Front Matter

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© 2005 International Monetary Fund

January 2005

IMF Country Report No. 05/19

Azerbaijan Republic: 2004 Article IV Consultation, Fourth Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria, Extension of Arrangement, Reduced Access and Rephasing of Disbursements—Staff Report; Staff Statement; 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 2004 Article IV consultation with the Azerbaijan Republic, fourth review under the Poverty Reduction and Growth Facility, requests for waiver of performance criteria, extension of arrangement, reduced access and rephasing of disbursements, the following documents have been released and are included in this package:

  • the staff report for the combined 2004 Article IV consultation, fourth review Under the Poverty Reduction and Growth Facility, requests for waiver of performance criteria, extension of arrangement, reduced access and rephasing of disbursements, prepared by a staff team of the IMF, following discussions that ended on October 27, 2004, 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 December 9, 2004. 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 statement of December 22, 2004 updating information on recent economic developments.

  • a Public Information Notice and Press Release, summarizing the views of the Executive Board as expressed during its December 22, 2004, discussion of the staff report on issues related to the Article IV consultation and the IMF arrangement, respectively.

  • a statement by the Executive Director for the Azerbaijan Republic.

The documents listed below have been or will be separately released.

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

Selected Issues Paper

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

Copies of this report are available to the public from

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Staff Report for the 2004 Article IV Consultations, Fourth Review Under the Poverty Reduction and Growth Facility, Requests for Waiver of Performance Criteria, Extension of Arrangement, Reduced Access and Rephasing of Disbursements

Prepared by Middle East and Central Asia Department (in consultation with other departments)

Approved by Lorenzo Pérez and Juha Kähkönen

December 9, 2004

  • The staff discussions for the 2004 Article IV consultations and fourth review under the Poverty Reduction and Growth Facility (PRGF) were held in Baku during October 13–27, 2004.

  • The team consisted of Messrs. Wakeman-Linn (head), Hobdari, Gvenetadze (all MCD), Joshi (PDR), Le Borgne (FAD), and Surin (BLS). Mr. Kramarenko, who will replace Mr. Wakeman-Linn as mission chief for Azerbaijan following completion of the 2004 Article IV consultations, joined the mission for a few days. Mr. Zavoico, the resident representative assisted the mission. Mr. Mammadov, advisor to the Swiss Executive Director, participated in policy discussions.

  • The mission met with government officials, as well as representatives from parliament, the business, banking and diplomatic communities, and members of civil society. The mission held a press conference.

  • Azerbaijan’s economic reforms have been supported since July 6, 2001 by an arrangement under the Poverty Reduction and Growth Facility (PRGF) in the amount of SDR 80.45 million (50 percent of quota). As of October 31, 2004, total Fund credit and loans outstanding to Azerbaijan amounted to SDR 139.2 million (86.5 percent of quota).

  • The authorities have communicated that they consent to the publication of the staff report, supplementary letter of intent, selected issues paper, and statistical appendix.


  • List of Acronyms

  • Basic Data

  • Executive Summary

  • I. Introduction

  • II. Overview

  • III. Recent Developments and Performance Under the Program

  • IV. Article IV Discussions

    • A. Medium-Term Macroeconomic Framework

    • B. Exchange Rate and Financial Sector Policies

    • C. Medium-Term Fiscal Issues

    • D. Other Article IV Issues

  • V. Program Discussions

    • A. Macroeconomic Framework for 2005

    • B. Exchange Rate and Financial Sector Policies

    • C. Fiscal Issues and 2005 Budget

    • D. Energy Sector Reforms and Financial Discipline in State-Owned Enterprises

  • VI. Balance of Payments Outlook and Capacity to Repay the Fund

  • VII. Risks to the Program

  • VIII. Program Modalities

  • IX. Staff Appraisal

  • Text Boxes

  • 1. Azerbaijan and the Extractive Industries Transparency Initiative

  • 2. Key FSAP Recommendations

  • 3. Economic Implications of a Possible Nagorno Karabakh Peace Agreement

  • 4. Structural Conditionality Streamlining Assessment

  • Figures

  • 1. Recent Economic Developments, 2000–05

  • 2. Sensitivity Analysis of Use of Oil Wealth

  • Tables

  • 1. Selected Economic and Financial Indicators, 2001–05

  • 2. Monetary Survey, 2001–05

  • 3. Summary Accounts of the Azerbaijan National Bank, 2001–05

  • 4. Consolidated Government Operations, 2003–05

  • 5. Selected Fiscal Indicators, 2001–05

  • 6. Balance of Payments, 2002–05

  • 7. Quantitative Performance Criteria and Indicative Targets for the PRGF, 2003–05

