Azerbaijan - Staff Concluding Statement of the 2021 Article IV Mission
IMF News, June 18, 2021
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- Published: June 18, 2021
Recent Developments, Outlook, and Risks
- Economic contraction and drivers:
- Economic activity contracted by 4.3 percent in 2020, driven by the hydrocarbon, contact-intensive and transportation sectors.
- Inflation remained low, under 3 percent in 2020.
- Fiscal balance moved from a sizable surplus in 2019 to a large deficit in 2020.
- Current account balance weakened in 2020.
- Policy response:
- Increased health spending and a sizeable economic relief package helped save lives and livelihoods and cushion the economic impact from the pandemic and the decline in oil prices.
- Outlook and risks:
- Vaccination is expected to help defeat COVID-19 and support the recovery.
- GDP growth is projected to pick up to 2.3 percent in 2021, as the sectors affected by stringent lockdown re-open.
- The new Southern Gas Corridor pipeline will boost exports of natural gas, mitigating the decline in oil production.
- Inflation is projected to increase moderately to around 4 percent.
- Consolidated budget deficit is projected to remain high at 5.6 percent of GDP in 2021, owing to continued COVID-19 spending and increased reconstruction spending, before starting to narrow in 2022.
- Higher oil prices should improve the current account, turning it to a surplus of 2.4 percent of GDP, from a small deficit in 2020.
- Risk assessment:
- Risks to the outlook are broadly balanced, although uncertainty about the future of the pandemic remains high.
Fiscal Policy — Findings and Recommendations
- Findings:
- The authorities suspended the fiscal rule and rolled out a substantial fiscal package in response to the COVID-19 pandemic.
- Allowing the fiscal balance to move from a surplus to deficit in 2020-21 was judged appropriate given the severity of the shocks.
- Near-term guidance:
- Priority is to defeat COVID-19 and support the economy until the recovery is firmly underway.
- Fiscal policy needs to remain flexible; if downside risks materialize, automatic stabilizers should be allowed to operate and additional, targeted relief should be provided as needed.
- Longer-term recommendations:
- Fiscal policy needs to shift to gradual and growth-friendly consolidation.
- Share oil wealth with future generations to ensure intergenerational equity given projected decline in oil resources.
- Improvements in the efficiency of public spending, generalized subsidies, public employment, and taxation could support fiscal consolidation.
- Ensure adequate and well-targeted social spending to protect the most vulnerable and improve inclusiveness and productivity.
- Reintroduce the fiscal rule, improve public financial management and reporting, and strengthen fiscal risk and SOE oversight and governance to underpin a sustainable and credible fiscal policy course.
Monetary and Financial Policies — Findings and Recommendations
- Findings:
- Monetary policy has been appropriately eased in response to the pandemic.
- Interest rate cuts, in the context of the de facto peg to the U.S. dollar, and easing of prudential regulation complemented fiscal relief and kept credit flowing.
- Bank lending rates eased only moderately and remain relatively high, amid weak monetary transmission.
- Recommendations:
- Gradual normalization of bank prudential and regulatory measures should continue, proceeding carefully in line with progress on combating the pandemic and re-opening the economy.
- Further improvements in the CBA’s policy frameworks and initiatives to develop financial markets and improve financial intermediation and access to finance would support diversification, productivity, and resilience.
- Continue CBA efforts to improve financial oversight, supported by cooperation with international financial organizations through technical assistance.
Structural Reforms — Findings and Recommendations
- Findings:
- Structural reforms are needed to boost productivity and long-term growth potential.
- Diversifying the economy and promoting development of a dynamic nonhydrocarbon sector is crucial for boosting growth prospects and creating jobs.
- Recent focus on improving governance and efficiency of state-owned enterprises is appropriate.
- Recommendations:
- Support SOE reforms with steps to promote competition, improve governance and transparency, and ensure access to finance.
- Ensure sufficient funding for education, healthcare and social protection to help the workforce deal with pandemic scarring and prepare for long-term challenges posed by exhaustion of oil resources, digitalization and climate change.
- Implement comprehensive structural reforms in line with recently approved national priorities for socio-economic developments to promote sustainable, inclusive, and green economic growth.
Selected Economic Indicators and Projections (as reported)
- Demographics and key facts:
- Population (2020 est.): 10.06 million
- Literacy/Poverty rates: 100.0 (2018)/5.4 (2018)
- Quota (in SDR million): 391.7
- Per capita GDP (in US$, 2020): 4,232
- Main products and exports: Oil, gas, and fruits.
- Key export markets: Italy, Turkey, Israel
- Projections and historical series (selected):
- Real GDP growth (in percent): 2018: 1.5; 2019: 2.2; 2020: -4.3; 2021: 2.3; 2022: 1.7
- Real non-oil GDP growth (in percent): 2018: 2.1; 2019: 3.3; 2020: -2.6; 2021: 3.5; 2022: 2.5
- Real oil GDP growth (in percent): 2018: 0.5; 2019: 0.4; 2020: -7.2; 2021: 0.2; 2022: (not listed)
- Unemployment rate (in percent): 2018: 4.9; 2019: 4.8; 2020: 6.5; 2021: 5.8; 2022: 5.7
- Consumer price index (period average): 2018: 2.7; 2019: 2.8; 2020: 4.0; 2021: 3.2; 2022: (not listed)
- Revenue (including grants, in percent of GDP): 2018: 38.6; 2019: 41.5; 2020: 33.8; 2021: 31.7; 2022: 33.5
- Expenditure (in percent of GDP): 2018: 33.1; 2019: 33.3; 2020: 40.4; 2021: 37.2; 2022: 36.5
- Current expenditure (in percent of GDP): 2018: 19.1; 2019: 21.6; 2020: 28.8; 2021: 27.2; 2022: 27.6
- Capital spending and net lending (in percent of GDP): 2018: 14.0; 2019: 11.7; 2020: 11.6; 2021: 10.0; 2022: 8.9
- Fiscal balance (in percent of GDP): 2018: 5.5; 2019: 8.2; 2020: -6.6; 2021: -5.6; 2022: -3.0
- Non-oil primary fiscal balance (in percent of non-oil GDP): 2018: -31.7; 2019: -27.2; 2020: -30.3; 2021: -32.1; 2022: -30.2
- General government gross debt (direct borrowing) 1/: 2018: 18.7; 2019: 17.7; 2020: 21.4; 2021: 30.6; 2022: 31.4
- General government gross debt including guarantees: 2018: 48.2; 2019: 47.7; 2020: 54.1; 2021: 46.0; 2022: 44.4
- Broad money (including foreign currency deposits, percentage change): 2018: 19.9; 2019: 1.1; 2020: 8.3; 2021: 6.4
- Bank credit to the private sector (percentage change): 2018: 14.9; 2019: 15.2; 2020: -0.7; 2021: 5.0; 2022: 9.1
- Current account balance (in percent of GDP): 2018: 12.8; 2019: -0.5; 2020: 2.4; 2021: 1.9
- Foreign direct investment (in percent of GDP): 2018: -1.7; 2019: -2.9; 2020: -1.8; 2021: 0.8; 2022: 1.0
- Gross international reserves (in months of non-oil imports): 2018: 4.7; 2019: 5.4; 2020: 6.8; 2021: 5.9
- REER (average, percentage change): 2018: 3.1; 2019: 3.9; 2020: 4.5
- Note on debt reporting:
- 1/ Starting in 2021, includes guarantees issued to Aqracredit for its acquisition of distressed assets from the IBA.
Azerbaijan - Staff Concluding Statement of the 2021 Article IV Mission, June 18, 2021.