Republic of Azerbaijan: 2010 Article IV Consultation Informational Annex
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This paper presents the key findings of the Republic of Azerbaijan’s 2010 Article IV Consultation. In 2009, overall GDP grew at 9.3 percent, but non-oil GDP growth slowed from 16 percent to 3 percent, fiscal and export revenues fell by more than 30 percent, and credit and liquidity conditions tightened substantially. Owing to the authorities’ appropriate policy response, the exchange rate remained stable, inflation dropped dramatically, official poverty rates continued to fall, and financial stability was maintained.

Abstract

This paper presents the key findings of the Republic of Azerbaijan’s 2010 Article IV Consultation. In 2009, overall GDP grew at 9.3 percent, but non-oil GDP growth slowed from 16 percent to 3 percent, fiscal and export revenues fell by more than 30 percent, and credit and liquidity conditions tightened substantially. Owing to the authorities’ appropriate policy response, the exchange rate remained stable, inflation dropped dramatically, official poverty rates continued to fall, and financial stability was maintained.

Annex I. Azerbaijan: Relations with the Fund

(As of March 31, 2010)

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 Payments to Fund:

(SDR million; based on existing use of resources and present holdings of SDRs)

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VII. Safeguards Assessment

Under the Fund’s safeguards assessment policy, the Central Bank of Azerbaijan (CBA) was subject to an assessment with respect to the PRGF arrangement that was approved on July 06, 2001, and expired on July 5, 2004. The assessment was completed on March 11, 2002, and it was concluded that the external audit and financial reporting were adequate. The assessment proposed a set of measures to strengthen internal control, data reporting to the Fund, and the legal framework. The majority of the recommendations were implemented, except for the recommendation to establish an Audit Committee. The external audit of 2009 CBA financial statements is scheduled to be completed by end-April 2010, and the audit report is expected to be published immediately afterwards.

VIII. Exchange Rate Arrangements

The currency of Azerbaijan is the manat, which became sole legal tender on January 1, 1994. The de jure exchange rate regime has been a peg to a euro-dollar basket since March 2008, but the de facto regime has been stabilized against the U.S. dollar since June 2008.

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 2008 Article IV consultation with Azerbaijan was concluded on May 23, 2008.

X. ROSCs

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 completed in July 2008 (IMF Country Report No. 08/273).

XI. Resident Representative

In October 2009, Mr. Koba Gvenetadze ended his term as IMF Resident Representative in Azerbaijan. Since November 2009, the IMF no longer has a Resident Representative in Azerbaijan, but the IMF Office in Baku, located in the building of the Ministry of Finance of Azerbaijan, continues to operate, headed by Ms. Aghgun Gadirli (Office Manager).

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 to 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 to April 1996. He was succeeded by Mr. Peter Barrand, who was stationed in Baku from January 2001 to December 2002. Mr. Isaac Svartsman was resident advisor in the CBA for bank supervision and restructuring from September 1998 to April 2001. Ms. Nataliya Ivanik was stationed in Baku as a STA regional external sector statistics advisor from November 2006 to November 2008.

Azerbaijan: Technical Assistance, 2003–10

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Annex II. Azerbaijan: Relations with the World Bank

(As of April 8, 2010)

1. The World Bank has been actively implementing a Country Partnership Strategy (CPS) that supports poverty reduction and improves economic management in Azerbaijan. The CPS for 2007-10 has been focusing on four key pillars: (i) improving public sector governance; (ii) fostering non-oil economy growth; (iii) strengthening social services; and (iv) improving environmental management. Over this period, the Bank has provided about $1.5 billion in lending with a heavy emphasis on water supply, highways, railways, public sector institutions, and rural investments. On the analytical side, the Bank has completed a Country Economic Memorandum (“A New Silk Road: Export-Led Diversification”), a Programmatic Poverty Assessment, and a Corporate Governance ROSC. The Bank recently organized a High Level Forum, chaired by the Prime Minister and the Bank’s Managing Director, that brought together key government officials, international practitioners and academics, and Bank staff to review key challenges and policy options for improving competitiveness and export diversification of the non-oil sectors in the post-crisis environment.

