Azerbaijan Republic
Poverty Reduction Strategy Paper

This paper reviews Azerbaijan’s State Program on Poverty Reduction and Economic Development 2003–2005 (SPPRED). The Poverty Reduction Program in Azerbaijan has attracted an extensive and high degree of interest, matching its complexity and scope. The main objective of the SPPRED is to define and measure poverty in Azerbaijan using a variety of indicators, identify the causes of poverty, and develop a strategy to address these causes. The role of a participatory dimension in the SPPRED is to ensure a comprehensive and genuine process of consultation with the civil society.


This paper reviews Azerbaijan’s State Program on Poverty Reduction and Economic Development 2003–2005 (SPPRED). The Poverty Reduction Program in Azerbaijan has attracted an extensive and high degree of interest, matching its complexity and scope. The main objective of the SPPRED is to define and measure poverty in Azerbaijan using a variety of indicators, identify the causes of poverty, and develop a strategy to address these causes. The role of a participatory dimension in the SPPRED is to ensure a comprehensive and genuine process of consultation with the civil society.

Chapter 1. Poverty in Azerbaijan - An Analysis of the Current Situation

Poverty is usually understood to be a multi-dimensional phenomenon, with the living standards and welfare of individuals and households being influenced by different factors. This chapter uses the available data to determine how many people and which population groups in Azerbaijan are most affected by different dimensions of poverty.

The most commonly used dimension of poverty is that defined by levels of per capita consumption or income. This has not been done on a regular basis in Azerbaijan.

In 2001 the State Statistical Committee of Azerbaijan (SSC) introduced a new Household Budget Survey (HBS), and this will now be carried out on a regular basis to provide grounds for poverty estimates based on income and expenditure welfare indicators. The first results are now available, and have been used as the basis for estimates of poverty in the country, using a new revised absolute poverty line and also a relative poverty line.

Poverty as characterised by low income or consumption as a whole usually reflects limit of opportunity. This is closely linked to labour market and employment issues, since employment provides jobs and regular income generation opportunities for the population. But opportunities are not only connected to employment, but also to ownership of assets; for example, access to land, and the opportunities to exploit land as an source of income.

However, poverty cannot be defined purely in terms of low income or consumption levels. Health and education indicators can be used to measure the difference in capabilities between different population groups. The two dimensions of poverty are linked, in that poor education, illness, malnutrition tend to lead to low income and income poverty. In this regard, the same survey data would ideally be used to look at the correlations between income / consumption levels and health and education. However, the available HBS data do not yet permit us to make such connections. Therefore, sometimes other information sources as well as official data on health and education indicators are used in order to show the links between low income and poor health and education.

While the HBS results on income poverty reported below give no clear indication of a gender dimension to poverty, it is important to note that other aspects of poverty affect men and women in different ways. Poverty is also connected with vulnerability and insecurity. Vulnerability and insecurity are linked to other dimensions of poverty, such as unemployment, risk of illness.

Azerbaijan has a refugee and IDP population of circa 1,000,000. Most of them are those who have been deported from Armenia and become refugees or IDPs due to the occupation of 20% of the country’s territory by Armenia. While poverty in Azerbaijan cannot be explained solely by the refugee / IDP problem, it is true that the IDP and refugee population represent a particular social policy problem for the country in that there are concentrations of extreme poverty among sections of the IDP/refugee population.

Several studies have been carried out in Azerbaijan with the participation of the poor to help define ways of reducing poverty. As part of the preparation of the SPPRED, meetings were held with poor people and representatives of civil society in several regions of the country. The results of these meetings are also used to help build up the full picture of the various dimensions of poverty.

This chapter begins with a brief summary of the demographic situation in the country, and then provides an estimate of the extent of poverty in the country using a monetary welfare indicator (consumption expenditure). The available results are used to build up a picture of the poverty profile for Azerbaijan, and the categories or regions of the population, which are most at risk of being poor.

1.1. Demographic Background

During the last decade of independence the country’s resident population grew from 7,131,900 to 8,016,200; the urban population grew from 3,847,300 to 4,086,400 with an increase of 6.2% while the rural population grew from 3,284,600 to 3,929,800 with an increase of 19.6%. Currently, 51.7% of the population live in urban areas, and 48.3% in rural areas. The share of male and female population is 48.9% and 51.1% respectively.

As was mentioned above circa 12% of the population are refugees or IDPs, many of whom are still living in unsatisfactory and unsanitary temporary living quarters.

According to the data for the year 2000, 4,617,331 or 57.6% of the population were of working age, while 2,469,000 were under working age, and 930,000 of retirement age. There has been an aging of the population during the last decade, with the share of population under working age decreasing, and the share of working age and above-working age increasing.

The birth rate and natural growth rate of the population has been decreasing; while infant and maternity mortality rates increased in the 1990–99 period. The annual population growth rate declined from 1.7% in 1985 to 0.4% in 19971. Marriage rates have also decreased, while the number of illegitimate children has increased. There has also been a negative migration balance in the 1990–99 periods; this is mainly due to the out-migration of working-age men. Overall, the demographic situation in the country is characterised by low population growth.

1.2. Poverty Incidence

The SSC introduced a new HBS in 2001. Analysis of the poverty levels in the country given here is based on data from the first year of this survey. The choice of welfare indicator is per capita consumption expenditure. Here two poverty lines are used: the first is an absolute poverty line of 120,000 AZM (25.8 USD2) per person per month. This line is based on the cost of a minimum food consumption basket, which guarantees a daily calorie intake of 2,200 kilocalories. The food share in the total minimum consumption basket is calculated at 70%, which corresponds to the actual food share in the household expenditure structure as reported in the HBS results. Using this poverty line, we get a poverty rate for the country as a whole of 49% for the year 2001 (Table 1.1.)3.

Table 1.1.

Poverty Incidence by Categories of the Population (individuals).

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Source: SSC, HBS, 2001

The second poverty line used is a relative one4, set at 60% of the median per capita consumption expenditure level, which was 72,000 AZM (15.5 USD) for the year 2001. Using this second poverty line poverty incidence is estimated at 17%. The results using this second poverty line can be taken as an estimate of extreme poverty in the country.

1.3. Poverty Profile

The new HBS data have been used to build up a picture of poverty in the country. Here the results which are “robust” for both of the chosen poverty lines have been reported. Although the number of the poor changes with the poverty line, the characteristics of the poor remain the same. The main results are summarised in Table 1.1. and 1.2. below. The survey data suggest the following5:

Table 1.2.

Poverty Incidence by Characteristics of Household and Head of Household.

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Source: SSC, HBS, 2001
  • Individuals living in urban households have a higher risk of being poor than rural households (poverty rates of 55% in urban areas compared to 42% in rural areas; 60% of the poor live in urban areas). Poverty in towns is slightly worse than in larger cities (58% and 54% respectively). Poverty in Baku is neither below nor above the national average (49%), but it is less than in other urban areas. However, the largest group of the poor is also concentrated in Baku city: one quarter of the total number of the poor.

  • The larger the household, the greater the poverty risk. Households with one or two members have a very low poverty risk (poverty rates of 8 - 18%), compared to households with over 6 members (poverty rate of 61%). The presence of up to two children does not have a particularly strong influence on the probability of being poor, but the risk increases particularly when households have more than three children. Conversely, households without children have a lower then average poverty rate (38%).

  • Children aged 1–15 years have a higher risk of poverty than the elderly aged over 60 years (52% compared to 44%)

  • From the point of view of per capita expenditure, gender does not influence the poverty risk - both male and female members of the population have an almost equal probability of being poor (48% for males and 50% for females). The sex of the head of household also does not influence the likelihood of a household being poor; i.e. female-headed households are not more likely to be poor than male-headed ones (both 49%).

  • Households where the head of household has IDP or refugee status have a higher poverty risk Poverty rates of 55% when the head of household has refugee status and 63% if the head has IDP status.

  • Households where the head of household has higher education are less likely to be poor Poverty rates of 42% compared to 54% for households where the head of household has less than secondary education.

1.4. Urban and Rural Poverty

According to the HBS data, the urban population has consistently higher poverty rates than the rural population. For example, 55% and 42% poverty levels for urban and rural areas respectively could be found using the 120,000 AZM (25.8 USD) absolute line.

The higher risk of poverty in towns can be attributed to the importance of land and home produce as a safety net. The rural population is relatively better off because of the value of produce consumed from the household’s own agricultural plot or livestock. The structure of cash expenditures only shows that urban households spend more overall, and in particular on food, than rural households. Table 1.3. below shows that total average per capita monthly expenditure in cash is 143,912 AZM (30.9 USD) for urban households, and 95,344 AZM (20.5 USD) for rural households; expenditure on food is 86,368 (18.5 USD) and 53,981 AZM (11.6 USD) respectively.

Table 1.3.

Consumption Expenditures by Urban - Rural (Per capita per month in AZM)

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Source: SSC, HBS 2001

As stated before, poverty is not only measured using monetary indicators, but also in terms of access to essential goods and services. The regional discussions and Town Hall Meetings in Azerbaijan revealed that many among the rural population do not have access to basic sanitation and health services, even if they wanted to spend money on them. The lack of availability was only partly explained by their price. More notably, they were explained by a noticeable absence of such goods and services, due to the collapse of the infrastructure or to badly needed repairs.

1.5. Regional Differences in Living Standards

Regional differences in living standards have been influenced above all by the concentration of economic growth in the oil and gas industries, and the development of the related service industries being concentrated in and around Baku. However, this has not meant that all of the Baku population are richer than the rest of the country: Baku has a full range of rich and poor categories.

The SSC uses 9 economic regions: Nakhchivan, Absheron, Mugan-Salyan, Ganja-Gazakh, Sheki-Zagatala, Lankaran-Astara, Shirvan, Karabakh-Mil, and Baku city. The available HBS survey data is still not complete enough to give a full picture of regional differences in living standards. However, the picture emerging suggests that poverty is relatively higher in Absheron,

Karabakh-Mil and Sheki-Zagatala. Baku has neither the highest nor lowest poverty risk (49%). Nakhchivan, Lankaran-Astara and Shirvan are relatively better off.

Nakhchivan faces a difficult situation, since it is physically separate from the rest of the country, and due to the conflict with Armenia, is effectively under a blockade. However, it benefits from proximity to Iran and Turkey, and cross-border trading with the latter.

Small scale surveys have shown that energy supply is much less reliable in the regions outside Baku and the Absheron peninsula. Electricity supply is often guaranteed for only several hours per day. This affects household welfare directly, and also indirectly, in that lack of guaranteed electricity is a major disincentive for the development of business in the regions.

The HBS data do not yet give any clear indication of regional differences in living standards. Poverty appears to be spread quite broadly over the country. Baku and the Absheron peninsula appear to be more privileged than other regions in terms of infrastructure and services, but a large section of the poor population are also situated there.

1.6. Gender and Poverty

The HBS results give no clear correlation between the sex of the head of household, and the likelihood of the household being poor, i.e. the poverty incidence is 49% whether the household head is male or female (Table 1.2.). If we look at the results for individuals we find that females and males have more or less the same likelihood of being poor, in that women have a 50% poverty rate, and men 48%. Thus, the HBS results for the year 2001 do not give any clear indication of a gender dimension to poverty.

However, as stated above, poverty cannot be measured purely on the basis of income and expenditure indicators. Men and women are affected in different ways by other aspects of poverty, and more research is required in order to document these in Azerbaijan. For example, employment data suggest that females have a higher risk of unemployment. Employment of working age men exceeds the rate for women by 13 percentage points (67.3 percent and 53.9 percent), despite the fact that the retirement age for females is 5 years lower.

It is a worldwide phenomenon that women and men dominate different sectors of economy and different occupations, with female dominated occupations often having lower status and pay than those dominated by men. The available data on gender in Azerbaijan show that women tend to concentrate in the social services sector, such as health and social care, education and other public services. Wages in the health sector are circa 30% of the national average, and education 70%. However, the gender employment statistics cover only the formal sector of economy, and due to the lack of a regular labour force survey not much is known about the sectoral distribution of labour in the economy as a whole.

In Azerbaijan, wage statistics by gender are scarce but the available data confirms that even in female dominated sectors of economic activities, such as health care, social work and education, wage levels for females are much behind the levels for males.

Thus, while there is currently no clear evidence that women have a higher income poverty risk than men in Azerbaijan, there is evidence that they are more disadvantaged in the labour market.

1.7. Income Distribution and Inequality

The following chapter shows that country has made notable progress in achieving macroeconomic stability and positive growth figures. At the same time, there exists inequality in the incomes of the population.

The Gini-coefficient is usually used as the indicator of income inequality in a country. In 1999, the World Bank estimated a Gini-coefficient of 0.44 for Azerbaijan6. But initial results from the 2001 Household Budget Survey put the Gini-coefficient at 0.35, indicating a more equal distribution that the former. The Gini-coefficient will be monitored from now on using the HBS results, thus ensuring comparability across years.

1.8. IDPs and Refugees

As a result of the ethnic purging policy pursued by Armenia in a planned way during 1988–1992, 250,000 Azerbaijanis were deported and expulsed from their native land to Azerbaijan. The refugee population also includes about 50,000 Meshetian Turks from Central Asia who sought refuge in Azerbaijan from 1990.

As a result of Armenia’s armed aggression against Azerbaijan in 1988, 20% of the country, including the territory of Nagorni Karabakh and 7 regions attached to it have been occupied. Thus, 60,000 Azerbaijanis from Nagorni Karabakh and over 600,000 Azerbaijanis from neighbouring regions have become IDPs. They are currently living in circa 1,600 temporary accommodations in 62 cities and districts of the Republic. Additionally, about 100,000 Azerbaijanis whose lives were at risk have been obliged to leave their permanent residences situated along the borderline with Armenia through Nakhchivan Autonomous Republic, Aghstafa, Tovuz, Aghjabedi, Gadabay, Tartar.

The armed aggression resulted in the occupation of the most productive land of 17,000 km2, which previously provided 35–40% of agricultural production, has brought ruins to 900 towns and villages, 7,000 industrial and agricultural units, 700 educational establishments and 665 health facilities, motor roads covering an area of 800 km, 160 bridges as well as 15,000 km of water lines and 23,000 km of electric lines. The socio-psychological damage aside, the war has caused damage amounting to 22 billion USD to the economy of Azerbaijan. As a result of the armed aggression 20,000 Azerbaijanis have died, 100,000 have been wounded and 50,000 became disabled. There are now 8,000 martyrs’ families, 5,000 war invalids, 5,400 children who have been deprived of parental care in the country.

Currently there are circa 1 mln. refugees and IDPs in the country, which makes up approximately 12% of the country’s overall population. Although 14 years have passed since the beginning of Armenia-Azerbaijan conflict over 1,722 refugee households have not still been permanently settled. 10,000 refugee households became IDPs after the occupation of the districts where they had settled.

Within the IDP population, there is still a sizeable group living in unsatisfactory and sometimes unsanitary living quarters. After 10 years, over 55,000 of them still live in tent camps, 32,000 in prefab houses, 57,000 in farms and dig-outs, 8,000 in railway cars and the rest of them live in hostels, public buildings, in incomplete buildings, and other unsatisfactory and unsanitary living quarters with no utilities. Many new families have already appeared within the IDPs whose separate housing has become an urgent problem.

Table 1.4.

Temporary IDP Accommodation (as of 2002)

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Source: SCRIDP, July 1,2002.

Since 2001 the government has taken serious measures to re-allocate IDPs from the worst conditions in tent camps temporarily to new settlements and to provide them with land for agricultural purposes. ARRA and Azerbaijan National Agency for Mine Action is operating with support from EU, IDB, IFRC, USAID, UNDP, UNHCR, UNTCEF, WB and some donor countries to alleviate the results of military conflict and to provide housing to the population in the liberated areas.

The Household Budget Survey results confirm that households with refugee or IDP status have a relatively higher risk of being poor, especially IDPs. Poverty incidence among IDPs is 63% using the absolute poverty line. However, the sample size is too small to allow us to look further at differentiation within the IDP/ refugee group. Anecdotal and other smaller surveys suggest, however, that there is considerable differentiation in living standards within the IDP/ refugee population. Apart from the housing conditions/ unsanitary conditions, the vulnerability of some of this group is often increased through loss of main breadwinners due to death or invalidity caused by the war.

There is much concern among the IDP women in terms of issues related to gender, family planning, protection of child health and etc. Currently, 40,000 IDP women suffer from various diseases (infectious, gastrointestinal infections, virus infections, skin diseases, malaria, diphtheria, typhoid, nervous disorders, tuberculosis, anaemia, diabetes) and disease incidence among children is increasing due to poor living conditions and lack of access to clean drinking water. Infant mortality is 3–4 times higher than the republican average.

The table below illustrates the extent to which health indicators for IDPs are below the national average levels. It is estimated that 26% of IDP households suffer from malnutrition, compared to 10% nationwide; and 30% of children (aged 6–59 years) suffer from chronic malnutrition, compared to 21% nationwide. The indicators for anaemia are also worse for TDPs (children, women and men).

Table 1.5

Comparison of health Indicators for the IDP population with the National Average

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Source: MH, SCRIDP, 2000.

The literacy level among IDP population can be considered as high as in other sections of the population. Thus, 60% of this population have general, secondary and higher education.

Women and children are considered the most vulnerable subgroup of this population group. 200,000 of the IDP population are children; more than 86,000 are under school age, and about 98,000 are schoolchildren. In order to involve children in education over 703 schools have been established, some in prefab buildings, some in sub-standard buildings. Schools work shifts due to the lack of classrooms. This as well as the lack of modern educational technical equipment affect negatively the quality of education.

Provision of employment to IDPs remains a problem. It is estimated that, 300,000 out of 400,000 able-bodied IDPs are without work; over 70% of the working-age IDP population. A certain share of IDPs is employed in non-permanent and part-time jobs. Unemployment problems are particularly acute among IDP women, in that 175,000 out of 380,000 are able-bodied. 38,000 of them have been provided with employment.

Most displaced households currently depend on assistance from the government and humanitarian organisations for their survival. But humanitarian assistance has been decreasing sharply in scale especially during the last 2–3 years. Thus, the number of IDPs receiving food aid from those organisations has decreased to 214,000 during the last 2 years and also the volume of food provision per capita has been reduced from 20 kg. to 4–5 kg. These difficulties have adversely affected the natural increase of the IDP population and this indicator has decreased 2–3 times compared to 1990.


The IDP population in general is considered to be the most vulnerable group of the population with poor living standards, low income and employment levels and increased health risks.

Despite the measures undertaken by both government and international humanitarian organisations there is a need to provide some part of IDPs with food on monthly basis, improve the social-living conditions of those with the worst living standards, upgrade health and education services, and create micro-financing capacity for expanding employment and income generation opportunities.

In this regard, recent policy measures aimed at providing more permanent housing solutions to certain part of those IDP households living in tent camps will contribute to improving the living conditions of some of the most vulnerable, and contribute greatly to their integration into society.

1.9. Social Protection System

Social Protection in Azerbaijan comprises a number of social insurance and social assistance benefits. In principle social insurance benefits are paid from social security contributions made by the working population, and social assistance benefits are paid from the state budget to the most vulnerable.

Social Insurance

The main social insurance payments currently available are as follows: old age pensions; disability pension, survivor’s benefit; pension for the years of service, unemployment benefit etc. Social insurance payments amounted to 3.1 % of GDP in 2001.

Pension Provisions

In 2001 there were 1,245,079 receiving pensions in Azerbaijan (15,5% of the total population). Of these, 734,758 received old age pensions, 179,514 disability pensions, 136,189 loss of breadwinner pensions, 194,618 for the years of service and social pensions.

As a result of recent measures the average size of the monthly old age pension is 92,900 AZM (19.2 USD). Working old age pensioners have the right to receive 50% of granted pension regardless of their salaries.

The state Budget makes various kinds of supplements to pensions. Pensions are supplemented by a total of 23 benefits. Thus, according to the Order by the President of the Republic of Azerbaijan dated May 22 1996, a supplementary benefit of 11,000 AZM (2.3 USD) is paid to non-working pensioners, and according to the Decree issued 17 June 1997, a supplementary benefit of 20,000 AZM (4.1 USD) is paid to single pensioners over 70 years. Benefits are paid to the disabled of the Great Patriotic War, martyrs’ families and those who have become disabled for the territorial integrity and sovereignty and constitution building of the Republic of Azerbaijan, and those affected by the 20th of January 1990 and Chernobyl NPP accident.

According to the Order “On Increasing the State Assistance for the Disabled and a Group of Underprivileged Citizens from Other Categories” issued by the President of the Republic of Azerbaijan in December 29, 2000, a benefit of 70,000 AZM (14.4 USD) per month is paid to the disabled of the first category; 60,000 AZM (12.4 USD) to those of the second category and; 50,000 AZM (10.3 USD) to those of the third category by increasing the monthly supplements to the pensions of those who have become disabled while protecting the Republic of Azerbaijan from Armenian aggression and during the events on the 20th of January 1990. As a result the size of the pensions of the people in this category has been increased up to 30%.

