sustainability of the non-oil fiscal position in the medium term."
  - Staff "welcomes the approved 2014 budget that contains government spending," and encourages complementing public investment efficiency plans with "decisive business climate reforms to create opportunities for private investment."
  - Move ahead with "planned reform of the pension system, along with the adoption of a rules-based fiscal framework and sound fiscal risk management."
  - Given "prospects of flat oil production and softer oil prices," a "public announcement of and strict adherence to the informal fiscal rule would help build a track record for the adoption of a formal fiscal rule."

### Data provision, statistics, and IMF engagement
- Data provision status:
  - "Azerbaijan’s data provision to the Fund has some shortcomings but is broadly adequate for surveillance."
  - Actions underway "to bring fiscal and external sector statistics in line with international standards."
  - Ongoing IMF technical assistance will "help strengthen the production of statistics, particularly for GDP, fiscal accounts, and the International Investment Position."
- Interagency work and IIP:
  - Joint work by "the Ministry of Finance, State Statistics Committee, and the CBA will help speed up the legislation needed for the compilation and dissemination of external debt and the IIP."
  - "The CBA thus expects to start the compilation and dissemination of International Investment Position (IIP) in coming months."
  - Staff urged authorities "to resume the compilation and dissemination of the IIP by the CBA, as required under Article VIII, Section 5, ahead of the next Article IV Consultation."

### Staff appraisal: strategic outlook and priorities
- Opportunities:
  - "Recent agreements in the gas sector will help transform Azerbaijan into a strategic gas supplier for the European market."
  - "The government's successful debut Eurobond, issued amid market turbulence in the region, is testimony of investors’ confidence in the prudent management of the oil revenues as reflected in large buffers and macroeconomic stability."
  - These factors "provide an opportunity to build on the recent progress in changing the course of macroeconomic policies and take decisive steps to improve governance and the business climate."
- Priority actions to achieve sustainable, diversified growth:
  - Advance governance and business climate reforms to foster "sustainable and diversified private sector-led growth."
  - Rein in government spending and safeguard consolidation with pension reform, rules-based fiscal framework, and fiscal risk management.
  - Strengthen monetary policy framework, develop interbank markets, and end permanent CBA direct lending.
  - Promote financial deepening, reduce connected lending, protect creditors’ rights, and restructure the IBA.
  - Broaden anti-corruption efforts beyond small-scale corruption, "strengthen the rule of law, and reduce formal and informal constraints to business environment in the non-oil sector."

*Source: IMF staff text from the provided content unit.*

### 27.      It is recommended that the next Article IV consultation with Azerbaijan will be held on

### _cr14159 - 27.      It is recommended that the next Article IV consultation with Azerbaijan will be held on

### Recommendation on Article IV consultation timing
- It is recommended that the next Article IV consultation with Azerbaijan will be held on the standard 12-month cycle.

### Output and inflation: recent performance and near-term outlook
- Natural gas will become increasingly important as oil production declines after 2020.
- Hydrocarbon export revenues will continue to decline given the lower price of gas versus oil.
- Oil production levels are recovering from their 2011 trough and non-oil growth remains strong.
- Non-oil growth is driven by construction and service sector growth, to a large extent associated to government spending.
- Inflation remains subdued as food prices continue to be soft, though upward pressure on prices may emerge with the non-oil economy hitting capacity constraints.
- Selected figures and projections:
  - GDP at constant prices: 2013 = 5.8, 2014 = 5.0, 2015 = 4.6 (annual percentage change)
  - Oil sector (GDP growth): 2013 = 0.5, 2014 = -0.1, 2015 = -0.1
  - Non-oil sector (GDP growth): 2013 = 9.9, 2014 = 8.3, 2015 = 7.5
  - Consumer price index (end of period): 2013 = 3.6, 2014 = 3.4, 2015 = 4.5
  - Consumer price index (period average): 2013 = 2.4, 2014 = 3.5, 2015 = 4.0
  - Deviation from potential non-oil output: (chart noted; upward pressure risks as non-oil economy approaches capacity)

