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Middle East and Central Asia > Azerbaijan, Republic of

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Cover IMF Working Papers
Monetary Policy Frameworks and Communication in the Caucasus and Central Asia
Omer Faruk Akbal, Klakow Akepanidtaworn, Ezequiel Cabezon, Mariarosaria Comunale, Mrs. Marina Conesa Martinez, and Ms. Filiz D Unsal
Central banks in Caucasus and Central Asia (CCA) have been enhancing their monetary policy frameworks in the last decade, and are at different stages of the transition to a type of inflation targeting regimes. This paper documents their progress and the current state of their monetary policy framework, utilizing the IAPOC index developed by Unsal and others (2022) covering Independence and Accountability, Policy and Operational Strategy, and Communications, as well as drawing from central banks’ laws and websites. Additionally, an analysis of press releases from CCA central banks is conducted to evaluate their features, content, and tones. The findings highlight the need for further improvements in the areas of Independence and Accountability, as well as Communications, despite some recent advancements in the latter.
Keywords:
Caucasus and Central Asia; Monetary Policy Frameworks; Communication.; CCA inflation; central banks in Caucasus and Central Asia; IMF working paper No. 2023/251; IAPOC Index; CCA country; Monetary policy communication; Inflation targeting; Inflation; Market interest rates; Central Asia and the Caucasus
Cover Departmental Papers
Strengthening Monetary Policy Frameworks in the Caucasus and Central Asia
Mr. Tigran Poghosyan, Klakow Akepanidtaworn, Maria Atamanchuk, Ezequiel Cabezon, Mr. Selim Cakir, Mr. Vahid Khatami, Ms. Filiz D Unsal, Mariarosaria Comunale, Mrs. Marina Conesa Martinez, and Omer Faruk Akbal
Amidst a global backdrop of persistent post-COVID inflation and spillovers from Russia’s war in Ukraine, the countries of the Caucasus and Central Asia (CCA) region have faced strong price pressures in recent years. Inflation is estimated to have peaked in early 2023, but still exceeds central bank targets. In particular, core inflation remains stubbornly high reflecting a combination of second-round effects, surges in global energy and food prices, and domestic demand pressures. More broadly, uncertainty and downside risks also weigh on the economic outlook, including due to regional tensions, financial turmoil related to international monetary policy normalization, and a growth slowdown in key trading partners. In this context, CCA countries’ ability to contain inflationary pressures and anchor inflation expectations hinges on the credibility and effectiveness of their monetary policy frameworks. Since gaining independence in the 1990s, countries in the CCA region have made considerable progress in modernizing their monetary policy frameworks. CCA central banks have strengthened their legal frameworks and established broad de-jure independence. Armenia, Georgia, Kazakhstan, the Kyrgyz Republic, and Uzbekistan are transitioning to inflation targeting regimes, while the central banks of Azerbaijan, Tajikistan, and Turkmenistan rely on the exchange rate as an operational target. However, the post-COVID surge in inflation has highlighted the limitations of current frameworks and triggered a fresh policy debate on the need to strengthen monetary policy effectiveness in the CCA. This paper reviews the CCA region’s monetary policy landscape, highlights challenges in monetary policy design and implementation, and identifies areas that warrant strengthening. It draws on original surveys of country authorities, IMF country teams, and the work by Unsal and others (2022). It uses novel empirical work to analyze monetary policy transmission, the link between foreign exchange interventions and exchange rate dynamics, the drivers of financial de-dollarization, and the effects of central bank communication in the CCA.
Keywords:
Caucasus and Central Asia; Monetary Policy Transmission Mechanism; Exchange Rate Management; Dollarization; Central Bank Communication and Transparency; Central Bank Credibility; CCA country; CCA central banks; monetary policy transmission; CCA economy; CCA region's monetary policy landscape; monetary policy effectiveness; Exchange rates; Monetary policy frameworks; Inflation; Inflation targeting; Exchange rate arrangements; Central Asia and the Caucasus; Middle East and Central Asia
Cover IMF Working Papers
The Anatomy of the Financial Inclusion Gap in the Caucasus and Central Asia
Mr. Tigran Poghosyan
This paper analyses how financial inclusion in the Caucasus and Central Asia (CCA) compares to peers in Central and Eastern Europe (CEE). Using individual-level survey data, it shows that the probability of being financially included, as proxied by account ownership in financial institutions, is substantially lower across gender, income groups, and education levels in all CCA countries relative to CEE comparators. Key determinants of this financial inclusion gap are lower financial and human development indices, weak rule of law, and physical access to bank branches or ATMs. This suggests that targeted policies aimed at boosting financial and human development, strengthening the rule of law, and supporting fintech solutions can broaden financial inclusion in the CCA.