According to the legislation in force, pensions for the number of the years of service as well as social pensions are funded by SPF. The SPF also finances childbirth allowances, childcare allowances for mothers with children under 3 years and funeral benefits. All are entitled to these benefits, not just those who have paid social insurance contributions. The childbirth allowance is currently 70,000 AZM(14.4 USD) and the funeral benefit 150,000 AZM (30.5 USD).

Pension expenditures account for 60% of the overall social insurance and social assistance payments. Old age pensions make up 63.2% of the whole Pension Fund. Thus the elderly benefit from a major part of social insurance and social assistance payments. In this regard, the social protection of elderly people is much better organised than those in other categories, including children.

The size of the disability pensions is defined according to the cause and extent of disability. These pensions are financed by social insurance contributions and supplemented by allowances. These allowances too are determined according to the cause and extent of disability. The supplementary allowances for disabled are not targeted according to the income level of the recipients.

Households without a breadwinner are paid benefits from the Social Protection Fund from obligatory social insurance contributions. While pensions are supplemented by allowances each member of the household who is entitled to this pension is taken into account. The minimum amount of these pensions is set at 70,000 AZM (14.4 USD) per household member.

Able-bodied people who have been registered as job seekers in the state employment service offices and who have no jobs and earning opportunities, but are prepared to start working, are entitled to the status of unemployed.

The State Employment Service Office provides the applicants who have been registered as job seekers with the status of unemployed if they do not receive any eligible job offer by the employment service for 11 days after submitting the necessary documents. If the people with status of unemployed have had a paid job for 26 weeks in the previous 12 months before unemployment, their benefits are determined at 70% of the last average monthly wage. In other cases, a minimum benefit is paid. After the new Law on Employment was adopted (August 2001) the minimum level of the benefit was increased from 5,500 AZM (1.2 USD) to 30,000 AZM (6.2 USD). After the increase, the average size of the unemployment benefit was 67,000 AZM (13.8 USD) in the first half of 2002 compared to 37,000 AZM (8 USD) in 2001.

According to the legislation the benefit is paid only to those registered at the State Employment Service Offices. The maximum level of the benefit is set at the level of the national average monthly salary.

Social assistance

Social assistance benefits include child benefits for low-income families, child birth allowances and child care allowances.

One main component of the social assistance is benefits and compensations. Benefits paid to low income families with children take a special place amongst these payments. Currently, 1,320,000 children and 303,000 working people receive such benefits from the Ministry of Labour and Social Protection. Every year over 15 billion AZM (3.09 mln USD) are spent for this purpose. It is paid if the per capita monthly income of the household is less than 16,500 AZM (3.4 USD). The size of this benefit is 9,000 AZM (1.9 USD) per month per child under 16 years (or under 18 years if the child studies and receives no grant).

The income assessment carried out for this benefit is very rough, and is based on formal wages. The benefit is low and non-targeted as it covers most of the children. There is a need to review income assessment procedures for increased, targeted benefits.

Other types of social assistance include the food allowance benefit paid to IDPs, social services provided through the offices of the Ministry of Labour and Social Protection, and allowances paid to pensioners, allowances for the children from certain families (families of martyrs and the war disabled) irrespective of their income. Again, the food allowance benefit (25,000 AZM or 5.2 USD) paid to IDPs is not targeted as it covers all IDPs.

Until 2001, there were non-tax privileges related to utilities, communications, education, health and transport services, as well as supply of medicine. Overall, 1.5 million individuals in 25 different categories of the population were granted with these privileges. These privileges were abolished in January 2002, and now compensations are paid to 10 most needy groups of the population instead of the privileges.

Overall, the system of social assistance is not targeted. Therefore, there it is necessary to improve the targeting and transparency of the system.

Table 1.6.

Size of Social Benefits Compared to Monthly Average Wage, 2001.

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Source: MLSPP

The biggest item of social protection in terms of expenditure is utility subsidies, which are in fact a very inefficient way of protecting the poor. This issue is discussed further in Chapter 4. The government has taken some important steps towards the removal of these subsidies with adoption of the State Programme “On Strengthening of Financial Discipline in the Energy and Water Sectors”. There is a need to design and implement a targeted social assistance scheme in order to help needy households cope with the increases in costs for utilities.

The key problems in the current social protection system can be summarised as follows:

  • There is no mechanism for benefits to be specifically targeted at the poor

  • Due to shortage of funds for social insurance payments, the state budget is used to make supplements to pensions and other benefits, meaning that there is no clear definition of social insurance and social assistance payments.

  • Despite the huge socio-economic changes which have occurred since 1991 the system of the social protection does not reflect the new reality and remains practically unchanged.

  • There is an urgent need to develop a new targeted social assistance benefit.

  • There are problems in pension provision as a main sector of social protection system: difficulties in collecting obligatory social security dues and its relation to pension amounts. A new system of individual records has to be introduced in order to bring the pension provision up to international standards. The main objective of the system is to provide a direct link between the obligatory social security payments and individual pension payments.

1.10. Employment

Paid employment is one of the most important ways of protecting the population from poverty. If citizens do not have the possibility to generate income for their families, the risk of poverty and vulnerability increases.

In 2000, the labour force in the Republic was 4,685,800 which exceeded the figure for 1990 by 17%. The economically active population grew by 0.3% in 2000 and became 3,748,200 in 2000, of these 3,704,500 were employed in all kinds of economic activities.

There has been a decline in the industrial and construction sectors, and a growth in the agricultural sector in the period 1991–2000.

Table 1.7.

Distribution of Employped Population by Economic Sector in 1991 and 2000.

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Source: CIS Statistical Handbook. 10 years of the CIS, Moscow 2001.

As can be seen from the table, in 2000 industry accounted for only 7% of the economically active population, and construction for 4.2%. The service sector accounted for 48% of the overall employed population. In 1991 the agricultural sector accounted for 31.8% of the overall economically active population, while it increased to 41% in 2000. It is important to note that growth in agricultural employment is directly related to a land reform, which has resulted in the allocation of small land plots to most of the rural population. However, as mentioned above, agriculture on the whole still remains poor in investment and capital. Thus, it is important to accelerate the implementation of the necessary measures to develop this sector.

The number of employed in the public sector was 2,618,900 in 1990, while it declined to 1,278,200 in 2000. However employment in the private sector is growing. There were 2,426,300 employed in the non-government sector in 2000, which was 2.2 times more than the figure for 1990. Currently, the process of creating organisations of collective or private ownership is underway. This partly provides employment for the work force that is unable to find a job in the public sector. Analysis of the employment in the private and public sectors suggest that, public sector employment rate is much higher than the republican rate (34.5%) in Nakhchivan (45.1), Khojavand (45.5), and in Sheki (44.5).

According to the 1999 census data, 64.6% of population over 16 years was employed (73% of males and 57.2% of females). By international standards this is also a relatively high labour force participation rate (LFPR: those who are employed, and the unemployed who are seeking employment). Among the working age population the LFPR is 71.9% (78.2% among males and 65.7% among females; working age—16–62 years for males and 16–57 for females).

Table 1.8.

Distribution of Population of 16 Years and Over by Economic Activity, (1999 census data, %)

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Source: SSC 2001 and WB 2002.

Although overall participation rates are quite high, many are engaged in temporary jobs in the informal sector, which leads to insecurity, and many of those in the formal sector, especially the public sector, earn low wages. Overall employment levels have not dropped nearly as much as GDP levels: despite falls in output, unemployment did not rise proportionally. This can be explained by the fact that workers are willing to accept reduced pay or hours of work; and it is a clear sign that real wages, through lower labour productivity, have decreased dramatically (Figure 1). Thus the relatively high employment and participation levels cannot necessarily be interpreted as implying higher income security. Although there is relatively low open unemployment, there is much hidden unemployment, with workers being retained on low wage, low productivity jobs.

Figure 1.1.
Figure 1.1.

Economically active, employed and underemployed by gender and age groups in 1999, % (ILO definitions).

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

Source: SSC and WB, 2002
Figure 1.2.
Figure 1.2.

Females’ wages as % of males’ wages.

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

Source: SSC and WB, 2002
Figure 1.3.
Figure 1.3.

The dynamics of employment, real wages and GDP in 1991–2000, %

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

Source: SSC and WB, 2002

With regard to unemployment, in 2001 there were 48,446 unemployed registered with the State Employment Services (giving an unemployment rate of 1.2%), but the 1999 census data suggest that among the able-bodied and economically active population there were 519,000 unemployed. This shows that non-registered unemployment is higher (15.8%). This gives an unemployment rate of 14.2% for men and 18.6% for women.

The main characteristics of the registered unemployed are presented in Table 1.9. Females dominate among the registered unemployed, as well as the youth aged less than 30 years. The share of highly educated unemployed among the pool of registered unemployment is extremely high in Azerbaijan: in late 1990s and in 2000, more than 60 percent of the unemployed had higher or secondary special education. 56.9% of the registered unemployed are graduates of higher and vocational educational establishments; 24.5 percent of registered unemployed left their previous job voluntarily and only 13.8 percent—due to staff reduction. This suggests that many of the professional education establishments produce workers with skills that are not in demand in the labour market.

Table 1.9.

Registered Unemployment (end-December)

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Source: SSC
Table 1.10.

Employment by Type of Economic Activity

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Source: SSC WB, 2002

The overall conclusions from the available labour market data are as follows:

Participation rates are quite high, but in all age groups men participate more than women, and the gap is especially significant in the most active years of work. This implies that women are retreating from the labour market, and has implications for female poverty and vulnerability.

Rural employment is slightly better than urban, due to the opportunities for agricultural self-employment promoted by land reform. However, the opportunities to develop agricultural assets are limited, and this self-employment is more of a survival/coping strategy rather than income generation.

Youth unemployment is high, especially among young people with secondary special and vocational education. Vocational education does not appear to be giving young people the skills they require to be competitive on the labour market.

1.11. Health

Poor health outcomes and low education achievement not only decrease well-being, but also limit people’s income-earning potential. They are dimensions of poverty, which interact and reinforce income poverty. There is a general recognition of the fact that the country experienced a worsening of the health status of the population in the period immediately following independence. However, there is less consensus on the trends in health status since the mid-1990s, when many of the national health status statistics have indicated an improvement.

There are gender differences in some health indicators. For example, the number of cases of tuberculosis has been growing, and this has especially affected men (3,780 cases registered, compared to 1,320 for women).

With regard to reproductive health, there has been a reduction in abortions compared to 1989, thanks to efforts by international organisations and the government to extend family planning services to the population. And with regard to maternal mortality, the risk of this is growing among poor sections of the population, due to the lack of financial means to pay for maternal care in maternity homes or hospitals.

In the 1985—1997 periods, the total fertility rate declined from 2.9 births per woman to 1.9, while the crude birth rate declined from 27 per thousand to 17 per thousand. While fertility has decreased dramatically, the decrease occurred in all age groups apart from that of 15—19 years. For this age group, fertility increased by 2 times. This is worrying due to the early age of childbirth, the implication being that these girls will miss some of their obligatory education with negative consequences for their future employment opportunities.

UNICEF carried out a survey in the year 2000, with the aim of establishing the health, education, and overall welfare status of children and women in Azerbaijan (the Multiple Indicator Cluster Survey, MJCS). This is a nationally representative sample survey, which, like the HBS, aims to show the links between the different aspects of women and child welfare. One finding, for example, is that children whose mothers have at least college or vocational school education are the least likely to be underweight and stunted compared to children of mothers with less education. Using the survey results and international definitions, UNICEF calculates a maternal mortality rate of 79 per 100,000 for 1988. This is considerably higher than the rate reported in Table 1.11. above.

Table 1.11

Selected Official Statistics on Health Status and Health System Performance

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Table 1.12.

Infant Mortality Rate (per 1,000 live births)

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Source:MH and WB

Since the mid 1990s attempts have been made by the government of Azerbaijan with the help of international organisations to combat the spread of infectious diseases in the country. Thus, by 1996 Azerbaijan had succeeded in eliminating polio and received Certificate on Polio-Free Country in Europe in 2002. Additionally, diphtheria has almost been eradicated; there as been a reduction in the number of cases of malaria, infectious hepatitis, measles, whooping cough and tetanus.

1.12 Education

The HBS results show a link between the education level of the head of household and poverty risk, i.e. the higher the education level, the lower the likelihood of the household being poor (Table 1.2). Access to good quality education is therefore one factor, which can help protect the population from vulnerability. This is partly due to the fact that the better educated are also more competitive on the labour market: the 1990 census data confirms that employment levels of those sections of the population with higher and incomplete higher education are significantly higher in all age groups.

Azerbaijan inherited relatively good education indicators from the Soviet period. However, the results of the HBS give some worrying indicators of how the education system is struggling to preserve the country’s strong educational heritage. In the 30–40 year age groups, 13–14% have higher education; 16–18.5% in the 40–60 year age group; compared to 11% in the 20–25 year age group (Table 1.14). According to the administrative statistics, only 16% of the 3–6 year old age category attends kindergarten, meaning that the system of pre-school education has almost collapsed in the post-Soviet period.

Table 1.13.

Number of Public Education Establishments and Students in 2001

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Source: SSC
Table 1.14.

Level of Education of Population by Age Groups in 1999, %

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Source: SSC

Overall literacy rates and school enrolment rates remain good, but there are problems with deterioration in the quality of the education being offered. It has also been noted above that unemployment among young people is high, and this is partly a direct result of inappropriate methods and subjects being taught in the general and vocational education system. Also, there is no systematic collection and analysis of school attendance rates, which would give a better indication of changes in the access to and quality of education being received by different sections of the population, and the extent to which there are gender differences in attendance and access.

Education enrolment and literacy rates

Azerbaijan has a high literacy rate (98.8%), high school enrolment rates (165,870 students have been enrolled in secondary schools in 2001/2002, that is 84.1% of total population of the age group 6 to 16 (1,971,200)), and good teacher/ pupil ratios (1:10).

Formal school education lasts 11 years, and is free and compulsory. Primary education consists of the first 4 years of this period. Studies conducted for and by the Ministry of Education show that there is a trend towards decreasing attendance of children in schools, especially in grades 8–11.

The number of vocational educational institutes, as well as the number of students studying in them, has declined over the last decade. While in 1990 there were 176 vocational schools with 82,188 students; at the end of 2001 there were 109 vocational education schools with 21,619 students. However, higher educational establishments experienced a relatively mild drop in the number of students—from 107,945 in 1991/92 to 89,155 in 1994/1995 but by 2000/01, the number of students already exceeded the pre-transition level—119,683 students were enrolled in higher schools.

Data on the gender distribution of students in the education system show that there are some gender differences in the enrolment at different types and levels of education.

Table 1.15.

Gender Distribution in Enrolment in Different Types and Levels of Educational Facilities. (1997–2000)

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While secondary school enrolment is slightly lower for females, the difference is not very striking. However, the table shows that females are over-represented in both state and private technical colleges; while males are over-represented in state and especially private universities. Post-graduate studies are also dominated by male students. This suggests that there is an increasing tendency towards the feminisation of certain vocational studies, and that this will probably be reflected then in the feminisation of certain types of employment. There is a tendency for the share of females in university and postgraduate education to grow, but the higher education levels, and therefore access to more prestigious jobs, are more accessible to men.

Quality of Education

Although the basic indicators in education remain good, there are several urgent problems relating to the quality of education being provided, which will have long term effects on the country’s education outcomes unless they are tackled. The problems in the education sector can be summarised as follows:

1. The quality of the learning environment has deteriorated at all levels of education, but especially in primary and secondary education. This is manifested in the poor condition of physical infrastructure, lack of textbooks, basic education materials and supplies, poor teacher training or shortage of teachers in remote regions. In addition, outdated curricula and teaching methods, poor teaching skills, and low wages have also had negative effects on the quality of education. The quality of teaching personnel has deteriorated considerably due to sharp drops in real teacher salaries, deteriorating conditions of the school environment, and poor teacher training. Such factors have prompted many of the best teachers to leave the system, de-motivated the existing teaching staff and reduced the demand for teacher training. Low salaries are one of the main reasons for the deterioration of the quality of education. The average monthly wage for the teachers working in general education establishments in 2001 was 193,200 AZM (41.5 USD).

2. Almost all education institutions lack basic textbooks and teaching materials and supplies to perform an acceptable high standard. Teaching and educational facilities for various subjects are not available. By law, the state is supposed to provide free textbooks for elementary grades 1–4, but it is reported that only 35 or 40 percent pupils receive free textbooks due to shortages. There have also been reductions in the budget funds available for maintenance and repairs, resulting in deterioration in the overall physical conditions of many school buildings, especially in rural areas.

3. Outdated school curricula and teaching methods, which were inherited from the Soviet system, bear little relevance to the needs of an emerging market economy and an independent country. Teaching methods usually do not reflect modem teaching practices.

4. An inappropriate linkage between education and the labour market, which requires substantial changes in the content of the education programmes being offered (in general secondary, vocational, higher education) to respond to the new skill demands in a market economy. In addition, there is still a major need for development of new curriculum, particularly for grades 7–11. Vocational education is reported to be more accessible to the poorer sections of the population, yet it offers training in skills which are not in demand on the labour market.

There is a need to develop policies to address the problems. These are discussed in Chapter 3.

1.13. Children and Poverty

The results from the HBS reported above show that children have a relatively high poverty risk, especially if they are members of large families. Children under the age of 15 years have a higher poverty rate than the over 40 year-old age groups (52% compared to 44–48%). The poverty rate for members of households with four or more children is 63%, compared to the national average of 49%.

Since independence, there have been two other visible pieces of evidence pointing to the increasing vulnerability of part of the child population. Firstly there has been an increase in the numbers of children in institutionalised care. Anecdotal evidence suggests that this is often due to the fact that families cannot afford to feed their children. Secondly, the problem of street children has become more visible. This is in many ways related to the problems of institutionalised care, since many of the street children have either run away or graduated from institutionalised care. There is also some evidence that the children of some sections of the IDP population have had to take to the streets to try to earn some money not just for themselves but for their families.

The table below shows that over 17,000 children are currently living in various forms of institutions and boarding schools. These include orphaned children, but also an increasing number of “social orphans”; i.e. children who have been placed in institutions by their parents, because they cannot afford to feed and cloth the children themselves. Once children are in institutions they are segregated from society, and many have problems re-integrating when they leave.

Table 1.16.

Children in Institutions in Azerbaijan (end of each year)

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Source: ME

It is the right of every child to grow up in a family environment. The policies needed to help ensure that this right is realised in Azerbaijan are discussed in Chapter 3

1.14. Environment

The well-being of the population is also affected by the environmental conditions in which it lives. Poverty and vulnerability are closely linked to environmental problems, in that land which has been ruined by environmentally detrimental practices cannot be used for agriculture; polluted air and drinking water leads to increased health risks for the population.

Azerbaijan inherited several environmental problems from the Soviet period. Environmental problems are particularly acute in large economic centres such as Baku, Sumgait, Ganja and Ali-Bayramli. The water resources, land, air, and flora and fauna have been negatively affected by the Soviet inheritance and also the economic difficulties of the 1990s.


Water sources are decreasing, while water consumption and supply is wasteful. Only 50% of the population has piped water. Rivers are lakes are polluted to various degrees. Clean water is becoming a privilege of the rich, since they can afford filters, mineral water etc. This leads to increased risk of infection through polluted water for the poorer sections of the population.


Degradation of land surface leading to soil erosion, salinisation, is affecting the ability of the rural population to use the land to generate income. Use of harmful chemical fertilisers means that they are absorbed into the soil and ultimately penetrated into the food system, with a negative impact on the population’s health.


Forest and woodlands are currently at risk. In particular, insufficient energy provision to the regions has given rise to harmful use of woodland resources. International experience shows that creating opportunities for participation of communities and user groups in managing these resources can help reverse this process. Participatory forest management and monitoring can have a positive impact on agro-pastoral practices in the areas concerned. Appropriately-designed tree plantation schemes both on state-owned and private land can improve watershed protection system, and preserve the biological diversity.


Emission of toxic pollutants into the air is mainly caused by power plants, industry and transport. Health outcomes for the population living in Absheron peninsula are negatively affected, since 70% of such units are located here.

The other main environmental problem linked to the living standards of the people of Azerbaijan is the pollution of the Caspian Sea. The livelihood of large sections of the population is connected with the Caspian Sea, whether due to the oil industry, or the fishing industry. The Baku bay area can be considered virtually dead from a biological point of view. Attempts are needed to protect the Caspian Sea from further pollution through limitations on fishing and prevention of biomass reduction, which in turn will adversely affect the livelihood of many coastal inhabitants.


Poverty is a multidimensional phenomenon. The new Household Budget Survey in Azerbaijan allows us to begin to define more clearly the characteristics of the poor in the country. The HBS data, as well as the results of smaller one-off surveys and administrative sources suggest the following:

There is a strong correlation between poverty and household size, and children have a higher poverty risk than the older age groups, including the pension-age group. This has implications for the design of social assistance and social protection policies: children are a very vulnerable group in this country.