### External and fiscal sectors: strengths and vulnerabilities
- External position remains strong, supported by elevated oil prices and large public assets accumulation, but the non-oil current account (CA) deficit remains large, albeit declining as a result of government spending.
- The high reliance of the budget on oil transfers will begin to decline with the 2014 approved budget as part of a spending-reducing fiscal consolidation strategy aimed at narrowing the non-oil primary deficit.
- Selected external and fiscal indicators:
  - Current account balance (in percent of GDP): 2013 = 19.7, 2014 = 15.0, 2015 = 9.9
  - Non-oil current account balance (in percent of Non–oil GDP): 2013 = -19.8, 2014 = -18.8, 2015 = -18.0
  - Gross official international reserves (in millions of U.S. dollars): 2013 = 13,987; 2014 = 15,987; 2015 (proj.) = 16,487
  - Oil Fund assets (in millions of U.S. dollars): 2013 = 35,448; 2014 = 37,723; 2015 (proj.) = 38,484
  - Oil price (US$ per barrel): 2013 = 109.2; 2014 = 102.9
  - Exports, f.o.b. (in millions of U.S. dollars): 2013 = 32,305; 2014 = 31,675; 2015 (proj.) = 29,824
  - Current account break-even and fiscal break-even oil price tracked in charts (RHS in figures)
- Consolidated central government finance (selected):
  - Total revenue and grants (in percent of non-oil GDP): 2013 = 67.0; 2014 = 63.3; 2015 (proj.) = 56.9
  - Total expenditure (in percent of non-oil GDP): 2013 = 61.6; 2014 = 63.3; 2015 (proj.) = 61.6
  - Consolidated government balance, cash basis (in percent of non-oil GDP): 2013 = 12.7; 2014 = 0.5; 2015 (proj.) = -5.0
  - Non-oil primary balance (in percent of non-oil GDP): 2009 = -35.5; 2010 = -36.3; 2011 = -40.3; 2012 = -45.4; 2013 = -45.0; 2014 = -43.2; 2015 (proj.) = -41.8
  - Oil revenue (in millions of manat): 2013 = 16,231; 2014 = 16,065; 2015 (proj.) = 15,907
  - Non-oil revenue (in millions of manat): 2013 = 6,741; 2014 = 7,439; 2015 (proj.) = 8,478

### Monetary and financial sector developments
- Monetary aggregates reflect movements in government spending.
- The nominal exchange rate remains stable, supported by CBA intervention.
- Growth in credit to the private sector has been robust, driven through the share of credit to households, which has sharply grown.
- Despite the fall in dollarization, banks’ foreign exchange exposure continues to grow rapidly. Financial development though generally remains low.
- Selected monetary and financial indicators:
  - Net foreign assets (annual percent change): 2009 = -18.5; 2010 = 34.6; 2011 = 68.7; 2012 = 5.6; 2013 = 19.9; 2014 = 16.4; 2015 (proj.) = 3.4
  - Net domestic assets (annual percent change): 2009 = 63.4; 2010 = 13.5; 2011 = 2.8; 2012 = 40.3; 2013 = 8.7; 2014 = 13.8; 2015 (proj.) = 38.2
  - Credit to the economy (annual percent change): 2009 = 37.9; 2010 = 9.4; 2011 = 20.7; 2012 = 32.1; 2013 = 8.5; 2014 = 11.2; 2015 (proj.) = 12.0
  - Of which: Credit to private sector (annual percent change): 2009 = 25.6; 2010 = 6.6; 2011 = 18.1; 2012 = 20.8; 2013 = 27.6; 2014 = 10.3; 2015 (proj.) = 15.1
  - Broad money (M3) (annual percent change): 2009 = 16.6; 2010 = 21.9; 2011 = 32.1; 2012 = 20.6; 2013 = 15.4; 2014 = 13.9; 2015 (proj.) = 20.0
  - Manat broad money (M2) (annual percent change): 2009 = 9.9; 2010 = 34.8; 2011 = 32.5; 2012 = 25.5; 2013 = 19.0; 2014 = 14.7; 2015 (proj.) = 14.1
  - Reserve money (annual percent change): 2009 = -1.1; 2010 = 32.9; 2011 = 30.2; 2012 = 25.6; 2013 = 10.6; 2014 = 12.6; 2015 (proj.) = 2.6
  - Gross official international reserves (US$ millions): 2009 = 5,364; 2010 = 6,927; 2011 = 10,899; 2012 = 11,587; 2013 = 13,987; 2014 = 15,987; 2015 (proj.) = 16,487
  - Share of foreign currency deposits in total deposits (percent): 2009 = 56.5; 2010 = 44.0; 2011 = 43.1; 2012 = 39.5; 2013 = 32.9; 2014 = 34.8; 2015 (proj.) = 38.6