Keywords:
Caucasus and Central Asia; financial inclusion; financial access; estimation result; CEE comparator; CCA country; IMF working paper 23/109; CEE peer; Financial sector development; Financial account; Financial sector; Income; Global; Central Asia and the Caucasus
Cover IMF Working Papers
Supporting Sustainable Financing and Access to Finance in Armenia
Maria Atamanchuk and Kiichi Tokuoka
In Armenia, both external and domestic financing face challenges. Armenia’s share of inward foreign direct investment (FDI) in private external financing has declined significantly over the past decade. Access to domestic finance in Armenia is also moderate and masks important disparities. Against this background, this paper analyses the determinants of inward FDI and examines the impediments to increasing access to domestic finance. The paper confirms empirically that governance-related structural factors have a significant impact on inward FDI. Similar structural factors, informality and poor accounting practices are reported among major challenges for increasing access to finance for firms in Armenia. This paper finds that to improve financing in Armenia include: implementing structural reforms to improve the business environment, maintaining prudent macroeconomic policies, strengthening financial reporting, and improving financial inclusion through reduced informality in the economy.
Keywords:
Inward FDI; access to finance; financial inclusion; face challenge; sustainable financing; inward foreign direct investment; financing in Armenia; Armenia's share; Foreign direct investment; Business environment; Capital inflows; Loans; Global; Europe; Middle East and Central Asia
Cover IMF Working Papers
Reducing Dollarization in the Caucasus and Central Asia
Mr. Selim Cakir, Maria Atamanchuk, Mazin Al Riyami, Nia Sharashidze, and Nathalie Reyes
Declining but still high dollarization rates in the Caucasus and Central Asia (CCA) region affect macroeconomic stability, monetary policy transmission, and financial sector development. Although several studies have investigated the dynamics of dollarization in the CCA, the relative roles of macrofinancial policies and financial market development in the de-dollarization process have not yet been assessed empirically. This paper takes stock of de-dollarization efforts and explores the short-term drivers of financial de‐dollarization in the CCA region. It highlights that there remains significant scope to further reduce dollarization through continued progress in strengthening macroeconomic policy frameworks and in developing markets and institutions.
Keywords:
Dollarization; Foreign Currency; Foreign Exchange; FX; Monetary Policy; Central Asia; Caucasus; CCA.; deposit dollarization; De-dollarization policy; credit dollarization; dollarization to a shock; dollarization in the CCA region; Currencies; Credit; De-dollarization; Central Asia and the Caucasus; rates in the Caucasus and Central Asia; dollarization to issuance; Reserve requirements
Cover IMF Staff Country Reports
Republic of Azerbaijan: Technical Assistance Report-Government Finance Statistics Missions (May 17-21 and July 22-August 4, 2021)
International Monetary Fund. Statistics Dept.