The older the head of household, the more likely the household is to be poor. The poverty rate for individuals in households where the head is more than sixty years old is 53%. On the other hand, individuals where the head is 18–29 years old have a poverty rate of just 38%. Thus pensioners as a group are not particularly vulnerable, but if the head of the household is of pension-age, the vulnerability increases significantly.

Access to land is important in protecting the rural population from poverty, but is not enough to let them use it for income generation rather than subsistence farming.

The IDP/ Refugee population have a higher than average poverty risk. Not all of this section of the population are poor, but there are pockets of severe poverty and vulnerability which require specific solutions.

Rural regions appear to be better protected from income poverty and unemployment, but suffer more from declining infrastructure, and irregular energy supplies.

Regional differences in living standards are largely connected to the one-sided character of economic growth in the last years.

Chapter 2. Current Economic Status

2.1. The macroeconomic background

Although Azerbaijan has started the independent government building and economic transformation process, it has inherited a lot of problems from the Soviet period. It was one of only two Soviet Republics which did not receive subsidies from the centre (the other being Russia), and it ranked tenth in terms of living standards among the 15 Soviet Republics. In 1990, average monthly wages were approximately 30% below the average for the Soviet Union, and were 50% lower than those of the Baltic republics. Official statistics from 1990 show that 35% of the population had per capita incomes below the national minimum subsistence level.

After gaining independence, Azerbaijan was faced with serious political, military, economic and social problems. It was exposed to military aggression by Armenia, as a result of which 20% of the country’s territory remains occupied by Armenian military units; and about one million Azerbaijanis were forced to leave Armenia and the occupied territories. This gave rise to a large refugee and IDP population, many of whom are still living in temporary accommodation, with no regular employment, and dependent on aid coming from different channels.

The system of economic relations established under the Soviet Union did not allow for full development of the country’s economic potential. During that period 80–95% of industrial products and 30–35% of agricultural products were exported to other parts of the Soviet Union in the form of semi-finished products and raw materials. The processing industry was underdeveloped. The collapse of the unified economic complex resulted in the breakdown of the system of existing division of labour, a drastic drop in production and increase in unemployment.

At the beginning of 1990s the economy of Azerbaijan was characterised by high inflation. Actually inflation was impossible to manage at that time. Market mechanisms did not work normally. There was a deficit of food products in the country. The unstable internal political situation also made it difficult to launch substantial economic reform, and made Azerbaijan unattractive to foreign investors.

Analysis of the reasons for high inflation and the fast devaluation of the national currency showed that, along with the decline in production, other factors were an unnecessarily large monetary emission, and financial institutions inherited from the administrative-command system which were incompatible with the market economy. The increase of cash volume which had with no links to the economic situation had paralysed the country’s financial system and served to increase the uncertainty in the performance of economic units.

In the 1991–95 periods, some policy measures were taken to try to ease social tensions, such as the periodic doubling and tripling of official wage rates, the establishment of a minimum wage and the introduction of numerous state benefits and privileges. But these just spurred on inflation and did not tackle root problems. There was a cumulative real GDP drop of about 60%, hyperinflation, sharp currency depreciation and a nearly depleted foreign exchange reserve:

Table 2.1

Economic Indicators, 1990–1994

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Source: SSC

During this period, elements of the market economy emerged and developed to a certain extent, particularly in trade, service sector, transport, middleman and retail trade, and banking. This development was, however, often informal and frequently tinged by criminal elements.

All of the above contributed to a continuing slide in the economy and the population’s standard of living. It is estimated that GDP in 1995 was only 44% of the 1990 level, and that household consumption expenditures also declined by about 50% in the same period:

Figure 2.1.
Figure 2.1.

Inflation, Real GDP and Household Consumption in 1990–1994

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

Source: SSC

2.2. Achievements

Immediately after Heydar Aliyev came to power in June 1993, a degree of social and political stability was restored in the country, which made it possible to embark on a series of economic reforms. Since 1995, three government programmes aimed at achieving macroeconomic stabilisation, structural adjustment, and resumption of economic growth have been launched. A comprehensive stabilisation programme was launched, supported by the IMF and WB. The State Oil Company (SOCAR) signed a number of production sharing agreements with foreign investors.

Figure 2.2.
Figure 2.2.

Inflation, Real GDP and Household Consumption in 1994–2001

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

Source: SSC

As a result of these programmes there have been several achievements. The budget deficit has been cut from 10% of GDP in 1994 to 1–2%; and credit from the National Bank of Azerbaijan is no longer used to cover the deficit. The lending rate of the NB has been lowered from 250% in 1994 to 7%; and an adequate gold and foreign exchange reserve has been created, which is equal to four to five times the value of monthly imports. Currently the strategic foreign exchange reserve of the country including SOFAR’s assets has reached 1.3 billion USD. This all allows the effective manoeuvring on the exchange market and contributes to maintenance of financial stability, low inflation, stable exchange rates, and a rise in gold and foreign exchange reserves. Overall, the inflation rate has been kept below 2%, falling to 1.5% in 2001 (Figure 3.2); and the currency made fully convertible domestically within a short period of time.

Table 2.2

Economic Indicators, 1995–2001

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Source: SSC

The process of privatisation has been started and more than 29,000 small enterprises together with over 1,000 medium-sized and large enterprises have been privatised through cash and voucher auctions. The private sector now accounts for more than 70% of GDP. Land reform was carried out through the free distribution of over 1.3 million hectares of agricultural land among rural residents. They have the right to buy and sell plots. The result has been the establishment of more than 40,000 individual farms and 5,000 other farming units.

Foreign trade has been liberalised, making it possible to increase foreign trade turnover. Thus, balance of payment and foreign trade are in surplus now. Preliminary work has been completed to prepare for accession to the WTO and bilateral and multilateral negotiations are on-going.

Table 2.3

Structure of Direct Foreign Investments by Sector, in mln. USD

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Source: MED

Stabilisation of the monetary situation allowed more determined steps to be taken to deepening the banking sector reforms, along with increasing business activity. The restructuring of state banks has been accomplished, and important steps have been made to consolidate and capitalise privately-owned banks. Currently 47 banks are operating in Azerbaijan: two of them with state capital and 14 with the participation of foreign capital. Certain steps have been made in terms of improving banking services in the regions and as of 1 July 2001 the number of bank branches was 192. Efforts have been made towards bringing the accounting system, payment system, banking supervision and banking legislation up to international standards, to develop financial markets and to build capacity for banking personnel. As a result of recent measures, the real growth in credit investment to the economy had increased six times over the last seven years, including long-term credit investment—3.6 times, deposits of population—13 times, cash volume in AZM—over 4 times, while consolidated bank assets had increased to 17% of GDP.

Structural reforms have been carried out at the institutional level, in about 30 ministries and other state organisations and new joint-stock companies created, the quota system abolished, export tax eliminated, etc.

In the 1995–2001 periods, the pattern of economic recovery was dominated by the oil sector, at the same time the economy registered economic growth across different sectors, including agriculture. In 2001 compared to 1995, GDP has increased by 2.5 times, industrial production by 3.5 times and foreign trade by 2.2 times.

2.3. The Challenges

Figure 2.3.
Figure 2.3.

Structure of GDP, 1995 and 2001

Citation: IMF Staff Country Reports 2003, 105; 10.5089/9781451802597.002.A001

The key poverty reduction strategy aims were outlined in the previous chapter. The challenge for the government is to implement economic and fiscal policies which support these aims. In particular, fiscal policy has to reflect the aim of maintaining macroeconomic stability; economic policies have to support the aim of promoting income-generating opportunities, and to promote development of the non-oil sector and regional development. Both fiscal and economic policies have to reflect the need to obtain public and private sector investment in infrastructure. The policies to achieve these aims are presented in Chapter 4

Chapter 3. Social Policies Aimed at Poverty Reduction

It has been noted that economic growth has been increasing during recent years. But, the living standards of the population have not yet reached an acceptable level. Increased inequality in income distribution, growing differences between Baku and the rest of the country are the important issues to be tackled.

Thus, while the main overall directions of economic policies now have to be to make sure that broad sections of the population have access to income-generating activities; the main aim of social policy is to ensure income re-distribution. While the former has the aim of achieving structural adjustments in the economy and further stimulating the private sector by ensuring growth in the non-oil sector and regional economic development, the second one requires the development of a comprehensive and cost-effective system of social protection.

3.1. Social Insurance and Social Assistance Reform

Social Insurance Reform

The current social protection system in Azerbaijan comprises mainly of provision of social insurance and social assistance. Azerbaijan inherited the foundations of this social protection system from the Soviet period. Since 1997, there have been some changes introduced to the system, however there has been no fundamental reform of either social insurance or social assistance. Thus while socio-economic conditions have changed dramatically, the system of social protection has not been adjusted accordingly.

In principle social protection benefits can be divided into those of a “social insurance” type, and those of a “social assistance” type. Social insurance benefits are designed to protect individuals from falling into poverty when special events occur (e.g. old age, disability, and unemployment). Pensions are financed from social insurance contributions that are made by the working population (and employers). The size of the pensions should be linked to the length of contributions. Unemployment benefits are funded from employer and employee contributions. Social assistance benefits on the other hand, are financed from the state budget. There is a need for redistributing resources to insure that the poor have a minimum consumption level. One of the main problems in Azerbaijan is that there is no longer any clear separation between these two social protection schemes particularly with regard to old age pensions. This is because the size of the pension received by a former contributor does not correspond to the amount and length of previous contributions and state supplements are paid to pensioners and funded from the state budget.

With regard to social assistance, there is still a heavy reliance on redistribution based on categories of the population rather than on need. As a result, existing resources have been spread very thinly over a large section of the population, rather than providing meaningful support to a more restricted number of the poorest sections. Until now there has been no survey data, no poverty line, nor the necessary information base for studying poverty and need; nor has any effective means-testing capacity for targeting the most vulnerable been developed. Another problem is that there is a multitude of different small benefits, making application and receipt of social assistance benefits unnecessarily complex.

The government is committed to carrying out reforms in the energy sector, and to removing explicit and implicit subsidies in order to guarantee sound market conditions. However, this will involve a notable increase in the energy bills for most households, and not all households will be able to afford these increases. It is therefore essential that a new social assistance programme be developed and introduced in parallel to the energy sector reform. This new programme should target assistance specifically to low-income families.

Another problem has been the inefficient way of administering both social insurance and social assistance, with various different organisations being involved in the collection of dues, delivery of benefits and services.

The main objectives with respect to social insurance reform are as follows:

  • - Achieving reliable provision of pensions to the population;

  • - Increasing the role of pension provision in improvement of welfare of the population and adjusting this system to the principles of market economy

  • - Ensuring full collection and meaningful use of contributions;

  • - Increasing the efficiency of pension provision system by improving its administration

  • - Creating a link between social insurance contributions and size of pensions.

The President of the Republic of Azerbaijan approved a concept paper on the “Pension Reform in Azerbaijan” in 2001 July 17. The concept paper outlines the provision of a mandatory social insurance pension, where the pension rate will be based on each participant’s amount and length of contribution. It separates out the roles of mandatory pension insurance and social assistance benefits. For those who have not acquired the rights to receive social insurance pensions during their working life, the social assistance system will be responsible for providing adequate protection. In a later phase, the concept envisages the establishment and development of a private pension system based on voluntary participation.

The concept paper outlines the steps the government will have to take in order to reform the pension system.

  • 1. Design of a new social insurance system;

  • 2. Establishment of an effective administrative structure for an efficient management and delivery of pensions;

  • 3. Development of an automated social insurance and pension system based on individual accounts.

The introduction and use of forecasting models will play an important role in the development of the new pension system. It will permit the modelling of various scenarios regarding the demographic composition of the population, economic development, the size of the formal labour market and the social insurance contribution rates, and improving the legislative framework accordingly. An improved legislation for the compulsory pension system will specify the retirement age (gradual elimination of occupational privileges, equalising retirement age for men and women in phases), the compulsory social insurance contribution period (increasing the minimum period) and shares of the social insurance contribution to be paid by employers and employees (gradual equalisation of this share), the calculation of the pension size (number of years and reference wage taken into account), and possible indexation. Social pensions, and pensions which are not based on social insurance contributions will be paid from the state budget.

Administration of the pension system will be concentrated in a new established executive body. This executive body will be responsible for collection of pension contributions, keeping and fulfilling individual records, control on provision of pensions, collection of statistic data about modifications in the levels of pension expenses and income.

The most expensive part of the envisaged reform of the social insurance system is the development and implementation of an automated system for the management of pensions and social insurance policies based on individual accounts. Major investment are needed in this area. The government already prepared legislation that will enable the introduction of individual accounts in Azerbaijan and some preparatory work has been done with the assistance of the EU TACTS. The introduction of individual accounts has to be planned carefully, and the same applies to the needs with respect to information technology. An IT plan would specify the necessary hard and software, the data management methods and the financing sources. Based on a model office, the government plans to assess the needs for a new fully automated administration system. However, the government will need additional assistance in order to finance and implement the desired system. Once there is an administrative system, which allows the storing and management of individual records, individual pension numbers can be issued, the benefit formula will be revised, making it possible to have more differentiation in pension levels thereby increasing incentives to contribute to the social insurance system, and finally making it financially sustainable.

Social Assistance Reform

The main task for the government with respect to social assistance policies is to define an effective safety-net strategy that will enhance the targeting efficiency, support the poorest and most vulnerable groups and will mitigate the social impact of new public utility policies in the short-run. The following are the main objectives for reform of the social assistance system:

  • 1. Ensuring that social benefits are targeted to the poor and that the policies are efficient and effective;

  • 2. Adjusting the system of social assistance to the developing market conditions, and increasing the efficiency of social assistance provision through improving the management and administration of social assistance system.

The government has already done some work in the area of social assistance. With the assistance from EU TACIS, a pilot project has been developed in order to test some of the envisaged policy principles. In order to develop an improved system of targeted social assistance, the following six sets of policy actions have been identified. All actions are of similar priority and are to be executed more or less simultaneously.

  1. Establishment of an effective administrative structure;

  2. Development of the necessary legal framework for targeted social assistance policies;

  3. Development of a Social Assistance Strategy paper;

  4. Development of a targeting mechanism for the identification of the poorest and most vulnerable groups of the population;

  5. Creation of a system of adequate compensation for the poorest against the impact of new public utility policies;

  6. Creation of a monitoring and evaluation system for the development and implementation of social assistance policies.

The main task for social assistance reform is to remove subsidies and the current array of small allowances, and to replace these with one social assistance benefit that is targeted to poor households. These social assistance benefits will be financed from the state budget in order to keep them strictly separated from insurance-type benefits. The preparation of a strategy paper is the first step in the development of a revised social assistance system and includes the formulation of the overall objective of social assistance policies. It has above all to identify monitoring indicators for the evaluation of social assistance system. The result is a streamlined menu of benefits. Ex-ante evaluation and social budgeting methods will help to estimate the amount and costs of the new benefits and set eligibility rules. Considering the limitations of the state budget in the coming years, the new social assistance benefits (amount and eligibility) are going to be based on the budget limits of the government.

One of the main policy priorities that have been identified for the reform of the social protection sector is to improve the targeting of the social assistance benefits. The limited resources available have to be well targeted, reaching the poorest and most vulnerable groups of the population in order to ensure an effective safety net policy. In order to set per capita income limits, more precise information on poverty is needed. If the purpose is to bring household per capita income up to a certain minimum level, then that level has to be set taking into account fiscal constraints. Work on this is being carried out now, and will be further developed. Another principle of the social assistance should be administrative simplicity: the system for applying and assessing eligibility has to be made as simple and transparent as possible. In order to assess eligibility, a new system of means testing will have to be developed and introduced, i.e. targeting can no longer be done on the basis of “categories”. Since widespread employment in the informal sector makes estimation, checking of earning levels and formal income very difficult, it will be important to develop alternative approaches to means-testing, using, for example, proxy means-testing.

While the last sections have identified measures to be taken in the short to medium run, it is planned to develop a short-term strategy that will cushion the effects of envisaged changes in the public utility sector. The energy sector is planning to gradually improve the payment compliance rate of its clients and to increase energy prices in the future to reflect a more realistic price level. An increase in payment enforcement will hurt the poorest proportionally more. An energy price increase will have an even more serious impact on their living standard and the available income to consume other basic necessities. The government is therefore initiating a study outlining the preconditions under which it is meaningful to install a benefit compensating for the removal of utility subsidies. The results will be presented in a policy paper together with a proposal for the type of support to be offered as well as the target group that is going to benefit. The compensation is only a temporary support and will be reconsidered together with all other social benefits as outlined above.

Monitoring and evaluation of policies is a crucial element in any reform process and is necessary for the development of sound policies that are effective and efficient. The need to establish a monitoring and evaluation system is immediate. Monitoring of the policy starts immediately with its implementation. Therefore, a monitoring plan has to be outlined simultaneously with the policy proposal. It includes the definition of monitoring indicators. Data for these indicators need to be collected during the policy implementation and evaluated. The government and the public need to be regularly informed about the failure or success of a certain policy and of social policies in general. Therefore, a monitoring system should be installed and a Poverty Monitoring Unit given the responsibility for regular monitoring and evaluation of the implemented policies. It is fully understood that only systematic evaluations will help to improve the existing policies. Some necessary work will be carried out at the Poverty Monitoring Unit towards training and capacity building for analysis and evaluation of policy outcomes. Poverty has to be monitored constantly in conjunction with monitoring of the effectiveness of social assistance policies in protecting the poor.

3.2. Social Protection of Most Vulnerable Groups

Children in Institutions

It was noted in Chapter 1 that there has been an increase in the numbers of children in institutionalised care in recent years. This has detrimental effects on children’s education and development. The increase in the numbers in institutions is partly due to the increasing inability of poor families to feed and cloth their children.

The government is concerned to develop alternative strategies in order to prevent children being put in state care. These strategies are being developed with the support of NGOs and international organisations. One good example is provided by Youth Azeri Parcel Service (YAPS) started in 1997 with the support of UNICEF.

In recent years, a number of programmes and laws have been adopted which address children’s issues, including the Family Code. More responsibility for child welfare is being delegated to the local executive powers, however these bodies need assistance in building up capacity to take on these responsibilities. The main thrust of the child protection strategy is to prevent children being put in institutions and to develop alternative policies aimed at providing support to families in need. In order to achieve this it is necessary to:

  • ▪ Develop new family support services to try to help families who are having difficulty in caring for their children

  • ▪ Develop services for families with children that need special care

  • ▪ Develop legislation on foster care, as an alternative to institutional care

  • ▪ Rationalise the resources currently spent on institutions for children, and direct the savings towards supporting families and re-integrating children

Crucial to all of these four strategies is the development of social workers as a profession in Azerbaijan. There is therefore also a need to develop a curriculum for social worker training, and to organise training courses in the Ministry of Education in collaboration with higher education institutes. Training and re-training will be required, as social workers will need to increase their skills in family social work and care.

Family Support Social Workers will be trained and they will work with families who are in crisis or have social problems. It is considered advisable to start by training existing staff within children’s institutions. They can take on some of the initial tasks of working with families in need of support, and help with the re-orientation of the old policy. They will also work with children who are already in institutional care to help their parents or relatives to regain the child from state care. Once social workers are trained and active, they can also get further training in the methods of recruiting, assessing, selecting and supporting foster families. Foster care families will also have to be trained initially to assess for themselves whether they have sufficient motivation and capability to take care of other children.

Social care centres will be created (at the local offices of the MLSPP or at existing children’s institutions), which can serve as information and service centres for foster families with children that need special care.

It should be stressed that this approach requires training, and some re-organisation, but that it does not require large budget implications. Initial assistance will be required to train and pilot the system, but recurrent costs should be covered by savings from the cost of keeping children in institutionalised care.

This strategy will require an inter-sectoral approach involving the MLSPP, the ME, the MYTS. It is also proposed to establish a State Coordination Council on child problems at the Cabinet of Ministers. At the local level the (city and district) the commission on minors should be involved, as should the commission on guardianship and adoption.

The Disabled

Apart from social benefits to the disabled, mentioned above, the main policy direction is to integrate as far as possible the disabled into society. The government will continue to install the necessary facilities for the disabled in transport and public places. It is planned to increase the number of centres such as Para-Olympic health-sport centres for the disabled. Rehabilitation services and centres will be developed, with special emphasis on providing services in the regions.

3.3. Labour Market, Wage and Employment Policy

It was noted in Chapter 2 that economic growth has been achieved since 1995. But that growth has not been sufficiently accompanied by increases in productive employment. Economic and social policies have to complement each other, with the end aim of ensuring more equitable growth. In a market economy, the state plays a limited role in the direct creation of jobs. Its role is rather to stimulate entrepreneurship and create a favourable business environment. Policies aimed at these objectives are comprehensively discussed in Chapter 4

Wage Policy

The average monthly wage in 2001 was 260,000 AZM (55.8 USD), although there are significant regional differences in wage levels (there is no gender disaggregated data on average monthly wage).

