Analysis Materials 13 December 2005 12:04 (UTC +04:00)

Azerbaijan has overstepped rating of poor countries with GDP comprising $800 per capita two years ago. Thus, in 2003 per capita GDP in Azerbaijan made up $850, in 2004 the country passed $1000 line, which in the end of last year made up $1041. As of totals of 2005 the government forecasts it to reach $1275. Over the first 10 months of 2005, per capita GDP rose 22.2% and made up 5.6m manats, or $1,181.

Therefore, Azerbaijan can soon enter the category of countries, which receive credits only at commercial terms. Oktai Hagverdiyev, the head of the Fiscal-credit Department of the Cabinet of Ministers, said that some international financial organizations included Azerbaijan in the list of countries which receive privileged loan. Thus the World Bank (WB) ceases the approval of privileged loan to countries with the per capita GDP of $800, while the International Monetary Fund (IMF) suspends it if the figure is $1500.

As a result, in accordance with the WB standards Azerbaijan will have to leave a group of poor countries, which are clients of the International Association for Development (IAD), and enter the category of countries developing countries, which cooperate with the International Bank for Reconstruction and Development (IBRD). The credit allotted on IAD terms is the privileged loan allotted for 35 years with a grace period of 10 years under 0.75% interest rates.

The situation with the countries which achieved this level at the expense of favorable economic state is bit different. The experience of the counties which borrow funds on the terms of both IAD and IBRD, show that they prefer the IAD credits for social projects, while the infrastructure projects are financed at the expense of the IBRD credits. The countries with average level of incomes on world standards use the IBRD credits for their projects in different spheres ranging from agriculture to infrastructure projects.

Donna Dowset-Koyrolo, the World Regional Director on South Caucasus, who started her official mission in the region on 5 December, did not exclude the total strategy will cost $1.2bn. Major part of the sum will be allocated by the International Bank for Reconstruction and Development, while the credit for poverty reduction will be approved on privileged term as earlier. The Bank plans to approve funds for social projects, as well as reforms in the law-enforcement bodies, improvement of the accountancy standards, reconstruction of the irrigation-drainage system, improvement of the water supply system out of the fund of the International Association for Development.

Judging on the rise of per capita incomes in the country one can suppose that in several years the incomes will be in the level enabling to fully pass to financing at IBRD terms. “The international financial organizations propose Azerbaijan commercial credits, which is unfavorable for us,” Hagverdiyev said. At present the talks with the international financial organizationsи on approval of credits under state guarantees for implementation of several projects is underway. The projects mainly concern the energy system, rehabilitation of roads and rehabilitation of infrastructure. Thus, Azerbaijan confirmed its readiness to attract $300m from the WB a year mainly on the terms of the International Bank for Reconstruction and Development (IBRD), which is linked with the plans on the reconstruction of automobile roads, energy and other infrastructure. The IBRD will approve loan at softened terms. The rates of the fixed credit is LIBOR+0,25%, while on fluctuating spread - LIBOR+0,17%.

At present Azerbaijan’s debts to World Bank and the IMF exceeds $600m. This Azerbaijan and the WB have signed credits agreement on 24 projects with the total amount of $655.8m, and they all were financed at IAD terms.

The rest part of debts was borrowed from the Asian Development Bank (ADB), the European Bank for Reconstruction and Development, the Kuwaiti Fund, the Islamic Bank for Development and different financial bodies. These financial institutes granted Azerbaijan with credits under 4% interest.

According to the Finances Ministry, limit on foreign debts has been assimilated in the amount of $1bn. Under the agreements signed, the foreign debts borrowed under the governmental guarantee made up $3,424bn as of early October, whereas as of 1 July - $2,973bn. Rise in debts is linked with the purchase of airliners.

The limit this year was increased three times during the reconsideration of budget forecasts for 2006. The rise is regarded as expedient in connection with the plans of borrowing loan under TRACECA program for financing the construction of automobile roads.

Taking in to consideration the experience of the government on management on foreign arrears, increase of the amount of foreign debts will evolve problems for Azerbaijan. In its report the World Bank estimated Azerbaijan with 5 points (maximal estimation is 6 points), which confirms right and balanced management of foreign debts. According to Fazil Abdullayev, the head of the Foreign Economic Relationships Department of the Finances Ministry, Azerbaijan pursues a policy of wise and stable borrowing.

To assert the stability of the foreign arrears in the country Abdullayev said that one of the indices of stability is its correlation to the GDP, which is accepted as normal up to the level of 40%, while in Azerbaijan вЂ" 15.8%. The second figure indicator is the correlation between repayment of foreign debts to general budget expenses. Today the figure in Azerbaijan is 1.14% of all budget expenses, or around 20% of annual repayment of the guaranteed loan. The third factor of stability is the correlation of the foreign debts to export of goods and services (the accepted norm is up to 200%), while in the country вЂ" within 50-60%.

As to amount of per capita foreign arrears in Azerbaijan, it is comparatively low - $192. However, under the plans on implementation of some big projects in 2006the total public debts will grow, whilst in accordance with the planned 30%-rise in GDP the correlation between public arrears and GDP will remain in the previous amount. Moreover, the credits will allotted with interests higher than the privileged and lower than the commercial loan.