Press Release No. 04/276

Press Release: IMF Executive Board Completes Fourth Review Under Azerbaijan Republic's PRGF Arrangement and Approves US$19.7 Million Disbursement

December 23, 2004

The Executive Board of the International Monetary Fund (IMF) has completed the fourth review of the Azerbaijan Republic's performance under the three-year Poverty Reduction and Growth Facility (PRGF) arrangement. In doing so, the Board approved a request for a waiver for the non-observance of the structural performance criteria with respect to the adoption of a procedure for future automatic adjustment of domestic energy prices, enactment of the Banking System Law, and submission to the parliament of a new central bank law. The Board approved the authorities' request to rephase the remaining disbursements, cancel the previously planned sixth review and correspondingly reduce access under arrangement to SDR 67.58 million (about US$103.6 million).

The Board also approved an extension of the arrangement from March 31, 2005 to July 4, 2005.

The IMF's Executive Board approved the three-year arrangement on July 6, 2001 (see News Brief No. 01/53) for an amount equivalent to SDR 80.45 million (about US$123.4 million). Completion of the latest review will bring total disbursements under the arrangement to SDR 54.71 million (about US$83.9 million).

Following the Executive Board's discussion on Azerbaijan, Mr. Águstin Carstens, Deputy Managing Director and Acting Chair, said:

"Azerbaijan's macroeconomic performance under the Fund-supported program has been commendable, with high broad-based GDP growth, relatively low inflation, and a strong external position. The government has made further progress in structural reforms albeit with some delays.

"The recently approved long-term oil revenue management strategy is consistent with a sustainable use of oil wealth and the major macroeconomic objectives of the government, including low inflation and sustainable growth of the non-oil sector.

"The continuation of policies aiming to maintain macroeconomic stability, together with further advancement of structural reforms, is key to achieving the objectives under Azerbaijan's State Program for Poverty Reduction and Economic Development targeting an improvement in competitiveness of the economy and a significant reduction in poverty.

"The 2005 budget targets a 2.4 percent of GDP increase in the non-oil deficit compared with the expected 2004 outcome. This increase is broadly consistent with the authorities' medium-term strategy of a gradual increase in spending out of oil wealth, as well as with program macroeconomic objectives for 2005.

"While the policy mix for 2005 is consistent with the authorities' inflation objective of about 5 percent, inflation developments should be closely monitored and additional steps should be taken, if necessary, in order to achieve the inflation objective.

"Progress is being made in financial sector reform. The new Banking System Law and the recently adopted Azerbaijan National Bank Law reflect the recommendations of the recent Financial Sector Assessment Program, and lay out sound legal foundations for operations of commercial banks and for strengthening central bank independence. The adoption of a package of measures to foster competition in the banking system is welcome. However, continued delays in privatizing the two largest banks have slowed down the development of a competitive banking system in Azerbaijan.

"The authorities' decision to increase domestic prices of most energy products in November 2004 is an important step toward reducing the gap between domestic and world market energy prices. Adhering to the commitment to review energy prices at least once a year in the context of the annual budget preparation process will be essential to reduce energy-related quasi-fiscal subsidies.

"Resolute efforts are needed to carry forward the authorities' structural reform agenda, which in 2005 will be geared toward further strengthening the financial discipline of state-owned enterprises, elaborating a civil service reform strategy, improving the annual budget preparation process, and tackling monopolistic tendencies in the banking sector. Continued efforts will also be needed to strengthen governance, including through fully implementing the recent Law on Fighting Corruption and Anti-Corruption Decree, especially in view of the importance of ensuring sound management and use of oil wealth," Mr. Carstens said.

The PRGF is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper, or PRSP. This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 ½-year grace period on principal payments.