IMF Executive Board Concludes 2013 Article IV Consultation with the Republic of AzerbaijanPublic Information Notice (PIN) No. 13/57
May 21, 2013
Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
On May 3, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Azerbaijan.1
Economic growth recovered in 2012, reaching 2.2 percent on the back of a more moderate decline in oil output than in 2011 and continued strong non-oil growth of 9.6 percent, supported by public spending. Shortfalls from new wells and maintenance issues continue to reduce oil output for a second year in a row. Inflation dropped sharply to an average of 1.1 percent in 2012, mainly reflecting the impact of global and domestic food price trends. The manat exchange rate has appreciated by less than 2 percent against the U.S. dollar since November 2010. The external position remains strong, supported by high oil prices and sizeable public assets accumulation which could reach about 66 percent of GDP by the end of 2012.
Expansionary fiscal policy continued in 2012 with the non-oil fiscal primary deficit increasing to 45 percent of non-oil GDP from 41 percent in 2011. The non-oil deficit will increase further in 2013 if the government implements the large public investment program approved in the budget.
Monetary policy turned accommodative in late 2012 and early 2013 as the Central Bank of Azerbaijan (CBA) lowered its benchmark refinancing rate by 250 basis points in December and then again in February, partly in response to low inflation. Direct lending to the real economy by the CBA surged in 2012, though macro prudential measures are being developed to slow the rapid growth in private sector credit, particularly consumer loans. With a view to foster consolidation and competition in the banking system, the CBA increased the minimum capital requirements for banks by fivefold. There remains little progress in the restructuring of the International Bank of Azerbaijan, the systemic public bank
Near-term economic prospects are generally positive, though with an increasing risk of overheating and the deepening of fiscal vulnerabilities. Overall GDP growth is expected at around 4 percent in 2013 and similar levels over the medium term, driven by government spending. With the non-oil economy hitting capacity constraints and expansionary fiscal policy, headline inflation is projected to reach 7 percent by end-year, above the CBA’s 5–6 percent target range, for an annual average of 3½ percent. Inflation could rise to above 6 percent over the medium term. Projections for the external position remain favorable, sustained by continued high oil prices. Risks emanate mainly from a fall in oil prices given Azerbaijan’s low reliance on non-oil exports. But large foreign assets could provide sufficient buffer to mitigate the impact of future shocks, including a sharp and sustained decline in oil prices.
Executive Board Assessment
Executive Directors welcome Azerbaijan’s rapid growth in recent years and its strong buffers against external instability, but noted that critical challenges lie ahead. Continued expansionary policies may be fueling short-term risks to macroeconomic stability, while the depletion of oil reserves undermines the medium-term viability of the development strategy. Directors considered that high oil prices at present offer a good opportunity to adjust the course of economic policies from a position of relative strength.
Directors cautioned that continued growth in public spending is exacerbating the budgetary dependence on oil revenues and increasing the risks from a fall in global oil prices. Accordingly, most Directors encouraged the authorities to undertake a moderate front-loaded fiscal consolidation, which would create room for private sector activity. Fiscal adjustment could be achieved by improving the efficiency of public spending, including through a better selection of capital projects, and by strengthening public financial management and revenue collection.
More broadly, Directors encouraged the authorities to revamp the fiscal policy framework in line with recent IMF guidance for resource-rich developing countries. A fiscal rule and strong institutional arrangements consistent with international best practice could strengthen fiscal discipline, particularly at times of high oil prices, boost fiscal sustainability, and promote a sound management of oil revenue.
Directors supported the readiness of the Central Bank of Azerbaijan (CBA) to tighten monetary policy if price pressures intensify. They also suggested that the CBA discontinue its direct lending to the real economy, which was meant to be a temporary response to the global economic crisis. Looking ahead, they agreed that a gradual move toward greater exchange rate flexibility would improve the economy’s ability to absorb shocks as the share of non-oil exports grows.
Directors noted the assessment that the financial sector remains sound. They welcomed ongoing efforts to preserve financial sector stability, including by recapitalizing some banks and adopting prudential measures to contain the growth of consumer credit. Directors encouraged the authorities to continue strengthening the supervisory framework and to restructure the largest bank.
Directors supported the government’s 2020 vision of making Azerbaijan a competitive and diversified economy. They observed that the development of non-oil exports will require ambitious structural reforms to reduce formal and informal barriers to trade and competition, improve the business climate, facilitate access of private companies to capital, and combat corruption and money laundering.