Wages from employment are one of the main contributions to the household budget, and are therefore crucial in ensuring household welfare. The state can do little directly to influence the size of wages, since in a market economy wages are defined by supply and demand in the labour market. The role of the government consists in creating conditions, which allow the market to function more effectively.

The government sets a minimum wage in order to protect the low-skilled and low-income workers. This is currently set at 27,500 AZM (5.7 USD). The minimum wage will be adjusted upwards, following increases in economic growth and productivity.

In the public sector, the government is developing policies to deal with increasing the low level of wages, and rationalising staffing structures. Low wages in the health and education sectors mean that the better-qualified staff is leaving the sector. The MTEF envisages an increase in expenditure to raise wages in these sectors. In education wage increases will also be accompanied by a gradual reduction in the numbers employed in the sector. It is also planned to introduce regional wage coefficients in the public sector.

The government is also committed to decompressing wages for civil servants. A wage structure, which takes into account the different responsibilities and functions will provide a better incentive for individual civil servants and should make them more motivated and productive. A more professional civil service should help improve the efficient allocation of available financial resources and increase the quality and delivery of public services.

Wages in other sectors will be largely determined by the market. As part of the redefining of the state’s role in the economy new regulations are being worked out to govern the tripartite relations between the state, employers and employees.

Employment Policy

At present one of the main directions of State’s employment policies is the development of the government’s employment policy aimed at social efficiency of employment of the population and rational use of labour force.

One of the main concerns of the government is significant redundancies associated with enterprise privatisation and restructuring. A list including 450 enterprises in machine building, oil, chemical, and trade sectors has been prepared to be privatised during 2001–2003, which will eventually lead to significant layoffs. As noted above, increases in wages in the educational and other public sectors will be accompanied by rationalisation measures, which will also result in redundancies. The task of the state is to get ready for these redundancies, and make sure that labour market policies are in place to help those affected by them.

The social protection measures described above will minimise the risks for individuals affected by restructuring. Unemployment benefits should help in the first six months, and then targeted social assistance should be available to those who have not found alternative employment. However, the restructuring has to be accompanied by policy measures, which encourage investment and development of the private sector, so that this wave of redundant individuals can find new and productive work activities.

In order to facilitate this process, the government intends to develop micro-credit schemes, and also establish entrepreneurship support centres to promote the development of private enterprise in the regions.

In all cities and villages of the Republic, as well as in Baku, the Employment Department of the MLSPP will continue carrying out measures, such as vacancy fairs and labour exchanges.

The government also intends to reform the system of vocational education in order to ensure that the training being offered in the vocational education institutes matches the skills required in the current labour market. The system of vocational education in Azerbaijan covers 109 educational institutions with 22,000 students and 5,000 pedagogical and other staff. It was pointed out in Chapter 1 that graduates of vocational education are one of the groups highly represented among the registered unemployed.

Vocational education is currently provided by the system of professional schools under the Ministry of Education. The Ministry of Education plans to draw up a policy paper setting out how it sees the objectives of a reformed vocational education system. The training offered has to be re-orientated to the needs of a growing private sector.

It is necessary to regulate and give flexibility to the institutions of vocational education in designing their educational plans. It is necessary to arrange a connection between small and medium enterprises and the system of vocational education. In the framework of social partnership (with participation of state organisations, private enterprises, non-govemmental organisations, etc.) it is necessary to develop services of employment for the graduates of technical colleges and universities.

Apart from this, training courses will be organised to help women engaged in crafts and agriculture to develop their skills and find outlets for their products.

Information and Monitoring

There is a need for reliable data on the labour force and employment in designing the development of passive and active labour market policies. Special and regular labour force monitoring is needed to analyse the data on economic migration, employment, underemployment and unemployment, including seasonal, occasional and informal employment; earnings and incomes generated; working hours, by occupational groups, regions, in the formal and in informal sector, household production, etc. The absence of special, regular and reliable information on the labour market does not allow flexible adjustments in labour market interventions by the government. For this reason, there is a need for a regular labour force survey to be carried out and for training to be provided to local experts in the use of labour force survey data for policy analysis.

3.4. Education Reform

Azerbaijan started the transition period with relatively good education indicators. However it was shown that at present Azerbaijan is struggling to sustain achieved education outcomes and that it is also struggling to re-orient its education system to the needs of a market economy and an independent country.

With regard to poverty and equity, there is little or no evidence of differences in access to basic primary/ secondary education (classes 1–11), although there are concerns about differences in the quality of the teaching, facilities, and access to textbooks at this level.

For the long term, poverty reduction is dependent on investment in the country’s human capital. Growth in labour productivity will also require a highly qualified workforce. Continuing investment in education will be required to develop a skilled and well-educated labour force. As mentioned above, there is an urgent challenge to redefine the goals of vocational education in order to provide the future workforce with skills which are relevant to the new market environment.

The overall strategic objectives of policy measures in the education sector are: (i) to provide equity in access to good quality education, including removal of differences in quality between urban and rural areas; (ii) to ensure that the content of education is revised and teaching methods modernised; (iii) to improve the motivation of teachers through increased wages and bonus system based on performance evaluation; and (iv) to ensure that vocational education provides skills appropriate to market economy.

In 1998 a State Reform Commission was established to help the government carry out the reform process in the education sector more effectively. The Reform Programme was approved in June 1999, and was launched at the beginning of the 1999/2000 school year.

The following policy directions will be pursued to tackle the problems outlined in Chapter 1 with regard to falling standards in education, and to achieve the above strategic objectives:

  • Ensuring equity in the quality of primary and secondary education by guaranteeing text book provision to all pupils;

  • Improving the quality of teaching by rationalisation of staffing, increasing teachers’ salaries; and introduction of a bonus system based on performance evaluation

  • Improving the quality of the content of education through curriculum development, and changes in teacher training and re-training

  • Improvement of the material-technical base of educational institutions, in order to guarantee a basic standard of school environment for all pupils

  • Establishing Special Assistance Funds at the local (raion) level to help poor families provide clothing and materials for their children to attend school

  • Introduction of new educational technologies; improving training of pupils and teachers in use of information technology.

  • Improving the life skills of adolescents by incorporating reproductive health, healthy life style and gender issues into the school curriculum

  • Improving equality of opportunity of all young people to embark on higher education by developing a new grant system based on some type of means testing

  • Improving early childhood care and development though establishment of alternative institutional, family and community based facilities to ensure equal access to pre-school education

  • Increasing equality of access to learning materials by improving school library services

  • Introduction of a more decentralised flexible budgeting system and improving transparency in this context.

  • Improving the system for regular monitoring of quality and access to education

1. Improving equity in the quality of primary and secondary education by guaranteeing free textbook provision for all pupils

In schools today, one of the most urgent problems concerns textbooks: on the one hand, there is a lack of appropriate and necessary textbooks and other educational materials; and on the other hand, poor and needy families are unable to purchase existing textbooks due to financial difficulties. It is therefore necessary to take measures to ensure (i) that new textbooks are developed, and (ii) that both old and new textbooks are available for all schoolchildren, including the children from poor and needy families.

2. Improving the Quality of Teaching

All teachers are paid from the state budget and the average wage for the education sector is low. The best teachers are leaving the profession, and those remaining have little incentive to improve the quality of their work. The number of male teachers has more than halved in recent years.

Increasing teachers’ wages would contribute to reducing the pressure to make informal payments to teachers, which also penalises lower income families.

Presently, there are 1,658,000 students and 163,200 teachers (i.e. 10 students per teacher) in the primary / secondary schools (the obligatory 11 year school) of Azerbaijan. For comparison it is to be noted that the average international indicator is 17–18 students per teacher. Therefore, one of solutions of this problem would be a reduction in the total number of teachers and consequently increasing the basic wages. Bonuses for teachers should also be paid on the principle of «experience and knowledge», instead of age characteristics, and the criteria for hiring and promotion should be merit-based.

All these factors influence the quality of teaching and efforts that the teacher puts into the work. It will be possible to develop a system of classification ranks for teachers, professors, senior lecturers and other faculty staff. In accordance with this system it is possible to introduce a system of bonuses for those teachers, who participate actively in the improvement, development and introduction of new ideas, methods and technologies in the educational system of Azerbaijan. Such an approach will considerably increase the efficiency of education process, as well as the motivation of Azerbaijani teachers.

3. Improving the Quality of Curriculum and Teacher Training and Re-training

It is essential to update the content of education ensuring the continuity of the programmes for various levels of education (each preceding step should completely meet the requirements of the following). During the period of realisation of the Reform Programme it is necessary to shift from rigid standardisation of education into a personality-oriented education; also considering the particular interests of poor and needy sections of the population.

There is not only a shortage of textbooks; most textbooks are based on outdated curricula. There is a need to redesign the content of primary and secondary school education.

There is also a need to invest in and improve the system of training and retraining of teachers and managers at all levels of the educational system. As part of the reform, the content of the curricula will change (what is taught); and also the methods used to teach (how it is taught).

There is also a need to explore possibilities of introducing new information technology into school curricula and into teacher training institutions. All of these issues are being addressed under the current Education Reform Programme.

4. Improvement of material and technical base of educational institutions

This is the policy direction associated with most expense, i.e. the improvement and modernisation of the existing material-technical base of the education sector: construction, repair works, reconstruction and re-equipment of classrooms, laboratories and other facilities.

At present, the condition of the material and technical base of educational institutions and especially secondary schools does not correspond to accepted international standards and requirements. Because of the shortage of budgetary funds, almost no school construction and sufficient purchase of inventory, technical equipment, etc. has been possible in Azerbaijan in the past ten years. As a consequence, in many schools, especially in the schools based in rural areas, there is no opportunity for introduction of new approaches and technologies in the educational process.

School buildings and the material base of education are in decay. Rates of capital investment have sharply decreased. The majority of schools work on a 2–3 shift basis; many of the school buildings need to be repaired. It is unrealistic in the short-mid term to try to solve this problem purely through use of budget funds. A more optimal and effective settlement of the problems could be an increase in state financing coupled with attempts to attract additional off-budget aid to support the schools (partial self-financing). A certain part of the population (parents, businessmen and others) could be asked to undertake some portion of school expenditures. At the same time it is important to introduce some financial incentives for this (including exemption of these contributions from tax).

Today there are also problems in the distribution of various educational institutions (including specialised education) throughout the country, including Baku. For example, in Baku most of special educational institutions are located in the centre of the city, which again leads to lack of equality in the access to them: it is difficult for talented children and the children from poor and needy families, living in the suburbs and outside of the urban areas to attend these schools. In some rural areas, schools with only 9-year education cause problems for pupils in the 10th and 11th grades. This means that providing a certain quality of educational services in each city district and each region of the country, and the establishment of 10th and 11th grades in rural schools must become a priority policy.

5. Establishing of Special Assistance Funds at the Raion Level

The children from poor households can be prevented from attending school due to lack of shoes and clothing. Such households also cannot afford the relatively small expenditure required for other school materials, such as pencils, pens etc. It is therefore proposed to set up Special Assistance Funds, to be administered at the local level with the participation of the municipalities. Local knowledge of living standards and of the families’ situation will be used to identify those households which are in need of such help.

6. Introduction of new educational technologies

One of the main priorities of the Ministry of Education is to establish a computer-integrated educational system in Azerbaijan and to create an environment for children from poor families to have access to information technology. In this area the Ministry of Education plans to cover the whole range of inputs: all necessary training materials (computers), software and other educational systems, constant training of teachers and technical support.

Introduction and organisation of financing of distant education should be carried out in accordance with a specially developed «National Programme of Distant Education» that will considerably improve the efficiency and quality of educational services, especially in regions. The programme should provide a needs-analysis for the system of distant education in the country, new educational plans with integration of new technologies, implementation plans, etc.

Creation of such a system can also facilitate the establishment of an education monitoring system based on modem technologies. Distant education is an important way to improve access to education and training. The respective departments of higher educational institutions can enable the students in the remote regions who do not have opportunities to attend the classes regularly (mainly students from poor and needy families) to receive fresh knowledge and skills.

It is planned to create regional educational technology centres with elements of distant education (completely equipped with computers etc.). Thus, the Ministry of Education can solve through computer technology some of the problems of guaranteeing access to education of children from poor and needy families, and also to families of refugees living in regions, enabling them to have access to the modem educational programmes.

7. Improving the Life Skills of Adolescents

Adolescence is a crucial period for ensuring that young people make use of their capabilities and the opportunities available to them to limit the risk of being poor in the future, or to help them move out of poverty. It is also a period in life when young people tend to take risks, or be open to peer pressure to experiment with drugs and other forms of substance abuse.

It is therefore planned to introduce lessons on reproductive health, healthy lifestyle and gender issues in the school curricula. Support will also be given for the establishment of extra-curricular activities and resource centres for young people, through which the development of life skills can also be encouraged.

8. Equality of Opportunity to Enter Higher Education

At present, non-paying students7 of state higher and secondary qualification educational institutions receive a monthly grant of as noted below.

Table 3.1.

Monthly Grant Received by State Higher and Secondary Education Students

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Source: ME

Every year the government spends 17–18 billions AZM (3.5–3.7 mln USD) for these purposes. However, the grant is not sufficient to cover basic needs. Therefore, it is necessary to increase the size of the grants. There is a need for a means-testing system, which would allow grants to be given only to those who cannot afford to study. Thus the available resources would be targeted on those who really need it.

9. Early Child Care and Development (ECCD)

Early Child Care and Development (ECCD) is an integral part of the Education strategy. It has traditionally been provided through pre-schools and kindergartens. However, in recent years, the number and quality of these facilities has decreased with the declining ability of the national and district level social systems to support this public service. Total enrolments and gross enrolment rates (GER) have both declined significantly since 1990. Provision and participation in early childhood education in rural areas is particularly low (GER of less than 10%) compared to urban areas (GER of almost 25%). A further issue relates to gender parity. In all areas of the country, fewer girls than boys attend early childhood education programmes and this disparity is particularly significant in urban areas. Moreover, very few IDP and refugee camps have some kind of organised care for young children.

The formative role that public kindergartens played in ECCD has been shifted to the home where the stresses of the current transitional period make parental education and improving opportunities for ECCD more urgent than ever.

To arrest the alarming problem of declining welfare of the general population of children and especially the most vulnerable poor and IDP/refugee’s children, the government intends to facilitate the development of child-centred community and family-based kindergartens.

It is also proposed to raise parents’ knowledge, skills, and awareness of childhood care and development, by promoting good parenting skills, and stressing the importance of supporting children’s education through media, advocacy, and educational programmes.

10. Improving Equality of Access to Learning Materials through Better Library Services

School libraries currently suffer from a deficit of books, particularly ones in the Latin alphabet. Stocks are old, and mainly in Cyrillic. The government proposes to support the publication of new textbooks, literature and scientific books in the Latin alphabet. These new books will be supplied to school libraries, so that children from all regions and sections of the population have the possibility to use them. It is also intended to introduce information technology in the libraries, and use them as centres where children can have access to the Internet.

11. Efficient and Flexible Management of Budget

One of the main directions of reform is to move away from the very centralised model of educational management inherited from the Soviet period. Decentralisation of management will improve management efficiency and contribute to the process of moving away from the model of teaching where the student is the passive receiver of information.

With regard to the budget, the Ministry of Finance is responsible for allocating funding to schools, early childhood institution and all other education institutions. For general schools the allocation is done through the District Finance Offices. There is a need for schools to have greater control and independence in the allocation of their budgets.

Since 1997, schools have been permitted to have special bank accounts, which can be used for funding provided by sponsors, parents, and local companies. (Funds from the state budget are not kept in these accounts). Such funding is used to improve the material basis of schools. Although the district education office is responsible for paying non-salary items, the budget is usually in deficit. Therefore there is a continual shortage of funding for repair and maintenance of school facilities and for supplies.

It is necessary to increase the autonomy and financial independence of schools. Broad autonomy in running the school budget will increase the efficiency of schools. With a flexible and transparent budget system, the saved financial recourses can be transferred from one budget item to another. This would increase the motivation among management at the schools. The financial contributions of individuals, local and foreign companies to educational establishments should be given a legal basis and be tax-exempt.

Decentralisation of the education system can be an auxiliary tool in organising the necessary support for development of educational system. However the state should keep the necessary control in places, so that the standards of education are observed in all areas of the country. This process should include careful control and regulation of the activities of local authorities. It is necessary to determine the possible forms of decentralisation and, for example, with this purpose to organise one pilot project in one pilot region.

12. Monitoring the Quality of and Access to School Education

To have regular and reliable information on the quality of education in different regions of the country for policy formulation, there is a need to develop a new national system of student assessment for the 1–11 classes. Equality of access will be better monitored through regular collection and monitoring of school attendance rates, disaggregated by gender.

3.5. Promotion of Culture and Protection of Cultural Heritage

The cultural heritage is a valid indicator of any nation’s creative capacity. Its protection and development is an integral part of human societies’ progress and their aspirations for higher achievements beyond mere economic spheres.

Azerbaijan has a rich and varied cultural heritage, as reflected in its many museums, public libraries, music and arts schools, monuments, parks, archeological sites, a number of them with international reputation. The sheer number of its artists, musicians and craftspeople, from all ages and regions, denotes the fact that cultural education has been a long-standing feature of the life style in this land.

As a country in transition, Azerbaijan is experiencing a sharp decline in the overall conditions of its cultural set up. Most of its public cultural outlets (museums, libraries, parks, theatres and concert halls) are in dire need of repair and upgrading. This is due to the weakening of the system whereby public funding would be available both for the infrastructure and for the students and staff engaged in the arts. Whatever the cause of it, the decline in arts and the loss of cultural heritage are not compatible with the overall goals of economic development. The government has outlined the main strategic steps for turning the declining trend, and for promoting the cultural dimension within its overall poverty reduction goals.

Cultural Development and Poverty Reduction

As pointed out throughout the document, poverty is a multifaceted phenomenon, and encompasses income and non-income factors. The government plans for fostering the cultural heritage and development and its further development will have an impact on its overall poverty reduction efforts in two main ways. These are reflected in details in the Policy Matrix.

The current level of salaries and wages in the arts are particularly low at the moment. Through increasing the wages and salaries for the arts teachers (as part of the overall improvement of pay system in the education sector) and the other service staff in public cultural entities, there will be an improvement in the living standards of the people concerned. This will be followed by other incomes policy measures, such as decompression and rationalisation. This economic incentive is also aimed at improving the quality of services and the development potential, making the cultural activities more attractive to the public.

The second main economic tool for reducing poverty through development of cultural entities comes in the form of public spending on rehabilitating and upgrading a selection of public libraries, museums, theatres and arts venues, particularly in the regions. This will generate some new jobs, as well as demand for complementary activities such as construction, transport, printing and other sectors.

On the non-income aspects of poverty reduction, the government intends to encourage and improve access to the arts schools, arts professions and cultural entities, particularly to the poorer sections of the population and the IDPs. Social exclusion, as pointed out in Chapter 1, is one of the hidden faces of poverty. Expanding and improving equity in the access, information, and choice of social activities and participation is therefore a crucial component of poverty reduction strategy.

The following illustrate the links of culture with other goals of the poverty reduction strategy, like private sector development, regional development and human capital development.

Private Sector Development

Like most other countries in the world, the fundamental development and maintenance of cultural heritage remains within the public funding domain as an integral part of government policy. However, through linkages, the private sector can be induced to participate in complementary activities. This includes various training programmes, organising artistic events, cultural site tours, transport, information technology and publishing, as well as other retail activities. Moreover, some of the cultural sites can be managed by the private sector. All these will have a direct impact on income generation, and are fully in line with the government development policy.

Regional Development and Tourism

By expanding the cultural attraction in the regions, mainly through the initial public funding in rehabilitation of viable entities, tourism may be further developed. However, the government will use every caution to be selective in its funding, where there are obvious and relevant prospects for job and income generation and / or where access is very important to the public, such as public libraries and arts schools. Development of tourism can also have a function of encouraging local-level participation in implementation and monitoring of related activities.

Development of Human Capital

Promotion of cultural activities and more equitable access will have a direct and immediate impact on enhancing the current wealth of cultural capabilities in the country. It will also complement the government’s efforts in bringing about a more equitable distribution of resources and prospects for fulfilling individual potentials in the years ahead. Lastly, a successful rehabilitation of cultural entities will do justice to Azerbaijan’s international image in this sphere, and thereby facilitating influx of external resources and arts grants when appropriate.

