## IMF Executive Board Concludes 2023 Article IV Consultation with the Republic of Azerbaijan

_IMF News, February 6, 2024_

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## Bibliographic details
- Published: February 6, 2024

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### Overview
- On January 11, 2024, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Azerbaijan and endorsed the staff appraisal without a meeting on a lapse of time basis.
- Press Release No. 24/41; IMF Communications Department; February 6, 2024.

### Recent economic developments (2022–2023)
- Real GDP increased by 4.6 percent in 2022, driven by a 9 percent increase in non-hydrocarbon GDP, with recovery in the construction and transportation sectors.
- Hydrocarbon GDP shrank by 2.7 percent in 2022, with oil production facing technical challenges only partially offset by rising gas production.
- Growth moderated in 2023, reflecting a deceleration of non-hydrocarbon growth to about 3 percent and declining hydrocarbon production.
- Inflation: increased sharply to 14.3 percent (yoy) in December 2022, then declined to 3.9 percent in October 2023, driven by a broad-based decline in food, nonfood, and services prices.
- External and fiscal positions strengthened in 2022 and remained strong into 2023:
  - Current account balance: surplus of 29.8 percent of GDP in 2022 (from 15.1 percent in 2021) and 10.1 percent of GDP in the first half of 2023.
  - Combined Central Bank of Azerbaijan (CBA) and Sovereign Oil Fund of Azerbaijan (SOFAZ) reserves reached about $55.5 billion by October 2023.
  - Overall budget surplus increased to over 6 percent of GDP in 2022, from 4 percent in 2021.
  - Non-oil primary balance improved by about 1 ½ percent of non-oil GDP in 2022.
  - During January-October 2023, overall budget surplus remained broadly similar to the same period in 2022.

### Outlook and risks
- Growth and inflation projections:
  - Growth projected to decelerate to around 2.4 percent in 2023 and to 2.3 percent in the medium term.
  - Output gap expected to close in 2024.
  - Inflation projected at 4.4 percent by end-2023, and to remain within the CBA target band in the medium term.
- External position: supported by elevated oil prices, projected to remain strong with trade surpluses and continued foreign reserves accumulation.
- Risks (broadly balanced but high, with high external uncertainty):
  - Upside: Intensification of wars could increase hydrocarbon prices and demand, boosting exports and fiscal revenues; a peace agreement with Armenia could increase regional trade.
  - Downside: Intensified conflicts could raise food prices, posing food security and inflation risks; global slowdown and geoeconomic fragmentation could weaken terms of trade and trading-partner demand.
  - Domestic risks: pro-cyclical fiscal policy, fiscal risks from state-owned enterprises (SOEs), extreme climate events affecting agriculture, food security, and inflation.

### Executive Board assessment (summarized)
- Growth is moderating after the post-pandemic surge in 2022; inflation has eased and returned to the target band of 4 ± 2 percent after peaking in late 2022.
- Hydrocarbon output projected to continue contracting gradually due to structural decline in oil production, only partially offset by rising gas production.
- The external position in 2022 is assessed as stronger than implied by fundamentals and desirable policies.
- Inflation risks remain from potential external shocks and continued strong domestic demand.
- Overall risk assessment: broadly balanced but high due to uncertain external developments.