  • 8. Structural Performance Criteria and Benchmarks for End-December 2003, End-March 2004, End-June 2004, End-December 2004, End-March 2005, and End-April 2005, and Prior Actions for the Fourth Review

  • 9. Millennium Development Goals

  • 10. Macroeconomic Framework, 2000–10

  • 11. Capacity to Repay the Fund, 2004–10

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

  • Attachments

  • I. Supplementary Letter of Intent

  • Appendices

  • I. Fund Relations

  • II. IMF-World Bank Relations

  • III. Statistical Issues

List of Acronyms


National Bank of Azerbaijan


Banking Systems Law




Cabinet of Ministers


European Bank for Reconstruction and Development


Extractive Industries Transparency Initiative


IMF’s Fiscal Affairs Department


Foreign direct investments


Financial Sector Assessment Program


Financial Sector Stability Assessment


International Bank of Azerbaijan


Joint Staff Assessment


Millennium Development Goals


Ministry of Tax


Medium-Term Expenditure Framework


National Bank Law


Non-governmental organizations


Public Investment Program


Poverty Reduction and Growth Facility


Quasi Fiscal Subsidies


Report on Standard and Codes


State Customs Committee


Special Data Dissemination Standards


Special Drawing Rights


Supplementary Letter of Intent


State Oil Company of the Azerbaijan Republic


Social Pension Fund


State Program for Poverty Reduction and Economic Development


Value added tax


World Economic Outlook


World Trade Organization

Azerbaijan: Basic Data

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Sources: Azerbaijan State Statistics Committee; Azerbaijan National Bank; Ministry of Finance; and Fund staff estimates.

Starting from 2002 revenue and expenditure include tax credits to SOCAR for energy-related subsidies.

Calculated from below the line data.

For nine months.

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 2, 2001. Four disbursements under this arrangement have been made through December 2003. Staff held discussions on the fourth review, as well as on the 2004 Article IV consultations, in Baku from October 13–27.

Macroeconomic developments remain broadly in line with program objectives. Real GDP grew 9.9 percent in the first nine months of the year, and the real effective exchange rate has remained broadly stable. Inflation has been higher than targeted. The non-oil deficit for 2004, as a percentage of non-oil GDP, is projected to be one percent lower than targeted, as a result of a favorable impact of tax administration reforms and tax policy changes.

Over the medium-term, the key challenge facing the authorities is to efficiently manage the forthcoming massive but temporary surge in oil revenue. A long-term oil revenue management strategy has been adopted by the authorities, targeting a path of non-oil deficits over the medium-term that seeks to preserve macroeconomic stability and also avoid overstretching implementation capacity. To ensure coherent fiscal policy, annual budgets will need to start from the poverty reduction strategy, and incorporate the public investment and regional development programs. Other key challenges include improving governance and accelerating structural and institutional reforms to support growth in the non-oil sectors, hopefully contributing to reducing poverty. Azerbaijan maintains an exchange system free from restrictions on the making of payments and transfers for current international transactions, except for restrictions maintained for security reasons which have been notified to the Fund in accordance with Executive Board Decision No. 144-(52/51).

Performance under the program has been satisfactory. All quantitative performance criteria under the program were met. The reserve money indicative targets were missed by significant margins, and the indicative limits on unpaid government bills were exceeded by small amounts. While several structural performance criteria were missed, policies subject to most of them have now been implemented, following acceleration of structural reforms in recent months.

Understandings were reached on a Supplementary Letter of Intent for 2005. Real GDP is projected to grow by more than 20 percent, and the current account deficit to improve sharply following completion of the Baku-Tbilisi-Ceyhan oil export pipeline. The program targets a 2.4 percent increase in the non-oil fiscal deficit relative to non-oil GDP, which will remain well under the long-term sustainable level, as well as a decline in inflation. To ensure the latter is achieved, the program envisages utilization of ANB bills as an instrument for sterilization, and acknowledges the possibility of modest nominal appreciation of the exchange rate of the manat. The government’s structural reform agenda focuses on fostering competition in the banking sector, in part by tendering all financial services of the treasury, improving fiscal management through better budget preparation, and strengthening financial discipline in the public sector by closer oversight of large state-owned companies.

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Statement by the IMF Staff Representative December 22, 2004

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Press Release No. 04/276


December 23, 2004

International Monetary Fund

Washington, D.C. 20431 USA

IMF Executive Board Completes Fourth Review Under Azerbaijan Republic’s PRGF Arrangement and Approves US$19.7 Million Disbursement

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Statement by Fritz Zurbrügg Executive Director for Azerbaijan Republic and Faig Mammadov Advisor to Executive Director December 22, 2004

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Public Information Notice (PIN) No.05/6


January 21, 2005

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

IMF Concludes 2004 Article IV Consultation with the Azerbaijan Republic

On December 22, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Azerbaijan Republic.1