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.
On May 3, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Azerbaijan.1
Background
Economic growth recovered in 2012, reaching 2.2 percent on the back of a more moderate decline in oil output than in 2011 and continued strong non-oil growth of 9.6 percent, supported by public spending. Shortfalls from new wells and maintenance issues continue to reduce oil output for a second year in a row. Inflation dropped sharply to an average of 1.1 percent in 2012, mainly reflecting the impact of global and domestic food price trends. The manat exchange rate has appreciated by less than 2 percent against the U.S. dollar since November 2010. The external position remains strong, supported by high oil prices and sizeable public assets accumulation which could reach about 66 percent of GDP by the end of 2012.
Expansionary fiscal policy continued in 2012 with the non-oil fiscal primary deficit increasing to 45 percent of non-oil GDP from 41 percent in 2011. The non-oil deficit will increase further in 2013 if the government implements the large public investment program approved in the budget.
Monetary policy turned accommodative in late 2012 and early 2013 as the Central Bank of Azerbaijan (CBA) lowered its benchmark refinancing rate by 250 basis points in December and then again in February, partly in response to low inflation. Direct lending to the real economy by the CBA surged in 2012, though macro prudential measures are being developed to slow the rapid growth in private sector credit, particularly consumer loans. With a view to foster consolidation and competition in the banking system, the CBA increased the minimum capital requirements for banks by fivefold. There remains little progress in the restructuring of the International Bank of Azerbaijan, the systemic public bank
Near-term economic prospects are generally positive, though with an increasing risk of overheating and the deepening of fiscal vulnerabilities. Overall GDP growth is expected at around 4 percent in 2013 and similar levels over the medium term, driven by government spending. With the non-oil economy hitting capacity constraints and expansionary fiscal policy, headline inflation is projected to reach 7 percent by end-year, above the CBA’s 5–6 percent target range, for an annual average of 3½ percent. Inflation could rise to above 6 percent over the medium term. Projections for the external position remain favorable, sustained by continued high oil prices. Risks emanate mainly from a fall in oil prices given Azerbaijan’s low reliance on non-oil exports. But large foreign assets could provide sufficient buffer to mitigate the impact of future shocks, including a sharp and sustained decline in oil prices.
Executive Board Assessment
Executive Directors welcome Azerbaijan’s rapid growth in recent years and its strong buffers against external instability, but noted that critical challenges lie ahead. Continued expansionary policies may be fueling short-term risks to macroeconomic stability, while the depletion of oil reserves undermines the medium-term viability of the development strategy. Directors considered that high oil prices at present offer a good opportunity to adjust the course of economic policies from a position of relative strength.
Directors cautioned that continued growth in public spending is exacerbating the budgetary dependence on oil revenues and increasing the risks from a fall in global oil prices. Accordingly, most Directors encouraged the authorities to undertake a moderate front-loaded fiscal consolidation, which would create room for private sector activity. Fiscal adjustment could be achieved by improving the efficiency of public spending, including through a better selection of capital projects, and by strengthening public financial management and revenue collection.
More broadly, Directors encouraged the authorities to revamp the fiscal policy framework in line with recent IMF guidance for resource-rich developing countries. A fiscal rule and strong institutional arrangements consistent with international best practice could strengthen fiscal discipline, particularly at times of high oil prices, boost fiscal sustainability, and promote a sound management of oil revenue.
Directors supported the readiness of the Central Bank of Azerbaijan (CBA) to tighten monetary policy if price pressures intensify. They also suggested that the CBA discontinue its direct lending to the real economy, which was meant to be a temporary response to the global economic crisis. Looking ahead, they agreed that a gradual move toward greater exchange rate flexibility would improve the economy’s ability to absorb shocks as the share of non-oil exports grows.
Directors noted the assessment that the financial sector remains sound. They welcomed ongoing efforts to preserve financial sector stability, including by recapitalizing some banks and adopting prudential measures to contain the growth of consumer credit. Directors encouraged the authorities to continue strengthening the supervisory framework and to restructure the largest bank.
Directors supported the government’s 2020 vision of making Azerbaijan a competitive and diversified economy. They observed that the development of non-oil exports will require ambitious structural reforms to reduce formal and informal barriers to trade and competition, improve the business climate, facilitate access of private companies to capital, and combat corruption and money laundering.
Public Information Notices (PINs) form part of the IMF’s efforts to promote transparency of the IMF’s views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.
Azerbaijan: Selected Economic Indicators, 2009–14
Includes the production and processing of oil and gas.
Includes the transportation of oil and gas (except transportation through the western route)
Defined as gross domestic demand (excluding hydrocarbon imports) divided by average broad money.
