This assessment was prepared by Vitali Kramarenko (MCD), Zia Ebrahim-Zadeh (PDR), and Joseph Ntamatungiro (FAD), and contributions from members of the MCD Azerbaijan team (Basil Zavoico, Mayra Zermeño, Koba Gvenetadze, and Sajjid Chinoy).
The EFF/ESAF was augmented with a purchase under the Compensatory and Contingency Financing Facility (CCFF) in 1999 to compensate for a shortfall in export oil revenues.
Oil production was 0.3 million barrels per day in 2004, and it is projected to increase to about 1.3 million barrels per day in 2011, and to decline thereafter.
During 2002-03, fiscal expansion was partly attributable to government’s financing of investment in the oil and gas sectors. By the end of the PRGF, fiscal expansion was in part justified by sustainability of larger non-oil fiscal deficits in the longer run.
The staff recommended greater exchange rate flexibility immediately following the outbreak of the Russian crises. In early 1999, the staff advised to allow the exchange rate to depreciation, also indicating that there was room to maintain less restrictive fiscal policy under the program in the first half of 1999.
The decline in social spending relative to GDP occurred mainly because of rapid nominal GDP growth.
While SOCAR’s oil revenues were excluded from non-oil deficit targets, compliance with SOCAR’s tax obligations were expected to be monitored under the performance criterion on net domestic credit to the government through adjustors related to the oil price and export tax liabilities. However, the desired effects of this adjustor were not fully achieved. All in all, it would have been more straightforward to have a performance criterion on SOCAR’s compliance with its tax liabilities.
In 2005, SOCAR keeps a large portion of the windfall oil revenue at the currently prevailing export tax rate of 25 percent of the difference between the actual oil price and the domestic price of $8 per barrel. A profit tax of 24 percent should be paid in 2006 on the remaining 75 percent of the difference.
De jure Azerbaijan has a managed float exchange rate regime because there is no legal commitment to an exchange rate target. However, PRGF program documents clearly indicated that the exchange rate was used as an anchor.
The legal basis and the infrastructure for a wide range of indirect instruments of monetary policy was developed by 1998–99. However, the use of indirect instruments of monetary policy was limited, in part reflecting the authorities’ reluctance to develop government securities’ markets in the absence of budget financing need and in part difficulties of developing money markets in the presence of one large bank with a significant market power.
The banking system is dominated by one large state-owned bank, and SOCAR is by far the largest supplier of foreign exchange to the market.
From mid-2002 to February 2005, the nominal exchange rate vis-à-vis the dollar fluctuated within a +/-1 percent band.
Administered energy price increases implemented in late 2004—early 2005 only added 1.5 percentage points to headline inflation. In addition, governance issues in customs might have contributed to price increases for some imported goods.
Under the PRGF, Fund conditionality in the area of fiscal reforms addressed many governance issues.
The performance criteria related to domestic energy prices were modified and postponed to accommodate the government’s gradualist approach, owing to rising world market oil prices and a lack of a comprehensive system of targeted social assistance.
This number is comparable to an average PRGF arrangement.