Azerbaijan and IMF: Cooperation on mutual agreement

The International Monetary Fund (IMF) currently cares about the issues other than financial, and more specifically - who will take the post of head of the organization, which was freed after the former head of IMF Dominique Strauss-Kahn was forced to resign because of accusations of rape?.

Upon tacit agreement between Europe and the U.S., the head of the IMF is always chosen amongst the Europeans. However, this time, the developing countries criticized the well-established "tradition". The representatives of BRICS (Brazil, Russia, India, China and South Africa) on May 25 stated that this situation does not comply with the rules and principles of the Fund. Mexico has already proposed its own candidate for the president of the IMF. He is the head of the National Bank, Agustin Carstens. CIS also defined its candidate - he is the head of the National Bank of Kazakhstan Grigory Marchenko.

Azerbaijan actively follows the news from the IMF, but in principle, it is all the same for the country who will head the IMF. For over six years, the Government of Azerbaijan has been cooperating with the IMF on the level of consultations under Article IV. After the refusal from the loan tranche of IMF, Azerbaijan automatically switched to the "observation", as part of which the mission of the Fund periodically visits Baku, sends recommendations to the authorities about the best way of implementing stabilization and structural reforms. These recommendations do not include any conditions and, in any case do not urge Azerbaijan to take concrete actions. On the contrary, the requests for assistance to provide technical support come from the Azerbaijani structures.

International Monetary Fund is always ready to cooperate with Azerbaijan in all three schemes of partnership: provision of technical assistance, reviews in accordance with Article IV "Articles of Agreement", provision of the Fund's resources. However, Azerbaijan is willing to receive only technical assistance and work under the terms of Article IV of the Fund's Charter, under which the IMF compiles annual reports on the economic situation in the country and does not imply to provide lending. The second direction of cooperation is carried out with all countries of the Fund, since the execution of the annual review, compiling report upon it and its consideration by the Executive Board of the Fund is the implementation of the supervisory functions of the IMF.

Currently, there are no reasons for the country's resumption of borrowing from the Fund, since Azerbaijan did not resort to IMF assistance even during the global financial crisis. In this regard, the IMF in 2009 decided to withdraw the head of the Azerbaijani representation of the Fund and reduce the office staff in the country. The Baku office of the IMF is managed by the regional office for Central Asia and Caucasus.

The sides also came to a mutual agreement in the issue of debt repayment on IMF loans. The Azerbaijani government several times changed its opinion about this: first, it wanted to early repay the debt, appealing the fact that Azerbaijan has a stable economic growth, and over-fulfillment of indicators of the state budget creates favorable conditions for debt repayment. Then, the Government considered such a move unwise, because IMF loans were provided at preferential rates, and it is possible to place the money in the world markets, generating additional revenues. The IMF loans received by Azerbaijan for the entire period since 1995 are long term and very favorable. These funds are borrowed at a rate of 0.5 percent per annum, while foreign currency deposits in foreign banks vary in the range of 2-2,5 percent per annum. Thus, in the history of cooperation, the Fund has provided the country $335 million within six programs. Azerbaijan will by 2015 continue to repay loans earlier borrowed from the Fund.

Structure of payments of debts to IMF, in million SDR. (Source: IMF)

***Rate of SDR as of 21 May 2011 totaled $1.5912

For its part, the IMF, which initially dissatisfied with Azerbaijan 's refusal from further lending to the economy, shifted to a new level of cooperation under Article IV of the Agreement on the establishment of the IMF, expressed positive feedback on the work of Azerbaijan. Despite that Azerbaijan does not depend on the IMF today, the periodic reports of this prestigious international organizations play a significant role for the country. Foreign investors, foreign governments, other international institutions pay attention to the IMF reports, and the image of Azerbaijan is established based on this.

Arrived in February in Azerbaijan, the new head of IMF mission in the country Nadeem Ilahi expressed satisfaction with the activities undertaken to maintain economic stability and rapid economic development. He appreciated the economic achievements in 2010 and cooperation with prestigious international financial institutions. The new head also stressed the soundness and success of the management of oil revenues of Azerbaijan, as well as extensive experience in this sphere. According to him, Azerbaijan could share this experience with other countries, particularly with African countries, which would give impetus to their development.

Thus, in its World Economic Outlook Report in April, the International Monetary Fund (IMF) has improved the Azerbaijani GDP growth forecasts for 2011-2012

Under the revised IMF forecast, the rate of Azerbaijani GDP growth will reach 2.8 percent in 2011 compared to the October forecast of 1.8 percent. As for 2012 and 2016, Azerbaijani GDP growth will reach 2.5 percent and 2.8 percent, respectively.