### Policy recommendations and authorities’ guidance
- Fiscal policy:
  - Near term: Fiscal policy should remain prudent. Projected increase in the deficit is unwarranted based on cyclical considerations while the output gap is still positive.
  - Authorities expected to continue meeting the non-oil primary balance target of -25 percent of non-oil GDP this year.
  - Save any revenue overperformance or expenditure shortfall to reduce inflation risk and sustain consolidation gains.
  - Medium term: Continued fiscal adjustment of at least 1.5 percent of non-oil GDP needed to reduce the gap with the permanent-income-hypothesis benchmark of 12.5 percent of non-oil GDP.
  - Adjustment requires spending prudence and measures to boost non-hydrocarbon revenues.
  - Authorities encouraged to clarify conditions for revising fiscal targets and correction mechanisms to strengthen credibility of the fiscal rule.
- Monetary policy and central bank actions:
  - Monetary stance is appropriate; caution advised before further easing.
  - Central bank cut policy rates in November 2023 after tightening by 275 points from mid-2021 to May 2023 and increasing reserve requirements.
  - Further easing should await tightening fiscal stance, decelerating income and wage growth, and absence of adverse food price shocks.
  - CBA should continue to strengthen the monetary transmission mechanism: launch of new operational framework and liquidity mop-up welcomed; further improvements needed to transmit policy rate changes to bank lending rates, along with better forecasting and communication, to enable greater exchange rate flexibility and a hybrid inflation targeting regime in the medium to long run.
- Financial sector and structural reforms:
  - Banking sector remains resilient; financial soundness indicators strong but do not fully capture risks.
  - Recommendations: continued comprehensive assessments of credit quality (given elevated restructured loans), move to risk-based supervision and consolidated supervision of large banks.
  - Enhance efforts to deepen financial markets.
  - Diversification requires reforms: strengthen governance, limit role of SOEs, and de-carbonize the economy.
  - Progress on fiscal transparency and judicial independence, increase private sector participation in SOEs, and improve SOEs’ financial position to improve the business environment, increase private investment, and enhance productivity.
  - Implementation of MONEYVAL’s recommendations is crucial.
  - Climate commitments: authorities’ efforts welcomed; should take stock of associated fiscal burden and reduce it through complementary policies, such as phasing out fossil fuel subsidies.

