On September 9, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with the Republic of Azerbaijan.
A number of negative shocks have impaired economic performance in Azerbaijan. Lower oil prices, weak regional growth, currency devaluations in its main trading partners, and a contraction in hydrocarbon production rapidly erased the large current account surplus that the country enjoyed during the oil boom years.
Against this backdrop, the authorities have taken a number of actions. With reserves falling and external shocks intensifying, the Central Bank of Azerbaijan (CBA) devalued the manat and shifted to a managed float exchange rate regime. The devaluations helped to improve competitiveness but worsened bank balance sheets and increased dollarization. The authorities have started to close problematic banks, restructure the largest state bank, launched a reform of the financial supervision architecture and added new macro prudential limits on dollar lending. At the same time, a counter-cyclical stimulus tailored to promote growth and protect vulnerable populations is being implemented. Public sector wages, overall pensions, and social protection expenditures have been increased while in train capital expenditure projects will be completed. Fiscal consolidation is set to resume in 2017. To limit inflationary pressures, the CBA has tightened the monetary stance in 2016, raising the refinancing rate by 1,200 basis points to 15.0 percent.
Near-term economic prospects remain weak. Under current policies, growth is expected to contract this year and remain sluggish in the next few years, while inflation is expected to gradually decrease. Large fiscal surpluses during the oil boom years are projected to turn into deficits in the next three years. The current account balance should improve as the devaluations work to limit imports and support non-traditional exports. The authorities plan to utilize a small amount of assets from the Oil Fund to help finance balance of payments gaps. To ensure sustainable growth, the authorities are developing a strategy to rapidly diversify the economy by creating a more business friendly environment and pursuing structural reforms. Risks to the outlook are tilted to the downside as economic growth is still highly linked to oil shocks and government spending. The ongoing restructuring of the financial sector is a major risk to growth.”
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 summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.