Republic of Azerbaijan: Staff Report for the 2016 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Middle East and Central Asia Dept.
Publication Date:
14 Sep 2016
eISBN:
9781475536485
Language:
English
Keywords:
ISCR; CR; center; IMF staff estimate; regime; managed float; fund Dept; financing ADB project; Baku AZ1010; EBRD involvement; direct loan; Government finance statistics; Loans; Global
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Azerbaijan built large buffers and invested heavily during the oil boom years, but efforts to diversify the economy have lagged. The authorities have taken steps to adjust to slumping oil prices and weaker growth in trading partner countries. In 2015, the Central Bank of Azerbaijan (CBA) undertook two devaluations and switched to a managed float. Inflation rose while the large current account surplus evaporated and the budget moved to a deficit. Financial sector soundness deteriorated. Monetary policy has been tightened to address inflation and support the currency. The non-oil primary balanced improved in 2015, but is being reversed in 2016 with a revised budget that boosts capital and current spending. The largest bank is being restructured via a bad bank-special purpose vehicle (SPV) model, some smaller banks have been closed or intervened, and a new integrated financial supervisory agency has been created.

Abstract

Azerbaijan built large buffers and invested heavily during the oil boom years, but efforts to diversify the economy have lagged. The authorities have taken steps to adjust to slumping oil prices and weaker growth in trading partner countries. In 2015, the Central Bank of Azerbaijan (CBA) undertook two devaluations and switched to a managed float. Inflation rose while the large current account surplus evaporated and the budget moved to a deficit. Financial sector soundness deteriorated. Monetary policy has been tightened to address inflation and support the currency. The non-oil primary balanced improved in 2015, but is being reversed in 2016 with a revised budget that boosts capital and current spending. The largest bank is being restructured via a bad bank-special purpose vehicle (SPV) model, some smaller banks have been closed or intervened, and a new integrated financial supervisory agency has been created.

Relations with the Fund (As of June 30, 2016)

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 Type

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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, including the establishment of an Audit Committee. KPMG conducted an independent auditor’s report of the 2015 CBA financial statements by April 25, 2016. The audited financial statements along with audit opinion has been published on the central bank’s website as an integral part of 2015 annual report.

Exchange Rate Arrangements

The currency of Azerbaijan is the manat, which became sole legal tender on January 1, 1994. A bilateral peg against the U.S. dollar had been in place since January 2011, but effective February 16, 2015, the CBA implemented an exchange rate policy based on the currency basket comprising the U.S. dollar and the euro. On February 21, 2015, the CBA devalued the currency by 25 percent relative to the U.S. dollar, and on December 21, 2015, by 32 percent. Since then, as a result of official action, the manat has been allowed to gradually depreciate based upon supply and demand factors vis-à-vis the U.S. dollar. According to Article IV, Section 2(a) of the Fund’s Articles of Agreement, Executive Director Daniel Heller informed to the Secretary that effective December 21, 2015, the CBA changed the de jure exchange regime from “other managed” to “managed floating”. The de facto regime is “other managed” based on the CBA’s periodic weekly auctions (on Tuesdays and Thursdays of each week) with a prescribed +/- 1 percentage point corridor. The amount supplied at the auctions is determined jointly by the CBA and SOFAZ. A ER corridor of +/- 4 percent is also in effect for transactions between banks and their clients. The CBA also stands ready to intervene to smooth out an excess volatility in the market. The CBA publishes its foreign exchange intervention data quarterly.

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

Azerbaijan is on a 12-month Article IV consultation cycle. The 2016 Article IV Board date is set for September 9, 2016. The previous Article IV consultation finalized on May 27, 2014; it was delayed mainly as a result of the authorities’ request for additional time to respond to economic developments.

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, 2003–16

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Azerbaijan: Technical Assistance, 2003–16

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Relations with the World Bank

(As of June 2016)

Azerbaijan became a member of the International Bank for Reconstruction and Development (IBRD) in September 1992 and the International Development Association (IDA) in March 1995 and a member of the International Finance Corporation (IFC) in October 1995. In FY11 Azerbaijan graduated from IDA and became IBRD country.

