Azerbaijan government should listen to IMF’s advice

Analysis Materials 16 April 2007 12:05 (UTC +04:00)

Last week the International Monetary Fund publicized its report "World Economic Review 2007", dedicated to global economic stability.

IMF stated that the state and nearest prospects of world economy does not impose serious threats, political and economic elite of the world to be on alert. Some risks are of different character and there are best realization of indefiniteness and paradoxes, which are hidden behind the current prosperity.

The growth of GDP in Azerbaijan in 2007 is expected to reach 29.2 % against 31% an increase of that same period in 2006, the IMF report "World Economic Review 2007" stated.

The Azerbaijani Government also expects to exceed in the expectations and forecasts of the economic development of the country, which was laid down in the State Budget at a level of 28%. That will be reflected at correcting the forecasts of social and economic development in the country , and according to preliminary data, the forecasts will be determined at a level of 30 %.

According to the IMF expectations, the growth of GDP in Azerbaijan in 2008 will make up 23.1 %. As it was noted in the reports prepared by IMF, the balance of payment in Azerbaijan's GDP in 2007 will reach 27.4 % against 15.7 % registered for the same period last year. In 2008, this is expected to be 36.2 %.

IMF forecasts on Azerbaijan are interesting for Azerbaijan.

Consumer prices in Azerbaijan for 2007 are expected to reach 21.1% versus the 8.4 % registered in 2006, the IMF reports in their "World Economic Review 2007

Inflation growth rates in 2008 are expected to be at 17 %. These forecasts made by the IMF are based on the increase in state expenditures to avoid pressure on inflation. During its last visit to Baku, the IMF mission recommended the State Government reduce their growth rates. However, the Azerbaijani Government has decided to obligate itself to reducing growth rates of state expenditures starting from 2008, but their significant reduction will most likely be in 2009-2010.

Expectations and forecasts vary between different international finance organizations. For example, in the recently-promulgated review for 2007 - "The Development of Asia. Growth and Changes", prepared by the Asian Development Bank (ADB), the growth rates of the index of the consumer prices in Azerbaijan in 2007 are expected to increase to14 %. The ADB commented on the decision made by the Azerbaijan Tariff Council concerning the increase in tariffs on electricity, gas, water, and public services by almost 50% in some cases, starting from 8 January 2007, saying that this will create significant pressure on the inflation rate in the country for that year. The ADB report says that state expenditures in 2007 will increase by 42 %. For the most part, 2007 state budget expenditures will be spent similarly to 2006, paying wages to state employees, pensions, benefits, as well as defense and infrastructure.

Meanwhile, the Azerbaijan government plans to maintain a single-digit inflation in 2007. The difference in the inflation rates has always been an apple discord between Azerbaijan Government and IMF. Thus, an IMF technical mission led by senior economist Zdravko Balezov is to visit Azerbaijan from 18 to 25 April. The key objective of the visit is to carry out expert estimation on the country's joining to special standards. The State Committee has submitted to table, calendar of publication of statistic data, while the term of Azerbaijan's joining to IMF standard are still to be defined

An IMF technical mission, headed by Obert Niavata, the Chief Economist of the IMF Department for Monetary Policy and Capital Market is expected to arrive in Azerbaijan on 16 April to review the interbank market of the country. The NBA has requested assistance from IMF for the program on improving banking supervision, as the existing program is coming to its end.

It is not secret, the privatization of two state-run banks of Azerbaijan is IMF's initiative. The International Monetary Fund considers it necessary to develop Azerbaijan's financial sector. "We are expecting to complete the first step of the privatization of the State-Run Kapital Bank, since it will allow us to increase the ability of the country's banking sector to compete," said the Chief of the IMF Baku Representative Office, Basil Zavoico. In accordance with the Presidential Order on measures to be taken for privatization of "Kapital Bank" OJSC, which was issued on 9 February 2007, in the first stage, the state's capital in the bank will be reduced to 50%, expected to be sold out by five equal shares.

The IMF Resident Representative in Azerbaijan, Basil Zavoico, said on 5 April that the aggregate oil revenues of Azerbaijan will amount to $200 billion after 20 years. According to Mr. Zavoico, the oil revenues of Azerbaijan will immediately increase in 2005-2010, but over the next years, oil production will decrease and in 20 years, its volume will equal the indicators which existed two years ago. Therefore, Zavoico considers it necessary to effectively manage oil revenues.

The IMF employees have prepared alternative expenditure models for Azerbaijan. According to research, spending more than the allotted finances for the mid and long-term strategy of oil revenue management will mean that in 4-5 years there will be no alternatives for the oil sector. As a result of accelerating the use of State expenditures, growth rates in the non-oil sector will decrease.

The IMF Resident Representative in Azerbaijan, Basil Zavoico, said that the Government of Azerbaijan should prepare a medium-term trajectory of non-oil budget deficit. Careful spending of the State finances will allow middle inflation to be regulated and keep the rates of the index increase of consumer prices at a level of 5-6%.

The moderate increase in expenses will provide an opportunity to increase the efficiency of the investments and ensure a healthy increase in the non-oil sector. The trajectory of the non-oil deficit may depend upon the change of oil prices and, depending upon the oil production, the oil reserves should be taken into consideration and real expenditures should be produced.

"If expenditure is hardly spent, the development of the non-oil sector and non-oil deficit should decrease accordingly. At present the deficit in Azerbaijan is at a level required for the sustainable development and equals 50% and it needs to be maintained in the future," Zavoico stated. According to him, the suggested sustainable deficit will need to be reconsidered in four years. The IMF Resident Representative in Azerbaijan felt that following the trajectory would provide an opportunity to avoid inaccurate use of oil revenues in Azerbaijan.

IMF reports for Azerbaijan are of recommendation character. Though Azerbaijan does not depend on IMF, periodical reports and reports by this prestigious organization play considerable role for Azerbaijan. The foreign investors, foreign countries and different international organizations adhere to IMF's opinions and it actually build Azerbaijan's image. The presentation of economic situation in Azerbaijan in an unambiguous situation will make the foreign investors to think carefully before investing.

In current conditions the efficiency of IMF activities is questionable as well. This is the major reason for last talks on the necessity of reformation of the IMF. Moreover, the IMF also admits such necessity, though understands that the IMF will continuing playing an important role in the world economy. For many countries IMF is just a fund, which responds calls from members and provides resources. This is the organization which enjoys confidence, provides balanced consultations and fair representation of interests of all members.