Republic of Azerbaijan: Staff Report for the 2008 Article IV Consultation—Informational Annex

This Article IV Consultation reports on policies of the Republic of Azerbaijan. These policies contain inflation and measures to strengthen the resilience of the banking system to promote the development of the financial sector. Non-oil GDP continued to expand rapidly, pushed by large increases in public expenditure, including wages and pensions. 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 infrastructure to set the basis for long-term non-oil growth.


This Article IV Consultation reports on policies of the Republic of Azerbaijan. These policies contain inflation and measures to strengthen the resilience of the banking system to promote the development of the financial sector. Non-oil GDP continued to expand rapidly, pushed by large increases in public expenditure, including wages and pensions. 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 infrastructure to set the basis for long-term non-oil growth.

Annex I: Azerbaijan: Fund Relations

(As of March 31, 2008)

I. Membership Status: Joined: September 18, 1992; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to Fund: (SDR million; based on existing use of resources and present hol dings of SDRs)

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VII. Safeguards Assessment

Under the Funds’s safeguards assessment policy, Azerbaijan National Bank (ANB) was subject to an assessment with respect to the PRGF arrangement, which was approved on July 6, 2001 and expired on July 4, 2005. A safeguards assessment of the ANB was completed on March 8, 2002. The assessment concluded that risks may exist in the legal structure and independence of the Central Bank, and in its internal audit and control systems.

The authorities have implemented all but one of the 2002 safeguards assessment recommendations. The National Bank Law adopted in 2004 clearly specifies the modalities for the ANB profit distribution, consistent with one of the last two outstanding recommendations, and requires that ANBs’s internal audit division be responsible only to the chairman of the ANB Board. The latter falls short of establishing an independent audit committee under the Board, as recommended by the safeguards assessment mission.

VIII. Exchange Rate Arrangements

The currency of Azerbaijan is the manat, which became sole legal tender on January 1, 1994. Currently de jure, the exchange rate is allowed to float against all currencies. Exchange rates for cash transactions are quoted by commercial banks licensed to deal in foreign exchange on the basis of market conditions. 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 rate system that had been in place since 2006.

Azerbaijan accepted the obligations of Article VIII, Sections 2, 3, and 4 effective November 30, 2004 and maintains an exchange system that is free of restrictions on the making of payments and transfers for current international transactions, except for restrictions maintained for security reasons that have been notified to the Fund.

IX. Article IV Consultation

The 2007 Article IV consultation with Azerbaijan was concluded on May 9, 2007.


A fiscal transparency ROSC module was prepared by FAD (SM/00/278, 12/12/01) and updated in April 2003 (SM/03/159, 04/30/03). A fiscal ROSC update mission took place in April 2005. A data dissemination ROSC module was completed by STA in March 2003 (IMF Country Report No. 03/86). The authorities published the fiscal ROSC, and it is available on the IMF web site. Several financial systems ROSC were conducted in the context of the FSAP (2003–04) but were not published. A CPI data ROSC took place in February 2008.

XI. Resident Representative

Mr. Koba Gvenetadze, the Funds’s sixth Resident Representative, took up his duties in Baku in January 2008.

XII. Resident Advisers

An adviser on the establishment of the Treasury in the Ministry of Finance, Mr. Nurcan Aktürk, was stationed in Baku from December 1994 until September 1996. He was succeeded by Mr. B.K. Chaturvedi, whose assignment was extended twice, first through August 2000, and then through May 2001. Mr. B.K. Chaturvedi was replaced by Mr. A. Khan, whose assignment started in May 2001 and ended in August 2002. A technical long-term adviser for tax administration, Mr. Mark Zariski, was stationed in Baku from April 1995 until April 1996. He was succeeded by Mr. Peter Barrand, who was stationed in Baku from January 2001 until December 2002. Mr. Isaac Svartsman was resident advisor in the ANB for bank supervision and restructuring from September 1998 to April 2001. Nataliya Ivanik took up the position of STA regional external sector statistics advisor in November 2006.

Azerbaijan: Technical Assistance, 2003–2007

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Annex II: Azerbaijan: IMF-World Bank Relations

(As of April 15,2008)

  • The World Bank has been actively involved in structural reforms, poverty reduction measures, public expenditure management, agricultural policies, private sector development, institution building, and governance. A range of instruments is used to conduct the dialogue. SAC-II, which was fully disbursed in June 2003, supported a wide-ranging structural reform agenda and its accompanying second institution building and technical assistance credit (IBTAII) assisted institutional capacity building, especially of the Treasury Information management System (TIMS), public investment program preparation, and utility reforms. The Banks’s Board approved a Poverty Reduction Support Credit (PRSC) in May 2005. By supporting the authoritiess’ State Program of Poverty Reduction and Economic Development (SPRED), the PRSC aimed to improve the business environment, the efficiency and effectiveness of allocations in the social sectors, support anti-corruption efforts and increased transparency and accountability of public finances.