Under the IMF forecast, the inflation rate in Azerbaijan in 2011 will hit 10.3 percent compared to the earlier forecast five percent. As the IMF forecasts, the inflation rate in Azerbaijan will reach 7.5 percent and 5.0 percent in 2012 and 2016.

Under the IMF assessment, Azerbaijan will have a payment balance equivalent to 28.4 percent of the GDP in 2011 and the figure will reach 24.2 percent and 17.2 percent in 2012 and 2016.

At present, Azerbaijan only receives technical assistance from the IMF in the following sectors.

Banking sector

The International Monetary Fund (IMF) has started to provide technical assistance to the Central Bank of Azerbaijan (CBA) in developing a strategy of consolidation of the banking sector. IMF consultant Peter Hayward visited Baku from 4 to 13 May in order to conduct consultations.

The Central Bank has a long-term prospect to consolidate the banking sector.
The consolidation should be conducted in a natural way. In addition, the quantitative requirements of the Central Bank are tightened from in terms of capital - its level, adequacy. If to talk about quality requirements, the attention is strengthened to quality control, quality of risk management, technology, human resource of banks.

In principle, complying with these requirements demands enough efforts by the banks, since there is a necessity for serious long-term investments, long-term development plans. Every bank must assess its possibilities and prospects in terms of complying the requirements of the Central Bank.

The plan for consolidation of banks is not to force the banks to combine or close them. This process can take place only on the basis of the decision of the shareholders of banks, as in the case of conversion to non-bank credit organization that will be possible after the relevant amendments to the Law on Banking Activities. Only decision of the Central Bank will not be enough for this.

Currency rate

The IMF has agreed to provide technical assistance to improve the monetary structure and exchange rate policy in Azerbaijan. The Central Bank of Azerbaijan has requested technical assistance from the fund to pass to a more flexible exchange rate regime of the national currency.

The bank controls the country's national currency to avoid the excessive strengthening of the manat rate. There is an increased dollar supply on the domestic foreign exchange market. This has led to the strengthening of the manat. But the Central Bank keeps the situation under control, preventing the excessive strengthening of national currency.

The volume of the Central Bank's intervention in the foreign exchange market amounted to $156 million during the first quarter of 2011. According to the CBA representatives, the foreign exchange market acted in a self-regulatory regime. The bank has implemented its exchange rate policy since early 2011 in the context of expanding supply channels in the currency market and a new operational mechanism.

During the first quarter, the rate of the manat to USD strengthened by 0.65 percent. Stability of national currency during this period had a positive impact on the stability of macroeconomic and financial sector. Strengthening the rate of the manat may slightly prevent the development of non-oil export of the country.So, today the main challenge facing the Bank is to keep inflation at a stable one-digit level.

Privatization of state bank

The IMF also vigilantly monitors the privatization process of state bank of Azerbaijan. IMF nurtures this process, since this idea is his brainchild. "In the medium term, the Government of Azerbaijan needs to resolve the issue of privatization of the International Bank of Azerbaijan, which continues to dominate in the banking market in the country," the IMF stated.

IMF calls for urgent actions to start the regulation process in the International Bank of Azerbaijan in order to maintain financial stability. The mission supports the authorities' intention to privatize the IBA after its restructuring.

Now the government is assessing the various aspects of privatization, but has not specified a specific time frame and ways of that process. Today, various methods of privatization are considered with low-risk and cost.

The IBA is a quasi-state bank, and its main shareholder is the Azerbaijani government, which owns a 50.2 percent stake. The remaining 49.8 percent is owned by private individuals and legal entities (including banks). The IBA completed 2010 with assets worth 5.527.92 billion manat, which is 8.99 percent more than in 2009.

State budget

In this sphere, the IMF recommends to continue cost containment policy in 2011, and welcomed the authorities' intention to approach the execution of the budget expenditures from the economic opportunities on spending costs.

"Efforts to ensure medium term fiscal sustainability are warranted, even if the prospects for more hydrocarbon resources materialize. This could be achieved through raising non-oil revenues, making government spending more efficient, and allowing space for sustainable private non-oil sector to develop further," Nadeem said. The basis of the growth of non-oil sector will be the restoration of growth in sectors such as construction, trade and services.

"Non-oil economic growth was strong in 2010, largely spurred by high public investment spending, though inflation rose rapidly in 2010, driven largely by rising global food prices. There are increasing signs of inflation expectations becoming entrenched."

"Prospects for 2011 are also promising and growth of non-oil sector expected to reach 6 percent, and overall economic growth - at 2.8 percent," he said. "But rising inflation, expected to reach 10 percent by end-2011, pose macroeconomic challenges. The main challenge for policymakers would be to contain inflation expectations, while fiscal policy would also need to contain demand pressures."