20211221-IMF-Republic_of_Azerbaijan_2021_Article_IV_Consultation-Press_Release_and_Staff_Report_67页_1mb

Summary of the 2021 Article IV Consultation with the Republic of Azerbaijan

Core Content

The 2021 Article IV Consultation with the Republic of Azerbaijan, conducted by the IMF Executive Board, assessed the economic impact of the pandemic and oil price shocks, and provided policy recommendations to ensure sustainable and inclusive growth.

Main Economic Developments

• Economic Impact of the Pandemic and Oil Shocks:
  Azerbaijan's economy faced a severe contraction in 2020, with real GDP declining by 4.3 percent. This was driven primarily by a 7.2 percent drop in oil GDP and a 2.6 percent contraction in nonoil GDP, especially in contact-intensive sectors like tourism and transportation.

• Fiscal Response:
  The government implemented a significant relief package of 4.8 percent of GDP, including emergency health spending, subsistence cash transfers, temporary public jobs, and support for microentrepreneurs. This helped cushion the economic impact.

• Fiscal Position:
  The fiscal balance turned from a surplus of 8.2 percent of GDP in 2019 to a deficit of 6.5 percent in 2020. The nonoil primary fiscal balance deteriorated from -27.2 percent to -30.3 percent of nonoil GDP.

• Monetary Policy:
  The Central Bank of Azerbaijan (CBA) reduced policy rates by 125 basis points, starting in June 2020, to 6.25 percent by the end of the year. Despite this, financial conditions remained tighter than pre-pandemic levels due to manat appreciation and sticky lending rates.

• Exchange Rate Regime:
  While the country officially has a free-floating exchange rate regime, the manat has been de facto pegged to the US dollar. This regime has kept inflation subdued (below 3 percent) but may hinder competitiveness as trading partners have more flexible regimes.

• Current Account:
  The current account moved from a 9 percent of GDP surplus in 2019 to a small deficit in 2020 due to the drop in oil export revenues (40 percent) and limited import compression. It is projected to return to a surplus of 2.5 percent of GDP in 2021.

• Foreign Reserves:
  External buffers, including international reserves and SOFAZ assets, reached 117 percent of GDP by end-2020. However, the external position is deemed weaker than desired for medium-term fundamentals.

Key Policy Recommendations

• Near-Term Fiscal Policy:

  • Maintain an accommodative fiscal stance to support public health initiatives, including vaccine rollout, and the economic recovery.
  • Gradually phase out exceptional support to avoid disrupting the recovery.
  • Ensure sufficient health spending to combat the pandemic effectively.

• Fiscal Consolidation:

  • Start a growth-friendly fiscal consolidation in 2022 to preserve fiscal sustainability and intergenerational equity.
  • Reintroduce a credible fiscal rule, using nonoil primary balance and debt-to-GDP targets as anchors.
  • Save windfall gains from higher-than-budgeted oil prices and reallocate spending to cover additional needs without further deteriorating the long-term fiscal position.

• Exchange Rate Regime:

  • Reconcile the de jure free-floating regime with the de facto pegged regime to improve policy credibility and exchange rate flexibility.
  • A more flexible exchange rate could enhance resilience and support market development.

• Financial Sector Reforms:

  • Carefully reverse exceptional prudential easing introduced during the pandemic.
  • Strengthen financial oversight, risk monitoring, and competition in the banking sector.
  • Continue improving the AML/CFT framework to enhance financial stability and inclusion.

• Structural Reforms:

  • Accelerate structural reforms to diversify the economy away from oil dependence and improve productivity in the nonoil sector.
  • Prioritize investment in healthcare, education, green, and digital infrastructure to support inclusive and sustainable growth.
  • Address institutional weaknesses, SME access to credit, and inefficiencies in labor, product, and service markets.

• Private Sector Development:

  • Reduce administrative barriers and improve governance and anti-corruption frameworks to encourage private sector-led growth and diversification.
  • Enhance the effectiveness of the National Priorities for Socio-Economic Development to improve SOE performance and productivity in the nonoil sector.

Risks and Uncertainties

• Downside Risks:

  • Emergence of more dangerous virus strains or delays in vaccine rollout could slow economic recovery.
  • Slower-than-expected global demand recovery may affect the oil sector.
  • High contingent liabilities and oil dependence pose long-term fiscal risks.
  • Weak policy frameworks and fragmentation could undermine reform efforts.

• Upside Risks:

  • Faster global recovery and higher oil prices could boost growth and improve fiscal and external balances.
  • Increased structural reform efforts could enhance economic prospects.

Key Economic Indicators (Selected)

Conclusion

The IMF Executive Board concluded the Article IV consultation with Azerbaijan, acknowledging the country's significant challenges but also the positive steps taken in response. The focus is on balancing short-term recovery with long-term fiscal sustainability, enhancing structural reforms, and improving the financial and exchange rate regimes to support a more resilient and diversified economy.