Press Release No. 95/58

The International Monetary Fund (IMF) today approved credits for Azerbaijan totaling SDR 87.8 million (about $132 million) to support the Government's 1995-96 economic reform program. Of the total, the equivalent of SDR 58.5 million (about $88 million) is being made available under a one- year stand-by credit, and SDR 29.3 million (about $44 million) is being disbursed as Azerbaijan s second drawing under the systemic transformation facility (STF).¹ The first drawing under the STF, also of SDR 29.3 million, was approved on April 19, 1995 (see Press Release No. 95/24).

Background

The comprehensive stabilization and reform program that Azerbaijan launched at the start of 1995 has been extremely successful in achieving macroeconomic stabilization. Supported by the first STF drawing, the program has brought about a rapid reduction in inflation from a monthly rate of over 50 percent in late 1994 to an average of 2-1/2 percent during the past six months. Significant progress has also been achieved in promoting monetary stability, as indicated by a broadly stable nominal exchange rate and a rapid accumulation of foreign reserves. As in other transition economies at this stage of the reform, recorded real output has continued to decline, although economic activity in the nonrecorded sectors, such as trade and services, appears to be on the rise. By contrast, progress in structural reforms has been mixed. In early 1995, commendable progress was made in improving the functioning of the marketplace by unifying and liberalizing the exchange regime, centralizing foreign exchange holdings in the central bank, abolishing the state order system, and eliminating subsidies. However, the pace of structural reforms has since slowed, in particular in the area of privatization.

The Program for 1995-96

Building upon the gains achieved thus far, the Government's program for 1995-96--supported by the second drawing under the STF and the stand-by credit--aims to reduce inflation to a monthly rate of 1 percent by the end of the program period through continued tight financial policies, and to achieve positive economic growth toward the end of 1996.

To these ends, the program aims at further fiscal adjustment, with a reduction of the overall budget deficit to 3 percent of GDP in 1996. There will be a tightening of monetary policy at the beginning of the program to contain inflationary expectations, following an expansion in monetary aggregates during the summer of 1995. For 1996, monetary policy will be geared toward achieving the targeted decline in the rate of inflation and maintaining a higher level of international reserves.

The external current account deficit (excluding the actions of an oil consortium developing offshore oil deposits) is expected to deteriorate slightly and reach 11 percent of GDP in 1996. Much of this deterioration is linked to imports for the development of oil fields and other investment projects.

Structural Reforms

The major emphasis in structural policies lies in restructuring the financial sector, rationalizing the price structure, achieving rapid progress in privatization, and initiating the enterprise restructuring process.

In the area of privatization, at least 8,000 small enterprises are to be privatized by end-1995, 50 large and medium-sized enterprises by end- March 1996, and the distribution of vouchers for mass privatization of other enterprises is to start by end-March 1996.

To advance the restructuring of the enterprise sector, the authorities intend to develop a restructuring program that draws on the experience gained in other countries of the Commonwealth of Independent States. In this exercise, the Government will identify large loss-making enterprises and isolate them from the banking system, reduce overmanning, and close nonviable product lines and plants.

Addressing Social Costs

Work has begun on a comprehensive reform of the benefits system. With this reform, the efficiency of the safety net will be greatly improved, while social expenditures will be preserved at 7-8 percent of GDP.

The Challenge Ahead

Continued progress on structural reforms and macroeconomic stabilization are needed for Azerbaijan to utilize fully the economic benefits that can be achieved from the successful implementation of its large oil projects. Most important, the authorities need to recognize the importance of rapid progress in structural reforms as a cornerstone for the success of the program.

Azerbaijan joined the IMF on September 18, 1992. Its quota² is SDR 117.0 million (about $175 million), and its outstanding use of IMF credit currently totals SDR 29 million (about $44 million).

Azerbaijan: Selected Economic Indicators   1994 1995* 1996*   (percent change) Real GDP –21.2 –16.4 –6.7 Consumer price index 1664.4 412.2 24.2   (percent of GDP) External current account balanc,     excluding oil consortium (deficit–) –8.5 –10.2 –10.8 General Government fiscal balance (deficit–) –14.8 –6.9 –3.0 Gross reserves in months of imports — 3.0 2.9 Sources: Azerbaijan authorities; and IMF staff estimates. *Program. 1. The STF is a temporary IMF financing facility that provides assistance to member countries facing balance of payments difficulties arising from severe disruptions in their traditional trade and payments arrangements owing to a shift from reliance on trading at nonmarket prices to multilateral, market-based trade. 2. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.