### Selected economic and financial indicators (selected exact figures from table)
- GDP at constant prices: -4.2 (2020); 5.6 (2021); 4.6 (2022); 2.4 (2023); 2.3 (2024–medium term projection).
- Of which: Oil sector (annual % change): -6.3 (2020); 2.0 (2021); -2.7 (2022); -1.5 (2023); -0.5 (2024).
- Non-oil sector (annual % change): -2.9 (2020); 7.1 (2021); 9.1 (2022); 4.2 (2023); 3.6 (2024); 3.5 (2025).
- Consumer price index (period average): 2.8 (2020); 6.7 (2021); 13.9 (2022); 9.4 (2023); 4.7 (2024); 5.0 (2025); 4.5 (2026); 4.0 (2027).
- Consumer price index (end of period): 2.6 (2020); 12.0 (2021); 14.4 (2022); 4.4 (2023).
- Domestic credit, net: -2.4 (2020); 20.0 (2021); 25.3 (2022); 17.2 (2023); 9.6 (2024); 8.8 (2025); 7.5 (2026); 7.2 (2027); 6.5 (2028).
- Exports f.o.b. (annual % change): -36.6 (2020); 72.3 (2021); 94.6 (2022); -39.3 (2023); 6.9 (2024); -7.8 (2025); -5.6 (2026); -1.7 (2027); -5.4 (2028).
- Gross investment (percent of GDP): 23.7 (2020); 17.1 (2021); 12.7 (2022); 21.8 (2023); 21.6 (2024); 21.9 (2025); 22.0 (2026); 23.3 (2027); 23.7 (2028).
- Consolidated government (percent of GDP): 11.5 (2020); 9.3 (2021); 10.2 (2022); 7.3 (2023).
- Private sector (percent of GDP): 12.1 (2020); 12.5 (2021); 13.4 (2022); 14.0 (2023); 14.7 (2024); 16.1 (2028).
- Gross national savings (percent of GDP): 24.5 (2020); 32.8 (2021); 42.1 (2022); 34.1 (2023); 34.9 (2024); 32.4 (2025); 30.3 (2026); 29.2 (2027).
- Total revenue and grants (percent of GDP): 33.7 (2020); 36.4 (2021); 33.5 (2022); 31.8 (2023); 29.1 (2024); 28.5 (2025); 27.5 (2026).
- Total expenditure (percent of GDP): 40.1 (2020); 32.3 (2021); 25.9 (2022); 31.5 (2023); 31.4 (2024); 31.1 (2025); 30.6 (2026); 30.0 (2027); 29.8 (2028).
- Overall fiscal balance (percent of GDP): -6.4 (2020); 4.1 (2021); 0.4 (2022); -1.4 (2023).
- Non-oil primary balance (percent of non-oil GDP): -30.6 (2020); -23.9 (2021); -22.4 (2022); -24.4 (2023); -22.5 (2024); -20.6 (2025); -18.0 (2026); -16.4 (2027); -15.3 (2028).
- General government debt (percent of GDP): 26.3 (2020); 17.3 (2021); 18.3 (2022); 18.0 (2023); 18.6 (2024); 19.3 (2025); 20.8 (2026).
- General government and government-guaranteed debt (percent of GDP): 54.0 (2020); 41.6 (2021); 26.9 (2022); 24.3 (2023); 24.7 (2024); 24.9 (2025); 25.1 (2026); 26.4 (2027).
- Current account (percent of GDP): 15.1 (2020); 12.4 (2021); 10.5 (2022); 5.9 (2023).
- Gross official international reserves (in millions of U.S. dollars): 6,369 (2020); 7,075 (2021); 8,996 (2022); 11,281 (2023); 11,481 (2024); 11,681 (2025); 11,881 (2026); 12,081 (2027); 12,281 (2028).
- Nominal GDP (in millions of manat): 72,578 (2020); 93,203 (2021); 133,826 (2022); 130,617 (2023); 135,534 (2024); 140,720 (2025); 146,474 (2026); 152,568 (2027); 159,409 (2028).
- Nominal non-oil GDP (in millions of manat): 51,132 (2020); 57,432 (2021); 69,826 (2022); 79,583 (2023); 86,323 (2024); 93,838 (2025); 101,493 (2026); 109,247 (2027); 117,548 (2028).
- Nominal GDP (in millions of U.S. dollars): 42,693 (2020); 54,825 (2021); 78,721 (2022); 76,833 (2023); 79,726 (2024); 82,776 (2025); 86,161 (2026); 89,746 (2027); 93,770 (2028).
- Oil Fund Assets (in millions of U.S. dollars): 43,564 (2020); 45,025 (2021); 49,034 (2022); 51,120 (2023); 52,819 (2024); 53,205 (2025); 53,425 (2026); 53,744 (2027); 54,424 (2028).
- Assumed oil price, WEO plus $2-$3 premium (in U.S. dollars per barrel): 44.8 (2020); 71.2 (2021); 98.4 (2022); 82.5 (2023); 81.9 (2024); 78.0 (2025); 74.7 (2026); 71.9 (2027); 69.5 (2028).
- Assumed natural gas price, WEO plus a premium (in U.S. dollars per thousands of cubic meters): 173.5 (2020); 368.1 (2021); 740.0 (2022); 384.8 (2023); 393.1 (2024); 291.7 (2025); 362.6 (2026); 322.6 (2027); 319.0 (2028).
- Exchange rate (manat/dollar, end of period): 1.7 (2020).

*IMF Communications Department; Press Release No. 24/41; February 6, 2024.*

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## References

- [https://www.imf.org/-/media/images/imf/bios/imfboard.jpg](https://www.imf.org/-/media/images/imf/bios/imfboard.jpg)
- [The Executive Board](https://www.imf.org/external/np/sec/memdir/eds.aspx)
- [Republic of Azerbaijan and the IMF](http://www.imf.org/external/country/AZE/index.htm)
- [IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)
- [Press Releases](https://www.imf.org/en/news/searchnews)
- [PRESS CENTER](http://presscenter.imf.org/)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2024/02/06/pr2441-azerbaijan-imf-executive-board-concludes-2023-article-iv-consultation_