IMF Staff Team Concludes Visit to Azerbaijan
An International Monetary Fund (IMF) team led by Mohammed El Qorchi visited Baku from May 19 to June 1 to hold discussions in the context of the 2016 Article IV Consultation.
At the conclusion of the visit, Mr. El Qorchi made the following statement:
“Azerbaijan’s economy has been hit by a series of negative shocks, in particular the decline in oil prices, and slowdown and currency depreciations in trading partners’ economies. As a result, economic growth fell to 1.1 percent in 2015 and is projected to turn negative (-2.4 percent) in 2016 before it starts picking up in 2017. Growth is expected to rise to about 2.5 to 2.75 percent over the medium-term as gas production and exports rise and reforms start to take effect. Full implementation of a strong structural reform agenda could increase the economy’s growth potential to around 4 to 5 percent.
“The authorities have taken a number of steps in response to the weak external environment—including a prudent shift in the policy mix. After two step devaluations, the Central Bank of Azerbaijan (CBA) moved to a managed float exchange rate regime and appropriately raised interest rates in 2016 to address rising inflation. At the same time, the government is implementing a small counter-cyclical fiscal stimulus which focuses on raising wages, old-age pensions and targeted social assistance, as well as completing existing investment projects. The current account is expected to improve in 2016 as the devaluations compress imports—reducing the need to utilize Oil Fund assets. Moreover, policy coordination among ministries is being enhanced with the creation of an informal macroeconomic committee within the government. Pension reform legislation, which is expected to improve the deficit of the Social Protection Fund, is progressing and is expected to be enacted by the end of 2016.
“The authorities reiterated the importance of maintaining a stable macroeconomic environment. Azerbaijan’s buffers remain ample but further actions are needed to maintain them at comfortable levels. The authorities concur with the need to return to a fiscal consolidation path in 2017 based on reducing inefficient public spending and increasing non-oil tax revenues. Other policy priorities include formulating and pre-announcing a multi-year fiscal consolidation plan, implementing a rule-based fiscal framework, and strengthening the monetary and exchange rate policy frameworks to allow greater exchange rate flexibility. A tight monetary policy to bring inflation under control and increase demand for manat will be required.
“They also realize the most pressing challenge facing Azerbaijan is to address the vulnerabilities in the banking sector. They agree that restoring confidence in the banking system would be accomplished by a deep restructuring of the system, and strengthening banking supervision, the macro prudential framework and the financial safety net.
“In this regard, the authorities have already taken measures to improve the health of the banking sector. The licenses of eight banks have been revoked, an asset quality review and a top-down stress test are being finalized, and an action plan is under preparation by the newly created supervision authority—in close coordination with the ministry of finance and the central bank—to restructure the remaining ailing banks. The plan seems to be at an advanced stage and is scheduled to be implemented soon. The mission welcomes the preparation of the bank restructuring plan and urges its prompt implementation, which should address the high level of nonperforming loans and lead to an increase of the capital of the weak banks.
“Hydrocarbon prices are projected to be much lower relative to recent boom years. Azerbaijani authorities appropriately see this as an opportunity to move to a new economic model—from one driven mostly by public capital investments to one more focused on private sector led growth. Efforts are ongoing to diversify the economy by creating a more business friendly environment and pursuing structural reforms. These include opening new e-government service centers, improving public construction tenders; simplifying customs clearance; increasing electronic payments; creating regional industrial zones; extending agriculture, tourism and environmental reforms and promoting regional economic integration.”
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