Under watchful window of the imf

Today it is possible to surely say that mutual understanding (but not fully) has been established in the relations between the Government of Azerbaijan and International Monetary Fund (IMF). Refusing financial assistance from the IMF at the end of 2005, Azerbaijan gives preference to consultation form of co-operation with the IMF and makes it with satisfaction.

In its turn, the IMF, which firstly was dissatisfied with Azerbaijan's refusal to obtain further credits, but later transferred to a new level of co-operation under Article IV of the IMF's Articles of Agreement, expresses positive attitude towards work with Azerbaijan. Despite that currently Azerbaijan does not depend on the IMF, the periodical reports of this prestigious organization plays great role for the Country. Foreign investors, foreign countries and other international institutions attach importance to the opinion of the IMF and Azerbaijan's image is built on the bases of it.

The Head of the IMF mission, Valerie Fiker, who arrived in Azerbaijan last week, expressed satisfaction with the measures taken in Azerbaijan to ensure economic stability and rates of economic growth in Azerbaijan. She positively assessed Country's economic achievements and the co-operation with the prestigious international financial institutions in 2007.

In addition, to macroeconomic results of the last year, discussions were also organized on the medium-term prospects for 2008, estimate of expenses of Public enterprises, process of Azerbaijan's entrance to the World Trade Organization (WTO), results expected after adoption of the Code on Competition, process of preparation of as law drat on direct private investment activities. Moreover, exchange of views was held on the key macroeconomic indicators for 2008.

The sides reached an agreement on the re-payment of the IMF credits. The Government of Azerbaijan changed its mind on this issue twice: firstly the Country was going to make early re-payment, arguing that Azerbaijan contains stable macroeconomic growth and the over-fulfillment of the Public budget indicators creates favorable conditions to re-pay the debt. However, later the Government considered it as an inexpedient step because the IMF credits were obtained on preferential terms (0.5% interest rate annually) and it gives an opportunity to direct these funds to the world markets, gaining additional profits. Since its co-operation with Azerbaijan, the IMF provided $335mln for the Country.

Early re-payment of the credits is not beneficial for the IMF. Providing credits for certain period, the IMF receives definite amounts from the interest rates. As of 1 January 2008, Azerbaijan's debts before the IMF totaled $100.6mln. In 2008-2012 Azerbaijan will pay 55.96mln SDR ($88.9mln) within the re-payment of the formerly obtained credits.

Structure of debt re-payment before the IMF, in mln SDR.

***SDR rate as of 17 March 2008 totaled $1.65041

Now, Azerbaijan is sure in its activity. The Government of Azerbaijan does not intend to early re-pay the IMF credits and will re-pay them in accordance with the time-table. The Head of the IMF mission especially highlighted this. "The Government of Azerbaijan does not ask for IMF financial assistance, the Fund continues providing technical support," Fiker said.

After refusal to obtain IMF credits, Azerbaijan automatically transferred to the regime of 'observant', within which the Fund's mission periodically visits Baku, gives recommendations to the Government. The recommendations do not envisage any conditions and do not force Azerbaijan to take concrete measures. Currently the State Social Protection Fund of Azerbaijan asked for the IMF technical assistance in realizing projects on pension reforms.

The Fund is prepared to co-operate with Azerbaijan in each of three schemes of co-operation: rendering technical assistance, review in accordance with Article IV, providing resources of the Fund. However, Azerbaijan is willing to obtain only technical assistance and co-operate on the base of Article IV, according to which, the Fund devises annual reports on economic situation in the Country.

The IMF makes a special control in Azerbaijan on the inflation processes. Within the current visit of the IMF mission, the inflation processes again became topic of discussions with the Azerbaijan Government. "We have expressed concern with the growth rate speed of the State expenditure, as this causes inflation rate to increase," Fikera stated. We understand the necessity to increase its expenditures, but the Azerbaijani economy is not yet ready to adopt such proposals."

The IMF provided Azerbaijan Government with a scenario decreasing Public expenses from 27% to 30%. The Government's intension to expand the expenditure from the State Budget for 2008 for investments, which is explained by the increase of prices for building materials, was discussed during meetings within the respective departments. The demand for additional expenditure is also connected with the increase of pensions. However, as yet the Government's plan to reconsider the budget forecast has not been specified.

Although, the macroeconomic forecast predicts the inflation at a 13% rate, IMF is expected increase the figure. "According to our assessments, the growth rate of inflation in 2008 will not drop less than 20%, if no measures are taken to limit the growth rate of the state expenditures," Fikera said. Azerbaijan may reach a single-digit rate of inflation within five years only after reconsidering the program of State investments.

In addition, the IMF controls on the process of privatization of the State Banks in Azerbaijan. The Azerbaijani Government is to resolve the privatization of the International Bank of Azerbaijan (IBA), which maintains the leading position in the banking market in the country, in the medium term prospect, Valeria said. "I think we should privatize IBA once Kapital Bank has been privatized," Fikera said. The Government is planning to privatize the bank in the second quarter of 2008. The Government share in IBA comprises 50.2% and the balance is formed at the expense of private shareholders.

With regards to the banking system, the mission assessed it as following: "The degree of openness to foreign borrowings in Azerbaijan has been limited, although this year the factor will increase," Fiker said. "However, currently this level is completely low. Therefore, the global crisis which affected Kazakhstan took place in a time that allowed the National Bank of Azerbaijan and other commercial banks to understand the risk with capital flow," Fiker added.

During the current visit, the Fund gave recommendations to strengthen financial control on the basis of review of the risks. According to the mission head, the control should not take place only on the basis of standard norms. The National Bank should select the banks where the control is made on the basis of existing risks. "These are framework recommendations for the National Bank in avoiding problems with non-repayment of credits in the future, which may appear as a result of double increase of the credits allocations by the banks," Fiker said. In addition, the Fund gave recommendations on how to weigh the credit operations.

Within the visit of the IMF visit, meetings were held in the Economic Development and Tax Ministries, National Bank of Azerbaijan, State Oil Company of Azerbaijan, State Social Protection Fund, State Statistic Committee, as well as International Bank of Azerbaijan, Micro Financing Bank of Azerbaijan, Bank Standard, Kapital Bank and Azerbaijani Bank Association. As a result of the visit, the mission devised a report. It will be submitted to the consideration of the IMF Board of Executive Directors.