Interview with Basil Zavoico, IMF resident representative in Azerbaijan
Question: On 24 June 2005 the Executive Board of the International Monetary Fund (IMF) considered the fifth review on Azerbaijan under the Poverty Reduction and Growth Facility (PRGF) program. Refusing from the last installment allotted under the program Azerbaijan actually sanctioned the completion of the PRGF. How does the IMF see the years of cooperation with Azerbaijan tracing back? What was the dynamic of the cooperation? Which problems have been resolved in this period?
Answer: Fund-supported programs over the past 10 years have helped Azerbaijan make progress towards a market economy. Early programs focused necessarily on macroeconomic stabilization and later programs added greater emphasis on structural reforms. Considerable success was achieved in reaching and maintaining single digit inflation. However, in 2004 double digit inflation returned as fiscal and income policies were loosened, and appropriate policy responses were delayed. As regards structural reforms, a recent report by the Fund concluded that the authorities and staff repeatedly underestimated the complexity of structural reforms included in programs, with the result that implementation was either delayed or the architecture of the reforms had to be reformulated. Looking ahead, the same report argued that Azerbaijan faces a critical challenge of ensuring sustainable growth in non-oil output, export diversification, and a reduction in poverty at a time when oil revenues are projected to increase substantially. This may give rise to temptations to overspend, leading to Dutch Disease that will make the attainment of these goals more difficult. Further details regarding the history of cooperation between the Fund and Azerbaijan are available in the recent report titled “Azerbaijan Republic вЂ" Ex Post Assessment of Longer-Term Program Engagement” (Country Report 05/259) which can be accessed on our local IMF website (www.imf-az.org).
Question: How does the IMF estimate the current economic situation in Azerbaijan? What are the major problems of the Azeri economy at the moment?
Answer: The IMF expects that growth will accelerate in coming years вЂ" with real GDP growth expected to rise by 24 percent in real terms in 2006. However, it should be noted this acceleration will be on account of the developments in the oil sector вЂ" which does not generate much income or employment opportunities. Growth in the more important sector for the average Azeri вЂ" the non-oil sector вЂ" is expected to decline somewhat in 2006 to about 8 percent from about 10 ВЅ percent in 2005. Among the obstacles to faster growth in the non-oil sector are the real exchange rate appreciation arising from early symptoms of Dutch Disease and a difficult business climate. Since the development of the non-oil sector is a key objective as regards creating income and employment for the average Azeri, the major problem for the Azeri economy is how to address these two questions. On Dutch Disease, it is well known from the experience of other resource rich countries that the overspending of natural resource wealth can result in rapid real exchange rate appreciation вЂ" which will take the form of either inflation or nominal exchange rate appreciation вЂ" or a combination of both. This can rapidly undermine the non-oil traded goods sector вЂ" and as this includes much of the agricultural sector in Azerbaijan, this has important implications for poverty reduction and regional development. Moreover, as the “oil boom” in Azerbaijan is only expected to last 10-15 years вЂ" it is vital to build up the non-oil traded sector today so that when the oil runs out, there is a sustainable and productive economy left to provide jobs and incomes for the population. On business climate, I would like to underline the importance of a good business climate for encouraging private investment вЂ" both foreign and domestic - which is essential for the development of the non-oil economy. But new investors are guided by the experience of existing investors, and some recent developments вЂ" especially on the part of foreign investors (e.g., Garadagh Cement) have been worrisome. Unless these concerns are remedied in a transparent and legal fashion вЂ" this may soon create the impression on the part of the international community that investors are not welcome here. Artificial monopolies have also been a concern, and the Ministry of Economic Development made a start in investigating this question in mid-August by identifying 16 commodities which may have been artificially monopolized. It also demonstrated that the import prices of most of these commodities are significantly lower than world market prices, suggesting that selected importers have been underinvoicing the goods they brought into the country and thus have not been fulfilling their obligations before the State Customs Committee. The Fund will be following up on progress in the investigation of this question on future missions. I would also expect that the newly formed Anti-Corruption Commission would look at all these questions in the nearest future.
Question: The IMF has shown the concerns the on the problem of inflation. As of end 2005 the government expects the one-digit inflation, while as of next вЂ" 9%-figure. What is the probability for the implementation of the indices? How does the IMF estimate the actions taken by the government for restraining the inflation processes and what are the ideal forms?
Answer: The Government’s target of 9 percent inflation by end-2005 may still be achievable, but this will require careful management of public spending, careful management of spending by state-owned enterprises (especially in the energy sector), and the implementation of a tight monetary policy by the National Bank. If these conditions are not met, a decline from the current double digit inflation may not be possible.
Question: The Finance Ministry has recently publicized the 2006 public budget forecasts. Does the IMF agree with its parameters, or have notes in this issue? What is the Fund’s estimation on the public budget expenses? Does the IMF agree with the ideas on financing the infrastructure projects at the expense of the State Oil Fund?
