Press Release No. 05/168

Press Release: Statement by IMF Deputy Managing Director Agustín Carstens at the Conclusion of his Visit to Azerbaijan

July 22, 2005

Mr. Agustín Carstens, Deputy Managing Director of the International Monetary Fund (IMF), issued the following statement today in Baku at the conclusion of his visit to Azerbaijan:

"This is my first visit to Azerbaijan. I had the opportunity to discuss the economic policy challenges facing Azerbaijan and the future cooperation between the IMF and Azerbaijan with President Ilham Aliyev and Prime Minister Artur Razi-zade. I also had very productive meetings with Minister of Finance Avaz Alekberov, Minister of Economic Development Farhad Aliyev, Chairman of the Azerbaijan National Bank (ANB) Elman Rustamov, and representatives of civil society. I would like to thank the Azeri authorities for their warm hospitality and the excellent arrangements they made for my visit.

"The timing of this visit is very opportune, as Azerbaijan has recently completed its Poverty Reduction and Growth Facility (PRGF) arrangement with the IMF, which is a major milestone in the 10-year program engagement of Azerbaijan with the IMF. I am taking away with me very positive impressions of the progress that has been made and the strong commitment of the authorities to tackle the macroeconomic challenges that lie ahead.

"There was a shared assessment that the major short-term macroeconomic challenge is to bring down core inflation to single digits, as inflation hurts the poor most and undermines Azerbaijan's medium-term growth prospect. In this regard, I am encouraged by the authorities' recent steps to reduce inflationary pressures. The ANB has increased interest rates and allowed the nominal exchange rate to appreciate. The authorities have also decided to reduce the original target for the non-oil fiscal deficit and increase the share of government securities in its financing. I am also reassured by the authorities' commitment to implementing additional disinflation measures, to avoid that inflationary expectations become entrenched.

"We agreed that the forthcoming significant increase in oil revenues will create a major challenge for macroeconomic management in the medium term. The authorities recognize the need to improve significantly the living conditions, while at the same time maintaining low inflation and the competitiveness of non-oil producers. To support their development agenda, the authorities are working on a medium-term structural reform agenda. Key will be to adhere to the long-run oil revenue management strategy, with a particular emphasis on transparency, expenditure quality, and fiscal sustainability. To free resources for targeted social assistance and other productive expenditure, energy subsidies should be reduced. It is also essential to improve corporate governance and the taxation of state-owned enterprises. Finally, a transition to a more flexible exchange rate regime would help to buffer against potentially large exogenous shocks stemming from fluctuation in international commodity prices, volatile capital flows, and increasing spending out of oil wealth.

"In our discussions, the authorities also acknowledged the importance of financial sector reforms and improvements to the business climate for economic growth and employment. In this regard, I welcome the authorities' intention to privatize the two remaining state-owned banks in a transparent manner, strengthen banking supervision, ensure effective enforcement of the anti-corruption law, and speed up the passage of new investment and anti-monopoly laws.

"I also had the opportunity to discuss with the authorities how the Fund can be most helpful in meeting the challenges going forward. I proposed a number of options for future cooperation between the IMF and Azerbaijan, including an IMF-supported program and regular consultations in the context of surveillance under Article IV of the IMF's Articles of Agreement. The authorities are still considering the merits of these options, but there is broad agreement among key policy makers that close cooperation between Azerbaijan and the IMF should continue in either case in light of significant challenges going forward."