### Key balance of payments and macro projections (selected)
- Balance of payments (in millions of U.S. dollars):
  - Exports f.o.b.: 2009 = 21,097; 2010 = 26,476; 2011 = 34,494; 2012 = 32,638; 2013 = 32,305; 2014 (proj.) = 31,675; 2015 (proj.) = 29,824
  - Imports f.o.b.: 2009 = -6,514; 2010 = -6,746; 2011 = -10,166; 2012 = -10,480; 2013 = -10,501; 2014 (proj.) = -11,261; 2015 (proj.) = -12,250
  - Trade balance: 2009 = 14,583; 2010 = 19,730; 2011 = 24,328; 2012 = 22,158; 2013 = 21,804; 2014 (proj.) = 20,415; 2015 (proj.) = 17,574
  - Current account balance: 2009 = 10,178; 2010 = 14,834; 2011 = 17,146; 2012 = 14,958; 2013 = 14,488; 2014 (proj.) = 11,914; 2015 (proj.) = 8,715
- Memorandum and projection items:
  - Oil price (US$ per barrel): 2009 = 61.8; 2010 = 79.0; 2011 = 111.0; 2012 = 110.0; 2013 = 110.1; 2014 = 109.2; 2015 (proj.) = 102.9
  - Overall fiscal balance (percent of GDP), selected years: 2013 = 1.0; 2014 = 0.3; 2015 (proj.) = -3.1; 2016 (proj.) = -4.8; 2017 (proj.) = -6.3; 2018 (proj.) = -6.6; 2019 (proj.) = -6.4
  - Gross official international reserves (in billions of U.S. dollars), projections: 2013 = 14.0; 2014 = 16.0; 2015 = 16.5; 2016 = 17.0; 2017 = 17.5; 2018 = 18.0; 2019 = 18.5

### Fiscal and policy implications emphasized in the chapter
- Fiscal consolidation is being implemented through a spending-reducing strategy in the 2014 approved budget to narrow the non-oil primary deficit.
- The budget’s high reliance on oil transfers is set to decline with the 2014 budget measures.
- Monitoring of inflationary pressures is warranted as the non-oil economy expands and capacity constraints may emerge.
- Financial-stability risks arise from rapid growth in banks’ foreign exchange exposure despite falling dollarization; continued monitoring and prudential measures are implied by the analysis.

*Sources: Azerbaijani authorities; and IMF staff estimates and projections contained in the cited chapter.*

### APPENDIX I. Risk Assessment Matrix

### APPENDIX I. Risk Assessment Matrix

### Global Risks
- Surges in global financial market volatility (related to UMP exit), leading to economic and fiscal stress, and constraints on country policy settings.
  - Overall Level of Concern: High
  - Likelihood of Severe Realization in the Next 1–3 years: Medium
  - Expected Impact if Threat Materializes: Channels of transmission from international financial markets to Azerbaijan are not strong. The biggest impact would be through the value of assets held by the oil fund.
- Protracted period of slower growth in advanced economies (negative surprises on potential growth) or emerging economies (incomplete structural reforms).
  - Overall Level of Concern: High (Advanced economies); High (Emerging markets)
  - Likelihood of Severe Realization in the Next 1–3 years: High (Advanced economies); High (Emerging markets)
  - Expected Impact if Threat Materializes: A long period of slow growth in Europe could hurt oil export volumes in the short run and hurt plans to export gas directly to Europe. A slowing in emerging markets will have less impact.
- Sustained decline in commodity prices triggered by deceleration of global demand and coming-on-stream of excess capacity (medium-term).
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: Medium/High
  - Expected Impact if Threat Materializes: Given Azerbaijan’s high oil dependence, the economy could go into recession. The oil fund savings could help cushion the shock. A prolonged price decline would necessitate a large fiscal adjustment.
- Increasing geopolitical tensions surrounding Ukraine lead to disruptions in financial, trade and commodity markets.
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: Medium/High
  - Expected Impact if Threat Materializes: Disruptions in gas supply could raise oil prices by 15 percent. Such event would strengthen growth prospects as well as fiscal and external positions.