Azerbaijan: Selected Economic Indicators, 2009–14
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||
|---|---|---|---|---|---|---|---|---|
| Prel. | Proj. | Proj. | Proj. | |||||
| (Annual percentage change) | ||||||||
| Real economy | ||||||||
| GDP at constant prices | 9.3 | 5.0 | 0.1 | 2.2 | 4.1 | 5.8 | ||
| Oil sector 1/ | 14.8 | 5.0 | −9.8 | −5.3 | −1.9 | 2.0 | ||
| Non-oil sector 2/ | 3.0 | 7.6 | 9.4 | 9.6 | 8.6 | 8.4 | ||
| CPI (end-of-period) | 0.7 | 7.9 | 5.6 | −0.3 | 7.0 | 6.5 | ||
| (In percent of GDP, unless otherwise) | ||||||||
| Consolidated government | ||||||||
| Fiscal balance | 7.0 | 14.6 | 13.3 | 4.0 | −2.7 | −4.3 | ||
| Non-oil primary fiscal balance (in percent of non-oil GDP) | −35.5 | −36.3 | −40.9 | −45.0 | −46.9 | −44.3 | ||
| (Annual percentage change) | ||||||||
| Money and credit | ||||||||
| Manat base money | 1.7 | 31.6 | 29.4 | 27.1 | 17.7 | 18.8 | ||
| Manat broad money | 9.9 | 34.8 | 32.5 | 25.5 | 28.4 | 30.2 | ||
| Banking sector credit to the private sector | 25.6 | 6.6 | 18.1 | 20.8 | 17.4 | 17.6 | ||
| Velocity of total broad money (M3) 3/ | 3.0 | 2.8 | 2.6 | 2.4 | 2.5 | 2.4 | ||
| (In percent of GDP, unless otherwise) | ||||||||
| Balance of payments | ||||||||
| Current account balance (-, deficit) | 23.0 | 28.0 | 26.5 | 20.3 | 10.6 | 6.0 | ||
| External public debt | 7.7 | 7.4 | 7.3 | 9.2 | 11.5 | 11.0 | ||
| Gross official international reserves | ||||||||
| In billions of US$, end of period | 5.3 | 6.7 | 10.9 | 12.1 | 14.1 | 14.6 | ||
| In months of next year non-oil imports, c.i.f. | 7.6 | 6.1 | 9.5 | 8.1 | 8.2 | 7.7 | ||
| Exchange rate | ||||||||
| End-of-period (Manat/US$) | 0.803 | 0.798 | 0.787 | … | … | … | ||
| Real effective exchange rate | ||||||||
| (percentage change, “-”=depreciation) | 14.0 | 1.1 | 2.5 | … | … | … | ||
Includes the production and processing of oil and gas.
Includes the transportation of oil and gas (except transportation through the western route)
Defined as gross domestic demand (excluding hydrocarbon imports) divided by average broad money.
Azerbaijan: Selected Economic Indicators, 2009–14
| 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | |||
|---|---|---|---|---|---|---|---|---|
| Prel. | Proj. | Proj. | Proj. | |||||
| (Annual percentage change) | ||||||||
| Real economy | ||||||||
| GDP at constant prices | 9.3 | 5.0 | 0.1 | 2.2 | 4.1 | 5.8 | ||
| Oil sector 1/ | 14.8 | 5.0 | −9.8 | −5.3 | −1.9 | 2.0 | ||
| Non-oil sector 2/ | 3.0 | 7.6 | 9.4 | 9.6 | 8.6 | 8.4 | ||
| CPI (end-of-period) | 0.7 | 7.9 | 5.6 | −0.3 | 7.0 | 6.5 | ||
| (In percent of GDP, unless otherwise) | ||||||||
| Consolidated government | ||||||||
| Fiscal balance | 7.0 | 14.6 | 13.3 | 4.0 | −2.7 | −4.3 | ||
| Non-oil primary fiscal balance (in percent of non-oil GDP) | −35.5 | −36.3 | −40.9 | −45.0 | −46.9 | −44.3 | ||
| (Annual percentage change) | ||||||||
| Money and credit | ||||||||
| Manat base money | 1.7 | 31.6 | 29.4 | 27.1 | 17.7 | 18.8 | ||
| Manat broad money | 9.9 | 34.8 | 32.5 | 25.5 | 28.4 | 30.2 | ||
| Banking sector credit to the private sector | 25.6 | 6.6 | 18.1 | 20.8 | 17.4 | 17.6 | ||
| Velocity of total broad money (M3) 3/ | 3.0 | 2.8 | 2.6 | 2.4 | 2.5 | 2.4 | ||
| (In percent of GDP, unless otherwise) | ||||||||
| Balance of payments | ||||||||
| Current account balance (-, deficit) | 23.0 | 28.0 | 26.5 | 20.3 | 10.6 | 6.0 | ||
| External public debt | 7.7 | 7.4 | 7.3 | 9.2 | 11.5 | 11.0 | ||
| Gross official international reserves | ||||||||
| In billions of US$, end of period | 5.3 | 6.7 | 10.9 | 12.1 | 14.1 | 14.6 | ||
| In months of next year non-oil imports, c.i.f. | 7.6 | 6.1 | 9.5 | 8.1 | 8.2 | 7.7 | ||
| Exchange rate | ||||||||
| End-of-period (Manat/US$) | 0.803 | 0.798 | 0.787 | … | … | … | ||
| Real effective exchange rate | ||||||||
| (percentage change, “-”=depreciation) | 14.0 | 1.1 | 2.5 | … | … | … | ||
Includes the production and processing of oil and gas.
Includes the transportation of oil and gas (except transportation through the western route)
Defined as gross domestic demand (excluding hydrocarbon imports) divided by average broad money.
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.