3.6. Health Sector Reform

In the first half of the 1990’s the situation in the health sector dramatically deteriorated: there was a decrease in real wages in the sector, lack of funds meant that immunisation programmes could not be fully implemented and there was an increase in infectious diseases, and health indicators worsened (Chapter 1). From 1995 onwards, a series of measures were undertaken to improve the situation. As part of this, changes were made in some medical services, and there was some privatisation of the health care services, particularly the pharmaceutical part. In 1998, a State Commission was established with the aim of organising and implementing reforms in the health care system, and in 1999 a concept paper for health care reform was adopted.

The main thrust of health sector reform is currently reform of primary health care services. In the Soviet period, the emphasis was on provision of inpatient treatment to the population -construction of hospitals, increasing hospital beds. However, the principle health problems faced by the poor are communicable diseases, acute respiratory diseases, diarrhoea, and other illnesses, which are best and most efficiently approached on an ambulatory basis. The health reform efforts are therefore now focused on improving the capacity to provide accessible and good quality primary care services. A number of reform measures have been implemented in five districts over the past three years. From this experience, it would appear that the reforms which were implemented have had a positive impact on the health care of the population in terms of access to better quality care, particularly for the poor. The government will implement a Primary Health Care Project with UNICEF and World Bank support in an additional five districts over the next three years.

The second main thrust of reform is that of developing cost-effective health care services; i.e. elaborating specific interventions that have proved to be effective in the improvement of the population’s health status and which can be provided at relatively low cost. Such measures include health education campaigns, improved immunisation programmes, and improved treatment practices, such as Integrated Management of Child Illnesses (IMCI), safe motherhood and new-born care, the salt iodisation programme.

These two main directions of health care reform outlined above (rationalisation of primary health care and introduction of cost-effective health care interventions) are complex and expensive. They require careful planning and piloting. Such interventions are therefore being implemented step by step in coordination with international donors.

In line with the Millennium Development Goals, the strategic objectives include reduction of infant, children under 5 year years, and maternal mortality rates in the country, and also monitoring of access to safe drinking water. Goals for achieving these will be set as part of the overall health reform effort, which also has the goal of improving access to and the quality of basic health services. The reform also envisages a move away from the focus on “treatment” to “prevention and treatment” of the most common diseases.

Apart from cooperating with donors on comprehensive primary health care reform, the government envisages the following to achieve these objectives.

  • Increase expenditure on health sector (MTEF);

  • Introduce a system of flexible budgeting to ensure that rationalisation efforts are not penalised by subsequent reductions in budget allocations;

  • Establish in coordination with donor organisations the cost of a basic per capita package of primary health care, and work towards gradually increasing government expenditure to ensure this. Parallel to this, design a system of targeted exemption from paid medical services, and develop health insurance;

  • Increase the salaries of health sector employees;

  • Full state financing of immunisation programmes (excluding hepatitis B);

  • Design public awareness campaigns to help improve maternal and new-born welfare, as well as campaigns to reduce the incidence of TB, malaria, iodine-deficiency and HIV/AIDS;

  • Design public awareness campaigns for healthy life styles and nutrition, especially targeted to the poor;

  • Take measures to protect the population’s reproductive health

  • Adopt international standard definitions for key health indicators and improve methods of data collection;

  • Improve training of health sector staff, including raising awareness of the need to shift to more user-friendly services and the need to concentrate on prevention rather than just treatment of the illnesses most prevalent among the most vulnerable sections of the population;

  • Monitor access to clean drinking water as well as other environmental factors affecting health.

Below we give a brief sketch of some of the elements of the primary health care reform, and then look at some of the particular areas of concern for improving the delivery of health care services and ensuring access to the poor.

1. Reform of the Primary Health Care

The main element of the reform is to ensure the rationalisation of health services in order to reduce the number of hospital beds and reallocate staff and resources to outpatient services. The reform also includes re-focusing services from being based on treatment of illnesses, to the introduction of preventative interventions, which are often cheaper and more effective.

Another important element is improving the provision of essential drugs and promoting rational drug use. This envisages training medical staff in rational use of drugs and drug management to avoid waste and excess use of drugs. As part of this, so-called revolving drug funds are being introduced on an experimental basis in some districts.

Another important element is the introduction of an “Integrated Management of Childhood Illnesses” (IMCI). This covers nutrition, immunisation, treatment of acute respiratory infections and diarrhoea diseases, and malaria.

Reform of primary health care also involves improvement of health management techniques and promotion of community participation through the establishment of community health councils, educational campaigns etc.

One of the principal problems of the health system, particularly for the poor, is access to good quality pharmaceuticals at reasonable prices. At present, in the absence of other alternatives, patients are usually obligated to seek pharmaceuticals in the private sector, often at prices considerably higher than those which could be offered by a well-integrated system with the ability to purchase drugs on a large scale at discount prices. The reform programme is trying to tackle this problem through training in rational drug use, and experimenting with various schemes to improve access of the most vulnerable.

2. Ensuring a Complete Child Immunisation Package

Infant and child mortality rates among the poor are considerably higher than the rest of the population. The average figures in 1998 were 17 per thousand live births of infants under one year of age. UNICEF has estimated that in poor populations the rates may be as high as 102 and 133. The proper way of preventing serious child illness and death is to provide immunisation against serious communicable diseases. Azerbaijan has in place a relatively comprehensive system of immunisation. UNICEF has supported the introduction of a national policy on the Expanded Programme on Immunisation (EPI) and vaccine procurement, as BCG, DTP, DT, Measles and Polio. With support from GAVI, vaccinations for Hepatitis B are also being introduced.

Excluding Hepatitis B, the entire vaccination programme costs about 10 USD per child. It not only saves lives and costs for all families, and especially the poor, but also avoids the more expensive costs of hospitalisation. Excluding Hepatitis B, which is provided free through the GAVI programme, the vaccines themselves cost about 2 USD per child. In the past, vaccines have been provided entirely by UNICEF, but an agreement has been reached that from 2003 the government will cover 100% of the costs incurred excluding Hepatitis B.

The government will also work with international organisations to improve monitoring of the coverage and effectiveness of the immunisation programmes.

3. Improving Maternal Health and Care of New-born Infants

The government is concerned to improve access to maternal health care services and to care for new-born children. This is part of primary health care reform, and reflects the government’s commitment to reducing infant and maternal mortality.

Maternal mortality rates will be improved through improvement in the quality of maternal health services and improving access to these services. The Ministry of Health, with donor assistance, is working on a Safe Motherhood and New-born Care project. This will involve capacity building of health staff especially at the primary health care level, raising awareness of pregnant women and adolescent girls on healthy life styles, improving access to essential maternal health services, promoting a mother-baby-friendly environment at maternity units, and ensuring the availability of maternal services with special focus on the vulnerable population including the IDPs and refugee population.

One appropriate way of improving maternal and new-born welfare is to encourage breastfeeding. According to surveys, most women who have given birth are aware of the benefits of breastfeeding and intend to do so for 6 months. But according to the UNICEF MTCS survey, carried out in 2000, less than 10% of newborns were exclusively breastfed during their first 3 months. The widespread practice of providing formula milk implies costs of 15–20 USD per month which the poor can ill afford. Efforts therefore have to continue to educate women to exclusively breastfeed for the first 6 months and these efforts need to be particularly focused and targeted on the poor. Another effective intervention is the introduction of “baby friendly hospitals”. This initiative has already been tested in Baku and in some regions, and has had positive results.

Another key component of health sector reform is “Integrated Management of Childhood Illness” (IMCI). This aims to improve the management of childhood illness with regard to nutrition, immunisation, acute respiratory infections, control of diarrhoea diseases, and malaria. This component involves improving provision of essential drugs, health education materials, training of health personnel, and further public awareness on better childcare.

Efforts are also continuing to improve the system of monitoring maternal, infant, and young child mortality rates. These include improving the system of collecting information, and moving towards consistent use of internationally accepted definitions.

4. Tuberculosis

In the year 2000 there were 5,123 tuberculosis patients, which imply 63.7 per 100,000 population. While this is below the levels of other CIS countries, it is still significantly higher than the EU level of about 12, or the Eastern European average of about 50. While there exists no specific evidence, it is likely that most of these people are poor, since tuberculosis is a disease aggravated through poor sanitary conditions.

The Ministry of Health jointly with the WHO has promoted the “Directly Observed Treatment -DOT” strategy, which was implemented in 1995 in 3 pilot districts. This programme focuses primarily on training physicians and nurses to treat patients with free medications taken under direct observation. It also includes educational programmes for both tuberculosis and healthy lifestyles.

In general, tuberculosis is best tackled through timely intervention, as well as education campaigns aimed at prevention. The disease is easier and cheaper to cure at the early stages. The government will also cooperate with international donors on improving coverage of the population with the BCG vaccination against tuberculosis.

5. Iodine Deficiency Disorders (IDD) and Universal Salt Iodisation

After the collapse of the Soviet Union, iodised salt was no longer imported, and an epidemic of iodine deficiency was observed particularly in small children in rural areas, particularly in the north, south and western areas of the country. This not only causes goitres, but first attacks the central nervous system causing multiple problems of growth and capacity. The government adopted a law in 2001 prohibiting the production, import and sale of non-iodised salt for the mass treatment of IDD.

6. Malaria

There was a rapid increase in the reported cases of malaria from the beginning of the 1990s onwards. However, since 1996 the trend has been reversed. In 1999, the reported incidence of malaria was less than half of 1998, and continued to fall in 2000 to about 19 per 100,000 or about 1600 cases and in 2001 about 1,058 cases.

Here the government is committed to raising community awareness of the dangers of this disease and how to prevent its spread. One innovative programme is the planting of large numbers eucalyptus trees in endemic areas. These trees grow quickly and absorb large quantities of water, reducing the breeding places of mosquitoes.

7. Promotion of Healthy Life Styles

Many of the problems of public health are directly affected by the lifestyles of the population. Unhealthy food, hygiene practices, alcoholism, smoking, unsafe sexual practices are serious concerns.

The Ministry of Health, with the help of numerous international organisations and NGOs, attempts to influence healthy lifestyles through counselling and health education. Campaigns targeted specifically at the young population have been developed. These efforts have to be continued. Other sectors and institutions must also participate in this effort; for example, health education will be introduced into the curricula of the schools in cooperation with the Ministry of Education. Campaigns against alcohol, drug and other substance abuse have also been undertaken, and will be continued.

Clearly special attention needs to be placed on combating the sexually transmitted diseases, both through educational efforts and the provision of drugs. UNFPA has developed guidelines on STI prevention. The guidelines include the sections for facilitators and for participants as well and is intended for service providers working in rural areas of Azerbaijan. The government will also strengthen its work on public awareness campaigns on HIV/AIDS, especially for young people.

8. Protection of Population’s Reproductive Health

One of the major causes of spiralling poverty is big families. Larger families among the poor lead to increasing costs, including health care, and contribute significantly to malnutrition since there is often simply not enough food to go around. The HBS results reported in Chapter 1 show that households with more than 6 members have a particularly high risk of being poor.

According to a UNICEF survey, about 55% of couples use some method of family planning, but modern methods are used less than one third, and use various considerably between economic groups. Traditional methods are much less effective, and probably their widespread use contributes to the high rate of abortions (one abortion for every four live births). For the poor, the cost of modern methods of family planning is an obstacle to their use. As a consequence, they use ineffective methods, and often resort to the much more costly abortion.

Clearly to protect the poor from the economically negative results of large families and the costs and suffering of abortions, modern methods of contraception should be made available to them. This requires active promotion, education and access to modem methods.

The Programme on Reproductive Health and Family Planning has been functioning in Azerbaijan since 1994 with the support of UNFPA. The first part of the Programme - Family Planning was implemented in the country in the period 1994–1999. 7 centres have been established in the framework of the Programme: Gusar, Sheki, Masalli, Ganja, Nakhchivan and 2 centres in Baku. The centres were supplied with equipment and contraceptives. 12 trainers were trained to arrange a training programme on family planning for obstetrician-gynecologists and midwives working in the medical facilities in Azerbaijan. Thus, 1,000 obstetrician-gynecologists and midwives on family planning passed the training aimed at improving the access of the population to quality services and data. Booklets, brochures and posters were published with a view to raising awareness of patients.

The second part of the Programme - “Protection of Population’s Reproductive Health” - was launched in 2000. Currently implementation of the Programme is followed up by the National Office on Reproductive Health and Family Planning which was established within the Ministry of Health of the Republic of Azerbaijan for this purpose. A National Strategy on Reproductive Health of the Population of Azerbaijan has been developed. This will provide access for the families living far from cities and hospitals, including refugees and TDPs, poor and low-income people to services. In the framework of this stage of the Programme 8 more centres have been established in Aghdash, Shamakhi, Ismaill, Gabala, Jalilabad, Lankaran, Salyan and Khachmaz regions. At this point of time, the Ministry of Health and the National Office are making joint efforts to integrate the RH / FP centres established by international organisations in the areas populated by the large number of refugees and IDPs in Barda, Tartar, Aghdam, Mingachevir and Yevlakh. In the framework of the project about 350 obstetrician-gynecologists have been trained in Baku and other regions of the Republic, and brochures on protection from STD and RH / FP published for adolocents. It is proposed to bring the number of centres for reproductive health up to 21 in the future.

9. Availability of clean water

One of the primary causes of morbidity and mortality in children is diarrhoeal disease, usually resulting from contaminated water. This not only results in additional health care costs and loss of income, but also aggravates malnutrition by reducing the capacity to absorb the few nutrients available. It is of the utmost importance that all communities be provided with adequate sources of clean water.

According to UNICEF’s MICS survey (2000) about 76% of the population has access to clean drinking water. This may be an over-estimate, since it assumes that all piped water is safe. The rural areas are particularly lacking in clean water supplies, as are specific areas of the country, particularly the south.

The only function of the health sector with respect to water is to monitor its quality. Availability is the responsibility of local and central authorities. It is intended to establish a system of regular and reliable monitoring.

10. Monitoring Indicators

One of the requirements for improving management is the availability of timely and accurate information related to all aspects of health care delivery. Without good information, effective decision-making is greatly weakened. As accurate and timely information has rarely been available, decisions have rarely been made on the basis of information, and thus the value of information is not fully appreciated.

A strong foundation on the national level has been developed, but there are many other aspects which require development. The first is an accurate system of vital statistics upon which to base the critical indicators of the health sector. This system focuses on births and deaths, and includes information related to each birth and information related to the deceased and the cause of each death. Without such a system, it is difficult to target specific populations, principally the poor, to better direct activities. The system has been designed and implementation has been authorised by a Ministerial decree from the beginning of 2002. Some computer hardware is in the process of being purchased, and software is presently being developed. Implementation of an accurate system of vital statistics will be carried out by a team which will train and supervise implementation at the regional level. Initial funding to train this team, prepare a manual, and implement the system in several regions will be provided by UNFPA. Further funding will be necessary to expand the system to other regions.

As noted in the text above, the system of data collection for monitoring infant, under 5 years, and maternal mortality has to be improved, and the definitions made consistent with standard international ones. Also, a system for monitoring access to clean water has to be developed and implemented.

UNICEF has cooperated with the SSC in the fielding of a “Multiple Indicator Cluster Survey” in order to increase the government’s ability to monitor health indicators in the country. Elements of this survey, particularly the collection of anthropometric measurements, could be incorporated into the HBS on a regular basis. For example, a special module could be developed, and fielded as part of the FIBS once very 3–4 years.

11. Budgeting and Administration

Four main issues should be noted with regard to budgeting in the health sector. First an overall increase is required in state expenditure. The amount allocated to health expenditure has dropped from 1.4% of GDP in 1995 to 0.9% in 2001. Attempts to reverse this trend are incorporated into the MTEF for 2002 - 2005 (Appendix 2).

However, an increase in overall funding will not solve all the problems, especially since planned increases have to be realistic and be linked to increases in budget revenue. The Ministry of Health has already tried to increase resources available by introducing charges for some medical services representing circa 10% of budget allocations. However in the current economic situation, many groups of the population are granted exemption from payment (currently about 75% of the population). Therefore, at present it is not realistic to consider further increases from this source. The funds from paid services can be used by health institutions to improve the social welfare of employees and strengthen their material-technical base. It is therefore important that increases in the budget achieved through charging for medical services should not be used as justification for reducing rather than increasing state funding. However, attempts can be made to improve the targeting of exemption. This can be done in line with moves towards targeting of other social protection measures, as outlined in the section on social assistance reform above.

The second issue is linked to the rationalisation of resources. Since the health sector can not expect to solve all its problems through increased budget allocations and increased revenue from paid services, it has to undertake measures to rationalise the use of available resources. Much of this can be achieved through the shift from hospital services to ambulatory primary health services, and through other measures being piloted with UNICEF and WB support.

The third issue is to ensure new budget norms and budget flexibility. The budget for the country and for each raion is allocated on the basis of norms, namely the number of hospital beds, medical specialists and pharmacist and other indicators. These are rigid, and standardised, and do not take into account particular needs (e.g. increased incidence of disease) of different regions. The norms for allocation have to be changed and calculated either on a per capita basis (number of residents in the region), or on the basis of regional characteristics or disease incidence. As part of this, there is a need to calculate the cost of a minimum package of basic primary care services and to budget on the basis of the per capita cost of such a package.

The fourth issue is to ensure the increase of wage levels in the health sector. Although half of the budget goes on wages, these are very low. Health sector wages represent circa 30% of the national average in 2000 (50,216 AZM (10.4 USD)). This decreases staff motivation, and also encourages informal payments in the health sector.

The MTEF envisages increases faster growth in health sector wages in the coming 3 years.

Table 3.2.

Total Health Expenditure as a Share of GDP; share of wages and other budget items within the total sector budget, in %

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Source: MH

Also critical for managing the resources in the health sector is a system of monitoring all financial flows in that sector. The system is still in a preliminary stage, but represents an important step towards improving financial management and transparency within the Ministry of Health. It is intended to expand and improve this system.

3.7. Promotion of Sports and Physical Education

Promotion of sports relates to the poverty reduction objectives in several ways. By encouraging physical exercise, a healthier life style will be induced, particularly amongst the youth. Positive outcomes may include generally higher levels of health awareness, and reduction in tendencies towards harmful habits such as smoking and drugs and substance abuse. The importance of promoting healthy life style has been stressed in the government’s policy measures for health reform, and part of this includes improving access to sport facilities, especially for young people.

Ensuring a more equitable access to sports facilities will also be part of the social inclusion of the poorer sectors of the country. While the government will undertake to construct Olympia Centres in regions, repair the National Child Recreation and Health Centre and rehabilitate sport-health centre within Olympia and Sport Lyceum, it is planned to encourage municipalities and communities to play a role in providing basic sports facilities and public parks for outdoors sports.

The government plans to repair and upgrade the youth sports schools in the regions, and also to construct new sport centres. Part of the reason for the decline in availability of public sports facilities is the fact that some of them were used to provide temporary accommodation for IDP families. As IDP families are voluntary re-settled, these sports centres will be gradually reconstructed and re-opened to the public. In particular, the government plans to re-open the Mingachevir Rowing Centre by the year 2003.

Hence, apart from the direct impact on health promotion and social inclusion, there will also follow a more equitable regional balance as a result of promoting sports and its infrastructure.

3.8. Gender Policy

Integration of gender policy into the country’s overall development strategy will ensure increased efficiency in the implementation of this programme and equal access to the benefits envisaged in the programmes directed at economic growth and social welfare of the poor.

The nature, causes and impact of poverty can be various; men and women can experience poverty in different ways. It is of great importance that this is taken into account by policy makers in general and in the sector policy-making process. It is necessary to deepen the diagnosis of poverty with more gender analysis as a basis for developing more appropriate strategies.

Gender issues are discussed in various sections of this document. This section gives a brief summary of the main directions of gender policy.

The current gender policy in Azerbaijan has its root in the “women issues” of the Soviet period. In that period, women enjoyed formal equality: there were legal guarantees of equal pay for equal work; a quota system which ensured women were represented at all levels of government; and other types of legislation that guaranteed women most rights. The “women’s Soviets” regulated women affairs. These Soviets represented women’s interests at all levels and they had the tasks of protecting women’s rights. At the end of the 1980s the women’s issue was de-ideologised and was no longer an explicit part of the government’s policy. At this point, NGOs representing the concerns and rights of women began to be formed.

Discussion of women issues in line with international practise emerged during the independence period of Azerbaijan. As part of the preparation for the IV International Conference on Women (Beijing 1995), all government and non-government women’s organisations were mobilised to address women’s problems. In this regard, in 1994, a National Preparatory Committee was set up according to a Decree issued by the President of the country. This Committee included representatives of women from government agencies, and leaders of women’s NGOs. In 1995 Azerbaijan ratified the “Convention on the Elimination of All Forms of Discrimination against Women.” The women’s delegation from Azerbaijan took an active part in the work of the Beijing conference.

In 1998 the State Committee for Women Affairs was established in the Republic and a Presidential Decree on the Measures to Promote Women’s Role in Azerbaijan” was issued. The responsibility of the Committee is to address issues related to the status of women in various fields. In 1997–2000 a joint government and UNDP project “Gender in Development in Azerbaijan” was launched. This project included the activities of organising gender institutional isation, dissemination of gender related information, logistical support and backup to the newly formed State Committee on Women Affairs and Women’s NGOs.