  • The Banks’s new Country Partnership Strategy (CPS) was discussed at the World Banks’s Board on December 7, 2006. A CPS Progress Report was prepared in April 2008. The CPS is based on a broad policy reform approach combined with sector investment projects in agriculture, transport, water, refugees/IDPs, environment, education, health, and energy. Analytical and advisory assistance for the next four years includes Programmatic Poverty Assessments, Programmatic Public Expenditure Reviews (PER), an update on the CFAA (financial accountability) and CPAR (procurement), and ongoing work on trade facilitation and mitigation of the social costs of utility price increases. In FY2008, the Bank, in collaboration with other donors, plans to complete three assessments: a Public Expenditure and Financial Accountability (PEFA) assessment, and a Country Procurement Assessment Review. In addition, a Country Economic Memorandum (covering macroeconomic polices, infrastructure, trade and the business environment, financial sector, and employment) is also planned for FY2008. The Bank will continue its advisory services in the energy sector, the health sector, and the water sector.

  • After the PRGF arrangement expired in July 2005, close collaboration between the IMF and the World Bank has continued. The World Banks’s policy advice will continue to focus on preparation and implementation of the medium term expenditure framework, public expenditure management (PEFA follow up, budget processing, and public accounting) and the business environment (including taxation issues) as well as areas for follow-up on the basis of CEM analysis. The World Banks’s recently expanded lending activity will continue to focus on infrastructure, education, private sector development, and other sectoral issues, as well as some financial sector issues. The IMF will continue to focus on macro-critical areas and tax administration, and will collaborate with the Bank on tax policy. The World Bank and the Fund will also share responsibilities on issues of banking and financial sector soundness. The Fund will continue to provide advice on banking sector soundness and supervision and systemic issues and the World Bank will provide assistance on microeconomic issues that are critical to strengthen the functioning and enhance the depth of the financial sector. The two country teams agreed to coordinate their policy advice in the financial sector area, where overlaps are more likely.

  • The IFCs’s strategy emphasizes support to the non-oil sector to help economic diversification. To this end, the IFC will help catalyze FDI in non-oil sector projects, which focus on exports, help generate foreign exchange earnings and contribute to the modernization of the countrys’s manufacturing base and basic infrastructure. The IFCs’s strategy for the non-oil sectors involves (i) promoting competition in the banking sector, establishing joint ventures in the non-bank financial sector, technical assistance to private local banks for institutional capacity building; (ii) improving access to finance through credit lines to local private banks for on-lending to small and medium size enterprises (SMEs); (iii) enhancing the business climate and reducing impediments to foreign investments; (iv) supporting agri-business and agro-processing; and (v) creating conditions for private provision of public services.

World Bank contacts:

Christos Kostopoulos (, Senior Country Economist for Azerbaijan. Phone (202) 473-8143.

Christian Petersen (, Lead Economist for the South Caucus. Phone (202) 473-3965.

Azerbaijan: JMAP Implementation

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Annex III: Azerbaijans’ Relations with the EBRD

(As of March 31, 2008)

As of March 31, 2008, the European Bank for Reconstruction and Development (EBRD) had signed 79 investments in Azerbaijan with cumulative commitments totaling EUR725.7 million. Current Portfolio Stock equals to EUR478.2 million. The EBRDs’s first operation-the rehabilitation of Yenikend power plant, was signed in December 1994. Since then, the pace and composition of portfolio growth has varied significantly from year to year.

During 2007, the EBRD signed 27 transactions in Azerbaijan for EUR122 million. In 2007, the Bank provided an additional EUR 65.3 million to Azerenerji, the public power utility for the rehabilitation of the countrys’s largest power generation facility, AZDRES. The EBRD has invested additional funds in Milk-Pro, the largest diary producer in Azerbaijan. Three more Azerbaijani commercial banks became clients of EBRD in 2007 increasing the number of partner banks to nine. The EBRD has signed two syndicated loans under the A/B structure for two local commercial banks. In addition, two leading non-bank microfinance institutions, received funding from EBRD in 2007, with co-financing from the BP-led Regional Development Initiative (RDI). A loan agreement with another non-bank microfinance institution was signed in the second half of 2007. In 2007, the EBRD signed four projects in agribusiness and general industries sectors under the co-financing facility and has provided equity and debt financing to Unileasing (privately owned leasing company).

