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IMF Country Report No. 19/301

REPUBLIC OF AZERBAIJAN

2019 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR THE REPUBLIC OF AZERBAIJAN

September 2019

In the context of the Staff Report for the 2019 Article IV Consultation, the following documents have been released and are included in this package:

  • A Press Release summarizing the views of the Executive Board as expressed during its September 6, 2019 consideration of the staff report on issues related to the Article IV Consultation with the Republic of Azerbaijan.

  • The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on September 6, 2019, following discussions that ended on June 27, 2019, with the officials of the Republic of Azerbaijan on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 20, 2019.

  • An Informational Annex prepared by the IMF staff.

  • A Statement by the Executive Director for the Republic of Azerbaijan.

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623–7430 • Fax: (202) 623–7201

E-mail: publications@imf.org Web: http://www.imf.org

Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2019 International Monetary Fund

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REPUBLIC OF AZERBAIJAN

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION

August 20, 2019

Key Issues

Context: Azerbaijan is recovering from a banking crisis and recession caused by a prolonged decline in oil prices since mid-2014. Monetary conditions remain tight under a de facto peg. Despite rising government spending, the fiscal position is projected to strengthen in 2019 mainly due to firmer oil prices and improvements in revenue administration. Weaknesses in bank balance sheets, structural and policy rigidities, and institutional and governance deficiencies hinder medium-term growth prospects and weaken resilience to shocks.

Main Policy Recommendations:

  • Gradual and growth-friendly fiscal consolidation is needed to strengthen intergenerational and precautionary buffers while mitigating the adverse impact on the economy. Consolidation could rely on prioritizing and improving the efficiency of spending, rationalizing tax policy, and improving revenue administration. The recently introduced fiscal rule needs to ensure spending discipline and reduce procyclicality. Monetary easing would complement fiscal consolidation. Greater exchange rate (ER) flexibility would facilitate adjustment to shocks and support diversification.

  • Promote inclusive, diversified, and private sector-led growth. Reducing administrative burden for businesses, encouraging competition, and strengthening governance and transparency would reduce the cost of doing business, foster entrepreneurship, and attract foreign capital. Prioritizing investment for healthcare and education, improving its efficiency, and better targeting of social protection would help nurture human capital and improve productivity.

  • Strengthen policy frameworks and institutions. Priorities include reforms in public financial and investment management, oversight of state-owned enterprises (SOEs) and governance, as well as fiscal accounting and transparency. Stronger financial regulation and supervision and modernization of monetary and foreign exchange (FX) operations are also needed. Addressing governance weaknesses is essential to reduce vulnerabilities to corruption. More integrated policies, along with better data availability, would support decision making and credibility, and attract investment.

Approved By

Juha Kähkönen (MCD) and Maria Gonzalez (SPR)

Discussions were held in Baku during June 12–27, 2019. The staff team comprised Natalia Tamirisa (head), Marwa Alnasaa, Anastasia Guscina, Kevin Ross (all MCD), Ashni Singh (FAD), and Galen Sher (MCM). Paul Inderbinen and Naghdaliyev Namig (both OED) joined some of the meetings. The team was assisted by Aghgun Gadirli from the IMF’s local office, and by Rayah Al Farah and Branden Laumann (MCD) at headquarters. The mission met with Finance Minister Sharifov, CBA Chairman Rustamov, other senior officials, and representatives of the private sector, civil society, academia, media, and the diplomatic community.

Contents

  • CONTEXT

  • RECENT DEVELOPMENTS

  • OUTLOOK AND RISKS

  • POLICY DISCUSSIONS

  • A. Rule-Based Fiscal Policy

  • B. Supporting Monetary Policy

  • C. Financial Stability and Development

  • D. Fostering Sustainable, Diversified, and Inclusive Growth

  • STAFF APPRAISAL

  • GLOBAL RISKS

  • COUNTRY-SPECIFIC RISKS

  • BOXES

  • 1. New Spending Packages

  • 2. New NPL Resolution Program

  • FIGURES

  • 1. Caucasus and Central Asia Macroeconomic Outcomes

  • 2. Real Sector Indicators

  • 3. External Sector

  • 4. Exchange Rate

  • 5. Fiscal Sector

  • 6. Monetary Sector

  • 7. Deposits and Interest Rates

  • 8. Business Environment and Governance

  • 9. Public Sector Debt Sustainability Analysis (DSA) – Baseline Scenario

  • 10. Public DSA – Composition of Public Debt and Alternative Scenarios

  • 11. External Debt Sustainability: Bound Tests

  • TABLES

  • 1. Selected Economic and Financial Indicators, 2017–24

  • 2a. Balance of Payments, 2017–24 (In millions of U.S. dollars)

  • 2b. Balance of Payments, 2017–24 (In percent of GDP)

  • 3a. Statement of Consolidated Government Operations, 2017–24 (In millions of manat)

  • 3b. Statement of Consolidated Government Operations, 2017–24 (In percent of non-oil GDP)

  • 4. Summary Accounts of the Central Bank, 2017–24

  • 5. Monetary Survey, 2017–24

  • 6. External Debt Sustainability Framework, 2014–24

  • ANNEXES

  • I. External Sector Assessment

  • II. Risk Assessment Matrix

  • III. New Fiscal Rule

  • IV. Fiscal Governance

  • V. Inclusive Growth

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REPUBLIC OF AZERBAIJAN

STAFF REPORT FOR THE 2019 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX

August 20, 2019

Prepared By

Middle East and Central Asia Department (In Consultation with Other Departments)

Contents

  • RELATIONS WITH THE FUND

  • STATISTICAL ISSUES

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Press Release No. 19/341

FOR IMMEDIATE RELEASE

September 18, 2019

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

Telephone 202–623–7100

Fox 202–623-6772

www.imf.org

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