In March 2000 the President of the Republic of Azerbaijan issued a Decree “On the Implementation of State Policy on Women’s Issues in Azerbaijan” With the Resolution of the Cabinet of Ministers related to the implementation of this Decree, responsible persons for women issues were appointed to supervise gender policy in the state owned enterprises and a programme for provision of employment to refugee and IDP women was approved. According to the Decree the SSC was commissioned to develop statistics on the position of women. At the same time the National Action Plan on Women’s Issues was adopted. This plan envisages taking measures on 12 “strategic objectives” of the Beijing Action Platform as a collaborative effort by ministries, state committees and NGOs.

Taking all these into consideration it was decided to focus on the following fields within the framework of Poverty Reduction Strategic Paper.

Employment: this objective covers the need to promote credit availability for women wishing to set up private businesses; organisation of special courses to train female entrepreneurs in legal and business matters; special employment initiatives for female single parents; promotion of self-employment opportunities in rural areas, provision of legal services to low income women, in order to help them get better information on their legal rights and rights to economic resources; involve female entrepreneurs in economy strategy development; help with technical and vocational training for women;

Education: this objective covers the need to promote equal participation of women in education; development of programmes for women to develop their legal and economic knowledge, gender awareness.

Health: promote education on family planning; promote government support to women NGOs to help in health services to women; prepare recommendations on women’s reproductive health and ecological problems; prepare recommendations on the problems of unmarried mothers.

Violence: Adopt and implement international conventions related to the human trade as well as women and child trafficking; provide medical, psychological and other kinds of consultation to women subject to domestic violence and during the military aggression and to offer legal advice to them.

Refugees and IDPs: assist in promoting availability of credit to IDPs and refugees; expand medical, social and education services to IDPs and refugees; promote social protection and employment of women refugees;

Girl Teenagers: To provide special training for developing work skills of girls;

Decision-making process: To take relevant measures ensuring gender balance of women in electoral, political and social life, to ensure more active involvement of women in social life.

The aim of the Poverty Reduction Strategy is to identify and implement policies, which will benefit both men and women, and thus maximise the benefits targeted to poor households.

New HBS (2001) is designed primarily to provide information on income poverty. In order to supplement the HBS it will also be necessary to take carry out special surveys to study the gender dimensions of different aspects of poverty more closely. The ground has already been prepared for this. The UNDP has already supported the project “Gender in Development in Azerbaijan” and CIDA has supported the development of gender-disaggregated statistics in Azerbaijan. This has contributed notably to the ability of policy makers to study gender related problems in the country, and to be aware of the gender aspects of current or proposed policies. For example, gender indicators were included in latest (1999) census, and statistics in many spheres are presented on the basis of gender-disaggregated statistics. Since 1998 an annual statistical report entitled “Women and Men in Azerbaijan” has been published. Along with this there is great need to extend the coverage, dissemination of available gender disaggregated statistics, and to publish these gender-disaggregated statistics regularly.

There is already official recognition in Azerbaijan that poverty can affect women and men in different ways and that policies have to take into account these differences. At present international organisations extend support and assistance to measures related to gender and women issues. The following should be emphasised among them: UN Agencies (UNDP, UNICEF, UNIFEM, UNFPA, UNWFP and IOM), OSCE, OXFAM and OSI.

Great efforts have been made to ensure that gender issues are reflected in the priorities formulated in this SPPRED. One of the main conditions for successful implementation of the SPPRED will be further attempts to increase gender awareness in programme monitoring in the implementation phase.

3.9. Social Policy and the Refugee - IDP Population

It was stated in Chapter 1 that refugees and particularly IDPs have a higher than average poverty risk.

Within recent years a legal framework for the social protection of these people has been established based on international practice. The President of the Republic of Azerbaijan has issued about 24 Decrees and Orders, the Parliament has adopted 13 laws (including the law on the Status of Refugees and Internally Displaced Persons (IDPs), the law of the Republic of Azerbaijan “On protection of IDPs and those who have equivalent status”), The Cabinet of Ministers has adopted about 140 orders and resolutions. The State Programme on the Solution of Problems of Refugees and IDPs has been approved by the Order of the President of the Republic and a Social Development Fund for IDPs has been set up.

Over 60 international organisations, about 54 Ministries, Committees, companies of the Republic are actively involved in refugees’ and IDPs’ settlement, improvement of water supply, sanitation conditions, addressing problems related to their education and health care.

Currently about 357,000 IDPs are provided with food assistance. About 143,000 of them are provided with assistance by UNWFP (the programme was prolonged to the end of 2005), and 214,000 by the state (until the end of this year). UNHCR is financing local and international organisations and coordinating their activities to improve housing, water supply and sanitation, income generation, health status of IDPs etc. Despite budget limits, each IDP and permanently settled refugee is paid 25,000 AZM (5.2 USD) a month as a food subsidy.

As a result of substitution of privileges for subsidies for permanently settled refugees and IDPs since early 2002, 15,000 AZM (3.1 USD) monthly subsidy per person is directly transferred to the utility companies from the state budget.

In order to improve the social and living conditions of 5,019 IDP families provisionally settled in refugee camps, and to provide permanent settlement to 1,722 refugee families, 359 billion AZM (74 mln USD) has been allocated from the State Oil Fund, in accordance with the respective Decree of the President of the Republic of Azerbaijan. Alongside with the infrastructure, it is intended to build 15 secondary schools, 14 kindergartens, and 15 hospitals and medical centres in the new settlement.

About 60,000 ha of land have been allocated to 20,000 provisionally settled IDP families, and 611 farmer households in order to contribute to the solution of employment problems of IDPs. However, only 400 out of them have been given privileged credits at the expense of a billion AZM (215 thousand USD) allotted from the state budget in 2001. In this area there is a need for support from the international organisations.

529 refugee and 92,000 IDP families provisionally settled in camps, prefab houses, and other temporary housing and in the villages are provided with paraffin in the autumn and winter seasons. Refugee and IDP children like the local population get free education at secondary schools and members of the lst -4th grades are provided with free textbooks. Refugees and IDPs are also granted exemption from income tax, and from tuition fees in the paying sections of the state high and secondary education establishments and are transported at the expense of the state budget when they move houses.

The living conditions of Refugees and IDPs should be periodically analysed in order to increase the targeting and efficiency of social protection measures, to focus them on the most vulnerable people. Surveys and monitoring of the living conditions of these people through international financial and humanitarian organisations is expedient. This will also enable the government to monitor the extent of poverty among the refugee and IDP groups of the population.

The complete solution of refugees’ and IDP’s social problems will only be possible when the Nagomi Karabakh conflict comes to an end, and the return to their homeland is secured. But the implementation of special measures should be continued for improving the living standards of these people in order to avoid loss of human capital by the time this conflict is solved. In this important work the support of international financial and humanitarian organisations is necessary to complement the efforts of the state authorities.

Chapter 4. Economic Policy and Poverty Reduction

The Poverty Reduction Strategy includes two main challenges for economic policy. Firstly, fiscal and monetary policies must be flexibly and carefully used in order to maintain macroeconomic stability. It was already noted in Chapter 2 that since 1995 Azerbaijan has enjoyed considerable success in this regard; the task now is to continue and consolidate these successes. Secondly, the government must now foster balanced growth of the economy. Transfers to households have until now been considered the major tool to alleviate poverty, although it was shown in Chapter 3 that in fact they are in general too low to have any major impact on living standards. There is still an important role for targeted transfers in the poverty strategy, but it is increasingly obvious that transfers alone will not resolve all the issues of poverty. Therefore, the government will focus on promoting business activity and entrepreneurship in order to generate employment and income.

As was shown in Chapter 2, Azerbaijan has achieved significant growth in the oil sector, which is the leading sector for the national economy. However, foreign investment in Azerbaijan’s petroleum wealth creates relatively limited job opportunities. In 2002, about 5,000 people are employed in foreign oil companies in Azerbaijan (mostly living in Baku), and about 61,000 for SOCAR (of which 74% are men and 26% women) out of total labour force of about four million. Oil and gas sector development plays an important role in increasing state revenues but only creates a limited number of employment opportunities.

The government will attempt to achieve balanced economic growth through development of the non-oil sector for job creation and promoting regional development. It should be noted, however, that the government will stimulate job creation, not create jobs itself. Job creation will be stimulated through various aspects of economic policy, for example investment policy, regional development programmes, privatisation, developing the financial and banking sector, and encouraging the growth of small and medium enterprises (SMEs).

The remainder of this chapter is divided into three parts. First, the need for continued stability, and the achievements which have been made, are highlighted. Second, an overview of the government’s medium-term expenditure strategy, which will support the reduction of poverty, is provided. Finally, sectoral initiatives which will promote balanced growth are explained. These include plans to provide a supportive environment for businesses, and to reform the energy and agricultural sectors.

4.1. Maintaining Economic Stability

As a result of the prudent economic policies pursued by the President of the Republic of Azerbaijan, with support from international financial institutions, economic stability was restored in the country in 1995. The government stopped the practice of borrowing from the National Bank in order to finance the state budget deficit, and the inflation rate was reduced to a minimum. The National Bank refinancing rate fell from 250% to 7% while the exchange rate stabilised. The state budget deficit was cut from 9% of GDP in 1994 to the current level of 1 -2% (This excludes Social Funds and inflows into the State Oil Fund. The Consolidated budget, which includes SOFAR receipts, is now in surplus by about 1% of GDP.)

The government of Azerbaijan set up the State Oil Fund (SOFAR) to mitigate the potentially negative impacts of rapid inflows of oil revenues to the state budget, and to preserve an appropriate portion of the oil wealth for future generations. Careful management of oil wealth is of the utmost important for the maintenance of macroeconomic stability. In the absence of such measures Azerbaijan would be very much at risk of suffering from “Dutch disease”. International experience has shown that countries which enjoy rapid increases in their exports of oil or gas often suffer from shrinking manufacturing and agriculture sectors caused by an appreciation of the real exchange rate.

In Azerbaijan, as in other countries, rapid changes in the prices of goods and services have hurt the poor much more than the rich. Therefore, one of the key planks in the government’s Poverty Reduction Strategy is to maintain macroeconomic stability. This will be realised in three forms: first, the NB will continue to use monetary policy to maintain low inflation rates taking the new environment into account; second, the government will limit its expenditure to a level that is sustainable over the medium term and is non-inflationary; and third, the government will increase the effectiveness of its fiscal planning and control, by making institutional improvements to key economic and financial agencies.

Monetary Policy and Maintaining Price Stability

The achievements in economic development have led to new challenges in economic policy, including monetary policy. The National Bank will continue to use monetary policy to support macroeconomic stability and poverty reduction. The main aims of exchange rate policy will continue to be maintaining a low rate of inflation and maintaining exchange rate stability. It is proposed to limit inflation to 2–3%.

The maintenance of foreign exchange reserves at a sufficient level will be ensured, and efforts to liberalise the foreign exchange regime will be sustained. Thus, it is planned to gradually bring about the external convertibility of national currency, the domestic convertibility of which has already been achieved.

It is planned to improve monetary policy tools and broaden their scope according to the current macroeconomic conditions in order to increase the effectiveness of the monetary management mechanism. Flexibility of monetary policy will be ensured to facilitate expansion of the economy as well as the banking-fiscal sector.

To achieve the goals, efficient links between monetary policy and other aspects of macroeconomic policy will be ensured.

Efforts will continue to be made to ensure that the efficiency and credibility of monetary policy are guaranteed through bringing transparency in the policy up to international standards.

Increase Efficiency of Expenditure

Azerbaijan has established a strong record of limiting fiscal deficits to low levels. Since 1996, the government budget deficit (excluding flows into SOFAR) has not exceeded 4.5% of GDP; it was 2.2% of GDP in 2000, and 2.1% in 2001.8 This prudence has left the country with low levels of debt, both domestic or external. Furthermore, Azerbaijan is in the fortunate position of anticipating rapid increases in the resources available for poverty reduction. For the years 2003 -2005 the total receipts available to the government will increase by an average annual 9% in nominal terms, while the state budget is expected to grow by an average annual 15% in nominal terms (inflation is expected to be about 2.5% per annum, so that real growth of the resource envelope will be about 6% annually). This strong revenue growth is driven by very high levels of investment in the oil sector, and is supported by appropriate levels of external borrowing, all of which will be available on concessional terms.

Improvement of the Budget Process

The Milli Majlis has adopted a new Law “On the Budget System” with a view to improving the budget process and ensuring transparency in expenditures. The law endorses a move from a one-year to a medium term fiscal forecast.

Budget planning in Azerbaijan has until now been undertaken on an annual basis. This has helped to maintain financial stability, but has not especially supported the reduction of poverty. A number of key economic and social expenditure programmes cannot be implemented within one fiscal year. Furthermore, the country’s revenues will soon undergo a dramatic change, as oil revenues begin to be paid to the state budget from the offshore oil and gas projects. Therefore a need has emerged to produce forecasts for several future years in order to increase opportunities for more efficient management of public expenditures and revenues.

The new Law “On the Budget System” requires preparation of budgets for the upcoming year as well as for the three following years. For this purpose, firstly, mid-term economic forecasts should be prepared and on the basis of these budget revenues determined and thus a medium term expenditure framework (MTEF) worked out, ensuring balanced expenditures and revenues and defining the government’s expenditure priorities. Within the framework of the MTEF a Public Investment Programme (PIP) will be prepared. Both documents will be annually updated in keeping with the changing economic environment, and the PIP will be presented to the Milli Majlis as part of the annual budget package.

Consolidation, balancing and coordination of budgets at all levels will be improved. The mid-term expenditure framework will be fully consolidated (which is to say, it will include the State Budget, Social Protection Fund, SOCAR budgets, and expenditure on projects funded with foreign credits). This will provide a more effective and longer planning horizon for public expenditure aimed at reducing poverty.

New rules for the preparation, introduction, revision and implementation of the budget will be developed and a new budget classification will be adopted in line with international standards. Norms and standards used in forecasting budget expenditure will be improved.

At the same time, changes in procedures will result in better management of extrabudgetary funds. Some extrabudgetary funds will be eliminated, while remaining extrabudgetary funds of budgetary organisations9 will be consolidated with the state budget. Additionally, all budgetary and extrabudgetary funds will follow the same procedures for expenditures: any expenditure (except for the State Oil Fund meeting its own administrative expenses) must be recorded and enacted by the Treasury. The Ministry of Finance and the two extrabudgetary funds (SOFAR and SPF) will continue to work closely together. A consolidated budget will be presented to the Milli Majlis, showing the revenues and expenditures of each of these three budgets.

The Ministry of Finance will continue upgrading the Treasury system, including a computerisation and capacity building program, which has already commenced. This will result in strengthened capacity to control the expenditures of the budgetary organisations, and to produce timely and accurate financial reports in compliance with the Budget System Law.

At the same time, audit functions implemented by the newly formed Chamber of Accounts will be strengthened, in order to ensure that budgetary funds are used for the purposes for which they are intended. The Chamber of Accounts will prepare proposals on preventing deviations which have been noted as well as on the improvement of the budgetary process as a whole, and will submit them to the Milli Majlis. These are aimed at ensuring that the funds of the state budget and extrabudgetary funds are allocated according to the time schedule and purposes indicated in the expenditure items of the approved state budget.

The simplified norms and standards used as the basis for expenditure budgeting by appropriate executive bodies will be updated. While there is an intention to move to output-based budgeting in the future, there is a need to revise existing norms and standards in order to manage expenditure in a more rational way.

Finally, the government will undertake relevant measures to build up capacity for self-sufficiency of municipalities. Active participation of the municipalities in the country’s social and economic life as part of the participatory process is very important. Therefore, it is planned to develop an action plan on increasing the local budget revenues in order to reduce the dependence of municipalities on the state budget and to improve their financial opportunities.

Revenue Management

In order to provide greater opportunities for business development and employment creation, the government is committed to continuing reform of its revenue raising policies and institutions.

Significant improvements of the tax system were made with the enactment of the Tax Code in 2001, which now provides a sound and transparent basis for taxation.

It is planned to amend the Tax Code to remove current problems in the tax legislation related to calculation, collection and payment of taxes. The Code will also be amended to allow for the payment of interest, where necessary, to taxpayers who have over paid to the budget, and dispute settlement processes which will take into account any legitimate concern of taxpayers.

The Ministry of Taxes will begin by improving regulations relating to the Tax Code, by consolidating the regulations into one book and renumbering them so that they correspond to the relevant section of the Tax Code. The Code itself is in need of some further amendment, so that the administrative law on taxation is itself contained in the Code, and not in other legislation. For example, the penalties for late payment of taxes are currently contained in the Administrative Code, when they should properly be found in the Tax Code. These moves will complete the development of a coherent and taxpayer friendly code of law for taxation. The Customs Code will also be improved, to simplify procedures for importers and exporters.

The Ministry of Taxes will continue to reform its organisational structure and processes with a view towards enhancing taxpayer compliance, increasing revenues and minimising expenditure. This will include enhancing the Large Taxpayers Unit with more staff and better training opportunities. There will be fewer audits for compliant taxpayers, and an increased focus on non-registered and non-compliant taxpayers. It is recognised that an effective and impartial appeals procedure is an essential part of creating a culture of compliance among taxpayers - to this end the appeals procedure will be reviewed and improved. Modernised and systematised practices and procedures for return filing, returns and payments processing, and collection of overdue returns and debt will be implemented.

The qualifications and motivation of tax and customs officials will be enhanced. A new Tax Training Centre has opened for officials of the Ministry. There are plans to develop a special higher pay scale for highly-qualified tax officials. This would mean increased pay for Large Taxpayer Unit staff, audit staff in local offices, and key staff in the Ministry.

In order to enhance compliance, a programme of taxpayer education will be developed and implemented by both the Ministry of Taxes and State Customs Committee. Taxpayer information brochures, which clearly set out taxpayers’ rights and obligations will be published and made widely available. Information services will be set up at each local office of the Ministry of Taxes. Key returns will be simplified and modernised.

Both organisations will expand the scope of international cooperation with a view to aligning their processes with international best practices.

State Debt Management

The government remains committed to maintaining appropriate levels of debt and debt service, and intends to take action to improve mechanisms for debt management. As part of the MTEF, a statement about the borrowing over the medium term will be made to the Milli Majlis, and detailed information will be provided on state debt and state guarantees. The government will continue to limit new borrowing to a level sustainable in the medium term, and to make that commitment public in the annual Budget.

Two new legal documents will help the government to better manage its debt. The law “On State Debts and Guarantees”, which is now before the Milli Majlis, will enable the Ministry of Finance to better track external official obligations. The regulations for the law “on Foreign Loans Registry,” will formalise the recording of official debts and guarantees in a public registry.

The government intends to limit the issuance of new state guarantees through a close examination of applications for such undertakings. Financial discipline for guarantees will be strengthened, as the Ministry of Finance continues to take action to recover loan payments made on the government’s behalf for defaulting enterprises.

4.2. Tools for Balanced Growth

While stability is a prerequisite to the alleviation of poverty, it is not enough on its own. Opportunities to find work or to start businesses are essential. The challenge for the government is to create growth and opportunities in all regions of the country, and in all sectors.

As Azerbaijan continues to move towards a market economy, the government can no longer provide jobs directly to the population. Instead, it will rely upon three sets of tools which can support balanced growth: public finance policy, regulation, and privatisation.

Public Finance Policy

Use of public finance, through both expenditure and tax policies, will have an important role in reducing poverty and encouraging balanced growth. Tax policy will be used to enhance equality by redistributing income, and can provide implicit subsidies to particular sectors or regions by offering reduced rates of taxes.

The government’s spending plan affects human capital formation (including spending on health and education), poverty alleviation through state transfers to households, and public investment in infrastructure.

Despite the importance of these policies, in the past, the government has not been always taken a strategic view of its expenditures. Instead, it has indiscriminately applied across-the-board increases to many functional and economic10 categories of expenditure. The lack of restructuring has meant that public expenditure has not reduced poverty. The government recognises the very real need to restructure spending within each spending category and full details of the expenditure strategy are found in Appendix 2: Medium Term Expenditure Strategy. In this chapter the relationship between the MTEF and the government’s focus on promoting balanced growth is explained.

One important method by which the government will improve its spending is through the implementation of a Public Investment Programme (PIP). All major capital projects financed from different sources will in the future be undertaken only as part of the PIP to ensure transparency of decision making and co-ordination of their implementation. The PIP itself will be fully consistent with the government’s Poverty Reduction Strategy. In order to ensure that this occurs, it is intended to strengthen the newly established PIP Division in the Ministry of Economic Development, with support from international donors. The Division will evaluate public investment projects on technical, financial and economic bases, and will select and prioritise capital works. The PIP will be presented as part of the MTEF to the Milli Majlis with the annual budget, and will show expenditure on (and, where relevant, revenues from) approved investment projects.