On July 2015, the World Bank’s Board of Executive Directors endorsed the new Country Partnership Framework (CPF) for Azerbaijan covering FY2016–2020. It is a joint strategy of the World Bank Group aiming to support Azerbaijan on its path toward sustainable, inclusive, and private sector–led growth. The CPF proposed three strategic pillars: (i) Effective Public Service Delivery; (ii) Economic Competitiveness and Growing the Role of the Private Sector; and (iii) Sustainability and Resilience of the economy. Under the two focus areas— Public Sector Management and Service Delivery and Economic Competitiveness— the Bank will help the country strengthen public resource management, facilitate public service delivery, and improve the quality of environmental assets, as well as improve selected infrastructure networks, increase the country’s financial inclusion, reduce the regulatory burden on the private sector, and support economic activities in rural areas.

The CPF envisaged the IBRD indicative financing program for FY2016-2017 in the range of US$300-500 million per annum. Lending volume and composition of projects for outer years would depend on country demand, global economic developments, and portfolio performance as well as IBRD’s lending capacity and demand from other borrowers. The indicative lending program for FY16 included five projects, of which only two – the Third Highway Additional Financing and the IDPs Livelihood Additional Financing have been approved the Bank’s Board of Directors in FY16. Due to the impact of the sharp drop of oil prices and deterioration of the overall economic situation, the originally planned program for FY16-17 has been revisited following to the client’s request.

As of June 2016, the IBRD investment portfolio comprised of fifteen projects under implementation with a total commitment of US$2.185 million, of which US$1.28 million or 58 percent of total commitment has been disbursed. By the end of FY16, five projects will exit the portfolio including the last three IDA projects, leaving the operations entirely with under IBRD going forward. The transport sector dominates the Bank financing, amounting to 50 percent of net commitments. Along with investments in the reconstruction of the road network, the Bank supports a major institutional reform of the motorway operation and maintenance system. Water and sanitation make up 29 percent and 6 percent covers projects focusing on Internally Displaced Persons (IDPs) and rural investments. These projects help to improve both the physical and social infrastructure for IDPs and promote the development of more economic opportunities to contribute to greater economic self-reliance for IDPs. Other sectors include public administration, agriculture, and financial and private sector development.

In addition to IDA/IBRD operations, the portfolio consists of one active trust fund project in the amount of US$2 million – the Swiss State Secretariat for Economic Affairs (SECO) Trust Fund for Azerbaijan – in support of the Financial Sector Modernization.

Bank lending is complemented by a strong program of advisory and knowledge services to inform the country growth strategy and policy choices as well as the design of investment operations. The Bank continues to support education and health sectors through the series of analytical and TA activities as well as the preparation of the Employment Strategy through another TA activity. Extensive technical assistance has been provided to the authorities on capital markets reform, consumer protection, financial inclusion and expansion of services by Azerpost, financial literacy, and stability. The focus of the Advisory Services and Analytics (ASA) is on assessing the constraints to access to finance for non-oil enterprises in Azerbaijan in support of private sector and economic growth.

IFC’s current strategy and operations in Azerbaijan, also guided by the CPF for FY2016-2020, is to support the economic competitiveness agenda and advance economic diversification, particularly in non-oil sectors. Reflecting these priorities, IFC’s focus is on strengthening the financial sector, improving investment climate, and promoting good corporate governance. More efforts will be dedicated to support development of growth-enhancing infrastructure, including through pilot Public-Private Partnership projects, and to invest in competitive private companies, particularly in export-oriented sub-sectors, and the success of these efforts will largely be conditional on the opening of the infrastructure sector to private sector participation and the progress in business climate reforms to reduce regulatory burden for private businesses and encourage greater corporate transparency.

Since the beginning of its operations in Azerbaijan in 1995, IFC has provided long-term financing of about US$460 million, of which about US$70 million was mobilized from partners, to 55 private sector projects in financial sector, agribusiness, manufacturing, and infrastructure1. In addition, IFC has provided trade finance guarantees through local financial intermediaries that facilitated over US$80 million of trade flows. As of June 2016, IFC’s active committed portfolio in Azerbaijan stood at about US$70 million.

