Azerbaijan's Opportunity to Reboot, Diversify Economy

IMF News, September 15, 2016

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Title: Azerbaijan's Opportunity to Reboot, Diversify Economy
Date: September 15, 2016
Context: IMF Country Focus piece summarizing the IMF assessment of Azerbaijan's economy amid a large decline in oil prices and weaker regional growth.

Growth fell to 1.1 percent in 2015.
Growth expected to be -2.4 percent in 2016.
Inflation averaged 4.1 percent in 2015 and is expected to jump to 10 percent in 2016.
During the boom years, oil activity accounted for about three-quarters of GDP and government income, and 90 percent of exports.
Recent dynamics driving the slowdown: large decline in oil prices, cuts in public investment, currency depreciations, and slowdown in trading partners’ economies.
Specific domestic developments in 2016 cited: public investment fell, credit activity stagnated, and oil production remained flat.

Monetary policy: tightened sharply over the last year to address inflation and support the currency.
Fiscal policy: slightly relaxed to accommodate more spending to stimulate growth and protect vulnerable populations.
Exchange rate regime: devaluations in 2015 (needed to restore competitiveness and preserve reserves); greater exchange rate flexibility allowed thus far in 2016 to more fully absorb shocks.

Devaluations and recession have hurt bank profitability and increased non-performing loans.
Dollarization pressures rose as citizens shift toward loans and borrowing in U.S. dollars, exacerbating financial vulnerabilities.
Authorities are taking steps to address high incidence of non-performing loans, including closing a number of non-viable banks.
IMF Mission Chief emphasized the pressing need for a rapid and well-organized cleanup of the banking system so that credit to the real economy flows efficiently.

Declines in oil prices translate into:
- Lower export revenues.
- Reduced hydrocarbon profits.
- Less foreign direct investment.
- Fewer budgetary transfers from Azerbaijan’s main sovereign wealth fund to the state budget.
- Lower related public investment.
Exchange rate pressure and reserve depletion under the old pegged regime prompted the 2015 devaluations; these helped avoid excessive external imbalances, restored competitiveness, and preserved foreign exchange reserves.
Non-oil sector growth has been lowered, producing indirect second-round negative effects throughout the economy.

Objective: shift to a new economic model based more on non-oil private sector growth.
Recommended measures include:
- Boosting competition among firms.
- Making it easier to start a business.
- Reforming rules on hiring and firing.
- Investing in human capital and education.
- Rapid and well-organized cleanup of the banking system to restore efficient credit intermediation.
IMF role: work with authorities to create first rate macroeconomic institutions, frameworks, and policies to support the reform process.

Source: IMF News — "Azerbaijan's Opportunity to Reboot, Diversify Economy", September 15, 2016.