Answer: The state budget for 2006 includes a rapid increase in public expenditures and a sharp rise in the non-oil fiscal deficit. This rapid increase in spending poses macroeconomic risks вЂ" including an excessive acceleration in the rate of real exchange rate appreciation (which will harm the non-oil traded goods sector) and possible inflationary pressures вЂ" as well as the question of ensuring that spending ministries spend these sums effectively. We have not yet had an opportunity to analyze thoroughly the implications for public policy of this budget and will be doing so in the context of the forthcoming Article IV mission to Baku (starting in early December). A key issue will be to strike an appropriate balance between the need to increase spending to improve critical infrastructure and the need to limit pressures on the appreciation of the real effective exchange rate so as to allow the non-oil traded goods sector to prosper.
Question: Does the IMF regard as real the execution of the forecast macroeconomic induces for 2006, in particular, 30%-rsie in the GDP?
Answer: Most of the growth of real GDP in 2006 will come from the increase in crude oil production associated with the development of the ACG oil fields and the opening of the BTC pipeline. As the Fund and the Government use the same data in making these projections, our projection for real growth in 2006 is of the same order of magnitude as the Government’s.
Question: As a result of actual completion of the PRGF Azerbaijan and IMF have faced with issue of further cooperation. How does the IMF regard its perspectives? Will the IMF get restricted only with the consulting services, or the cooperation will continue on the financial level? When the final contours of the further cooperation will be defined?
Answer: Now that the PRGF has expired, Azerbaijan automatically moves into what we call “surveillance” mode, where Fund missions will visit Baku periodically and leave behind advice for the authorities on how best to implement stabilization and structural reform policies. However, this advice does not involve any conditionality and thus would not require Azerbaijan to take any specific measures (unlike letters of intent). It is open for Azerbaijan to request a more formal program with the Fund вЂ" which will entail reaching agreement on a letter of intent and will include quarterly performance criteria вЂ" and we understand that this is one option that that Government and the National Bank are currently considering. Access to technical assistance and institute courses for officials and, occasionally, journalists and parliamentarians will continue as before.
Question: What was the outcome of the 2005 IMF technical assistance mission on external debt?
Answer: It is not our policy to comment on the substance of our technical assistance missions and we would refer you to the Ministry of Finance for further information.
Question: The government publicized the plans on increase of per capita GDP by 2024 to $6000, while total GDP to 300trln manats by 2024. It was also noted that as of 2005 the figure was expected to be 20%. From 2005 to 2009 it is planned to achieve double-increase of the GDP, by 2024 вЂ" six-fold. Do the forecasts seem real and don’t they reflect the growth pace of the figure, whereas the growth pace (indicating not the quantity, but quality parameters of economy) is considerably low?
Answer: As long as real GDP continues to grow rapidly, so will per capita GDP. However, unless major new oil reserves are discovered, the evolution of real GDP will depend critically on the combination of (i) the production profile of the ACG oil field and (ii) developments in the non-oil economy. Current estimates of production from the ACG field suggest that after rising over the period 2006-2010, it will start to decline thereafter. Although we expect that sustainable growth in the non-oil sector can reach about 6-8 percent, provided that the business climate improves, even at that upper limit the growth rate of total GDP is likely to turn negative after about 2011. As regards the Government’s projection of per capital GDP of US$6,000 in 2024, at this time we feel that there are too many uncertainties to make a judgment as to whether this projection is appropriate. However, it is because of this projected sharp rise and then decline in real GDP growth that we regard as critical the prudent implementation of the long term oil revenue strategy that the President signed in September 2004 вЂ" which will help ensure that the budget gets adequate financial support even as real GDP declines.
Question: This year Azerbaijan will have to �face’ with a big amount oil revenues. How efficiently will Azerbaijan succeed to manage over the funds? What are the recommendations in this issue?
Answer: This is an important question and really consists of three elements вЂ" how fast to spend oil wealth, what to spend it on, and where to invest it in the meanwhile. As regards how fast to spend it, the President of Azerbaijan signed an important decree on the long term oil revenue management strategy in September 2004. The guiding principle was to establish how much money could be spent annually in perpetuity and to limit spending to this amount, also taking into account macroeconomic (especially the need to limit inflationary pressures) and implementation capacity issues. The process of implementing this decree is still ongoing. As regards what to spend it on, this involves choosing good projects and then ensuring they are properly implemented. We expect that the public investment project funded by USAID that is currently working in the Ministry of Economic Development will help improve the process by which projects are selected across different Ministries. As regards project implementation, I would refer you to the World Bank which has much greater expertise in this area than the Fund. However, I would underline that making rapid improvements in both these dimensions is of the greatest importance if Azerbaijan wants the physical investment of its oil wealth to genuinely contribute to the development of the non-oil sector. Finally, as regards the financial investment of oil wealth by the Oil Fund, we are satisfied that this is being done to international standards.