The ratio of private sector projects in the portfolio now stands at 51 percent. A new, three-year EBRD Country Strategy for Azerbaijan was approved in September 2007. The Strategy sets a number of objectives directed towards the development of enterprise, financial institutions, infrastructure and energy sectors. The EBRD will contribute to the development of the non-oil sector by making direct debt and equity investments and via support to the financial sector. Micro-, small- and medium-sized enterprises will continue to be the primary target for these investments using the instruments available under the ETC Initiative. A special emphasis will be on provision of financial resources to regions outside Baku through the banks’ expanding branch networks and providing increased support to the agriculture sector. In the infrastructure and energy sectors, the main focus will be in financing projects and pursuing an active policy dialogue for reforms in the transport, power, municipal infrastructure and environmental clean-up. The EBRD is already taking the lead in policy dialogue with the Government particularly in the power sector and will help drive key sector reforms, legislative and regulatory changes, and attraction of the private sector.

Azerbaijan is part of the “Early Transition Countries” (ETC) initiative. Launched in April 2004, the initiative aims to increase investments in the Banks’s eight countries of operation in the early transition stage. The initiative builds on international efforts to address poverty in these countries. Through this initiative, the EBRD focuses its efforts on private sector business development and selected public sector interventions. It aims to stimulate market activity by using a streamlined approach to financing, focusing on smaller projects, mobilizing more investment, and encouraging ongoing economic reform. The Bank will accept higher risk in the projects it finances in the ETCs, while still respecting principles of sound banking.

Azerbaijan: EBRD Portfolio

As of March 31, 2008

(EUR, million)

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Annex IV. Azerbaijan: Statistical Issues

1. Economic and financial statistics provided to the Fund are broadly adequate for surveillance purposes. Although the authorities have made significant progress in improving the quality and timeliness of their macroeconomic statistics, a number of weaknesses should be addressed, particularly in the areas of national accounts, price statistics, and external sector statistics. STA has provided extensive technical assistance and recommendations in these areas.

2. Azerbaijan has participated in the GDDS since mid-2001. In April 2002, a data ROSC mission reviewed Azerbaijans’s data dissemination practices against GDDS guidelines and conducted an assessment of the quality of national accounts, consumer price index (CPI), producer price index (PPI), government finance, monetary, and balance of payments statistics. The data module of the ROSC is available on the IMFs’s external website. Azerbaijan nominated a national SDDS Coordinator in August 2005. An SDDS assessment mission in April 2007 provided technical assistance on the outstanding issues required for SDDS subscription. A data ROSC module to reassess the Consumer Price Index (CPI) took place in February 2008.

A. Real Sector

National accounts and price statistics

3. Under STAs’s national accounts project, significant technical assistance has been provided to the State Statistics Committee (SSC) and progress has been made in a number of areas. Methods for compiling gross national income have been improved and revised estimates disseminated; quarterly national account estimates at constant prices for 1998–2004 have been compiled; capital investment data have been revised; estimates of undeclared wages have been made; and a new methodology for calculating price indices for the construction and transportation sectors is well underway. The March/April 2005 mission identified the following problems: (i) the Oil Funds’s transactions are not adequately reflected in the national accounts due to lack of information from the Oil Fund; (ii) the SSC does not have sufficient information to make reliable estimates of remittances from domestic residents working abroad; and (iii) there are no estimates of informal sector activity.

4. In January 2005, the CPI was revamped: the consumption basket was expanded to cover 585 items and expenditure weights updated to reflect recent consumption patterns. With respect to regional coverage, which is now expanded to 54 regions, the SSC used population-based weights in the aggregation of elementary price indices. However, this treatment raised methodological questions, because (i) international best practices suggest the use of expenditure-based weights in every stage of aggregation in CPI compilation, and (ii) population shares are not reliable proxies for regional expenditure shares. The recent reassessment of the CPI found that expenditure weighting for regional aggregation has now been implemented, but noted that expenditures on owner-occupied housing are inadequately represented by expenditure for maintenance and repairs.

B. Fiscal Sector

5. Recent treasury modernization efforts are expected to improve the compilation of fiscal data. With the assistance of a Fund peripatetic advisor, the Ministry of Finance developed the treasury chart of accounts (COA), an essential input to the new treasury system. The October 2006 STA government finance statistics mission found the latest draft COA broadly consistent with the Government Finance Statistics Manual, 2001. The work on the COA is proceeding in parallel with the computerization of Treasury operations.

