IMF concludes Article IV consultation with Azerbaijan

Baku, Azerbaijan, Sept. 19

By Kamala Mustafayeva – Trend:

The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Azerbaijan on September 6, Trend reports referring to IMF.

According to the fund’s report, the economy of Azerbaijan is continuing to recover from a banking crisis and recession. Real GDP growth reached 1.4 percent in 2018 and 2.4 percent in the first half of 2019, supported by increases in natural gas production and activity in the services sector.

Higher oil prices have helped improve internal and external balances. Lower food prices and a stable exchange rate have kept inflation subdued, below the midpoint of the target band (4±2 percent). With inflation expectations well anchored and the fiscal position strengthening, the Central Bank of Azerbaijan has started to ease monetary policy. The business environment has been improving as bank lending and manat deposits have picked up.

“Looking ahead, economic growth is expected to reach 2.7 percent in 2019 on strong hydrocarbon production and robust domestic demand, benefitting from new spending measures,” the report reads.

In the medium term, economic growth is projected to settle at 2.5 percent, as hydrocarbon expansion stabilizes at about 1.25 percent, and non-oil growth gradually rises above 3 percent, according to the fund’s report.

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

Challenges remain, however, including fragilities in bank balance sheets, structural rigidities, governance weaknesses, and lack of transparency. 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.

“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,” the report reads.

It was also noted that the Executive Directors emphasized the importance of economic inclusiveness and sharing the exhaustible hydrocarbon wealth with future generations.

The IMF 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.

The 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.

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