The government will promote pro-poor economic activity directly to improve the lives of the poor. At the same time, it will eliminate regulations that disadvantage the poor or limit their income generating opportunities.

Providing a framework in which farmers’ associations can properly function is an example of regulation working directly to alleviate poverty. By cooperating to share equipment and knowledge, such associations can help farmers to improve their livelihoods. Similarly, setting up an Export Promotion Fund can help entrepreneurs to sell their products to other countries, allowing them to expand their businesses and employ more people.

Some regulations, many of which have their origins in Soviet times, are stopping the poor from improving their lives. For example, onerous licensing conditions have been a real barrier to starting up new businesses. With the recent announcement of a reduction in the number of fields for which licences are required, this barrier will be greatly lessened. Similarly, entrepreneurship has in come cases been stifled by the overlapping role of the state as both owner of commercial businesses and regulator of the sector. Structural adjustments to relevant ministries and state entities, including clear separation of commercial and policy functions, will be part of the government’s policy. The prevalence of corruption also inhibits business growth, and will be reduced by introducing new legislation.


Privatisation is an essential step in order to attract new investment. The government believes that in a properly regulated competitive market, the private sector is more efficient at providing goods and services than the state. When properly managed, privatisation increases the efficiency of privatised firms. Privatisation also brings capital for upgrading of networks and technology, introduces best practice management techniques and lays the basis for competition among providers. It should be noted that privatisation is a tool that the government can use to promote better corporate governance, increased efficiency, and to stop the drain on state resources. Privatisation is not an end in itself.

The adoption of the “Second State Programme on Privatisation of State Property of the Republic of Azerbaijan” in August 2000, has brought additional impetus to the process of decentralisation of state property.

As per adopted legislative acts, certain measures are applied with regards to the enterprises to be privatised, such as pre-privatisation rehabilitation, restructuring (including debt management), application of certain tax exemptions, provision of financial support as needed, including other methods of revitalisation, such as post-privatisation technical, legal and financial support.

To encourage foreign investment in the privatisation process, the option mechanism, which was a kind of ceiling for participation of foreign investors in privatisation, was fully liberalised. Now the only case where options are required for foreign investors is in the case of cheque privatisation; in all the other cases this requirement has been eliminated. At the same time, it was determined that foreign investors can participate in privatisation without options when investments are made with revenues earned from business operations in Azerbaijan.

Certain problems go along with achievements in the course of privatisation. Thus, some of the privatised enterprises either completely or partially ceased their operations. This is result of the government’s emphasis on privatising large numbers of enterprises, the collapse of commercial relations, the loss of market and equipment becoming outdated.

The government will, where possible, revitalise large enterprises before they are privatised. Additionally, foreign and domestic strategic investors which have successful records of managing privatised enterprises will be encouraged to participate in the privatisation process.

The Presidential decrees of 22 and 29 March 2001 made possible the privatisation of enterprises in certain attractive fields which had until then not been scheduled for sale. The list of these fields includes machinery, chemistry, communications, and air transport.

To increase the efficiency of privatisation process, the government will use such privatisation mechanisms as investment competitions and individual project approaches to revitalise large enterprises which are considered of great importance to the economy

Given the importance of transparency and attracting strategic foreign investors, the services of well known international privatisation consultants will continue to be used.

The government will also pursue regulatory reforms which allow the objectives of privatisation to be met where the sale of an enterprise to a strategic shareholder is not practical. For example, as outlined in the section on infrastructure development below, the government may sign long-term management contracts with private enterprises to manage public utilities.

4.3 Sectoral Strategies for Balanced Growth

As outlined in the previous section, public finance policy, regulation and privatisation are three sets of tools which will be employed to encourage balanced growth of the economy. These tools will be used to bring about improvements in some of the key economic sectors: to improve the investment climate; to increase access to credit among businesses and entrepreneurs; to develop infrastructure; to develop small and medium entrepreneurship; to develop the regions and agriculture industry; to improve the environment; to reform energy generation and distribution and to promote tourism.

Poverty is a multidimensional problem, and cannot be solved with a single approach. The strategies below work together to help solve the problems which have so far inhibited balanced growth. For example, the growth of small businesses outside of Baku will be assisted by strategies to improve the investment climate, to increase access to credit, and to improve infrastructure. Farmers will benefit from increased access to credit, improved infrastructure and regional and agriculture development.

Improvement of the investment climate

Azerbaijan’s impressive record of attracting foreign investment in the oil industry has not, unfortunately, been matched in the non-oil sector. The government will take steps in order to encourage investment, by both international and domestic investors. Rebuilding infrastructure and ensuring better access to credit are important strategies. At the same time, the government will examine tax rates, and reform its regulation of businesses, in order to encourage investment. Special attention will be paid to the needs of entrepreneurs, and to small and medium enterprises. SMEs are often very labour intensive, and can create new jobs in regions where large-scale investment rarely take place.


It is planned to improve the existing legal and regulatory base in order to attract investment to the non-oil sector and to develop regions of the country outside of Baku. A draft law “on Investment Activities” will be submitted to the Milli Majlis. This law will provide for equal treatment of domestic and foreign investors, and will replace all existing investment laws. A draft law “on Establishment of Special Economic Zones” will also be submitted.

Regulations for businesses have already been considerably simplified. Up to the present time, according to legislation 75 types of business fields have been subject to licensing. These fields have been broken into certain activities (communications, mining, alcohol and tobacco production) resulting in 270 types of activities being subject to licensing. Licensing and supervision have been implemented through 27 central and local executive power authorities, their departments and other entities.

As a result of the meeting of the President of Azerbaijan Republic with the local and foreign business community, steps are now being taken to improve legislation and procedures. Based on the Presidential decree of 2 September 2002, the number of activities for which licenses will be required will be sharply reduced, to only 27.

It is planned to conduct regular studies on the investment environment in the country, and to discuss the results jointly with the representatives of public and private sectors and undertake relevant measures in this regard. An Entrepreneurs Council has recently been established (by the Presidential decree of August 27, 2002), which will represent both local and foreign entrepreneurs.

A comprehensive programme of support for entrepreneurs was announced on August 17, 2002, when the President of the Republic of Azerbaijan issued a decree approving the “State Programme on Small and Medium Enterprise Development.” The programme includes over sixty specific measures, which are grouped into six broad areas: improving regulation of entrepreneurship; financial and investment support for SMEs, assisting structural and technological progress; human resource development; promotion of regional development, and strengthening the legal rights of entrepreneurs.

A Tariff Council was established in early 2002 with the participation of government officials and private sector representatives in order to ensure the improvement of the tariff system of the country and flexible regulation of the level of tariffs based on the requirements of the economy. Regular adjustment of tariffs from the point of view of entrepreneurs’ interests through capacity building for this organisation would be of great importance.

The government also plans to undertake several measures in order to promote exports. Several initiatives are currently being considered, including the creation of a database to increase marketing opportunities for local products, arrangement of trade fairs, establishment of exhibition centres and bonded warehouses as well as opening trade representations in potential partner countries and establishing an Export Promotion Fund.

The government plans to continue with efforts to move to International Accounting Standards (IAS). As part of the process, joint stock companies with turnover exceeding a prescribed level will be required to develop their reports in line with IAS.

The government will strengthen the fight against corruption that is considered to be a worldwide social menace. Thus, in 2003 the government plans to adopt and enforce the law “On Fight Against Corruption” which has passed its first reading in the Milli Majlis. The law will aim to prevent, uncover and investigate corruption related infringements and to eliminate their consequences, to protect human rights and civil liberties by means of punishment of the individuals guilty of such infringements, to protect public interests and state security, to ensure efficiency and lawfulness of the activities of the public and local municipal organs and of public officials. This law also will intend to strengthen the confidence of the populace towards the state and its individual structures thereof, and to encourage professionals to enter public or local municipal service, and to create conditions excluding involvement of the staff of such organs from corrupt practices.

It is planned to continue the process of applying for admission to the World Trade Organisation. Bilateral and multilateral trade negotiations will be held for this purpose. The WTO offers Azerbaijan the opportunity to participate in a rules-based multilateral trading system (as opposed to a bilateral trading system, where differences in economic power often decide the outcome of trade disputes).

Public Finance Policy

With regard to tax rates, changes are planned in the 2003 budget for the rate of social contributions. It seems clear that social insurance contribution rates are unhelpfully high, and are discouraging both compliance with the tax regime, and the growth of employment in the country. Steps have already been taken to reduce this tax burden by consolidating Disability and Employment Funds with the Social Protection Fund, and reducing taxes accordingly. It is intended to further reduce social insurance contributions by lowering the rate levied upon employers on employee’s pay from 29% to 27%. At the same time, the rate to be paid by employees will be raised from 1.5% to 2.0% of their wage. These changes will make it less expensive for businesses to comply with their legal obligations, and less expensive to hire additional employees.

The National Fund for Entrepreneurship has been operating since 1993, providing both concessional credits and advice and training to small businesses. Over the period of 1993–2001 the National Fund for Entrepreneurship has implemented over 100 businesses development investment projects on a concessional basis. The amount of soft loans given to entrepreneurs from the state budget during 1999–2001 was 5.4 billion AZM (1.1 million USD). According to the Presidential Decree, it is planned to allocate 250 billion AZM (51.5 million USD) to increase financial support for the development of entrepreneurship.

The government has already taken an important step for the purpose of education, counselling and information provision, by organising training and seminars and sending entrepreneurs to foreign countries to gain experience. The government intends to continue its efforts in this field.

Increased Provision of Credit

A major problem which entrepreneurs and small and medium sized businesses face is the lack of credit, to start up or expand their businesses. This is because the Azeri financial sector, which is dominated by banks, is small and still needs to be developed. Increased availability of credit will come about primarily as a result of improvements to the banking sector, although there will be some targeted provision of credit by the state. These improvements will increase the public’s trust of the banking system, and so encourage them to deposit their savings in banks. At the same time, better run banks will be better able to provide credit to entrepreneurs and investors.

Trust in the banking system is low, and consumers largely keep their savings outside the banking system, so bank deposits, mainly in dollars, amount to just over 7% of GDP. At the same time, borrowers do not finance much investment through banks - with loans, many of them bad loans, amounting to just 9% of GDP - since the cost of borrowing is very high. To improve competitiveness and so attract more deposits and lower the cost of loans the NB will develop and implement a strategy of banking system reform. This will include several measures, designed to lead to the expansion of banks’ role in the economy, improvement of opportunities for credit and especially to the decrease of interest rates, which in turn will improve credit provision to entrepreneurs and increase employment opportunities.


The government will sell much of its stake in the International Bank of Azerbaijan and will also improve the operational and management system of the Universal United Joint Stock Bank (BUS Bank) to prepare it for privatisation.


The minimum capital requirements for banks will be increased. It is also planned to undertake measures to improve the competitive environment in the banking services market.

The expansion of the number of regional bank branches, establishment of the regional banks and financial institutions, as well as the promotion of credit unions are planned within the framework of the institutional development of the banking sector. It is planned to develop microcredit banks, which will provide credits to SMEs and to further liberalise foreign capital participation regime.

As in many countries, in Azerbaijan not all entrepreneurs feel confident in depositing the receipts from their businesses in the banking system. Some fear that they have not fully complied with the tax regime, while others prefer the convenience of keeping funds in cash. Keeping these funds in cash form prevents banks from making loans to other businesses. Many countries have attempted to tackle the problem of encouraging legitimate businesses to deposit their funds with banks, while discouraging the laundering of money earned from illegal businesses. Thus, it is also intended to study international practices in order to encourage holders of cash to use their funds to finance entrepreneurs, and to create new jobs.

Completion of the small payments system, development of the intrabank payment system, completion of the transition to international accounting standards, improvement of the bank control system, and the establishment of credit bureaus are amongst the measures to be undertaken.

It is also planned to introduce deposit insurance for individuals, taking into account reconstruction and enhancement of the banking system. Deposit insurance will increase the confidence of the population, and will prevent small depositors or depositors with poor knowledge about banking activity from losing their deposits due to a bank’s inability to repay. This measure will play an important role in transforming free resources into investment and thus will lead to the acceleration of economic growth and improvement of social welfare by strengthening banks’ role as financial intermediaries.

At the same time, there will be a continued focus on the improvement of human resource management systems, and the development of internal information systems of the banks.

In order to provide a better environment for banks, the government will establish a centralised and simplified collateral registration system, and will set up an effective land market, as noted in several sections in this document. Special emphasis will be placed upon the stimulating non-cash transactions and limiting dollarisation of the economy in order to ensure healthy money turnover and its effective regulation.

Improvement of banking legislation is of particular importance for the development of banking infrastructure. In this regard, it is planned to amend the Law of the Republic of Azerbaijan “On the National Bank” and to adopt a new Law “On Banks in the Republic of Azerbaijan”. These changes are necessary in order to implement better supervision of banks by the National Bank, and provide for the deposit protection scheme.

Development of Infrastructure

The unreliability of infrastructure such as gas, electricity and water supplies, and the poor quality of transport infrastructure is a serious impediment to economic development and the standard of living of the Azeri population. Lack of reliable power supplies outside of the Absheron Peninsula limits the opportunity for private sector investment, and stifles the creation of new jobs. Given the importance of underinvestment in infrastructure, the government intends to undertake comprehensive actions in this regard during 2002–2005, as reflected in relevant sections of this document and the Policy Matrix.

Public Finance Policy

As noted above, all new infrastructure including major maintenance and repairs will be undertaken only as part of the Public Investment Program. Planned expenditure on capital works will increase from 17% to 21% of total government expenditure; it will total 2,015 billion AZM in 2005, a 111% increase in nominal terms from expenditure in 2001.

This increase takes into account many pro-poor capital projects which have already begun. These include rebuilding essential transport infrastructure such as roads, railways and ports. Improvements to the Trans Caucasus Highways have as a specific focus improving the quality of transport services for the low income rural population living in the vicinity of the highway and the tertiary road network connected to it. Rehabilitation of the port will emphasise minimising the negative environmental impact of the operations on the Caspian Sea. Improvement of transportation will help to promote trade and economic growth, and will help to spread the extent of growth to include regions outside of Baku.

Improvements to the Baku water supply system have also been designed with the poor in mind. The reconstruction of the Greater Baku water supply system is focused on emergency short-term improvements of water supply, especially supplies for the poorer elements of the population.

As is shown in the policy matrix, the programme of capital works includes the following:

  • building 28 new schools, and rebuilding 200 schools;

  • building new houses for refugees and IDPs, and upgrading facilities in IDP camps;

  • anti-pollution measures, including the treatment of mercury and radioactive waste;

  • rebuilding irrigation and drainage facilities;

  • conversion of oil-fired power stations to natural gas-fired, and building of new power plants;

  • reconstructing underground gas storage facilities;

  • building Olympic centres in regions;

  • rebuilding cultural and art centres, and preserving cultural heritage.


These improvements to public infrastructure are funded by the government. It does not seem likely that there will be significant interest from the private sector in investing in infrastructure in the medium-term. However, the government is already pursing new methods of improving governance for existing infrastructure. For example, the management of the Baku and Sumgait electricity network has been let to a private company, Barmek Holdings, and Ganja and Ali Bayramli electricity networks to “Baku High Voltage Power Equipment” JSC for a 25 year period. This sort of public-private partnership will be used in the future, and may extend to include management of other utilities.

Investment in Human Capital

In the long term, poverty reduction is dependent upon investment in the country’s human capital. Building up human capital embraces a broad spectrum from meeting basic needs to empowering and enriching capabilities. As such, it rests on making a more efficient use of the existing capacity, as well as creating additional human capital through developing capacity, skills and know-how. As part of its Poverty Reduction Strategy, the effectiveness of the government’s spending on human capital development, particularly in social security, health and education, will be improved. As has been noted above, the government has developed a strategic medium term expenditure plan which provides for a more rational use of public funds in order to fight again poverty.

Public Finance Policy

As has been described, there is a pressing need to increase expenditure on health care. Health care expenditure will more than double over the life of the SPPRED program, and will account for 5.4% of total government expenditure (up from 3.8% in 2001). Spending reforms will support the reform of primary health care delivery, and the introduction of cost-effective health care interventions. At the same time, the wages of health sector employees will be significantly increased. As noted in Chapter 3, increased spending from the state budget cannot solve the problem of poor health care outcomes. In addition to increased funding, resource use will be rationalised, and the emphasis of care will shift from hospital services to ambulatory primary health services. Furthermore, it is planned to review budget norms, and possibly to budget on the basis of a per capita, rather than a per bed basis.

The increase in education funding will be relatively modest. Until there is significant restructuring of expenditures in the education sector, additional funding will probably have little impact upon educational attainment by students. Thus, the share of total expenditure on education will fall, from 17.0% to 15.2% of total government spending. Within this total, it is planned to reduce the total number of teachers, and to increase pay for those who remain. A bonus system will be implemented, which will reward teachers who participate in the improvement and development of the education system. Resources are being allocated to help ensure that all children receive equally high quality education, including providing free textbooks to all children, and to build or significantly improve over 200 schools.

Agriculture and Regional Development

A key element of the Poverty Reduction Strategy is the development of the non-oil sector and reducing differences in living standards between Baku and the other regions of the country.

The government intends to umplement a number of measures within the framework of the Poverty Reduction Strategy to stimulate business outside of the Baku area. In addition to that, preparation and implementation of specific proposals on preferential wage indexation, and preferential tariff rates on energy carriers, to local producers in mountainous and border regions and Nakhichivan, is planned. Additionally, in the areas mentioned special consideration will be given to promoting investment by providing tax breaks or soft loans. The government will also support the expansion of financial services in the regions, whether provided by banks, credit unions, or micro-finance institutions.

Development of the agricultural sector, within the framework of a comprehensive rural development policy, is also crucial for development of the non-oil sector. Over the last decade the numbers employed in agriculture have grown from 1,144,000 in 1990 to 1,515,000 in 2001. Over 40% of the economically active population is now employed in agriculture, of whom 21% are female. This growth in agricultural employment is largely a result of the land reform, but is also a result of the loss of employment in villages and small towns due to the closure of state factories.

Although the land reform has been completed successfully, it has not led yet to higher living standards for the rural population. Wages in the agricultural sector were reported to be only 30% of the national average in 2000, and although 40% of the workforce is employed in agriculture, the sector accounts for only 16% of GDP. Amongst the most important factors hindering better economic outcomes are the small size of the land plots; the need to develop a land market, pressure on common grazing lands; shortage of inputs such as seeds, water and equipment; lack of market outlets; poor transport, and poor efficiency of irrigation and other crucial elements of rural infrastructure; as well as lack of access to credit and lack of collateral to secure credit.

The agricultural sector is crucial to the rural economy, with strong linkages to non-farming activities such as the agro-processing industry, handicrafts, retail, distribution, transport, construction and other aspects of rural infrastructure. As such, any improvements in the performance of the agricultural sector in Azerbaijan will have far reaching effects in increasing demand and generating growth and development in the rural economy as a whole, and in the regions. For this reason the government considers it important to place development of the agricultural sector in the context of an integrated rural development policy. Such a policy will take into account environmental concerns, since rural development will only be successful if it is based on sustainable use of the country’s natural resources, It will also encompass development of infrastructure, and promotion of non-agricultural employment. The government has already taken first steps in the direction of developing a rural development strategy with the Presidential Decree on National Food Security Policy Framework and Programme of March 2001.


The integrated rural development policy will take into consideration the achievements already obtained through the land reform. The government is committed to continuing the land reform and to developing the necessary institutional and legal framework to enforce and secure the property rights stemming from the Land Reform Law. However, the current level of fragmentation of land plots and the poorly developed land market are hindering the establishment of viable agricultural businesses. The government will therefore facilitate the formation of Farmers’ Associations to help the process of consolidation of land plots. The government will also strengthen the Land Committee Regional Cadastre Centres which will play a key role in regulating [and distribution, land demarcation, delivery of remaining land certificates, and will help to create a transparent and functioning land market.

The government will continue institutional reforms in the agricultural sector in order to improve the management of the country’s natural resources and create conditions for sustainable agricultural production. Institutional reforms will result in a more transparent distribution of responsibilities between governmental organisations, and help prevent further degradation of land and other resources. The overuse of land, lack of maintenance of water infrastructure, reduction of pasture share and poor management practices have resulted in land erosion, the raising salinity of soils and pollution of water resources. There is currently a duplication of functions between the Ministry of Agriculture, State Amelioration and Water Resources Committee, State Committee for Soil and Mapping and Ministry of Ecology and Natural Resources, which hampers good management. Institutional reform will also serve to bring about a clearer separation of the state’s regulatory role from its commercial functions in the agricultural sector. The government will form an inter-ministerial commission to prepare a comprehensive proposal for institutional reforms of the agrarian institutions.

The government will develop policies aimed at guaranteeing sustainable use of the country’s natural resources.