Note on likelihood terminology:
- "low" is meant to indicate a probability below 10 percent
- "medium" a probability between 10 and 30 percent
- "high" a probability of 30 percent or more

### Country-Specific Risks
- Oil production risk
  - Nature/Source: Disruptions in oil production if recent efforts to stabilize oil output cannot be sustained.
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: High
  - Expected Impact if Threat Materializes: Disruptions in oil production would undermine growth prospects and result in deteriorations of the overall fiscal and external positions.
- Financial sector risks
  - Nature/Source: The weak position and supervision of the systemic public bank (IBA) could compromise the stability and soundness of the system.
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: Medium
  - Expected Impact if Threat Materializes: A further deterioration of this bank could create systemic problems in the banking system. Though the government is likely to step in with important fiscal costs.
- Fiscal risks
  - Nature/Source: Slippages in the fiscal adjustment due to investment commitments for the 2015 Euro Olympic games in Baku.
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: Medium/Low
  - Expected Impact if Threat Materializes: Delays in undertaking the fiscal adjustment could exacerbate fiscal vulnerabilities to a potential oil price decline.
- Escalation of the conflict with Armenia over Nagorno-Karabakh
  - Nature/Source: Tensions with Armenia could increase, following recent geopolitical events surrounding Ukraine.
  - Overall Level of Concern: Medium
  - Likelihood of Severe Realization in the Next 1–3 years: (not stated)
  - Expected Impact if Threat Materializes: High — Military conflict would entail severe economic and social impacts and damage FDI prospects, particularly in the non-oil sector.

### Policy Responses and Recommendations
- Rebuild policy buffers in anticipation of potential downside risks.
  - Strengthen the non-oil fiscal position beyond the levels envisaged in the 2014 approved budget.
  - Sustain efforts to enhance banking supervision.
  - Develop plans to bring the public bank (IBA) under a sustainable financial position to help contain risks in the financial sector.

*Source: APPENDIX I. Risk Assessment Matrix (Republic of Azerbaijan). International Monetary Fund.*

### 6.      Two more analytical pieces have been delivered in FY14, namely on Economic Diversification

### _cr14159 - 6.      Two more analytical pieces have been delivered in FY14, namely on Economic Diversification

### Bank–Government and donor analytical work and policy dialogue
- Two analytical pieces delivered in FY14: Economic Diversification for Growth, and Fostering Entrepreneurship in South Caucasus.
- The Bank, in partnership with the government, EU and SECO, launched preparation of PEFA. It is expected to be delivered in fall 2014.
- A reimbursable Joint Economic Research Program (JERP) with the Government will be established on a case-by-case basis and start with engagement in ICT area.
- High-level policy dialogue: two high level policy fora were held (first in 2009, then in March 2012). The next high level policy forum is under preparation and expected to take place in September 2014.

### Coordination with the Fund
- Relations between the Bank and the Fund concerning Azerbaijan are characterized as very good in terms of coordinated policy advice and collaboration on macroeconomic monitoring.
- Broad agreement on division of labor: the Fund will continue to focus on macro-critical areas, and will share responsibilities with the Bank on banking and financial sector soundness, coordinating closely to minimize overlap and ensure harmonization of policy advice.

### IFC program and activities
- IFC program aligned with the joint World Bank Group strategy focuses on supporting sustainable growth and diversification of the economy through investments and advisory support to the non-oil sectors, with focus on agribusiness, MSMEs and infrastructure.
- During the current CPS period (FY2011–14) IFC’s annual commitments have averaged at about $30–40 million and have been primarily in the financial sector in the areas of micro, small and medium enterprises and trade finance.
- IFC advisory programs address barriers to private sector investments by:
  - improving the business climate, strengthening financial markets, and increasing resource efficiency;
  - implementing policy reforms related to business registration, inspections and permitting regime;
  - strengthening competitiveness of agribusiness sector through analysis and regulatory reforms;
  - extending policy reforms to tax administration;
  - strengthening financial infrastructure through development of credit bureaus and collateral registries;
  - promoting sustainable energy finance through investments and advisory projects with Bank Respublika aimed at developing SME lending capacity for energy efficient projects;
  - banking sector capacity-building with focus on risk management and SME lending, corporate governance, food safety standards and resource efficiency through regional programs (ECA Corporate Governance Project, ECA Banking Advisory, ECA Resource Efficiency Program and ECA Agribusiness Standards Program).

### IFC Asset Management commitments
- The State Oil Fund of the Republic of Azerbaijan has committed US$350 million to three funds managed by the IFC Asset Management Company:
  - The IFC Global Infrastructure Fund;
  - The IFC Catalyst Fund;
  - The IFC African, Latin American and the Caribbean Fund.