2. The World Bank Group is currently preparing a new CPS for Azerbaijan for the period 2011–14. The strategic framework of the CPS will likely rest on three pillars: (i) promoting economic diversification and competitiveness; (ii) strengthening human capital for growth with equity; and (iii) supporting sustainable development. Bank staff expects to present the new CPS to the Board in the fall of 2010.

3. The strategy of the International Finance Corporation (IFC) focuses on supporting the non-oil sector to help economic diversification. To this end, the IFC aims to catalyze foreign direct investment in non-oil sector projects and to contribute to the modernization of the country’s financial sector, its agriculture, its manufacturing base, and basic infrastructure. The IFC’s strategy for the non-oil sector involves (i) promoting competition and improving corporate governance in the banking sector; (ii) establishing joint ventures in the nonbank financial sector; (iii) providing technical assistance to private local banks for institutional capacity building; and (iv) improving access to finance through credit lines to local private banks for on-lending to small and medium size enterprises.

4. Relations between the Bank and the Fund concerning Azerbaijan are very good in terms of coordinated policy advice and collaboration on macroeconomic monitoring. There is also broad agreement between the Bank and the Fund on the division of labor between the two institutions. The Bank’s investment operations and analytical activities will continue to focus on the areas of competitiveness and sustainability of economic outcomes, infrastructure provision, budgeting and public expenditure management, education, private sector development, and other sectoral issues, as well as some financial sector issues as outlined in the three pillars of the upcoming CPS. The Fund will continue to focus on macro-critical areas, and will share responsibilities with the Bank on banking and financial sector soundness, taking care to coordinate closely so as to minimize overlap and ensure harmonization of policy advice.

World Bank contacts:

Anthony Cholst (ACholst@worldbank.org), Lead Country Officer, South Caucasus Management Unit. Phone (202) 458-0324.

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

Annex III. Azerbaijan: Relations with the EBRD

(As of December 31, 2009)

1. As of December 2009, the EBRD has signed 114 projects in Azerbaijan for a cumulative business volume of US$1.6 billion (including regional projects). The current portfolio stock amounts to US$979 million, and the ratio of private sector projects in the portfolio now stands at 62 percent.

2. The infrastructure sector (municipal infrastructure, transport, and power) dominates EBRD’s portfolio, representing 34 percent. EBRD financed three power projects for a total of US$281 million, making Azerenergy, Azerbaijan’s state-owned power utility, EBRD’s single largest client. EBRD also financed five transport projects and one municipal project for a total of US$201 million. The natural resource sector represents about 25 percent of the portfolio. EBRD financed 16 natural resource projects for a total of US$571 million, including several landmark transactions such as BTC, ACG, and Shah Deniz. The corporate sector represents about 22 percent of EBRD’s portfolio. EBRD financed 15 projects for a total of US$224.7 million, including two projects with Garadagh Cement, EBRD’s second largest client in Azerbaijan. The financial sector represents 18.6 percent of EBRD’s portfolio but covers 73 projects, more than any other sector.

3. In 2009, EBRD invested a total of US$232 million in 9 projects. This included a EUR 120 million loan to Garadagh Cement—EBRD’s largest loan in the non-oil sector of Azerbaijan to-date—that will implement a state-of-the-art dry process cement production technology, significantly reducing energy consumption and CO2 emission. The other projects in 2009 were in the financial sector. EBRD also worked closely with Azerenergy to generate carbon credits under the Clean Development Mechanism (CDM) established by the Kyoto Protocol. In July 2009, Azerenergy signed an Emission Reduction Purchase Agreement (ERPA) to sell carbon credits generated by the rehabilitation of the Azdres Thermal Power Plant financed by EBRD. The project is expected to reduce CO2 emissions by three million tons annually. This is a landmark deal that involved the development of a new CDM methodology for power plant rehabilitation projects. The methodology, which was developed with EBRD’s assistance, can now be applied worldwide. EBRD is preparing a new country strategy for Azerbaijan for 2010–13. The strategy will be provided to the government for comments in early May, posted on EBRD’s website for public consultation in late July, and is expected to be adopted by EBRD’s board of directors in late September. The central theme of the strategy will be EBRD’s support to the development of Azerbaijan’s non-oil economy through investments in financial institutions, private enterprise, and infrastructure.

