IMF calls for continued reforms in Azerbaijan to diversify the economy and improve its resilience to shocks

Economic growth is expected to reach 2.7 percent in 2019 on strong hydrocarbon production and robust domestic demand, benefitting from new spending measures, Report informs citing the Article IV consultation of the International Monetary Fund (IMF) with the Republic of Azerbaijan concluded by the Executive Board on September 6, 2019.

‘In the medium term, economic growth is projected to settle at 2½ percent, as hydrocarbon expansion stabilizes at about 1¼ percent, and nonoil growth gradually rises above 3 percent’, the Article said.

According to IMF forecasts, the GDP growth rate in 2020 will be 2.1%, in 2021 - 2.1%, in 2022 - 2.2%, in 2023 - 2.3%, in 2024 - 2.5 %. At the same time, growth in the non-oil sector in 2019 will amount to 3.2%, 2020 - 3.3%, 2021 - 3.4% and 3.5% per year for the period 2022-2024. In the oil sector, growth in 2019 will be 2.5%, in 2020-2024 - 1.2% per year.

Inflation should remain under control, given low projected food price inflation and continued fiscal consolidation envisaged under a new fiscal rule.

The Monetary Fund predicts inflation in Azerbaijan in 2019 at 3.2%, in 2020 - 3.3%, in 2024 - 3.5%.

‘With oil prices expected to hover around $60 per barrel, the current account surplus is forecasted to remain sizeable. Public debt is set to decline relative to the size of the economy. Challenges remain, however, including fragilities in bank balance sheets, structural rigidities, governance weaknesses. Risks to the outlook are tilted to the downside, but Azerbaijan has room to respond to adverse shocks, given its strong net foreign asset position’, the Article says.

According to the results of 2019, the IMF forecasts a surplus of the current account of the balance of payments of Azerbaijan at 9.7% of GDP, in 2020 - 10%, in 2024 - 7.7%.

Executive Directors agreed with the thrust of the staff appraisal. With the economy recovering from a banking crisis and a prolonged downturn, they commended the authorities for their policy response to the recent economic challenges. Going forward, Directors encouraged the authorities to continue their efforts to diversify the economy, raise its potential, and improve its resilience to shocks. They also emphasized the importance of economic inclusiveness and sharing the exhaustible hydrocarbon wealth with future generations.

Directors saw continued fiscal adjustment as necessary for ensuring long term debt sustainability and intergenerational equity. To mitigate the impact on economic growth, they recommended that fiscal consolidation proceed at a gradual pace and rely primarily on mobilizing nonoil revenues, improving the efficiency of public spending, reforming SOEs, and better targeting transfers and subsidies.

While welcoming the introduction of a fiscal rule, Directors recognized that recent spending packages make compliance with the fiscal rule challenging. In this context, they underscored the importance of complementing the fiscal rule with stronger public financial management, greater fiscal transparency, and better management of fiscal risks.

Given still tight financial conditions and economic slack, Directors broadly encouraged the authorities to continue normalizing monetary policy with a carefully calibrated and data driven approach based on incoming evidence about the impact of recent fiscal measures. They agreed that greater exchange rate flexibility would improve competitiveness, foster diversification, facilitate adjustment to shocks, and enhance risk management. Directors also encouraged the authorities to step up preparations for modernizing monetary and exchange rate policy operations and transitioning to an inflation targeting regime.

Directors agreed that strengthening financial supervision and fostering competition in the banking sector is crucial for ensuring its health and enabling it to play an effective role in intermediating resources for economic growth. They encouraged the authorities to conduct an independent asset quality review.

Directors emphasized the importance of pressing ahead with structural reforms to foster diversified, private sector led and inclusive economic growth. In this context, they welcomed the progress in improving the business environment and encouraged the authorities to make further efforts to reduce the economic footprint of the state and open the economy to greater international trade and investment.