IFC’s investments have been complemented by a range of advisory projects aiming to facilitate private sector growth, which are aligned with three broad priorities: (i) Improving the business climate through facilitation of regulatory reforms in the areas of business inspections, licensing, transfer pricing and investment climate for the agri-business sector. Additional advisory programs will be developed to deepen the business climate reforms in the areas of trade facilitation, investment policy and investment promotion. (ii) Expanding access to finance for businesses and individuals by improving the financial infrastructure and regulatory environment related to private credit bureaus and secured transactions, increasing financial literacy, and assisting partner banks to improve risk management, develop sustainable SME banking business, and lend to underserved segments including farmers and women entrepreneurs. Going forward, IFC will also support the development of agricultural insurance system. (iii) Enhancing corporate transparency by helping private companies and financial institutions to improve corporate governance practices, building capacity of local institutions on corporate governance services, training and reporting, and working with regulatory institutions to improve relevant laws and regulations.

In addition to investment and advisory services, IFC has been also working with the State Oil Fund of the Republic of Azerbaijan (SOFAZ), which has committed US$350 million to three funds managed by IFC’s Asset Management Company: the IFC Global Infrastructure Fund, which invests alongside IFC in infrastructure projects in emerging markets; the IFC Catalyst Fund, which invests in funds and projects focused on low-carbon power generation, energy and water efficiency and the resource efficiency sector; and the IFC African, Latin American, and Caribbean Fund, which invests alongside IFC in equity and equity like projects in these regions. This engagement supports SOFAZ’s efforts to diversify its portfolio into sustainable projects by providing access to IFC’s expertise and track record in private equity as well as access to new markets.

World Bank contacts:

Viktoriia Siriachenko (vsiryachenko@worldbank.org)

Country Officer, South Caucasus Country Management Unit, ECA region.

Phone +1-202-458-9733

Congyan Tan (ctan2@worldbank.org),

Country Economist for Azerbaijan.

Phone +1-202-473-3896.

IFC contacts:

Iuliia Mironova (imironova@ifc.org)

IFC Strategy Officer for Russia and Caucasus, ECA region.

Phone: +1-202-473-5655

Aliya Azimova (aazimova@ifc.org)

IFC Country Representative for Azerbaijan

Phone: +994-124977698

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

(As of June 2016)

As at first quarter of 2016, the EBRD has signed a total of 161 projects with cumulative investment value of €2,459 million since initiating its operations in Azerbaijan in 1993. 44 percent of the EBRD’s cumulative investments were made in the energy sector, 11 percent in the financial institutions sector, 36 percent in the infrastructure sector and 8 percent in the corporate sector. In 2015, the EBRD invested a total of €268.8 million in 9 projects in Azerbaijan, all in the private sector, a record number for the EBRD in Azerbaijan.

Amid economic challenges in Azerbaijan, the EBRD remains committed to supporting market-driven diversification of the economy. The EBRD’s focus will be on small and medium enterprises (SME) and financial sector development. The EBRD continues to support the real private sector and stands ready to do more if further reforms are implemented.

Demand for local currency lending has risen sharply since devaluation. In order to support the existing and future clients with local currency loans, the EBRD is working with the authorities on a possible manat bond issue.

The main challenges for the EBRD’s current strategy period (2014-17) in Azerbaijan are as follows:

  • promoting market-driven diversification;

  • developing a sustainable financial sector to support private sector development; and,

  • improving corporate governance and transparency to promote competition and address distortions in the non-oil, non-financial sectors.

The pipeline for 2016 is strong, with the potential ABI of around €1 billion in natural resources (Southern Gas Corridor project), transport sector, municipal and environmental infrastructure and mainly restructuring projects in agribusiness, manufacturing and services.

Azerbaijan will become an important source of gas for the European Union in the next few years. EBRD involvement in strategically important hydrocarbons projects such as Shah Deniz helps to ensure that Azerbaijani SMEs benefit as suppliers and contractors on large projects and that the economy as a whole gains from improved governance and transparency which such projects require. The EBRD has provided two loans to Lukoil, a 10 percent consortium member for Shah Deniz phase I and a syndicated loan for Shah Deniz Phase II, also to Lukoil (EBRD A Loan US$250 million). The EBRD was approached to finance the Southern Gas Corridor to deliver the gas via Turkey and Greece to Italy.

The Institutional Investment Partnership Programme is in late stage negotiations with the State Oil Fund of the Azerbaijan Republic (SOFAZ) to become a limited partner in the EBRD’s first Equity Participation Fund.

The pipeline for the rest of 2016 is dominated by two large transactions: the second tranche of the regional roads program and a further loan for phase one of the Shah Deniz off-shore gas field. Other core transactions are shared equally between industry, commerce and agribusiness (ICA) and financial institutions (FI) sectors, reflecting a healthy balance of opportunities in the developing private sector.

