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Azerbaijan Republic: Staff Report for the 2003 Article IV Consultation, Second Review Under the Poverty Reduction and Growth Facility, and Requests for Waivers of Performance Criteria, Extension of Arrangement and Rephasing of Purchases

International Monetary Fund
Published Date:
June 2003
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I. Recent Economic Developments

1. Economic developments in recent months were broadly consistent with program targets. Real GDP grew an estimated 7.9 percent in the first quarter of 2003 relative to the same period last year. Inflation remains low, with 12-month CPI inflation of 2.3 percent at end-March, down from 3.3 percent at end-2002. As expected, reserve money balances fell at end-March relative to the end-2002 stock, due to seasonal factors, although the decline was less than assumed under the program. Similarly, net international reserves (NIR) of the ANB fell somewhat less than expected.1

2. Consistent with two key commitments under the program, SOCAR paid more in taxes in the first quarter than had been assumed in the state budget, with payments reportedly based on actual tax obligations rather than negotiated tax targets, and the Ministry of Finance has saved this higher-than-budgeted tax revenue as a cushion against possible future lower SOCAR tax obligations. Continuing the efforts to improve the business environment, a new presidential decree further streamlines the licensing process for business activities requiring licenses, and a Council of Businessmen has been created and charged with preparing additional proposals for the improvement of the business environment.

3. Unusually heavy rains this spring resulted in serious flooding in three regions of southern Azerbaijan, with some 4,000 households reportedly affected. The government has requested assistance from the World Bank in dealing with the impact of the flood, and may also solicit assistance from other UN organizations. It is too early to determine the impact on agricultural output or GDP more generally, or on the state budget.

II. Implementation of prior actions

4. There were four prior actions for the completion of the second review under the PRGF, as specified in paragraph 55 of the LOI and labeled (i) to (iv). All have now been implemented, as described below and smnmarized in Table 1.

Table 1.Prior Actions for the Completion of the Second Review under the PRGF
Policy ActionStatus
(i) Submit to Parliament amendments to Budget System Law (as specified in paragraph 55 of LOI)Done. Amendments submitted to Parliament on April 17,2003
(ii) Adopt privatization timetables for International Bank (IBA) and United Universal Joint Stock Bank (paragraph 37 of LOI)Done. A presidential decree and a presidential resolution were issued on April 17, 2003
(iii) Adopt procedures for allocation of tax credits and subsidies for unpaid fuel consumed by utilities, in consultation with Fund staff (paragraph 10 of LOI)Done. Streamlined procedures approved on April 15, 2003
(iv) Issue a Cabinet of Ministers decree instructing timely payment of pension contributions by state-owned enterprises (paragraph 34 of LOI)Done. Cabinet of Ministers decree issued on April 19,2003

5. Draft amendments to the Budget Systems Law were submitted for Parliament’s consideration on April 17,2003. Consistent with the understandings under the program (prior action (i)), these amendments call for parliamentary approval of the deficit and expenditure ceilings of the consolidated budget, require that all expenditures in the consolidated budget (except for expenditures on the management of the oil fund and its assets) be executed by the treasury and that all capital expenditures be part of the State Investment Program, assign responsibility for the preparation of the consolidated budget to the Ministry of Finance, ensure that extra-budgetary funds do not make portfolio investments in domestic commercial activities or issue loans or loan guarantees, and require that the State Oil Fund (SOFAZ) holds equity position only through highly rated professional portfolio managers in international markets. These amendments have already been approved by the Economic Committee of parliament, and are expected to be considered by the full parliament shortly.

6. A presidential decree and a presidential resolution were issued on April 17,2003 regarding the privatization, respectively, of International Bank of Azerbaijan (IBA) and BUS Bank. The decree on IBA instructed the Ministry of Economic Development (MOED) to hold negotiations with the EBRD for the sale of 20 percent of the state-owned shares in IBA during the summer of 2003, including signing a Memorandum of Understanding with the EBRD on this issue by May 30,2003, and to sell by end-2004 the remaining portion of state-owned shares in IBA through cash auctions. In a separate letter, the MOED has committed to announcing the tender for these remaining shares no later than end-2003. The resolution on BUS Bank instructed MOED to submit by July 1,2003 for presidential approval a plan of action that would ensure all measures for the preparation of BUS Bank for privatization are completed by end-2003, and that the privatization of BUS Bank be completed by end-2004.

7. A streamlined mechanism calling for the provision of quarterly tax credits to SOCAR and subsidies to Azerenergy and Azerigas within 30 days of the end of each quarter was approved on April 15 2003, in a joint decision of the ministers of finance, economic development, and fuel and energy and the president of SOCAR (prior action (iii)).

8. A Cabinet of Minister’s decree was issued on April 19,2003, as called for in prior action (iv), instructing all central, regional, and local government bodies to take urgent measures to ensure timely payments by all state-owned companies of their State Pension Fund contributions.

9. Nothing in this supplement changes the thrust of the staff appraisal, as detailed in EBS/03/57.

1While actual end-March NTR is higher than the unadjusted indicative target under the proposed program, insufficient information is available at this time on the disbursement of foreign financed capital spending and actual taxes due by SOCAR during the first quarter of2003 to enable the staff to calculate the adjusted target. Thus staff is not yet in a position to judge performance against the NIR target, as well as most other end-March indicative targets.

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