*World Bank and IFC contact information provided in source.*

### Relations with the European Bank for Reconstruction and Development (EBRD) — overview and activity (As of December 31, 2013, Update as of March 2014 in paragraph 5)
- EBRD operations in Azerbaijan since 1993.
- As of 31 December 2013, EBRD invested approximately US$2.3 1 billion in 142 projects.
- Current active portfolio amounts to US$930 million of which 57 percent has been disbursed, and operating assets amount to US$500 million.
- The ratio of private sector projects in the portfolio now stands at around 63 percent.

### EBRD strategic priorities (from February 2014 country strategy)
- Promote market-driven economic diversification:
  - support leading local corporates with direct financing while helping EBRD partner banks to remain active in the corporate segment;
  - special emphasis on SMEs in the agribusiness sector;
  - support local banks to develop capacity to support agricultural and regional lending;
  - regional roads development to facilitate development of a viable agricultural sector and integration of smaller communities.
- Develop a sustainable financial sector to support private sector development:
  - strengthen financial intermediation to ensure efficient financing of the private sector, particularly SMEs and MSEs, including in the regions;
  - promote high standards of corporate governance and risk management: increased competition, new standards and markets for banks, consolidation;
  - extend co-operation with existing partner banks and assist in development and promotion of new financial instruments targeting improved access to finance for women-owned and women-run businesses, energy efficiency, local capital markets, and local currency instruments.
- Improve governance and the business environment:
  - work closely with the Government of Azerbaijan to deepen institutional and regulatory reform;
  - pursue investments in energy projects that improve energy security, create new generating capacity, stimulate competition, diversify energy sources, increase efficiency, and create wider and larger markets through regional integration.

### EBRD sectoral portfolio and 2013–2014 activity
- Energy and natural resources: financed landmark transactions such as BTC pipeline, AZDRES Power Rehabilitation and the Shah Deniz gas field; financed three power sector projects for a total of US$281 million; energy and natural resources represents 30 percent of the overall portfolio.
- Industry, commerce and agribusiness (ICA): represents about 10 percent by volume, but 30 percent by number of transactions; includes investments from building materials to mineral water bottling.
- Financial sector: one fifth of the portfolio; EBRD has equity stakes in three Azerbaijani banks and provides funding for on-lending to the MSME sector to a further six banks and four micro-finance institutions.
- Infrastructure sector: constitutes 40 percent of EBRD's portfolio; includes US$ 250 million for Regional Roads Reconstruction and Upgrading Project, EBRD’s largest investment in Azerbaijan to date.
- 2013: EBRD invested a total of US$225 million in 18 projects.
  - Eight projects in the corporate sector with the average investment size of less than US$5 million.
  - Three projects in the agribusiness sector and four in the manufacturing and services sector.
  - In the financial sector, EBRD signed eight projects, including credit lines with four existing partner banks to be onlent to micro companies and SMEs.
  - EBRD signed a US$120 million second tranche of the Roads Reconstruction project.
  - Continued technical assistance in institution building, credit appraisal and risk management to financial institutions, and accountancy standards, corporate governance to corporate clients.
- First three months of 2014: EBRD signed US$220 million in four projects, of which Shah Deniz Natural Resource project was the largest at US$200 million.
- The Bank expects to sign a further 10 transactions by end-2014, including projects with financial institutions and corporate clients.

### EBRD Early Transition Countries (ETC) initiative
- Azerbaijan is part of the EBRD’s ETC initiative launched in April 2004.
- Initiative aims to increase investments in EBRD’s eight countries of operation in the early transition stage, focusing on private sector business development and selected public sector interventions, using a streamlined approach to financing, focusing on smaller projects, mobilizing more investment, encouraging ongoing economic reform.
- EBRD will accept higher risk in projects it finances in the ETCs while respecting principles of sound banking.

### Statistical issues — summary findings and technical assistance
- General: Economic and financial statistics provided to the Fund are broadly adequate for surveillance purposes, but weaknesses remain especially in national accounts, price statistics, and external sector statistics. STA has provided extensive technical assistance and recommendations.

- Participation and ROSC history:
  - Azerbaijan has participated in the GDDS since mid-2001.
  - April 2002 data ROSC reviewed data dissemination practices and assessed quality of national accounts, CPI, PPI, government finance, monetary, and balance of payments statistics.
  - Azerbaijan nominated a national SDDS Coordinator in August 2005.
  - An SDDS assessment mission in April 2007 provided technical assistance on outstanding issues required for SDDS subscription.
  - A data ROSC module to reassess the CPI completed in July 2008.

