Front Matter

Front Matter Page

© 2003 International Monetary Fund

June 2003

IMF Country Report No. 03/154

Azerbaijan Republic: 2003 Article IV Consultation, Second Review Under the Poverty Reduction and Growth Facility, and Requests for Waivers of Performance Criteria, Extension of Arrangement and Rephasing of Purchases—Staff Report; Staff Supplement; Public Information Notice and Press Release on the Executive Board Discussion; and Statement by the Executive Director for the Azerbaijan Republic

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of a combined discussion of the 2003 Article IV consultation with the Azerbaijan Republic, Second Review Under the Poverty Reduction and Growth Facility, and Requests for Waivers of Performance Criteria, Extension of Arrangement and Rephasing of Purchases, the following documents have been released and are included in this package:

  • the staff report for the combined 2003 Article IV consultation, second review under the Poverty Reduction and Growth Facility, and requests for waivers of performance criteria, extension of arrangement and rephasing of purchases, prepared by a staff team of the IMF, following discussions that ended on March 6, 2003, with the officials of the Azerbaijan Republic on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 29, 2003. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a staff supplement of May 9, 2003 updating information on recent economic developments.

  • a Public Information Notice (PIN) and Press Release summarizing the views of the Executive Board as expressed during its May 14, 2003, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.

  • a statement by the authorities of the Azerbaijan Republic.

The document(s) listed below have been or will be separately released.

  • Joint Staff Assessment of the Poverty Reduction Strategy Paper

  • Letter of Intent sent to the IMF by the authorities of the Azerbaijan Republic*

  • Poverty Reduction Strategy Paper

  • Report on Observance of Standards and Codes

  • Selected Issues Paper and Statistical Appendix

  • *May also be included in Staff Report

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

700 19th Street, N.W. • Washington, D.C. 20431

Telephone: (202) 623-7430 • Telefax: (202) 623-7201

E-mail: publications@imf.org • Internet: http://www.imf.org

Price: $15.00 a copy

International Monetary Fund

Washington, D.C.

Front Matter Page

INTERNATIONAL MONETARY FUND

AZERBAIJAN REPUBLIC

Staff Report for the 2003 Article IV Consultation, Second Review Under the Poverty Reduction and Growth Facility, and Requests for Waivers of Performance Criteria, Extension of Arrangement and Rephasing of Purchases

Prepared by European II and Policy Development and Review Departments

Approved by Julian Berengaut and Martin Fetherston

April 29, 2003

  • The staff discussions for the 2003 Article IV consultation and the second review under the Poverty Reduction and Growth Facility (PRGF) were held in Baku during February 23-March 6, 2003. The mission met with the Prime Minister, Deputy Prime Minister, Ministers of Finance, Economic Development, and Education, the Governor of the National Bank, and representatives of the banking and diplomatic communities, NGOs, and parliament, as well as other senior officials. The mission comprised Messrs. Wakeman-Linn (head), Hobdari and Gvenetadze (all EU2), Ms. Aturupane (PDR), Messrs. Desai and Danninger (both FAD), Mr. Surin (BLS) and Ms. Moss (staff assistant, EU2) and was assisted by Mr. Mered, the Resident Representative. Mr. Zurbrügg, Executive Director for Azerbaijan, participated in several meetings.

  • In concluding the 2001 Article IV consultation in February 2002, Directors commended the authorities for continued strong economic performance, and stressed that economic diversification was crucial for sustained reduction in poverty. Directors welcomed the comprehensive plan to strengthen energy sector financial discipline. Finally, Directors were encouraged by the regulations designed to ensure the planning, execution and monitoring of the oil fund and state budgets in the context of a consolidated budget, stressing that, if used wisely, the oil fund could make a crucial contribution to combating poverty in Azerbaijan.

  • Azerbaijan’s statistical base is adequate to conduct effective surveillance and the publication policy is open. Implementation of the recommendations outlined in the country’s ROSC data module, completed in March 2003, would further strengthen economic statistics. The authorities have agreed to publish the data ROSC.

  • Azerbaijan continues to avail itself of the transitional arrangements of Article XIV, but no longer maintains restrictions under such transitional arrangements.

Contents

  • Basic Data

  • Executive Summary

  • I. Introduction

  • II. Recent Developments

    • A. Macroeconomic Developments

    • B. Program Performance

    • C. Structural Reforms and the PRSP

      • Energy Sector Financial Discipline

      • Financial Sector Reforms

      • Fiscal Sector Reforms

      • Governance

      • Poverty Reduction Strategy

  • III. Report on the Discussions

    • A. Key Challenges for 2003 and the Medium Term

      • Management of Oil Revenues

      • Financial Sector Reforms

    • B. Program Discussions and Macroeconomic Policies for 2003

      • Fiscal Policy

      • Monetary and Exchange Rate Policies

      • Governance

      • Energy Sector Financial Discipline

      • Trade and Investment Policy

    • C. Medium-Term Prospects and Capacity to Repay the Fund.