Azerbaijan has a large variety of climatic zones and types of agricultural land. In the mountainous areas, livestock is more important than cultivation of crops, making pasture administration is particularly important. Hence it is important that the regulation of pastureland be improved, in order to ensure that there is not too much pressure on the pastureland located in the immediate vicinity of the villages. It is equally important to prevent any irresponsible exploitation of summer and winter pastures, and to ensure that the rights of access of poorer herders are protected. The involvement of municipalities in the regulatory process will be beneficial to the communities concerned.

In order to improve the land protection and soil quality, it is proposed to develop a State Programme for Soil Conservation, which will include specific measures aimed at protecting soil from wind and water erosion, as well as to carry out amelioration programmes to reduce the levels of soil salinity.

The creation of new forms of organisations in rural areas, such as farmers’ unions, will serve to promote private initiatives and will help small farmers increase productivity through better access to appropriate technology and inputs, and also to access markets. It will also enable them to reduce costs of production and processing as well as to build up economies of scale. The government will facilitate and promote the establishment of the Fanners Associations or Unions with these objectives in sight by preparing the necessary legislation for their development.

Easier access to micro-credits, and transparency in licensing procedures, are required to encourage the development of alternatives to current farming technology. These are also required to help private suppliers to set up, and fill the gap left by the dismantling of former state-owned machine-tractor parks and the collapse of the agro-processing industry. Small farmers cannot afford to buy equipment, but they can afford to lease it for short periods. Access to seeds and other inputs is also limited at present, and private supply of these has to be stimulated.

Another problem to be addressed is the need to promote the creation of marketing channels for farmers’ products. As mentioned in Chapter 6, many rural inhabitants are demanding a return to state orders, whereby produce was bought at favourable prices; and increasing customs duties to protect domestic producers. Such solutions are incompatible with the need to develop a market economy, but alternative solutions need to be found. That is why the attraction of private sector to the agricultural products processing in rural areas in order to increase its capacity is part of the country’s agricultural sector development strategy. At the same time the preparation for WTO accession will be continued.


As has been noted, land has largely been privatised. The government is planning to rebuild the Sumgait superphosphate plant through privatisation in order to increase the provision of fertiliser. It is envisaged that a comprehensive privatisation programme will also facilitate the supply of the other vital inputs into the agricultural sector by the private sector, including equipment and services. Promotion of participation of the private sector in veterinary services, medication provision and technical services is considered one of the priorities.

Public Finance Policy

Improved management of the country’s natural resources also requires better supply of information to local farmers. There is a need to continue the development of an effective and accessible extension network providing advisory information services to farmers in order to promote adequate technical and managerial know how, while also showing the need to respect the ecological balance. This information will cover the different approaches and practices that are best suited to local soil and agro-ecological conditions. It is planned to expand local advisory services for farmers providing information on micro-credits, increase the number of technical and management associations etc. These centres will also be used to provide training for local farmers, and to distribute information leaflets on best farming practices for local conditions. The centres will build on the existing experience of both public and private service delivery and will strengthen linkages with national and regional research and academic institutions.

Favourable conditions for the establishment of rural micro-financing institutional capacity, such as credit unions and micro-credit banks, will be created. There will also be an increase in state transfers to agriculture for the purpose of improving financial provision to farmers.

The state will retain responsibility for the protection of public health by improving food safety. In order to improve the quality of livestock, and reduce the risk of human brucellosis and tuberculosis, it is planned to improve the coverage of veterinary vaccinations and introduce improved measures of epizootic control in the country. For this, the provision of veterinary vaccines will be improved, and laboratory conditions and equipment modernised. The Khanlar production complex will be rebuilt to improve production of veterinary preparations, and the facilities and equipment in the national diagnosis laboratory and in three regional laboratories will be modernised in order to improve epizootic control. It is also important to improve the control of food safety by the state laboratories, and to upgrade the quarantine control at the borders.

Development of agriculture and alternative employment in rural areas is closely linked to the infrastructure. Unreliable power, water and gas supply, as well as poorly developed communications and transport systems discourages the development of entrepreneurship. It is planned to eliminate the above-mentioned problems through investment and privatisation programmes, in particular through the PIP.

Most of the country’s agriculture is dependent on irrigation and drainage systems. Public investment is required to rehabilitate much of these systems and make them more efficient. But efficiency and effectiveness also require improved management and control of the irrigation and drainage infrastructure. Therefore, “Water Users’ Associations” involvement will be further expanding in this regard. It is important to introduce cost recovery systems to assure sustain ability of public investment. Until full cost recovery is achieved, it is necessary to allocate public money for operation and maintenance of state owned infrastructure.

The future sustainable development of agriculture will also depend on human resources’ development through applied research aimed at capacity building for experts in this field, as well as improvement and modernisation of capacity and the quality of the technical training provided by the Agrarian Academy and Agrarian Studies/Research Institutes, and to promote cooperation with foreign universities for student/researcher exchange programmes in agricultural science.

Environmental Improvement

Economic development which upsets the environmental balance cannot be sustainable. Environmental pollution has a negative effect on the population’s ability to earn income; firstly through adverse affects on the health of individual citizens, and secondly, as has been shown above, by leading to a depletion of the natural resources available for income-generating activity in agriculture and other sectors. The government therefore needs to develop a poverty strategy, which takes into account environmental concerns. This involves tackling large-scale national and international projects, such as those concerning the Caspian Sea, and also measures such as those outlined in the Agriculture Section above, aimed at improving management of the country’s natural resources. There is also a need to improve regular monitoring of environmental pollution, and to conduct campaigns to raise public awareness of the need to respect the ecological balances. Local communities will be involved in monitoring, regulating, and providing information on the environment.

Public Finance Policy

Among the most urgent problems to be tackled are the need to clean up mercury sludge and improve waste management. With regard to water purification and sewerage system management, it is planned to reconstruct the purification units and sewerage system in Sumgait, expand the purification facilities in Baku, and finish construction of new facilities in Ganja.

The government is cooperating with GEF, UNDP, WB, UNEP and EU on a project to protect the bio-diversity of the Caspian Sea. It is planned to protect the traditional spawning areas for sturgeon in the Kura and Araz rivers, and to treat the contaminated water discharged from the Zykh and other lakes into the Caspian Sea.

Soil pollution has to be monitored systematically. In the Absheron peninsula, efforts will be made to recultivate the oil-polluted soil. The radioactive waste in the coal storages at Ramany, New-Surakhany and Neftchala iodine-processing plants will be treated.

It is noted in Chapter 6 that the country’s forests are threatened by uncontrolled logging, due to the pressure on poor households to find fuel or heating and cooking given the lack of guaranteed gas and electricity supplies. There is a need to control this practice, and also to undertake replanting operations. Forests will be planted along the banks of the Kura and Araz river, covering an area of 5000 ha. There will be further planting of forests covering an area of 6000 ha, and native vegetation and plants will be planted to cover an area of 4500 ha. The process of reforestation will in turn have a positive impact on reducing the level of salinity in the areas concerned. It will be preceded by a feasibility study, which will ensure that the re-forestation is compatible with the government’s overall rural development strategy, and that it does not limit further the access of local communities to land for grazing and cultivation.


In the long term, the government is planning to develop alternative energy sources, and with this in mind it will conduct a study to define profitable geo-thermal energy sources, will develop a national programme on solar and wind power generation, and work on the restoration of Guba and Gusar Power Stations.

Environmental protection should be enforced through the improvement of monitoring of environmental indicators. Administrative reforms are planned to improve management, as is the provision of regional laboratories with the necessary equipment for monitoring. The Geographic Information System will be improved, and the municipalities and communities involved in the assessment of the environmental impact of regional economic development projects.

Waste collection and disposal and rehabilitation of sewage systems at municipal level will be developed taking advantage of best available technology at affordable costs to introduce recycling practices and reduce water and soil contamination.

Energy Reform

Lack of reliable energy supplies is considered a major problem by the rural population. It limits employment opportunities and limits opportunities for investment. Equally as important, the provision of energy at subsidised rates represents a large drain on the state budget. These subsidies are not targeted, and the benefit is disproportionately enjoyed by better-off segments of the community. Thus, energy reform, especially improvements to financial discipline, are the government’s top priorities.

Public Finance Policy and Regulation

The energy sector is intrinsically linked to the Poverty Reduction Strategy due to the way in which utility subsidies have been used as a form of social protection. Currently consumers of energy and gas receive huge subsidies from the state budget, but these subsidies are hidden, in that they are never explicitly calculated or published. At present many budget organisations, businesses and private households do not pay their utility bills. This means that the two main utility suppliers, Azerenergy and Azerigas, are unable to pay SOCAR for the mazut and gas which they need as inputs. (In 2001, SOCAR received only 0.5% of the value of the fuel supplied to Azerenergy and 1.3% of the value of supplied gas to Azerigas). As a result, SOCAR has major shortfalls in its revenue, and cannot pay its full tax liabilities. Thus the state budget also loses significant amounts of revenue. The IMF has estimated that in 2001 the government paid roughly 50 percent more to subsidise the activities of Azerenergy and Azerigas than it spent on health and education.

The average level of collection for the entire country is 27% for electricity and 30% for gas. Such explicit and implicit subsidies for electricity, gas and water have a detrimental effect on the economy and negatively impact public expenditures, in that energy producers are unable to pay their taxes. The money collected for consumption of gas and electricity is enough to cover salaries and operational expenses, but nothing more.

With regard to households, utility subsidies are a cost-ineffective form of social protection. Since the amount of subsidy received by households depends on the quantity they consume, those who consume more benefit most. Both rich and poor households benefit from these subsidies. However many low-income families have no access to the subsidies because they have either limited or no services. As a result of non-collection of payments and arrears (the implicit subsidies) the utility companies have no money to invest in maintenance, and improved supply, especially to rural areas. The present widespread failure to pay for utilities is a de facto subsidy to households, in particular those living in urban areas, and the use of these implicit subsidies as a form of social protection is neither pro-poor, nor cost-effective.

The government has taken some important steps towards the removal of these subsidies. In particular it has adopted the government programme “On Strengthening of Financial Discipline in the Energy Sector”. The policy measures planned include several steps. First, it is intended to make these implicit subsidies explicit by making sure that they are recorded clearly in the state budget documents. It is planned to increase the payments to SOCAR from the utility companies gradually between the years 2002 and 2006. In the this period, in order to make the subsidies explicit, the Ministry of Finance will issue securities to Azerenergy and Azerigas for the amount of money which it cannot pay to SOCAR for fuel.

Budget organisations and state enterprises will be transferred enough money to pay for energy and gas consumption, and limits will be put on their consumption. If they surpass these limits, they will face sanctions, including disconnection. A list of consumers will be kept, and there will be compulsory installation of meters. This should stop the accumulation of debts, and also encourage less wasteful consumption.

Payment cards will be used for all utility services, and this will ensure a significant increase in collections. These cards will only be valid for payment of utility service fees.

Improvement of the collection rates from households will need careful planning. Installation of meters will take some time (in rural areas, 13% of households do not have metering of electricity consumption, and metering of gas consumption is available to only 10% of households), and enforcement of collection rates will be accompanied by a new compensation benefit for low-income households (Chapter 3). It is also planned to carry out public awareness campaigns (for organisations and households) on energy saving methods.

It is planned to improve the management of utility supplies by transferring the management of regional electricity and gas supply networks to the private sector. Transfer the management of the regional electricity distribution networks in Baku, Sumgait, Ganja and Ali-Bayramli have already been completed.

Restructuring of SOCAR, Azerenergy and Azerigas will continue. The regulatory functions performed by the state will be carried out by the Ministry of Fuel and Energy, while SOCAR and the utility companies will be responsible for commercial operations. There are two main problems with regard to increasing the financial viability of the utility suppliers. One involves improving collection rates, as has been discussed above. The second involves gradually increasing tariffs to bring them in line with world prices. Estimates show that even if consumers make full payments to Azerenergy and Azerigas, these companies would still not be in a position to pay all their bills to SOCAR. A tariff board has been established to advise on tariff levels, and to regulate them. The aim is to achieve a gradual reduction in the distinction between domestic and world prices for oil, oil products and natural gas.

With regard to the future development of the sector, it is planned to achieve an efficient exploitation of the remaining reserves in the oil fields, and to take measures to ensure stable increase in oil and gas output levels. It is planned through construction and rehabilitation of energy infrastructure to switch thermal power plants from heavy fuel oil to gas, which is more efficient and is less damaging to the environment. The export potential of the sector will be increased by the construction of new oil and gas pipelines, and the energy supply system will be improved through the integration of Azerbaijan into the regional energy supply systems (linking with Russia, Turkey, Georgia and Iran). The following targets have been set for 2005:

  • to increase gas storage capacity to 3.5 bln. m3;

  • to increase oil export capacity 50 mln. t/year;

  • to increase gas export capacity to 7 bln. m3;

  • to have additional 2.600 mWt power production.

Both the government and foreign companies involved in the development of the country’s oil and gas sectors will respect environmental considerations, since the energy sector has in the past been responsible for much of the country’s pollution problems.

Improved collection rates and increased tariffs will ultimately lead to more funds for investment in the supply and distribution systems, especially in rural areas. In the short-term, capitat investment will be undertaken in new power plants in line with the PIP.

Promotion of Tourism

Azerbaijan is a large and varied country with some good potential for both internal and international tourism, especially if better integrated into a kind of network with other tourist-attracting countries in the region of Southern Caucasus and Caspian sea (e.g. Georgia, Uzbekistan, Turkey, Iran). This potential can only be utilised with a well co-ordinated set of policies, bringing together the public resources and the private sector for a sustainable development of tourism.

The tourist industry can play a role in the overall development and growth of the country. It is strongly linked with several other main areas of the government’s strategy for poverty reduction through income generation.

Tourism, by definition, implies flow of resources to the regions. Given the climatic and natural variety of Azerbaijan, the development of tourism will enhance the government policy of regional growth. This takes the form of long-term, infrastructural investment, as a prerequisite for tourism to flourish, as well as flow of income through tourists’ spending in the regions.

Tourism can generate income at local levels by creating demand for specific services, ranging from high-skill to low-skill jobs. Given the present situation of unemployment levels in the regions, a boost in demand for low-skill jobs, mainly in services, will lift some of the immediate economic constraints at local levels, and would foster the poverty reduction objectives in the country. In a longer term perspective, as the demand for higher skills in tourist industry may rise, so will the human capital by way of training for new skills in the regions.

Tourism can attract SMEs in a variety of activity lines, and at local levels. Essentially a service-based sector, tourism requires relatively little capital. This makes it a labour-intensive sector. With relative abundance of labour, compared to capital, the entry barriers for SMEs into tourism at the local level may be modest. This in turn would contribute to the overall government’s strategy for attracting the private sector into new lines of income-generating activities, and in generating more gainful employment in the regions.

A boost in tourism can also have positive impact towards improving and maintaining the artistic and cultural heritage of the country. This again will enhance the regional development, as many sites, museums and cultural monuments are located outside the capital.

The development of tourism is dependent on better and healthier natural environment. As such, the linkages with environmental improvement are obvious, and strongly in line with the government’s policy on the issue of environmental safety and preservation.

The development of tourism can facilitate a more equitable distribution of income and resources, in favour of the poorer income groups. Provided appropriate implementation and monitoring, it can also make the non-income aspects of poverty less pronounced for the poor, by facilitating familiarity and access to cultural and artistic wealth in the regions to the local population.

With concern for all these major aspects of development and balanced growth strategy, the government plans to encourage the development of the tourist industry. The role of the state in this process is important by way of creating a favourable environment for the private sector.

Public Finance Policy

The state, through its public investment policy (PIP), will try to ensure that the necessary infrastructure for the development of tourism is in place. While Azerbaijan can boast considerable natural beauty, the government will focus on improving roads, electricity supply, telecommunications, water supply and sewage systems to support tourism development and contribute to the country’s regional economic development. In this regard, the role of municipalities and the local communities are very important.

The government will also encourage the development of so-called green and rural tourism, concentrating initially on domestic tourism. In this particular respect, the existing capacity and quality of museums, arts galleries and music venues need considerable upgrading in the urban centres and in the regions, as these can bring in regular visitors from nearby, as well as from farther away.

The government will set up tourist information centres in Baku and in seven regions of the country. These centres will coordinate work on the advertising and publicity for tourism, as well as providing brochures with information on local services and sights for tourist. It is planned to develop well-defined tourist routes within the country, to guide tourists to the most interesting sights. The government will also organise courses to train specialists in the tourism industry.


The government will prepare and approve a new licensing rules for simplification of licensing in tourism industry.

The government will also make an effort to ensure that the tourist visa regime is as simple as possible, to ensure that entry and exit procedures are improved, and to help encourage foreign tourists.

In line with the measures envisaged to encourage SMEs development, the government will try to ensure that access to credit is improved, in order to allow the development of the private sector in tourism.

Chapter 5. Institutional Framework for the Poverty Reduction Strategy

Institutional reform in Azerbaijan is closely tied to the process of redefining the role of the state in the transition to a market economy. As mentioned in Chapter 4, the regulatory role of the state is very important for improving the business and investment environment in the country. Over the last five years the state has taken important steps to withdraw from commercial activities. The process of redefining the role of the state will be continued.

Another important part of institutional reform is the rationalisation and improvement of public administration structures. In this regard, some measures have been taken to rationalise through the merging of government agencies. So far nearly 30 central government structures have been either liquidated or merged and new ones established. A civil service reform is underway, with the aim of improving the professional and managerial capacity of civil servants; and decompression of wages within the civil service will be undertaken so that pay levels correspond to levels of responsibility and qualifications.

The government has been trying to decentralise management within the public sector. The creation of municipalities can be considered an important step in this process. As a part of the process of decentralisation, the municipalities can contribute to the strengthening of local governance and decision making by improving allocation of resources at the local level, promoting regional development and allowing local communities to participate more actively in decision making.

Juridical reforms are also being undertaken with the aim of improving the legal qualifications of judges, prosecutors, defence attorneys; improving the court procedures for handling legal cases; improving legal access to the public and allowing public participation in trials; making sure that the legal profession has the background to ensure that new laws and legislation are consistent with the requirements of a market economy; and improving the performance of law enforcement agencies.

As part of institutional reform, the government is undertaking a number of active measures to reduce corruption and increase transparency in the public administration system. Since 1995 a series of Decrees were issued by the President of the Republic in this regard, and in June 2000 a Law on Combating Corruption was drafted. The draft law has already passed its first reading in Milli Mejlis.

The main strategic objectives of institutional reform can be summarised as follows: (i) to redefine the role of the state in the changing economic environment, including the clear and precise separation of regulatory and commercial activities; (ii) to rationalise and improve the professionalism and transparency of the public administration system; (iii) to promote decentralisation and local self-governance; (iv) to reform the juridical system; and (iv) to fight corruption at all levels.

Institutional reforms will consequently contribute to economic efficiency, social safety, good governance and transparency.

5.1. Public Administration Reform

The government aims to provide key social and economic services for the citizens and help to remove impediments to growth and employment in the non-oil sectors through efficient management of the country’s natural resource wealth. In order to achieve this it is important to improve the existing governance, policies and institutions for public expenditure management.

The overall aims of public administration reform are:

  • To improve governance, financial discipline and transparency

  • To improve resource allocation and use

  • To improve the efficiency of programmes and services

Although 30 central government structures have been reformed, it is still considered necessary to continue with these reforms in order to rationalise the existing government structures. Public administration reform envisages a close review of the mandates and expertise of separate government agencies since there is still significant duplication of functions in most of the government agencies dealing with economic issues. Therefore, it is intended to continue structural reforms with a view to ensuring the efficient functioning of different government agencies particularly in the agricultural sector.

The government continues with its efforts to improve transparency in the management of public financial resources. A Budget System Law has been adopted, almost all extra-budgetary funds abolished and consolidated into the state budget. All budget operations are currently implemented by the Treasury. Transformation of the implicit subsidies to explicit ones notably with regard to the structural reforms in the energy sector is one of the important steps towards improving transparency in budget reporting.

The preparation of SOFAR’s and the government’s budgets will be coordinated to ensure agreement on the key macroeconomic and fiscal aggregates, and to ensure that domestic investment and expenditure of the Oil Fund are coordinated with the budget and implemented through the Treasury.

The existing situation of SOCAR’s financial resources will be discussed and published by its Supervisory Board on a quarterly basis for public dissemination.

Work is being carried out towards a clearer separation of commercial and administrative functions. On the one hand, companies such as SOCAR, Azerenergy, Azerigaz, Azerbaijan State Railway Department, and Azerbaijan Airlines have been stripped of all policy development or regulatory functions. On the other hand, the establishment of the Ministries of Fuel and Energy and Transportation is part of the process of re-enforcing the state’s regulatory role.

The recent Law “On Civil Service” is designed to strengthen recruitment policy. A competitive mechanism is being developed as the basis for hiring civil servants, and a periodic performance review will be carried out to assess the professional level of the staff. Capacity building measures to improve management skills are also envisaged, inc