Azerbaijan: Staff Concluding Statement of the 2022 Article IV Mission
IMF News, July 6, 2022
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Bibliographic details
- Published: July 6, 2022
Context: recovery, inflation, and external environment
- Mission dates: May 25 to June 7, 2022.
- Real GDP increased by 5.6 percent in 2021; hydrocarbon GDP increased by 1.8 percent; non-hydrocarbon GDP rose by 7.2 percent.
- CPI inflation: 2.7 percent (yoy) in December 2020 → 12.0 percent in December 2021; remained around 12 percent during January–April 2022.
- Current account: surplus of 15.2 percent of GDP in 2021 (from a small deficit in 2020).
- SOFAZ oil revenues jumped by over 60 percent in 2021.
- General government and government-guaranteed debt decreased to 41.8 percent of GDP in 2021, from 54 percent of GDP in 2020.
- CBA policy rate: raised cumulatively by 150 points by end-March 2022 to 7.75 percent (25 points above end-2019).
- Banking sector: total loans increased by 22 percent (April 2022 vs April 2021); loans to households rose by 34 percent; deposits grew by 28 percent. Deposit dollarization declined to 50.8 percent (from 54 percent a year ago).
- Key near-term risks from the war in Ukraine: rising food prices, food security, spillovers from sanctions, uncertainty.
Outlook and risks
- Growth projections:
- 2022: 3.8 percent (staff projection).
- Medium term: around 2½ percent as output gap closes in 2023 and oil and gas production gradually declines.
- Non-hydrocarbon GDP: projected growth of 5.5 percent in 2022 (based on robust Q1 growth).
- Inflation projections and policy:
- Inflation projected to remain elevated in 2022 due to high food and commodity prices and supply chain rigidities.
- Additional monetary tightening needed to support inflation returning to the upper bound of the CBA target band (4±2 percent) by end-2024 and remain around the mid-point thereafter.
- Energy price effects:
- Staff projects SOFAZ assets to approach 100 percent of GDP in 2025, driven by higher energy prices and potential increased gas exports to Europe.
- Risk assessment:
- Risks increased due to the war but remain broadly balanced.
- New challenges: food security (17 percent of imports come from Russia, mostly food), limited access to fertilizers and inputs, potential sanctions impact, domestic risks from SOEs and banking asset quality, and spending pressures from higher oil revenues.
Fiscal policy — saving the windfall; protecting the poor
- Staff projection for 2022 budget surplus based on WEO oil price of $108.5 per barrel (authorities budget assumption: $50 per barrel).
- Staff projects nonoil revenue growth of 12.2 percent.
- Staff total spending projection: increase by about 18 percent (slightly higher than authorities’ approved budget).
- 2021 fiscal outcomes:
- Overall fiscal balance improved by 10 percent of GDP, reaching a surplus of 4 percent of GDP in 2021.
- Non-oil primary deficit improved by over 7 percent of nonoil GDP.
- Covid-related spending increased from AzN 261 million to over AzN 800 million; funded by reallocation.
- Social protection measures implemented:
- 20 percent increase in the minimum wage and the minimum pension.
- 35 percent increase in social allowances.
- Subsidies to flour producers extended; VAT and customs exemptions for wheat, wheat flour and bread extended until January 1, 2024.
- Total 2021–22 social package amounts to AzN 2.1 bn (1.6 percent of GDP) and covers 3.5 million people.
- Fiscal framework recommendations:
- Staff views appropriate a reduction in the nonoil primary deficit on average by at least 1.5 percent of nonoil GDP annually in the medium term.
- Revenue measures suggested: broaden tax base by reducing tax holidays, tax exemptions and reduced tax rates; reform personal income tax system; modernize property tax system.
- Expenditure measures suggested: moderate wage bill growth (in line with inflation or less), rationalize generalized subsidies by gradually raising domestic fuel and energy prices while protecting the poor, continue rolling expenditure framework for pilot sectors (education, agriculture, environmental protection) for 2022–25.
- Staff welcomes re-introduction of a revised fiscal rule targeting the nonoil primary balance (NOPB) and general government debt; medium-term target: reduce NOPB to 20 percent of nonoil GDP by 2025 while keeping public debt-to-GDP ratio below 20 percent of GDP.
- Need for transparent, binding fiscal rule with accountability, correction mechanisms, escape clauses, and strong fiscal oversight.
Monetary policy — tackling inflation; strengthening interbank and markets
- CBA actions:
- Reversed easing and increased interest rates in late 2021 and early 2022; discount rate at 7.75 percent by end-March 2022.
- CBA paused tightening at end-April meeting as inflation and expectations moderated.
- Policy assessment and recommendations:
- Imported inflation is an important driver, but inflation has become broad-based; further tightening would be needed to prevent entrenchment of inflation expectations.
- CBA should be prepared to keep pace with expected increases in global interest rates.
- Continue modernization of monetary policy framework: emphasize interest rates as intermediate target, increase exchange rate flexibility in the long-run, develop government securities market and active money markets, continue de-dollarization efforts, strengthen CBA analytical and forecasting capacity, and improve communication.
- CBA is developing a new CBDC strategy; staff stands ready to support.
Financial sector — soundness, vulnerabilities, and supervision
- Financial soundness indicators and trends:
- Capital adequacy ratio: 19.1 percent at end-2021 (fell as risk-weights reset to pre-pandemic levels).
- NPL ratio declined further; loan dollarization fell to 25.4 percent by March 2022 (lowest in seven years).
- Return on assets around 2 percent; return on equity increased from 12.5 percent (end-2019) to 15 percent in Q1 2022. [footnote data preserved]
- Emerging vulnerabilities:
- Large number of restructured loans may mask impaired business loans; uncollateralized business loans and restructured loans remain major credit risks.
- Consumer lending increasing rapidly in some banks; risk from high DTI ratios.
- Stress tests indicate NPL ratio could increase by the same magnitude as during the 2015–16 crisis in an adverse scenario.
- Supervision and regulatory recommendations:
- Renew effort to move to a risk-based supervisory framework and supervise larger banks on a consolidated basis.
- Continue stress tests and thematic inspections to assess asset quality.
- Modernize provisioning rules and align to the IFRS 9 framework to account for expected credit loss rather than actual incurred loan loss.
- Monitor banks’ usage of alternative payment systems or crypto currencies given potential exposure to Russia.
- Correspondent banking:
- Authorities monitor situation; some challenges with correspondent banks in the United States and Europe, including delays in processing payments. Two thirds of Azerbaijan’s banks have correspondent accounts in U.S. and European banks, though some banks face access problems.
Structural policy — diversify and de-carbonize; SOE reforms and governance
- Long-term objectives:
- Diversify away from hydrocarbon exports and promote a sustainable, diversified economy per Azerbaijan 2030.
- Invest part of hydrocarbon windfall in productive investment, including green infrastructure to support intraregional trade.
- SOE-related recommendations:
- Large SOE footprint impedes diversification; limited progress in reducing state participation.
- Establishment of Azerbaijan Investment Holding (AIH) provides opportunity to reinvigorate reforms.
- Suggested steps for SOEs:
- Separate commercial from noncommercial activities (finance noncommercial from the budget).
- Increase SOE transparency and performance monitoring through AIH.
- Facilitate privatization and financial restructuring where needed.
- Introduce measures to mitigate social impact of SOE reforms.
- Governance and anti-corruption:
- Important governance weaknesses and corruption vulnerabilities remain in judicial independence, AML/CFT, public procurement, and transparency in the extractive industry.
- Staff welcomes recently adopted National Anti-Corruption Strategy (NACAP) but notes critical areas remain to be addressed.
- Authorities should integrate critical policy measures into an updated anti-corruption strategy, address remaining gap in AML/CFT legal framework, upgrade anti-corruption framework in line with international standards, and strengthen implementation.
Key statistics and projections (selected figures preserved exactly)
- Growth and inflation:
- GDP at constant prices: 2.5 (2019), -4.2 (2020), 5.6 (2021), 3.8 (2022), 2.6 (2023).
- Consumer price index (period average): 2.7 (2019), 2.8 (2020), 6.7 (2021), 12.3 (2022), 9.5 (2023), 7.0 (2024), 5.0 (2025), 4.0 (2026).
- Consumer price index (end of period): 2.4 (2019), 12.0 (2021), 11.0 (2022), 8.0 (2023), 6.0 (2024).
- External and fiscal aggregates:
- Current account: -0.5 (2019), 24.6 (2020), 21.0 (2021), 15.2 percent of GDP (stated earlier for 2021).
- General government and government-guaranteed debt: 47.5 (2019), 54.0 (2020), 41.8 (2021), 29.2 (2022), 29.1 (2023), 30.1 (2024), 32.0 (2025), 34.0 (2026), 36.1 (2027).
- General government debt 5/: 17.7 (2019), 21.3 (2020), 26.4 (2021), 21.2 (2022), 23.5 (2023), 25.5 (2024), 27.7 (2025), 30.0 (2027).
- Oil Fund Assets (in millions of U.S. dollars): 43,323 (2019), 43,564 (2020), 45,025 (2021), 53,429 (2022), 62,168 (2023), 70,742 (2024), 76,580 (2025), 79,840 (2026), 82,076 (2027).
- Assumed oil price (WEO plus $2-$3 premium, U.S. dollars per barrel): 63.4 (2019), 44.3 (2020), 71.1 (2021), 108.5 (2022), 96.5 (2023), 85.7 (2024), 78.7 (2025), 74.4 (2026), 72.2 (2027).
- Gross official international reserves (in millions of U.S. dollars): 6,258 (2019), 6,369 (2020), 7,075 (2021), 7,275 (2022), 7,475 (2023), 7,675 (2024), 7,875 (2025), 8,075 (2026), 8,275 (2027).
- Monetary and banking indicators:
- CBA policy rate: 7.75 percent by end-March 2022.
- Banking sector capital adequacy ratio: 19.1 percent at end-2021.
- Loan dollarization: 25.4 percent by March 2022.
- Deposit dollarization: 50.8 percent (April 2022), from 54 percent a year earlier.
- Banking sector flows: total loans +22 percent (April 2022 vs April 2021); household loans +34 percent; deposits +28 percent.
- Social measures and fiscal support:
- Exemptions and measures: VAT and customs exemptions for wheat, wheat flour and bread extended until January 1, 2024.
- Total 2021–22 social package: AzN 2.1 bn (1.6 percent of GDP), covers 3.5 million people.
- During January–April 2022, state budget revenues rose by 30 percent.
International Monetary Fund. Staff Concluding Statement of the 2022 Article IV Mission for Azerbaijan (July 6, 2022).