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© 2008 International Monetary Fund

December 2008

IMF Country Report No. 08/214

Republic of Azerbaijan: 2008 Article IV Consultation—Staff Report; Staff Statement; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for Republic of Azerbaijan

Under Article IV of the IMFs’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2008 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 2008 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on March 12, 2008, 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 May 8, 2008. 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 May 23, 2008 updating information on recent developments.

  • A Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its May 23, 2008 discussion of the staff report that concluded the Article IV consultation.

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

The document listed below will be separately released.

  • Statistical Appendix

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

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: • Internet:

Price: $18.00 a copy

International Monetary Fund

Washington, D.C.

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Staff Report for the 2008 Article IV Consultation

Prepared by Staff Representatives for the 2008 Consultation with Azerbaijan

Approved by Lorenzo Pérez and Mark Plant

May 8, 2008

  • Mission: February 27-March 12, 2008, Baku.

  • Team: Ms. Fichera (head), Mmes. Zermeno, Koeda, John (assistant), Mr. Ding (all MCD), and Mr. Pratt (MCM external expert). Mr. Pérez (MCD) and Mr. Lanz (OED) attended policy discussions. Mr. Gvenetadze, resident representative, and the local office staff, assisted the mission.

  • Exchange system: Azerbaijan accepted the obligations of Article VIII, Sections 2, 3, and 4, effective November 30, 2004. A new de facto exchange rate arrangement that pegs the manat to a dollar/euro currency basket became operational in March 2008, replacing a crawling peg exchange system that had been in place since 2006.

  • Data: Azerbaijan has participated in the General Data Dissemination System since 2001. Provisions of data to the Fund is adequate for surveillance.

  • Previous consultation: concluded on May 9, 2007. The staff report and PIN are available at


  • Executive Summary

  • I. Introduction

  • II. Recent Developments

  • III. Outlook

    • A. Short-Term

    • B. Medium- and Long-Term

  • IV. The Authorities’ Views

    • A. Macroeconomic Policy Mix to Reduce Inflation

    • B. Improving the Quality and Efficiency of Public Expenditures

    • C. Strengthening the Financial System

  • V. Staff Appraisal

  • Tables

  • 1. Selected Economic and Financial Indicators, 2004–08

  • 2. Balance of Payments, 2004–08

  • 3. Consolidated Central Government Operations, 2004–08 (In millions of manats)

  • 4. Consolidated Central Government Operations, 2004–08 (In percent of non-oil GDP)

  • 5. Summary Accounts of the National Bank, 2004–08

  • 6. Monetary Survey, 2004–08

  • 7. Banking System Soundness Indicators, 2004–07

  • 8. Selected Economic and Financial Indicators, 2006–13

  • 9. Public Sector Debt Sustainability Framework, 2003–13

  • 10. External Debt Sustainability Framework, 2003–13

  • 11. Economic and Financial Indicators, 2006–13

  • Boxes

  • 1. Non-Oil Revenues: Recent Developments and Policy Issues

  • 2. Banking Sector Developments

  • 3. Exchange Rate Assessment for Azerbaijan

Executive Summary

The 2008 Article IV consultation discussions focused on policies to contain inflation, the need to improve the quality and efficiency of public expenditure, and measures to strengthen the resilience of the banking system to shocks and to promote the development of the financial sector.

Economic developments and outlook

Economic growth was strong in 2007, led by a major increase in oil production. Non-oil GDP continued to expand rapidly pushed by large increases in public expenditure, including wages and pensions. The overall fiscal balance was in surplus, but the non-oil primary deficit deteriorated. A large current account surplus resulted in a major accumulation of foreign reserves and oil fund assets. But inflation rose to almost 20 percent, also reflecting the lack of monetary and exchange rate policy actions to reduce the impact of the fiscal expansion, and an uncompetitive business environment. The growth and external outlook remains favorable on account of strong oil production and prices, but, if macroeconomic policies remain loose, inflation will remain high.

The authorities’ views

The authorities intend to continue with their expansionary fiscal plans in 2008, in line with their strategy to pursue fast improvements in living standards and infrastructures to set the basis for long-term non-oil growth. They reported intentions to moderate the fiscal expansion in 2009. In the meantime, they have adopted a new exchange rate arrangement that pegs the manat to a dollar/euro currency basket, aimed at keeping the nominal effective exchange rate stable. They expect the new arrangement to help contain imported inflation and view it as a step towards preparing the foreign exchange market for more exchange rate flexibility. The ANB has strengthened prudential regulations and supervision to contain potential risks from a very rapid credit expansion. The authorities are also considering measures to develop the financial market.

Staff recommendations

  • Moderate the 2008 fiscal expansion and tighten the fiscal stance in 2009 to avoid the entrenchment of a nascent wage-price spiral.

  • Facilitate the unavoidable real exchange rate adjustment through more nominal appreciation rather than through higher inflation, by allowing the manat to appreciate against the basket.

  • Significantly strengthen the medium-term expenditure framework to improve the quality and efficiency of public spending and the monitoring of financial operations of public enterprises.

  • Reinforce the enforcement of current and planned prudential regulation to address probable risks from a very rapid credit expansion.

  • Take steps to help the development of the financial market and measures to enhance competition and strengthen the supply response of the economy.

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Staff Report for the 2008 Article IV Consultation—Informational Annex

Prepared by Middle East and Central Asia Department

May 8, 2008


  • I. Fund Relations

  • II. IMF-World Bank Relations

  • III. Azerbaijans’ relations with the EBRD.

  • IV. Statistical Issues

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Public Information Notice (PIN) No. 08/79


July 1, 2008

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA