Republic of Azerbaijan: Staff Report for the 2013 Article IV Consultation—Informational Annex

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Relations with the Fund

(As of February 28, 2013)

Membership Status

Date of membership: September 18, 1992;

General Resources Account

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SDR Department

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Outstanding Purchases and Loans

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Latest Financial Arrangements

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Projected Payments to the Fund

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

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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 2011 CBA financial statements was completed by April 2012, and the audited financial statements along with the audit opinion has been published on the bank’s website as an integral part of 2011 annual report.

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 is “other managed arrangement” since March 2011, but the de facto regime remains as “stabilized arrangement”, based on the authorities’ policy to allow greater exchange rate flexibility since late 2010.

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.

Article IV Consultation

The 2011 Article IV consultation with Azerbaijan was concluded on January 9, 2012.

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).

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).

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, 2003–13

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Relations with the World Bank

(As of March 2013)

1. The World Bank is currently implementing a two-pillar Country Partnership Strategy (CPS) that focuses on: (i) building a competitive non-oil economy; and (ii) strengthening social and municipal services; with a strong cross-cutting theme of governance and anticorruption.

2. This strategy builds on the Governments own development strategies and includes: (a) Under Pillar I, strengthening the non-oil economy, primarily through an improved business environment, better infrastructure and agriculture improvements, and (b) Under Pillar 2, improving the effectiveness of social and community services, including health, education, social protection and water supply.

3. During the current CPS period, the Bank has increased its focus on implementation of existing operations and only considered new operations in selected areas with a strong record of sufficient institutional capacity and ownership.

4. The ongoing FY11–14 CPS Progress Report (CPS PR) assesses the objectives of the CPS as relevant in the long run and refines the WBG program for FY13–14 to adjust to the changing environment

5. The Progress Report confirms the Bank’s stance on modest and selective lending. The program for FY13–14 is expected to be in line with the Government’s own borrowing plans of US$120–150 million per year from IBRD. This program will focus on sectors in which external borrowing from international financial institutions is economically and socially justified based on expected returns, knowledge and technology transfer, and proven implementation capacity. Specifically, projects to be proposed by the Bank will support improved competitiveness in agriculture, solid waste management, water supply and sanitation, judicial modernization, roads and health sectors.

6. IFC’s active portfolio as of June 30, 2012 consisted of five projects focused on improving the business enabling environment, strengthening bank financial markets infrastructure, and helping microfinance institutions to reduce their reliance on grants and operate on a commercial basis. IFC remains engaged in the areas of capital market modernization, crisis management and corporate governance through the regional programs, such as ECA Corporate Governance Project and ECA Banking Advisory.

7. Bank lending will be complemented by a strong program of knowledge services to inform the country growth strategy and policy choices as well as the design of investment operations. The Bank will increase analytic work in the areas of job creation and growth, poverty and inequality, the financial sector, agriculture and irrigation, wastewater, and public expenditures. The set of Policy Notes prepared for the High Level Economic Policy Forum (HELP) focused on economic diversification, agriculture, education, and institutional development. Two important analytical pieces have been delivered within the Programmatic Poverty Assessment. The first Programmatic Public Expenditure Review (PPER) is planned for FY13. Two more analytical pieces have been delivered in FY13, namely on National Solid Waste Strategy and Private Sector Participation in Solid Waste Management, and two more will be delivered, namely, Economic Diversification for Growth, and Fostering Entrepreneurship in South Caucasus.

8. The Government has agreed in principle to partner with the Bank through a reimbursable Joint Economic Research Program (JERP). The Bank and the Government have also established a strong vehicle for policy dialogue in two high level policy fora held for the first time in 2009 and then in March 2012.

9. Relations between the Bank and the Fundconcerning 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.

10. 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:

Larisa Leshchenko (lleshchenko@worldbank.org); Country Program Coordinator, South Caucasus Management Unit Phone (202) 458–1297

Mona Prasad (Mprasad@worldbank.org), Senior Country Economist for Azerbaijan. Phone (202) 458–8757

Relations with the European Bank for Reconstruction and Development (EBRD)

(As of December 31, 2012, Update as of March 2013 in paragraph 5)

1. As of 31 December 2012, the EBRD has invested approximately US$2.1 billion in 130 projects. The current active portfolio amounts to US$861 million of which 85 percent has been disbursed, and operating assets amount to US$559 million. The ratio of private sector projects in the portfolio now stands at around 70 percent.

2. Strategic priorities for the EBRD’s activites in Azerbaijan, set out in the country strategy approved by the Board in 2010, include (i) development of the non-oil sector through investments in the enterprise sector, with an emphasis on agribusiness, and acting as a catalyst to attract much needed foreign investment and know-how; (ii) promoting competition, consolidation as well as foreign investment in the financial sector and assisting in the development of new financial instruments; (iii) supporting the development of microfinance, particularly in the regions, and promoting the expansion of the non-bank financial sector; (iv) supporting infrastructure development with a particular focus on power and energy savings, promoting transparent procurement practices, instilling commercial discipline and improving financial transparency and corporate governance; and (iv) providing advisory services to companies through its Small Business Support (SBS) programmes. The Bank is working on a new three-year strategy for Azerbaijan, expected to be discussed by the Board by end-2013

3. In the energy and natural resources sectors, the EBRD financed several landmark transactions such as the BTC pipeline, AZDRES Power Rehabilitation and the Shah Deniz gas field. The EBRD also financed three power sector projects for a total of US$281 million, making Azerenerji, Azerbaijan’s state-owned power utility, EBRD’s second largest client in the country. Energy and natural resources represents 30 percent of the overall portfolio. The industry, commerce and agribusiness (ICA) sector represents about 10 percent by volume, but 30 percent by number of tranactons and includes major investments across a broad range of segments from building materials to mineral water bottling. In the financial sector (one fifth of the portfolio), EBRD has equity stakes in three Azerbaijani banks and provides funding for on-lending to the MSME sector to a further six banks and four micro-finance institutions. The infrastructure sector, which constitutes 40 percent of EBRD’s portfolio, includes US$250 mln for Regional Roads Reconstruction and Upgrading Project, EBRD’s largest investment in Azerbaijan to date.

4. In 2012, EBRD invested a total of US$109 million in 16 projects. EBRD financed seven projects in the ICA sector including food processing and the development of a retail chain, with the average investment size of less than US$5 million. Four projects were in the agribusiness sector and three in the manufacturing and services sector. In the financial sector, EBRD signed eight projects, including credit lines with two micro-finance organizations and four existing partner banks to be onlent to micro companies and SMEs. There was a marked increase in the amount of EBRD lending in local currency. Subordinated debt was provided to one EBRD investee banks to support tier II capital. EBRD also continued to provide technical assistance in the areas of institution building, credit appraisal and risk management to financial institutions, and accountancy standards, corporate governance to ICA clients.

5. During the first two months of 2013, the EBRD has signed three projects with financial institutions for approximately US$12 million, including first energy efficiency loan in the sector. The Bank expects to sign a further 13 transactions by end-2013, including projects with natural resources, financial institutions, infrastructure and ICA clients.

6. Azerbaijan is a part of the 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

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. The February 2013 mission that visited Baku at the request of the authorities prepared an action plan for the development and publication of discrete quarterly national account statistics.

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. 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.

8. The 2012 STA mission that visited Baku at the request of the authorities, provided assistance with the preparation of financial reports based on the Government Finance Statistics Manual 2001 (GFSM 2001). The mission concluded that while further work is needed on improving the source data for the compilation of these statistics, the present level of development of budgetary accounting and reporting system makes it possible a preliminary compilation and dissemination of the GFS in accordance with the GFSM 2001 on an annual and quarterly basis.

C. Monetary Sector

9. The Central Bank of Azerbaijan (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

10. 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 compilation of IIP data effective 2009.

11. 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.

12. 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, which may be affected by recent staff turnover and a change in the status of the BOP Department (now a division).

13. 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.

14. The 2012 STA mission found low prospects for restarting work on the IIP (annual data were last published for 2008) as the legal position has not changed since STA’s previous mission in 2009 and the data sharing and data provision across government agencies remain a challenge. The mission also discussed the BOP compilation methodology and assumptions, and made several recommendations in the areas of data validation, and in fine tuning the data to the BPM6 specifications. Work on the transition to BPM6 is well underway, with technical assistance provided by the State Secretariat for Economic Affairs (SECO, based in Switzerland).

15. 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.

16. 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 March, 2013)

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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.