In 2005, Azerbaijan was in its third year of double-digit real GDP growth, and inflationary pressures that arose in early 2004 appear to have subsided. Trend reports citing the IMF report.
From the mid-1990s to the early 2000s, macroeconomic stability, some progress in structural reforms, and massive inflows of oil-related Foreign Direct Investment (FDI) contributed to an increase in oil export potential and a pick-up in non-oil output growth. During 2004-early 2005, higher oil prices and expansionary policies also added to the growth momentum of the non-oil economy, while reviving inflationary pressures.
. After rising to 15.4 percent in April 2005, inflation has recently declined to single digits mainly due to prudent management of the state budget and a tightening in monetary policy, but a revision to the Consumer Price Index (CPI) compilation methodology and informal price controls were also contributing factors. While the rapid economic growth has resulted in a reduction in poverty, the level of poverty remains high. Rising oil prices and export volumes have contributed to a significant strengthening of Azerbaijan's external position.
Fiscal policy was tightened in 2005. The central government non-oil primary balance declined by 1.5 percent of non-oil GDP in 2005, as rapid non-oil revenue increases more than offset higher spending.
Progress in structural reforms has been uneven. Some fiscal reforms have advanced, including a strengthening of the budget formulation process, the preparation of the legislative framework for establishing targeted social assistance, the creation of a civil service reform committee, the participation in the Extractive Industries Transparency Initiative, and an increase in some regulated utilities and energy prices.
While competition pressures in the banking system have increased, the International Bank of Azerbaijan has preserved significant market power and its preferential treatment by the government and state-owned enterprises (SOEs). Furthermore, only limited progress has been made in improving financial discipline and corporate governance of SOEs, and privatization of the remaining two state-owned banks has stalled
Azerbaijan: Selected Economic Indicators, 2003-06
________________________________________
2003 2004 2005
est. 2006
proj.
________________________________________
(Changes in percent)
Real economy
Real GDP 10.4 10.2 24.3 26.2
CPI (end-of-period) 3.6 10.4 5.5 12.0
(In percent of GDP, unless otherwise specified)
Consolidated government
Total revenue 1/ 21.2 22.4 24.0 31.8
Total expenditure 23.0 21.4 21.5 23.2
Fiscal balance -0.8 1.0 2.7 8.6
Non-oil primary fiscal deficit (in percent of non-oil GDP -17.5 -13.4 -12.1 -24.8
(Changes in percent)
Money and credit
Manat reserve money 23.7 38.2 7.5 65.0
Manat broad money 28.0 31.9 15.8 93.7
Banking sector credit to the economy 38.3 60.2 53.0 59.6
Velocity of total broad money (M3) 2/ 7.7 6.3 5.0 5.2
(In percent of GDP, unless otherwise specified)
Balance of payments
Current account balance (-, deficit) -27.8 -30.0 -5.2 17.7
External public debt 3/ 19.7 18.5 14.3 10.6
Gross international reserves
In millions of US$, end of period 803 1,075 1,178 2,009
In millions of non-oil imports c.i.f. 3.5 3.9 2.8 4.3
Exchange rate
End-of-period level (Manat/US$) 4,923 4,903 4,593 ...
Real effective exchange rate (percentage change, -,
depreciation 4/ -10.8 -3.5 6.6 ...
________________________________________
Sources: Azeri authorities; and IMF staff estimates.
1/ Excluding tax credits allocated to SOCAR.
2/ Defined as gross domestic demand (excluding hydrocarbon imports) divided by average broad money.
3/ Includes government and government guaranteed external debt only.
4/ REER is calculated based on new INS weights for Azerbaijan. 2005 is the average of ten months.