A. Real Sector — National accounts and price statistics
- STA national accounts project: significant technical assistance to the State Statistics Committee (SSC); progress made including:
  - Improved methods for compiling gross national income and revised estimates disseminated;
  - Quarterly national account estimates at constant prices for 1998–2004 compiled;
  - Capital investment data revised;
  - Estimates of undeclared wages made;
  - New methodology for calculating price indices for the construction and transportation sectors well underway.
- March-April 2005 mission identified problems:
  - (i) the Oil Fund’s transactions are not adequately reflected in the national accounts due to lack of information from the Oil Fund;
  - (ii) the SSC does not have sufficient information to make reliable estimates of remittances from domestic residents working abroad;
  - (iii) there are no estimates of informal sector activity.
- February 2013 mission prepared an action plan for development and publication of discrete quarterly national account statistics.
- CPI developments:
  - January 2005: CPI revamped—the consumption basket expanded to cover 585 items and expenditure weights updated.
  - Regional coverage expanded to 54 regions; SSC used population-based weights in aggregation of elementary price indices, raising methodological questions because international best practices suggest expenditure-based weights and population shares are not reliable proxies.
  - Recent reassessment found SSC used population weights for regional aggregation through 2006, and has weighted regional indexes by expenditure since 2007, using 2006 Household Budget Survey results; 2009 data are based on 2008 expenditure weights.
- Recommendation: measure both asset and rental prices of housing; 2008 CPI reassessment mission suggested compiling a house price index as a new price indicator distinct from consumption-based CPI.

B. Fiscal Sector
- Treasury modernization expected to improve compilation of fiscal data.
- Ministry of Finance developed the treasury chart of accounts (COA) with Fund peripatetic advisor; October 2006 STA mission found draft COA broadly consistent with the Government Finance Statistics Manual, 2001.
- Work on COA proceeds in parallel with computerization of Treasury operations.
- 2002 data ROSC recommended expanding coverage of government finance statistics to include all operations recorded by the treasury and publish details on financing and debt outstanding.
- Since 2006, state budget incorporates transfers to Nakhichevan as a separate expenditure item, but no further details provided.
- 2012 STA mission assisted with preparation of financial reports based on GFSM 2001; concluded preliminary compilation and dissemination of GFS in accordance with GFSM 2001 on an annual and quarterly basis is possible, though further work on source data is needed.

C. Monetary Sector
- Central Bank of Azerbaijan (CBA) compiles monetary statistics according to the methodology of the Monetary and Financial Statistics Manual.
- CBA reports monetary data to STA within three weeks after the end of the reference month via Standardized Report Forms (SRFs).
- Monetary and financial data published in the International Financial Statistics (IFS) Supplement since December 2006.

D. External Sector
- Balance of payments (BOP) statistics compiled and disseminated by the CBA are broadly in accordance with BPM6.
- CBA has initiated compilation of International Investment Position (IIP) statistics; IIP data for 2002–2008 have been published in IFS; authorities indicated they have discontinued compilation of IIP data effective 2009.
- November 2006–November 2008: a Regional Advisor in External Sector Statistics stationed in Baku to facilitate agency coordination, capacity building, and coordinate technical assistance.
- October 2009 STA technical assistance mission addressed outstanding issues related to external sector statistics.
- 2009 mission findings and recommendations:
  - Appropriate statistical legislation to assign responsibilities for compilation and dissemination of external sector stocks (IIP and gross external debt) had yet to be developed.
  - A draft Presidential Decree On Improvement of the Gross External Debt and International Investment Position Statistics of Azerbaijan was developed to authorize the CBA to compile private and public debt data from relevant agencies but had not been approved, leading to temporary discontinuation of IIP dissemination and IIP/gross external debt compilation system development.
  - Recommended establishment of a formal, high-level structure for data sharing and data provision; expressed concerns about pace of implementation of strategic framework for external sector statistics due to staff turnover and change in status of the BOP Department (now a division).
- 2012 STA mission: found low prospects for restarting IIP work (annual data last published for 2008) as legal position had not changed since 2009 and data sharing across agencies remained a challenge; made recommendations on BOP compilation methodology, data validation, and fine-tuning to BPM6 specifications.
- External debt reporting:
  - Statistics for public and publicly guaranteed external debt are reported quarterly on a due-for-payment basis with a lag of one to two months.
  - A debt service schedule for public and publicly guaranteed external debt, separately identifying principal and interest components, is provided with a one quarter lag.
  - Systematic information on nonguaranteed external debt, including a sectoral breakdown, is lacking.
  - 2005 BOP mission noted desirability of using balance sheet data from commercial banks pertaining to banking sector liabilities to permit presentation of information with a breakdown by maturities and instruments.

