20240206-IMF-Republic_of_Azerbaijan_2023_Article_IV_Consultation-Press_Release_and_Staff_Report_74页_2mb

Summary of the 2023 Article IV Consultation with the Republic of Azerbaijan

Core Content

The 2023 Article IV Consultation with the Republic of Azerbaijan, conducted by the International Monetary Fund (IMF), assessed the country's economic developments and policy framework. The consultation concluded on January 11, 2024, with the Executive Board endorsing the staff appraisal without a meeting on a lapse of time basis. The report outlines the current economic situation, medium-term outlook, and policy recommendations for sustainable growth and development.

Main Economic Developments

• Growth:

  • Real GDP increased by 4.6% in 2022, driven by a 9.1% rise in non-hydrocarbon GDP, with recovery in construction and transportation sectors.
  • Growth moderated in 2023 to about 3%, with hydrocarbon GDP shrinking by 2.7% due to technical challenges in oil production, partially offset by rising gas production.
  • Projected growth for 2023 is 2.4%, and for the medium term, it is expected to remain around 2.3%.

• Inflation:

  • Inflation peaked at 14.4% in December 2022 and declined to 3.9% in October 2023, entering the CBA target band of $4 \pm 2$%.
  • Core inflation also dropped from 14% in December 2022 to 3.8% in October 2023.

• External Position:

  • The current account balance improved to a surplus of 29.8% of GDP in 2022, up from 15.1% in 2021.
  • It remained strong in the first half of 2023 (14.5% of GDP).
  • Combined CBA and SOFAZ reserves reached about $55.5 billion by October 2023.

• Fiscal Position:

  • The overall budget surplus increased to over 6% of GDP in 2022, from 4% in 2021.
  • The non-oil primary balance improved by about $1 \frac{1}{2}$% of non-oil GDP.
  • In 2023, the overall budget surplus remained similar to 2022 levels, with SOFAZ revenues offsetting higher expenditures.

Key Policy Recommendations

• Fiscal Policy:

  • Fiscal consolidation should resume following the temporary easing in 2023.
  • The non-oil primary deficit should remain in line with the revised fiscal rule.
  • Authorities should clarify conditions for revising fiscal targets and implement correction mechanisms to strengthen fiscal credibility.

• Monetary Policy:

  • The monetary policy stance is appropriate, and caution is advised before further easing.
  • Inflation risks from both external and domestic factors remain, so monetary tightening and fiscal adjustment should precede any easing.
  • The CBA should strengthen the monetary transmission mechanism to support the transition to a hybrid inflation targeting regime.

• Financial Sector:

  • The banking sector is resilient but needs stronger supervision and monitoring of risks.
  • The CBA should move to a risk-based supervisory framework and supervise large banks on a consolidated basis.
  • Continued stress tests and thematic inspections are recommended to assess asset quality.
  • The sector should play a more pivotal role in financing the economy.

• Structural Reforms:

  • Diversification of the economy is crucial, especially as hydrocarbon production is expected to decline.
  • Reforms to limit the role of state-owned enterprises (SOEs) and improve governance are needed.
  • The private sector should be encouraged to lead growth, and the renewable energy sector should be developed to support diversification.
  • Implementation of MONEYVAL's recommendations is important to meet climate commitments.
  • Phasing out fossil fuel subsidies and reducing the fiscal burden of climate policies are recommended.

Risks to the Outlook

• External Risks:

  • Uncertainty around the war in Ukraine and the Israel-Gaza conflict could lead to higher hydrocarbon prices and demand, boosting exports and fiscal revenues, but also increasing food prices.
  • A global slowdown could negatively impact the terms of trade and export volumes.

• Domestic Risks:

  • Pro-cyclical fiscal policy and fiscal risks from SOEs could pose challenges.
  • Extreme climate events may affect agricultural production, food security, and inflation.
  • Domestic demand pressures remain high due to expansionary fiscal policy and strong wage and income growth.

Summary of Key Indicators

Conclusion

The IMF encourages Azerbaijan to continue fiscal consolidation, maintain a prudent monetary policy, and implement structural reforms to reduce reliance on hydrocarbons and enhance economic diversification. The report emphasizes the importance of improving fiscal transparency, strengthening financial supervision, and addressing climate-related fiscal risks. The outlook is cautiously optimistic, with risks remaining broadly balanced but high due to external uncertainties and domestic challenges.