4. Azerbaijan is part of EBRD’s Early Transition Countries (ETC) initiative. Launched in April 2004, this initiative aims to increase investments in EBRD’s eight countries of operation in the early transition stage, while building 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. EBRD will accept higher risk in the projects it finances in the ETCs, while still respecting the principles of sound banking.

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 Azerbaijan’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 IMF’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) completed in July 2008.

A. Real sector

National accounts and price statistics

3. Under STA’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 Fund’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, although the SSC did use population weights for regional aggregation through 2006, it has weighted regional indexes by expenditure since 2007, using 2006 Household Budget Survey results on household expenditure, while 2009 data are based on 2008 expenditure weights.

5. Given that property prices are thought to be inflating rapidly in urban centers, it is important for the SSC to measure both the asset and rental prices of housing. Accordingly, the 2008 CPI reassessment mission suggested compiling a house price index, which would provide an estimate of inflation for the capital formation component of household final expenditure. The SSC has been considering proposing such an index for its statistical development program, as a new price indicator distinct from its consumption-based CPI.

B. Fiscal sector

6. 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.

7. 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

8. The Azerbaijan National Bank (CBA) compiles monetary statistics according to the methodology of the Monetary and Financial Statistics Manual. The CBA 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

9. Azerbaijan’s balance of payments (BOP) statistics are compiled and disseminated by the CBA and are broadly in accordance with the fifth edition of the Balance of Payments Manual (BPM5). The CBA has also initiated compilation of International Investment Position (IIP) statistics. The IIP data for 2002–2008 have been published in IFS; however, the authorities have indicated that they have discontinued the official publication of IIP data effective 2009.

10. During November 2006–November 2008, a Regional Advisor in External Sector Statistics to Azerbaijan and Georgia was 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 MCD’s work program; and (iv) assist the authorities in coordinating with other international institutions and bilateral agencies involved in technical assistance in statistics in Azerbaijan and Georgia. Moreover, Azerbaijan has benefited from a STA technical assistance mission in external sector statistics, which visited Baku in October 2009 to further assist the authorities with addressing a number of outstanding issues related to the compilation and dissemination of external sector statistics.

11. The 2009 mission found that appropriate statistical legislation to assign responsibilities for compilation and dissemination of external sector stocks statistics (IIP and gross external debt) has yet to be developed. A draft Presidential Decree On Improvement of the Gross External Debt and International Investment Position Statistics of Azerbaijan was developed in order to authorize the CBA to compile private and public debt data from relevant agencies, but still has not been approved. As a result, the CBA temporarily discontinued dissemination of IIP statistics and the development of the compilation system for the IIP and gross external debt statistics. The mission recommended the authorities to address these issues, as they would affect the timing of Azerbaijan’s subscription to the SDDS. The mission also expressed concerns with regard to the pace of implementation of the strategic framework for the development of external sector statistics. However, the authorities note that recent changes in staffing have led to improvements in this area.

12. The 2009 mission also found that, in spite of the CBA’s efforts, data sharing and data provision remain a challenge for the compilation of external sector statistics. Consequently, the mission recommended to set up a formal, high-level structure for data sharing and data provision. Moreover, given the outstanding issues related to data sharing and data provision by various respondents, and non-reporting by major market participants, the mission considered that the existing International Transactions Reporting System (ITRS) should be further developed, including by changing the ITRS design to introduce a closed ITRS, and by further improving ITRS verification procedures via the on-site inspection of reporting banks.

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. 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 CBA 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 CBA 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. STA has recently advised the authorities on the definition and coverage of gross official reserve assets. As the authorities indicated that several definitions of gross official reserve assets are used, STA stressed the importance of using only one definition, more specifically the definition that follows the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6). STA will continue to provide advice to the authorities for the correct compilation of Azerbaijan’s gross official reserve assets.

Azerbaijan: Table of Common Indicators Required for Surveillance

(As of April 16, 2010)

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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, extrabudgetary 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.

1

Following the Low Income Countries (LIC) reforms, effective January 7, 2010, the PRGF arrangements were renamed the Extended Credit Facility (ECF) Arrangements.

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