EBRD contacts:

Konstantine Kintsurashvili (kkintsurak@ebrd.com),

Country Manager for Azerbaijan

Phone: +994 12 497 1014

Baku Resident Office

90A Nizami Street,

Landmark III, 3rd Floor

Baku AZ1010, Azerbaijan

Relations with the Asian Development Bank (ADB)

(As of June 2016)

The ADB has provided extensive assistance to Azerbaijan to strengthen its capacity. The ADB helped improve poverty analyses, prepare a strategic development plan, develop policy frameworks, streamline the management of public debt, analyze macroeconomic data, and develop medium-term policies for the rural economy. The ADB also provided advisory assistance to enhance its lending operations in selected sectors, such as water supply and sanitation, transport, and energy.

Projects supported by the ADB in Azerbaijan have seen 240,000 people protected from the effects of flooding, while about 350,000 residents of regional and rural towns have received high-quality and reliable drinking water for the first time. The ADB has helped construct approximately 200 kilometers of new and upgraded highways and rural roads, benefiting the country’s entire population, and it has invested in improved power transmission to deliver energy more reliably and reduce power outages. Other ADB assistance in Azerbaijan has helped raise the living conditions of hundreds internally displaced families, rehabilitated several schools, and provided small loans to those displaced, many of whom are women.

ADB’s assistance to improve Azerbaijan’s transport and energy infrastructure will increase the economy’s efficiency and competitiveness. It will also boost the country’s connectivity within the Central Asia Regional Economic Cooperation (CAREC) region and beyond. The ADB continues to assist with the development of modern urban infrastructure and services across the country, which will provide a platform for a more diversified economy and improve living conditions. Technical support to improve solid waste management and develop renewable energy sources will improve the urban environment and quality of life in Azerbaijan’s regional cities and rural towns. The ADB is also working to further enhance the country’s power distribution network and ensure stable power supply to households and industry.

As of June 16 2016, cumulative public sector loan commitments to Azerbaijan amounted to about US$2.32 billion, of which about US$1.29 billion has been disbursed. Commitments cover 26 public sector loan operations in agriculture and natural resources, health, finance, transport, energy, and water supply and sanitation. These loans were complemented with 32 technical assistance (TA) projects amounting to about US$22.0 million. Since 2014 Azerbaijan is eligible for the ordinary capital resources (OCR) only.

Non-sovereign operations

As a catalyst for private investments, the ADB provides direct financial assistance to non-sovereign public sector and private sector transactions in the form of direct loans, equity investments, guarantees, B loans, and trade finance. Since its inception, the ADB has approved US$738 million in non-sovereign financing for 10 private sector transactions in Azerbaijan. In 2015, the ADB approved a direct loan of US$250 million and US$225 million in B loans to construct offshore gas production platforms as well as subsea wells and pipelines, and to expand an onshore gas-processing terminal. Gas extracted from the second stage development of the Shah Deniz gas field will be delivered to Europe via the Southern Gas Corridor.

The ADB’s Trade Finance Program (TFP) fills market gaps by providing guarantees and loans through partner banks in support of trade. In Azerbaijan, the TFP works with one bank and has supported US$43.8 million in trade for 54 transactions. In addition to filling market gaps, the TFP’s objective is to mobilize private sector capital and involvement in developing Asia. In Azerbaijan, 9.1 percent of trade supported through the TFP was co-financed by the private sector.

Co-financing

Co-financing operations enable ADB’s financing partners, governments or their agencies, multilateral financing institutions, and commercial organizations, to participate in financing ADB projects. The additional funds are provided in the form of official loans and grants, technical assistance, other concessional co-financing, and commercial co-financing such as B loans, risk transfer arrangements, parallel loans and equity, guarantee co-financing, and co-financing for transactions under ADB’s TFP.

By the end of 2015, cumulative direct value-added (DVA) official co-financing for Azerbaijan amounted to US$2.5 million for one investment project and US$2.7 million for six technical assistance projects. Cumulative DVA commercial co-financing for Azerbaijan amounted to US$802.3 million for five investment projects. A summary of projects with co-financing from January 1, 2011 to December 31, 2015 is available at www.adb.org/countries/azerbaijan/cofinancing.