Following the launch of the Caucasus, Central Asia, and Mongolia Regional Capacity Development Center (CCAMTAC) in February 2021, and in response to a request from the Azerbaijani authorities to support their statistical capacity development (CD) in government finance statistics (GFS), a series of technical assistance (TA) missions took place remotely (via Zoom meeting platform) during May 17−21 and July 22−August 4, 2021. Both missions were conducted by Mr. Roderick O’Mahony (GFS expert), who worked with the staff of the Ministry of Finance’s Medium-Term Expenditure Framework (MTEF) Development Center as the main counterparts. He also met with other relevant agencies, including the State Oil Fund of the Republic of Azerbaijan (SOFAZ), the State Employment Agency, and the State Social Protection Fund.1
Keywords:
IMF-World Bank database; GFS compiler; IMF's Statistics Department; source data provider; authorities of Armenia; Government finance statistics; Medium-term budget frameworks; Financial statements; Budget planning and preparation; Public sector; Central Asia
Cover IMF Working Papers
Weather Shocks and Exchange Rate Flexibility
Mr. Selim A Elekdag and Maxwell Tuuli
This paper assesses the stabilization properties of fixed versus flexible exchange rate regimes and aims to answer this research question: Does greater exchange rate flexibility help an economy’s adjustment to weather shocks? To address this question, the impact of weather shocks on real per capita GDP growth is quantified under the two alternative exchange rate regimes. We find that although weather shocks are generally detrimental to per capita income growth, the impact is less severe under flexible exchange rate regimes. Moreover, the medium-term adverse growth impact of a 1 degree Celsius increase in temperature under a pegged regime is about –1.4 percentage points on average, while under a flexible regime, the impact is less than one half that amount (–0.6 percentage point). This finding bolsters the idea that exchange rate flexibility not only helps mitigate the initial impact of the shock but also promotes a faster recovery. In terms of mechanisms, our findings suggest that the depreciation of the nominal exchange rate under a flexible regime supports real export growth. In contrast to standard theoretical predictions, we find that countercyclical fiscal policy may not be effective under pegged regimes amid high debt, highlighting the importance of the policy mix and precautionary (fiscal) buffers.
Keywords:
Exchange rate regimes; Economic growth; Climate change; weather shock; growth impact; regime s; decline in government expenditure growth; peg exchange rate regime; temperature shock; government consumption growth; regime window; Exchange rate arrangements; Exchange rate flexibility; Conventional peg; Exchange rate adjustments; Emerging and frontier financial markets; Global
Cover Departmental Papers
Managing Financial Sector Risks from the COVID-19 Crisis in the Caucasus and Central Asia
Iulia Ruxandra Teodoru and Klakow Akepanidtaworn
The COVID-19 crisis raises the risk of renewed financial sector pressures in the Caucasus and Central Asia (CCA) region in the period ahead. Bank distress and its economic and fiscal fallout have been recurring features of many CCA countries, as seen after the global financial crisis and the 2014–15 oil price shock. Strong policy responses have delayed the full impact of the COVID crisis so far, but financial sector risks will increase once public support is phased out. If these risks are not preemptively addressed, banks’ ability to lend during the recovery phase could be impaired and there may be a need for costly public interventions, as in the past.
Keywords:
Financial risks; stress tests; financial supervision and regulation; CCA country; CCA banking systems; FX risk; CCA bank's capital adequacy ratios; FX-induced credit risk; Financial sector risk; Commercial banks; Credit risk; Nonperforming loans; Central Asia and the Caucasus
Cover Departmental Papers
Macroprudential Policies to Enhance Financial Stability in the Caucasus and Central Asia
Padamja Khandelwal, Ezequiel Cabezon, Mr. Sanan Mirzayev, and Rayah Al-Farah
Limited economic diversification has made the economies of the Caucasus and Central Asia particularly vulnerable to external shocks. The economies in the region are heavily reliant on oil and mining exports as well as remittances. In some countries, tourism and capital flows also play a prominent role in aggregate economic activity.
Keywords:
Financial risks; financial supervision and regulation; macroprudential policy; credit cycles; CCA country; CCA economy; CCA contribution; economies of the Caucasus and Central Asia; credit downturn; banking sector crisis; credit cycle analysis methodology; Macroprudential policy; Credit; Credit gaps; Countercyclical capital buffers; Macroprudential policy instruments; Central Asia and the Caucasus
Cover IMF Staff Country Reports
Republic of Azerbaijan: 2021 Article IV Consultation-Press Release; and Staff Report
International Monetary Fund. Middle East and Central Asia Dept.
Azerbaijan faced unprecedented challenges in 2020. The combined COVID-19 and oil price shocks pushed the economy into recession. A sizeable relief package helped cushion the economic impact from this shock, and the economy has started to recover. Yet the medium-term outlook remains subdued. The long-term fiscal position is unsustainable as oil resources are expected to run out by mid-century. The authorities have laid out strategic goals of accelerated yet sustainable socio-economic development over the next decade and are developing policy plans to that end.
Keywords:
CPI data ROSC; fund Dept; safeguards assessment policy; fund surveillance; transparency policy; International Monetary Fund Washington; d.c; Oil prices; Oil; External sector statistics; Global