*Source: _cr14159 - 6.      Two more analytical pieces have been delivered in FY14, namely on Economic Diversification (PDF chapter/section).*

### 16.      Monthly data on total official reserve assets and daily CBA net interventions in the foreign

### 16. Monthly data on total official reserve assets and daily CBA net interventions in the foreign exchange market

### Data reporting and compilation
- Monthly data on total official reserve assets and daily CBA net interventions in the foreign exchange market are provided within 15 days of the end of each month.
- Data on official reserves during the month are provided on request from Fund staff.
- Azerbaijan does not disseminate International Reserves and Foreign Currency Liquidity Template data.
- The CBA and the government have stated that there have not been any forward or futures transactions that could give rise to contingent short-term net drains on foreign currency assets.
- STA has recently advised the authorities on the definition and coverage of gross official reserve assets.
- The authorities indicated that several definitions of gross official reserve assets are used; STA stressed the importance of using only one definition, specifically the definition that follows the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).
- STA will continue to provide advice to the authorities for the correct compilation of Azerbaijan’s gross official reserve assets.

### IMF Executive Board assessment (Article IV consultation conclusion)
- On May 29, 2014, the Executive Board concluded the Article IV consultation with Azerbaijan and considered and endorsed the staff appraisal without a meeting.
- Recent economic developments were described as favorable:
  - 2013 overall GDP growth: 5.8 percent.
  - 2013 non-oil growth: nearly 10 percent.
  - Inflation in 2013: averaged 2.4 percent.
- Impact of regional market turbulence in early 2014: limited, with few signs of lower manat demand or capital flight.
- Financial indicators of the banking system excluding the largely state-owned public bank, the International Bank of Azerbaijan (IBA), appear stable.

### Recent policy actions and macroeconomic stance
- Authorities have begun to unwind supportive macroeconomic policies from the 2008/09 global crisis.
- Preliminary data suggest the 2013 non-oil primary deficit in percent of non-oil GDP remained at the 2012 level and below the announced target, reflecting some spending restraint.
- The approved budget for 2014 is expected to further consolidate the non-oil primary deficit.
- Central Bank of Azerbaijan (CBA) actions:
  - Kept the refinancing rate steady until end-April 2014, when it lowered the rate by 50 basis points.
  - Reduced direct lending to the real economy.
  - Early 2014: tightened consumer loan conditions to cool private sector credit acceleration.

### Outlook and risks
- Growth projections:
  - Non-oil GDP projected to remain strong at about 8 percent in 2014–15, before declining to 5 percent through 2019.
- Inflation outlook:
  - Set to rise as the non-oil economy hits capacity constraints, but tighter fiscal policy and soft food prices would allow inflation to stay at low single digit levels.
- Sovereign foreign assets: expected to remain comfortable due to high oil prices.
- Key downside risks:
  - Disruption in oil production.
  - Slippages in fiscal adjustment.
  - Further weakening of the financial situation of the IBA.
  - Global outlook deterioration, mainly via a fall in global oil prices.
- Large sovereign foreign assets provide a buffer to mitigate shocks.