    • D. Technical Assistance and Statistical Issues

    • E. Program Monitoring

  • IV. Staff Appraisal

  • Figure 1: Recent Economic Developments, 1997-2002

  • Tables

  • 1. Selected Economic and Financial Indicators, 2002-2005

  • 2. Monetary Survey, 2000-2003

  • 3. Summary Accounts of the Azerbaijan National Bank, 2000-2003

  • 4. Consolidated Government Operations, 2001-2003

  • 5. Selected Fiscal Indicators, 2000-2003

  • 6. Balance of Payments, 2001-2005

  • 7. Capacity to Repay the Fund, 2000-2005

  • 8. Macroeconomic Framework, 2002-2008

  • 9. Azerbaijan Review and Phasing of Disbursements Under the Proposed PRGF Arrangement

  • Text Boxes

  • 1. Azerbaijan Oil Production and Oil Exports: A Regional Comparison

  • 2. Monetization and Dollarization Trends in the BRO Countries

  • 3. Oil Revenue Management: Azerbaijan and Kazakhstan

  • 4. Structural Performance Criteria and Benchmarks End-March 2002.

  • 5. Prior Actions, Structural Performance Criteria and Structural Benchmarks

  • 6. Structural Conditionality Streamlining Assessment

  • Appendices

  • I. Fund Relations

  • II. IMF-World Bank Relations

  • III. Statistical Issues

  • Attachments

  • I. Letter of Intent

Azerbaijan: Basic Data

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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 utility companies (5.4 percent of GDP).

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

Executive Summary

A three-year arrangement under the PRGF, in an amount equivalent to SDR 80.45 million (50 percent of quota) was approved on July 6, 2001. The first semi-annual loan was disbursed in July 2001, and the second was disbursed in March 2002. The 2001 Article IV consultation with Azerbaijan was concluded on February 20, 2002.

Macroeconomic developments remained favorable in 2002, with strong and broad-based real GDP growth and low inflation. The central bank continued to intervene in the market largely to smooth out short-term fluctuations in the nominal exchange rate, and the real effective exchange rate has been depreciating steadily since mid-1999. Fiscal policy was modestly expansionary in 2002, in line with program objectives.

Performance relative to the quantitative targets under the program was strong, as all quantitative performance criteria and most indicative targets were met. While most indicative targets for end-December 2002 were missed, this was due to actions taken by the government, and supported by staff, to finance SOCAR’s share of the new oil export pipeline, Baku-Tbilisi-Ceyhan.

Implementation of the structural reforms under the program was slower than planned, delaying completion of the second review. The authorities are requesting several waivers related to delays in structural reforms. However, there was a significant acceleration of reforms beginning in late 2002, and the authorities have now introduced measures that meet or exceed program objectives, including on the missed performance criteria. One half of energy sector quasi-fiscal subsidies have been eliminated in two years.

The key challenge facing Azerbaijan over the medium term will be to ensure that the projected boom in oil exports is managed effectively, and in a manner consistent with sustainable non-oil growth and poverty alleviation. This will require development of a sound strategy for the use of oil revenues. The development of such a strategy is the most pressing issue facing the authorities.

For 2003, real GDP growth is projected at 9.2 percent, while the CPI is targeted to increase 2.5 percent. The external current account deficit is expected to deteriorate sharply, but will be offset by higher net oil-sector FDI. The non-oil fiscal deficit will increase modestly during the year, but will remain below the sustainable level.

The government has adopted a comprehensive structural reform program, including amendments to the Budget Systems Law that will further strengthen the links between the state and oil fund budgets, measures to further enhance payments discipline in the energy sector, acceleration of SOCAR restructuring, and measures to further strengthen the banking sector.

Front Matter Page

INTERNATIONAL MONETARY FUND

AZERBAIJAN REPUBLIC

Staff Report for the 2003 Article IV Consultation, Second Review Under the Poverty Reduction and Growth Facility, and Requests for Waivers of Performance Criteria, Extension of Arrangement and Rephasing of Purchases

Supplemental Information

Prepared by European II and Policy Development and Review Departments

Approved by Oleh Havrylyshyn and Martin Fetherston

May 9, 2003

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Public Information Notice (PIN) No. 03/67

FOR IMMEDIATE RELEASE

June 4, 2003

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org

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Press Release No. 03/67

FOR IMMEDIATE RELEASE

May 15, 2003

International Monetary Fund

Washington, D.C. 20431 USA

Washington, D.C. 20431 • Telephone 202-623-7100 • Fax 202-623-6772 • www.imf.org