6. The 2002 data ROSC mission recommended expanding the coverage of government finance statistics by including all operations recorded by the treasury and publishing details on financing and debt outstanding. Starting in 2006, the state budget incorporates transfers to Nakhichevan as a separate expenditure item, but no further details are provided.

C. Monetary Sector

7. The Azerbaijan National Bank (ANB) compiles monetary statistics according to the methodology of the Monetary and Financial Statistics Manual. The ANB reports monetary data to STA within three weeks after the end of the reference month, via Standardized Report Forms (SRFs). Monetary and financial data have also been published in the International Financial Statistics(IFS) Supplement since December 2006.

D. External Sector

8. Starting in November 2006, a Regional Advisor in External Sector Statistics to Azerbaijan and Georgia has been stationed in Baku to (i) facilitate activities carried out by different government agencies in the development of external sector statistics; (ii) assist with statistical capacity building; (iii) coordinate the technical assistance activities of STA with the MCDs’s work program; and (4) assist the authorities in coordinating with other international institutions and bilateral agencies involved in technical assistance in statistics in Azerbaijan and Georgia.

9. While the overall structure of the balance of payments (BOP) statistics is broadly consistent with the fifth edition of the Balance of Payments Manual, several compilation weaknesses remain. These include (i) insufficient data on FDI stocks and flows that prompt inadequate estimates for FDI income and impede the proper treatment of profit taxes of the oil sector; (ii) undercoverage of nonguaranteed external debt and inconsistencies with the relevant creditor source data; (iii) incorrect treatment of operational leases of mobile equipment; and (iv) an inadequate breakdown between FDI equity and other capital, which is necessary to properly record transactions associated with the Baku-Tbilisi-Ceyhan Pipeline, Shah-Denis gas field, and South Caucasus Pipeline.

10. The ANB has made steady progress toward implementing the short-term measures recommended by the 2002 data ROSC mission. Almost all short-term measures have now been completed: the methodology for compiling reserve assets has been revised to exclude the Oil Fund assets, and they are now classified as other investment assets of the government; a new survey form for oil sector enterprises (IOCs) has been designed and distributed to international oil consortia; and the scope and classification of BOP statistics have been improved. However, the data provision from IOCs remains insufficient, which hampers the compilation of foreign direct investment estimates due to inconsistencies in timing, coverage, and valuation of the source data.

11. To date, significant progress has also been made in implementing the data ROSC medium-term recommendations. Starting with data for the third quarter of 2005, the classification of services has been expanded, and data on reinvested earnings have been included in the BOP. The compilation system appears to be facing some operational problems due to the lack of collaboration with other data-producing agencies, such as the Oil Fund. Problems also remain with the sources and methods, particularly with regard to short-term liabilities. No data are available on intercompany lending to direct investment enterprises, and trade credit transactions are estimated on the basis of trade statistics and the International Transactions Reporting System (ITRS) data with no clear distinction between asset and liability transactions.

12. The ANB has initiated compilation of the International Investment Position (IIP) statistics, but the IIP statement is still at an evolving stage. The IIP data have been published in the IFS since 2002.

13. Statistics for public and publicly guaranteed external debt are reported quarterly on a due-for-payment basis with a lag of one to two months. A debt service schedule for public and publicly guaranteed external debt, separately identifying the principal and interest components, is also provided with a one quarter lag. However, systematic information on nonguaranteed external debt, including a sectoral breakdown, is lacking. The law on external debt, which includes the assignment of responsibility for external debt compilation, has been drafted and provided to the Parliament. On external debt, the 2005 BOP mission noted that it would be desirable to use balance sheet data from commercial banks pertaining to banking sector liabilities, which would permit presentation of information with a breakdown by maturities and instruments.

14. Monthly data on total official reserve assets and daily ANB net interventions in the foreign exchange market are provided within 15 days of the end of each month. Data on official reserves during the month are provided on request from Fund staff. Azerbaijan does not disseminate International Reserves and Foreign Currency Liquidity Template data, but the ANB and the government have stated that there have not been any forward or futures transactions that could give rise to contingent short-term net drains on foreign currency assets.

Azerbaijan: Table of Common Indicators Required for Surveillance

AS of April 15, 2008

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Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discount rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Reflects the assessment provided in the data ROSC published on March 20, 2003 and based on the findings of the mission that took place during April 8–23, 2002 for the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning (respectively) source data, statistical techniques, assessment and validation of source data, assessment and validation of intermediate data and statistical outputs, and revision studies.