Partnerships

As well as collaborating closely with the Government of Azerbaijan and its agencies, the ADB plays an important role in fostering the country’s membership in CAREC. The ADB facilitates partnerships and encourages dialogue between Azerbaijan and other CAREC countries on issues of transport, energy, trade negotiation, and policy development.

The ADB also collaborates with other multilateral and bilateral development partners, such as the European Bank for Reconstruction and Development, KfW, the Islamic Development Bank, the Japan International Cooperation Agency, the Korean International Cooperation Agency, the State Secretariat for Economic Affairs of Switzerland, the United Nations agencies (including UNIDO, UNICEF and the FAO), and the World Bank.

The ADB works with civil society organizations in Azerbaijan to strengthen the effectiveness, quality, and sustainability of its assistance, while also providing guest lecturers and specialist spokespeople to the country’s leading universities and media outlets.

Procurement

  • Share of ADB’s Procurement Contracts

Each year, the ADB provides loans, grants, and technical assistance to fund projects and activities in its developing member countries, and several billion dollars in contracts to procure goods, works, and consulting services. Most contracts were awarded on the basis of international competition, which is open to firms and individuals from any ADB member, regional or nonregional.

Procurement contracts for goods, works, and related services under loan and grant operations totaled $8.4 billion in 2014 and US$11.12 billion in 2015. Cumulative procurement, as of December 31 2015, was US$145.92 billion.

Procurement contracts for consulting services under loan, grant, and technical assistance operations totaled US$556.05 million in 2014 and US$637.4 million in 2015. Cumulative procurement, as of December 31 2015, was US$10.64 billion.

  • Goods, Works, and Related Services

From January 1, 1966 to December 31, 2015, contractors and suppliers were involved in 199,625 contracts for goods, works, and related services under ADB loan and grant projects worth US$145.92 billion. 107 contracts were awarded to contractors and suppliers from Azerbaijan worth US$915.46 million.

  • Consulting Services

From January 1, 1966 to December 31, 2015, consultants were involved in 48,767 contracts for consulting services under ADB loan, grant, and technical assistance projects worth US$10.64 billion. 102 contracts were awarded to consultants from Azerbaijan worth US$22.18 million.

Future direction

Development priorities for Azerbaijan in the short to medium term will include projects in transport, energy, water and other urban infrastructure services as well as private sector development. The ADB will support the construction of transport corridors, providing linkages with neighboring countries and expanding opportunities for rural communities. ADB’s assistance will help expand the electricity network, and to improve energy efficiency by enhancing power distribution and integrating renewable energy sources. The ADB will provide financing over construction of Shah Deniz Stage II gas developing project to expand production and processing and, diversify regional energy sources. Upgrades to urban infrastructure and services—including public transport, water supply and sanitation, and solid waste management in regional towns and peri-urban areas—will be a priority. Assistance to education sector will help increase level of technical and vocation education, increase supply of skilled labor and provide support to the transition to 12-year education system. The ADB will also leverage in-country expertise to produce and distribute knowledge products and services in Azerbaijan. The ADB will promote regional cooperation, governance and capacity development, environmental sustainability, and the mitigation of climate change. Private sector opportunities will continue to be explored to further diversify the economy, and to help private enterprise play a greater role in industry, trade, small and medium-sized enterprises, and infrastructure.

Azerbaijan and the ADB

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ADB Contacts:

The Azerbaijan government agency handling ADB affairs is the Ministry of Finance.

Mathew Fox is the Director and Richard Sisson is the Alternate Director representing Azerbaijan on the ADB Board of Directors.

Nariman Mannapbekov is the Country Director for Azerbaijan. The Azerbaijan Resident Mission was opened in 2004 and provides the primary operational link for activities between the ADB and the government, the private sector, civil society stakeholders, and development partners. The resident mission engages in policy dialogue, country partnership strategy development and programming, and portfolio management, while also acting as a knowledge base on development issues in Azerbaijan.

Azerbaijan Resident Mission

45A, Khagani Street, Landmark II

3rd Floor, Baku, AZ1010, Azerbaijan

Phone: +994 12 437 3477

Fax: +994 12 437 3475

adbazrm@adb.org

ADB Headquarters

6 ADB Avenue, Mandaluyong City

1550 Metro Manila, Philippines

Phone: +63 2 632 4444

Fax: +63 2 636 2444

Statistical Issues

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, government finance statistics and external sector statistics. With the exception of government finance statistics, STA has provided extensive technical assistance and recommendations in these areas.