### Executive Directors’ policy recommendations and priorities
- Fiscal policy:
  - Continue efforts to rein in government spending to reduce fiscal vulnerabilities and achieve sustainability of the non-oil fiscal position in the medium term.
  - Complement plans to improve public investment efficiency with decisive business climate reforms to create opportunities for private investment.
  - Move ahead with planned pension system reform, adopt a rules-based fiscal framework, and implement sound fiscal risk management.
  - Public announcement of and strict adherence to the informal fiscal rule would help build a track record for a formal fiscal rule.
- Monetary and financial policy:
  - Current monetary policy stance is appropriate if supported by prudent fiscal and financial sector policies.
  - Monetary tightening warranted if demand pressures arise from fiscal slippages or reversal in soft global food prices.
  - Discontinue the CBA’s direct lending on a permanent basis.
  - Decisive progress to develop the interbank money and foreign exchange markets in line with past IMF technical assistance.
  - Move toward inflation targeting and greater exchange rate flexibility over the medium term as diversification and financial integration increase.
- Banking sector and structural reforms:
  - Enhance the regulatory framework while promoting financial deepening.
  - Reduce exposure of banks to connected lending and to un-hedged borrowers.
  - Encourage market-led consolidation of banks without extending the new deadline to meet the capital requirement.
  - Create a private bureau to promote competition in interest margins.
  - Protect creditors’ rights to help banks reduce their costs.
  - Ensure a level playing field by further reducing the IBA’s dominance.
  - Restructure the IBA to strengthen monetary transmission and contain fiscal risks.
- Structural and governance reforms to support non-oil growth:
  - Accelerate reforms to attract private investment.
  - Broaden anti-corruption efforts beyond small-scale corruption.
  - Strengthen the rule of law.
  - Reduce formal and informal constraints to the non-oil business environment.
  - Build domestic capital markets and open new export markets.

### Key statistics (Azerbaijan: Selected Economic Indicators, 2010–15)
- Real economy (annual percentage change)
  - GDP at constant prices: 2010: 5.0; 2011: 0.1; 2012: 2.2; 2013: 5.8; 2014 Prel.: 5.0; 2015 Proj.: 4.6
  - Oil sector 1/: 2010: 5.0; 2011: -9.8; 2012: -5.3; 2013: 0.5; 2014 Prel.: -0.1; 2015 Proj.: -0.1
  - Non-oil sector 2/: 2010: 7.6; 2011: 9.4; 2012: 9.6; 2013: 9.9; 2014 Prel.: 8.3; 2015 Proj.: 7.5
  - CPI (average): 2010: 5.7; 2011: 7.9; 2012: 1.0; 2013: 2.4; 2014 Prel.: 3.5; 2015 Proj.: 4.0
- Fiscal (in percent of GDP)
  - Consolidated government fiscal balance: 2010: 14.6; 2011: 13.6; 2012: 4.9; 2013: 1.0; 2014 Prel.: 0.3; 2015 Proj.: -3.1
  - Non-oil primary fiscal balance (in percent of non-oil GDP): 2010: -36.3; 2011: -40.3; 2012: -45.4; 2013: -45.0; 2014 Prel.: -43.2; 2015 Proj.: -41.8
- Money and credit (annual percentage change)
  - Manat base money: 2010: 31.6; 2011: 29.4; 2012: 27.1; 2013: 10.7; 2014 Prel.: 12.7; 2015 Proj.: 9.5
  - Manat broad money: 2010: 34.8; 2011: 32.5; 2012: 25.5; 2013: 19.0; 2014 Prel.: 14.7; 2015 Proj.: 14.1
  - Banking sector credit to the private sector: 2010: 6.6; 2011: 18.1; 2012: 20.8; 2013: 27.6; 2014 Prel.: 10.3; 2015 Proj.: 15.1
  - Velocity of total broad money (M3) 3/: 2010: 2.8; 2011: 2.6; 2012: 2.3; 2013: 2.3; 2014 Prel.: 2.3; 2015 Proj.: 2.3
- Balance of payments (in percent of GDP unless otherwise specified)
  - Current account balance (-, deficit): 2010: 28.0; 2011: 26.5; 2012: 21.8; 2013: 19.7; 2014 Prel.: 15.0; 2015 Proj.: 9.9
  - External public debt: 2010: 7.4; 2011: 7.3; 2012: 9.2; 2013: 11.7; 2014 Prel.: 14.0; 2015 Proj.: 14.2
- Gross official international reserves
  - In billions of US$, end of period: 2010: 6.7; 2011: 10.9; 2012: 11.6; 2013: 14.0; 2014 Prel.: 16.0; 2015 Proj.: 16.5
  - In months of next year non-oil imports, c.i.f.: 2010: 6.1; 2011: 9.6; 2012: 9.9; 2013: 11.4; 2014 Prel.: 12.3; 2015 Proj.: 10.7
- Exchange rate
  - End-of-period (Manat/US$): 2010: 0.798; 2011: 0.787; 2012: 0.785; 2013: 0.785
  - Real effective exchange rate (percentage change, "-"=depreciation): 2010: 1.1; 2011: 2.6; 2012: 0.8; 2013: 3.0

*Source: IMF staff report — IMF Executive Board Concluding Statement and related country data (as of March, 2014).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14159.pdf_