Azerbaijan Republic: Selected Issues and Statistical Appendix

This Selected Issues paper and Statistical Appendix for Azerbaijan aims to provide a guide to the management of Azerbaijan’s expected natural resource-generated windfall. The paper provides information on Azerbaijan’s endowment of oil and gas deposits and the projected revenue stream, and highlights the common characteristics of policies leading to the mismanagement of natural resource wealth in natural resource-abundant countries. It also outlines a medium- and long-term policy strategy for oil wealth management in Azerbaijan.

Abstract

This Selected Issues paper and Statistical Appendix for Azerbaijan aims to provide a guide to the management of Azerbaijan’s expected natural resource-generated windfall. The paper provides information on Azerbaijan’s endowment of oil and gas deposits and the projected revenue stream, and highlights the common characteristics of policies leading to the mismanagement of natural resource wealth in natural resource-abundant countries. It also outlines a medium- and long-term policy strategy for oil wealth management in Azerbaijan.

Azerbaijan: Basic Data

article image
Source: Azerbaijan State Statistics Committee. Azerbaijan National Bank, Ministry of Finance; and Fund staff estimates

Preliminary data.

Revenue and expenditure in 2002 include the estimated value of SOCAR’s unpaid energy deliveries to the utilities (5.4 percent of GDP).

Defined as non-oil GDP divided by average manat broad money.

I. Introduction

1. This selected issues paper and statistical appendix provide background information for the 2003 Article IV consultation discussions with Azerbaijan.

2. The biggest medium- to long-term challenge facing Azerbaijan is to ensure an efficient management of the expected very large, but short-lived, surge in oil and gas revenue starting from 2005, so that it would support a sustainable growth of the non-oil sector and alleviate poverty. Chapter II aims to provide a guide to the management of Azerbaijan’s expected natural resource generated windfall. This chapter provides information on Azerbaijan’s endowment of oil and gas deposits and the projected revenue stream, highlights the common characteristics of policies leading to the mismanagement of natural resource wealth in natural resource abundant countries, and outlines a medium- and long-term policy strategy for oil wealth management in Azerbaijan.

3. The development of a strong domestic banking system and liquid financial markets is a key ingredient to ensuring balanced and sustainable economic growth. Chapter III reviews the trends in monetization and financial deepening in Azerbaijan, and compares those trends with the rest of the BRO (Baltics, Russia and other countries of the Former Soviet Union). Despite Azerbaijan’s impressive achievements on the macroeconomic front, it has so far experienced only a very modest recovery in money demand and financial intermediation, much less than in most other BRO countries. The chapter provides evidence that the limited progress in structural reforms in Azerbaijan—particularly in enterprise, financial sector and judicial reforms—goes a long way toward explaining this slow pace of recovery of money demand.

4. Azerbaijan is continuing the process of developing a modern tax system, consistent both with a market economy and with an economy heavily dependent on natural resource extraction. Chapter IV describes recent tax policy developments in Azerbaijan, putting these developments in a regional context. It also provides a summary of Azerbaijan’s tax system.

Azerbaijan Republic: Selected Issues and Statistical Appendix
Author: International Monetary Fund