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

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 most recent national accounts mission took place in Baku in May 2014 at the request of the State Statistical Committee (SSC). The mission identified the following problems: (i) the staff of the National Accounts and Macroeconomic Statistics Department (NAMSD) is not familiar with the Quarterly National Accounts (QNA) techniques. These techniques are totally different from the procedures used in the existing monthly system. Unfortunately, there are insufficient staff resources dedicated to national accounts (handled by the Deputy Head of the division and one other staff member, both of whom are also engaged in other activities); (ii) there are significant problems with the estimates of agriculture, manufacturing and energy. In particular, the volumes of agriculture have increased significantly faster than the existing annual estimates. The SSC has been investigating these industries’ issues, but has not yet fully resolved the problems; (iii) there are inconsistencies between the annual and quarterly estimates for public administration and the construction industry. Additionally, the benchmark indicator ratios for the construction industry are extremely erratic over all years. There is no obvious reason for this, so the mission recommended that the NAMSD investigate the figures with the data providers; (iv) the treatment of oil production in the industrial production index is not in line with that in the national accounts; (v) the SSC does not have sufficient information to make reliable estimates of remittances from domestic residents working abroad; and (vi) there are no estimates of informal sector activity.

Price Statistics

In 2010, the CPI was revised to update the consumption basket (561 items) and expenditure weights that reflect recent consumption patterns. Prices are collected from 54 geographic areas and disseminated at the national and regional level (nine regional indexes). CPI metadata lack sufficient detail and should be augmented. There is need to expand CPI coverage to include housing (rentals and owner occupied) and to develop a residential property price index.

The SSC compiles a number of producer price indices (PPI) covering agriculture, fishing, forestry, mining, manufacturing, utilities, transportation, postal and communication services, and construction. Ideally, the SSC should compile and release a total out-put PPI that includes all activities. Finally, export and import price indices (XMPI) are also compiled and released. Metadata describing PPI and XMPI lack detail and should be augmented.

B. Fiscal Sector

The Ministry of Finance has worked recently on the delineation of government and built limited capacity on Government Finance Statistics (GFS) compilation and reporting. This has enabled the authorities to report annual general government data according to the methodology of the Government Finance Statistics Manual 2001 (GFSM 2001) for inclusion in the GFS Yearbook. However, the stock positions in assets and liabilities have yet to be reported. The compilation of longer time series, including sub-annual series, to support surveillance and fiscal analysis and policy making, is also needed. While further work is required to improve 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 on a quarterly basis.

To address the fiscal reporting issues, Azerbaijan will participate in a new STA’s three-year regional project to build capacity and improve GFS reporting to be used for fiscal analysis, policy making, and Fund surveillance. STA will assist the authorities to move to the updated GFSM 2014 methodology, strengthen reporting of financial transactions and begin reporting balance sheet positions in assets and liabilities. It is excepted that by the end of the project, Azerbaijan will make progress on the requirements to subscribe to the Fund’s Special Data Dissemination Standard (SDDS) and starts reporting to the World Bank’s Quarterly Public Sector Debt Database (QPSD), which will enhance fiscal transparency and fiscal risk assessment.

C. Monetary Sector

The CBA compiles monetary statistics according to the methodology of the Monetary and Financial Statistics Manual. The CBA reports monetary data to STA for the central bank and the other depositary corporations, which includes commercial banks. The authorities report monetary data within three weeks after the end of the reference month, via Standardized Report Forms. Monetary data have also been included in the International Financial Statistics (IFS) publication since December 2006.

D. Financial Sector

The authorities do not report financial soundness indicators (FSIs) to STA for the Fund’s publications. The authorities were encouraged to report FSI data and metadata. Countries participating in the FSI submission are expected to compile 12 core FSIs on deposit takers and 28 additional indicators on other financial corporations, nonfinancial corporations, households, and real estate markets.

E. External Sector

Azerbaijan’s balance of payments (BOP) statistics are compiled and disseminated by the CBA and are broadly in accordance with the sixth edition of the Balance of Payments Manual (BPM6). 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.

The CBA benefited from the TA provided by a regional advisor in ESS stationed in Baku during November 2006-November 2008, and by missions conducted in 2009 and 2012. The missions found that appropriate statistical legislation to assign responsibilities for compilation and dissemination of IIP and gross external debt had yet to be developed. Also, lack of institutional cooperation and staff turnover affected the pace of implementation of the strategic framework for the improvement of ESS.

