Front Matter

Front Matter Page

© 2007 International Monetary Fund

June 2007

IMF Country Report No. 07/191

Republic of Azerbaijan: 2007 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Azerbaijan

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2007 Article IV consultation with the Republic of Azerbaijan, the following documents have been released and are included in this package:

  • the staff report for the 2007 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on February 28, 2007 with the officials of the Republic of Azerbaijan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on April 19, 2007. 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 Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its May 9, 2007 discussion of the staff report that concluded the Article IV consultation; and

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

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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Price: $18.00 a copy

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Staff Report for the 2007 Article IV Consultation

Prepared by the Staff Representatives for the 2007 Consultation with the Republic of Azerbaijan

Approved by Lorenzo Pérez and Adrienne Cheasty

April 19, 2007

Mission dates and place: February 14—28, 2007, Baku.

IMF team: Mr. Kramarenko (head), Ms. Zermeño, Mr. Ding, Ms. Koeda (all MCD), and Mr. Crowley (MCM). Mr. Pérez (MCD) and Mr. Moser (OED) attended policy discussions. Mr. Zavoico, resident representative, assisted the mission.

Exchange system: Azerbaijan accepted the obligations of Article VIII, Sections 2, 3, and 4 effective November 30, 2004 and maintains an exchange rate system that is free of restrictions on the making of payments and transfers for current international transactions. Azerbaijan has maintained a de facto crawling peg exchange rate system since early 2006.

Data: Azerbaijan has participated in the General Data Dissemination System since 2001. Azerbaijan’s statistical base is broadly adequate for surveillance, but significant improvements are needed in selected areas, including CPI and external debt statistics (Annex III). The authorities requested technical assistance (TA) geared toward subscribing to the Special Data Dissemination Standard.

An arrangement under the PRGF ended on July 4, 2005. The authorities are not expected to request a new arrangement in the foreseeable future.

The previous consultation was concluded on March 27, 2006, and the PIN was made available at on April 25, 2006.


  • Executive Summary

  • I. Introduction

  • II. Recent Developments

  • III. Macroeconomic Outlook

    • A. Short-Term Outlook

    • B. Medium- and Long-Term Outlook

  • IV. Report on the Authorities’ Views

    • A. What is the Appropriate Pace of Spending out of Oil Revenue?

    • B. How to Reduce Inflation to Single Digits in the Medium Term?

    • C. What are the Key Productivity-Enhancing Structural Reforms?

  • V. Staff Appraisal

  • Boxes

  • 1. Non-Oil Taxation Issues

  • 2. Assessing the Exchange Rate Level

  • Figures

  • 1. Recent Developments, 2003–07

  • 2. Competitiveness Indicators, 1995–2006

  • 3. Monetary Indicators, 2003–07

  • 4. Problems Doing Business, 2002 and 2005

  • 5. Selected Oil-Related Indicators, 2005–24

  • 6. Medium-Term Macroeconomic Scenarios, 2006–12

  • 7. Current Account Balance, 2006–07

  • 8. Relative Price and Relative Productivity, 2006

  • Text Tables

  • 1. Selected Economic Indicators, 2003–07

  • 2. Problem Banks, January 1, 2007

  • 3. Estimates of VAT Revenue Losses, 2006

  • 4. Estimates of Customs Duties Losses, 2006

  • Tables

  • 1. Selected Economic and Financial Indicators, 2003–07

  • 2. Balance of Payments, 2003–07

  • 3. Millennium Development Goals, 1990–2004

  • 4. Consolidated Central Government Operations, 2003–07 (In millions of manats)

  • 5. Consolidated Central Government Operations, 2003–07 (In percent of non-oil GDP)

  • 6. Summary Accounts of the National Bank, 2003–07

  • 7. Monetary Survey, 2003–07

  • 8. Financial Soundness Indicators, 2003–06

  • 9. Selected Economic and Financial Indicators, 2005–12 (Baseline)

  • 10. Selected Economic and Financial Indicators, 2005–12 (Recommended Scenario)

  • Appendix

  • Analysis of Long-Term Sustainability of the Baseline Scenario

Executive Summary


Azerbaijan is at the beginning of a large but temporary oil production boom that will peak in 2009–10 if no new oil deposits are discovered. The oil boom resulted in exceptionally high real GDP growth and a significant improvement in the external position during 2005–06. It also made it possible to increase government expenditure by almost 30 percent in 2005 and to ratchet it up by over 80 percent in 2006. The resulting massive fiscal expansion in the context of a de facto slowly appreciating exchange rate crawl contributed to an increase in inflation from 5.5 percent in December 2005 to 16.4 percent in March 2007. The non-oil economy continues to suffer from important structural rigidities and an unfavorable business climate.

Authorities’ views

Appropriate pace of spending out of oil revenue. While the authorities acknowledged rising inflationary pressures and medium-term fiscal sustainability concerns, they only saw limited room for expenditure restraint in the short term. In the medium term, the authorities will consider implementing fiscal reforms to support a reduction in the non-oil primary fiscal deficit toward a sustainable level, but they have not made firm decisions on the pace of adjustment.

Reducing inflation to single digits in the medium term. The Azerbaijan National Bank (ANB) will consider tightening monetary policy gradually, if inflation continues to rise and if key cabinet members support this tightening. The authorities aim at reducing inflation to single digits over the medium term once fiscal adjustment has been initiated and institutional reforms underpinning the transition to inflation targeting have been advanced.

Key productivity-enhancing structural reforms. The authorities intend to privatize the two state-owned banks and improve the business climate.

Staff recommendations

  • It would be appropriate to scale down expenditure increases in 2007 to support disinflation and put fiscal policy on a more sustainable path.

  • A detailed medium-term fiscal strategy consistent with long-term fiscal sustainability should be prepared and adhered to.

  • If fiscal restraint is not considered in 2007, it is all the more important to tighten monetary policy to facilitate the real exchange rate adjustment through nominal appreciation rather than through higher inflation.

  • On the structural front, the banking privatization terms should be made attractive to reputable strategic investors, and higher priority should be given to effective measures to strengthen the oversight of the large spending program, reduce corruption, and improve governance at the customs and tax administration agencies.

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2007 Article IV Consultation—Informational Annex

Prepared by Middle East and Central Asia Department

April 19, 2007


  • I. Fund Relations

  • II. IMF-World Bank Relations

  • III. Statistical Issues

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Public Information Notice (PIN) No. 07/59


May 30, 2007

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On May 9, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the Republic of Azerbaijan.1

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May 9, 2007

Republic of Azerbaijan: 2007 Article IV Consultation: Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Republic of Azerbaijan
Author: International Monetary Fund