Azerbaijan one of world's fastest growing economies: IMF

By AzerNews

The International Monetary Fund recently confirmed that Azerbaijan has become one of the world's fastest growing economies.

The remarks were made in conclusion of a visit by an IMF mission to Baku from February 27 till March 12.

"Through the use of oil revenue, Azerbaijan has become one of the world's fastest growing economies over the last 10 years," IMF Mission Chief for Azerbaijan, Raja Almarzoqi, said in Baku on Tuesday. "Supported by public spending, growth in the non-oil sector is projected to remain near 9 percent and drive overall GDP growth of 4.5 percent in 2013. With increased government spending and the non-oil economy operating at capacity, and unless actions are taken, inflation is set to reach an annual average of 3.5 percent."

The IMF mission reported, however, that with a relatively short oil production horizon, the authorities need to accelerate efforts in several areas to achieve the government's 2020 goal of a highly competitive economy, with sustainable and broad-based growth led by the private sector.

"This will require decisive changes in the current course of economic policies, focused on improving the efficiency of public spending while reducing its size, strengthening the financial sector, and improving the business climate," Almarzoqi said.

Following the visit the mission issued a report citing the following suggestions: embarking on an up-front fiscal consolidation to pursue a sustainable non-oil fiscal position and provide room for private sector activity; shifting to a more neutral monetary policy stance, ending the central bank's role in direct lending to the real sector, and preparing, in coordination with other government agencies, for greater exchange rate flexibility over the long term. The IMF also recommended capitalizing the banking system while strengthening supervisory safeguards; promoting diversification by easing the entry and exit of companies in the non-oil sector, fighting corruption, improving access to finance, enacting the code of competition, and completing the WTO accession.

The mission also recommends that the authorities tighten the non-oil fiscal deficit. The 2013 budget is expansionary and creates overheating risks. It says plans for continued large deficits in the coming years, if implemented, would increase Azerbaijan's oil dependence and raise concerns about fiscal sustainability and efficiency. Scaling down government spending, resisting pressures for a mid-year supplementary budget, and guarding against evasion from recent tax amendments would reduce fiscal vulnerabilities while promoting a self-sustaining expansion of private-sector activity. Public investment can be cut without hurting growth if projects are prioritized and their selection and appraisal is done in line with best international practice.

According to the IMF, high oil prices provide an opportunity to cement principles of sound oil revenue management in a new policy framework. This would entail committing to a fiscal rule and strong institutional arrangements to bring public finances to a sustainable level by 2018 in line with the government's objective. Reforms to strengthen non-oil revenue and rationalize public spending would help support the credibility of the new framework.

In the near term, monetary policy should shift to a more neutral stance and be tightened if signs of demand pressures intensify. The Central Bank of Azerbaijan (CBA) should continue adopting prudential measures to cool down the acceleration in consumer loans. In addition, the CBA should not have any role in future direct lending to the real economy.

Over the longer term Azerbaijan would benefit from a more flexible exchange rate as this would improve the economy's ability to absorb shocks. In preparation for a gradual move toward greater flexibility, the authorities need to initiate sequenced reforms to put the pre-conditions in place, the IMF said.

It said the financial sector needs to be strengthened to support economic diversification. The ongoing capitalization should be used to create a more viable and competitive banking sector. Initiatives to strengthen this sector should be supplemented with supervisory safeguards to guide the capitalization process and contain risks in the system.

The mission reports that ongoing CBA initiatives to strengthen corporate governance regulations, risk management practices, and prudential regulations to contain consumer lending are well placed.

It was also reported that efforts to strengthen capital markets with the support of the World Bank will facilitate the financing of companies in the non-oil sector.

"We welcome plans to develop the legal framework, infrastructure, and instruments for savers and investors. Though the recent expansion of the corporate bond market could help deepen the capital market, the authorities need to strengthen the consolidated supervision of banks and its brokerage subsidiaries, and develop an appropriate credit infrastructure -- in particular through enforcement of contracts, effective recovery of collateral, and a private credit bureau. The recent change in the Commercial Secrets Law discouraging the disclosure of shareholders of companies, including banks, should be reversed and the law brought into line with international disclosure principles," the report reads.

The mission says that the government's 2020 strategy could provide the platform for decisive reforms in the business environment that could promote non-oil exports.

It said that the "easy service center" initiative (ASAN) has reduced the costs and delivery time of government services and should be expanded while phasing out "more traditional and inefficient" government services.

Also, ambitious reforms aimed at reducing informal and formal barriers to trade and competition will be crucial to promote a diversified and competitive economy, the IMF concluded.

'Azerbaijan 2020: A Look into the Future' concept

Azerbaijan approved Development Concept "Azerbaijan 2020: A Look into the Future" in late 2012. The need for such a concept is explained by the fact that the country is entering a new phase in its development.

The key strategic vision of the concept is to take into consideration the existing opportunities and resources to achieve sustainable economic growth and social prosperity in Azerbaijan, ensure effective state governance, rule of law and complete exercise of all human rights and freedoms, and reach a development stage characterized with an active status of civil society in the country's public life.

Over the period covered by the concept, Azerbaijan's population will increase by an average of 1.1 per cent a year to reach 10.2 million people by 2020.

Then, Azerbaijan will be an economically and politically developed and competitive country. Azerbaijan will be a country with high population incomes, minimum unemployment rate, highly developed human capital, a sound environment and extensive opportunities for every citizen.

As a result of the activities envisaged in the concept, the GDP per capita will more than double to reach $13,000. In 2020, according to the World Bank's gross national income classification, Azerbaijan will become a "high average income country" with plans to advance further among "high human development" countries of the UNDP human development report.

From the standpoint of economic development, Azerbaijan will advance from being a regional leader to become a highly competitive participant in the system of international economic relations. To do that, the country will avail itself of the advantageous geographical location and broad potential to turn into a regional commercial center with the per capita volume of non-oil exports of $1,000.