Against that background, Azerbaijan was one of the countries targeted by the 20-month project (November 2014-June 2016) financed by the Swiss Government (SECO) “Improvement of ESS in three Central Asian Countries – Azerbaijan, Kyrgyz Republic, and Tajikistan”. Within the SECO project, three TA mission have been conducted to Azerbaijan focused on improving the methodological soundness, expanding the coverage of ESS, and bringing dissemination practices to international standards. The compilers also participated in three regional workshops which were attended by representatives from the CBA and of three other public institutions - the main data providers for ESS purposes (the State Statistical Committee, Ministry of Finance, and Customs). During the third, closing workshop, conducted in June 2016 the accomplishments of the project have been assessed and the follow-up activities for achieving a full transfer of ownership on the project’s products to the authorities have been identified.

During the project, the CBA made some progress in improving the system for collecting and compiling ESS. A resolution of the Cabinet of Ministers of the Republic of Azerbaijan, adopted in April 2015, assigns responsibility to the CBRA for compiling IIP and external debt statistics. Based on the resolution, the Central Bank Law was amended, which states that the CBRA is responsible for compiling the country’s external debt statistics (public and private) and IIP. Also a number of recommendations of TA missions were implemented, in particular: agreements were reached regarding the provision of information by a number of large enterprises and consortiums from the oil and gas sector; the State Statistical Committee (SSC) implemented a comprehensive survey form on the foreign economic activity of enterprises; work is being completed on the implementation of closed international transactions reporting system; and a number of technical issues concerning the ESS have been implemented. In addition, the first draft of the quarterly IIP and gross external debt statistics for all institutional sectors have been compiled that are yet to be approved by the authorities and disseminated

The most recent external sector mission visited Baku in April 2016. Despite the progress achieved during the TA project (comprised of 3 missions: May 2015, November 2015 and April 2016), there are still many deficiencies in the balance of payments compilation. For instance, significant under-coverage has been identified in balance of payments components such as trade in goods and services (specifically in import of goods), investment income (including reinvested earnings), and some financial account components (like debt liabilities within the direct investment, debt securities in portfolio investment, and loan liabilities for other sectors). A number of methodological inconsistencies have also been identified in estimating assets in trade credit and advances; currency and deposits for other sectors; and reserve assets. These shortcomings affect a number of indicators used for assessing the country’s performance such as debt sustainability and reserve assets adequacy.

There is need to take decisive measures for compiling and disseminating the IIP and external debt statistics. The TA missions assisted in compiling the draft IIP and external debt statements but the methodological inconsistencies mentioned above in estimating some financial account components lead to the accumulation of unrealistic stocks for those components in the IIP. In order to address the inconsistencies between balance of payments and the IIP, revising the estimation techniques and addressing the identified classification issues is required. However, compilers are reluctant to conduct such revisions and classification changes.

The main challenge in implementing the recommended actions during the project changes to the ESS includes gaining high-level national officials’ support for implementing the new international standards, and allowing the use of new data sources and estimation techniques that, in some instances, may result in the revised ESS indicators portraying trends less favorable than the previous data vintage.

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.

Monthly data on total official reserve assets are provided within 15 days of the end of each month. Azerbaijan does not disseminate International Reserves and Foreign Currency Liquidity Template data. The TA missions advised the authorities on the definition and coverage of gross official reserve assets and stressed the importance of using the definition that follows the BPM6.

Azerbaijan: Table of Common Indicators Required for Surveillance

(As of August 12, 2016)

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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

This amount does not include project finance of $500 million provided for the construction of Baku-Tbilisi-Ceyhan Pipeline, which in addition to Azerbaijan, also covered Georgia and Turkey.

Same Series

Other IMF Content

Other Publishers

Cover IMF Staff Country Reports
Republic of Azerbaijan: 2016 Article IV Consultation-Press Release; Staff Report; and Informational Annex
Author: International Monetary Fund. Middle East and Central Asia Dept.
Volume/Issue:
Volume 2016: Issue 296
Publisher:
International Monetary Fund
ISBN:
9781475536485
ISSN:
1934-7685
Pages:
83
DOI:
https://doi.org/10.5089/9781475536485.002