Press Release No. 97/62

Press Release: IMF Approves Second Combined ESAF/EFF Financing for Azerbaijan

December 23, 1997

The International Monetary Fund (IMF) has approved loans and credits totaling SDR 46.8 million (about US$64 million) for Azerbaijan to support the second annual economic and financial program under the Enhanced Structural Adjustment Facility (ESAF)¹ and the Extended Fund Facility (EFF)². Of this total, SDR 29.4 million (about US$40 million) is available in two equal semi-annual instalments of SDR 14.6 million (about US$20 million) under the ESAF, and SDR 17.5 million (about US$24 million) under the EFF.

Background

Since early 1995, Azerbaijan has been successfully implementing an ambitious economic reform program supported by the IMF, the World Bank, and other bilateral and multilateral creditors. Macroeconomic conditions have stabilized, as evidenced by a drastic reduction of inflation and the resumption of growth, and rapid progress has been made in developing market-based mechanisms in key areas of the economy. Inflation dropped to an estimated 4 percent in 1997 and output rebounded by an estimated 5 percent. The manat appreciated by 7 percent in nominal terms against the U.S. dollar between October 1996 and September 1997, as the overall balance of payments recorded a surplus.

Following this initial success, the Azerbaijan economy is now facing the dual challenge of continuing the transition to a market economy while at the same time dealing with increasing capital inflows related, in particular, to the development of its oil resources.

Medium-Term Strategy and the 1998 Program

Azerbaijan’s medium-term economic policy strategy aims at speeding up the transition to a market economy and developing the country’s oil resources without adverse impact on the rest of the economy. Although growing income from oil is expected to relax the constraints on economic growth in the country, the government recognizes that such inflows could also become sources for unbalanced economic development characterized by a strong appreciation of the real exchange rate and the crowding out of the non-oil economy. To address the risks, both macroeconomic and structural policies will be used to dampen the pressures of domestic demand and encourage domestic savings, while supply-side policies will aim to remove the obstacles to growth in the non-oil sector inherited from the planning era.

Real GDP in expected to grow by 7-9 percent a year in 1998-2000, mainly led by the development and export of oil, while annual inflation should be contained to around 5 percent. The investment ratio should grow to 44 percent of GDP in 2000 from an estimated 27 percent, largely financed by capital inflows. The current account deficit, including imports related to the development of the oil sector, is projected to increase to about 35 percent of GDP in 2000 before declining rapidly in subsequent years because of the rapid growth in oil exports. Fiscal policies will aim to reduce the deficit of the general government to less than 1 percent of GDP during the next three years. Monetary policy will aim at maintaining low levels of inflation.

For 1998, the authorities’ program aims at accelerating growth to 7 percent, while maintaining inflation below 5 percent and limiting the external current account deficit to some 27 percent of GDP, including imports related to the development of the oil sector.

Structural Reforms

The medium-term program objectives require strong progress in structural reforms, and the highest priority has been placed on public sector management reform, bank restructuring and privatization, and an equitable process of enterprise and land privatization.

A comprehensive program to overhaul the public sector, based on the appropriate role of the state in a market economy, will be designed and implemented with the objective of eliminating the state’s commercial and industrial activities and will focus on regulatory and policymaking functions. It will aim at establishing a modern, efficient, and professional civil service capable of managing public resources, together with a competent and impartial judiciary and legal system that can enforce property rights and contracts.

The scope of the government’s privatization program is broad. Over 70 percent of state enterprises - by asset value and employment rate - are to be transferred to private hands through the year 2000. Given the near completion of small-scale privatization over the past two years, emphasis has now shifted to voucher privatization of medium-size and large enterprises. Voucher auctions are expected to continue at a rate of at least one a month through 1998, with some 40 enterprises placed for privatization at each auction.

Addressing Social Needs

The government is committed to substantial reforms in the health sector, in response to deteriorating quality and access problems. A comprehensive reform of the education sector is also being planned with a view to a more efficient use of budgetary funds. Expenditures of the Social Protection Fund will be increased to 6.1 percent of GDP in 1998 from 5 percent, while efforts will be made to achieve better targeting the social safety net.

The Challenge Ahead

The Azerbaijan authorities have demonstrated a continued commitment to macroeconomic stabilization and structural market reforms, and there is overwhelming evidence of the rapiddevelopment of new private sector activities. However, it will be of special importance to maintain coordination between the government and the central bank in creating the appropriate policy framework to prevent inflationary pressures that result from the inflows of oil revenues.

Azerbaijan joined the IMF on September 18, 1992; its quota³ is SDR 117.0 million (about US$159 million); its outstanding use of IMF credit currently totals SDR 181 million (about US$246 million).