Azernews.Az

By Gulgiz Dadashova

The International Monetary Fund has hailed Azerbaijan's rapid growth in recent years and its strong buffers against external instability.

The conclusion was made in the latest statement of the IMF Executive Board over the Conclusion of 2013 Article IV Consultation with Azerbaijan.

The IMF said that the country's economic growth recovered in 2012, reaching 2.2 percent on the back of a more moderate decline in oil output than in 2011 and continued strong non-oil growth of 9.6 percent, supported by public spending.

"Inflation dropped sharply to an average of 1.1 percent in 2012, mainly reflecting the impact of global and domestic food price trends. The manat (national currency) exchange rate has appreciated by less than 2 percent against the U.S. dollar since November 2010. The external position remains strong, supported by high oil prices and sizeable public assets accumulation which could reach about 66 percent of GDP by the end of 2012.

Expansionary fiscal policy continued in 2012 with the non-oil fiscal primary deficit increasing to 45 percent of non-oil GDP from 41 percent in 2011. The non-oil deficit will increase further in 2013 if the government implements the large public investment program approved in the budget," the report reads.

The IMF said that direct lending to the real economy by the Central Bank of Azerbaijan (CBA) surged in 2012, though macro prudential measures are being developed to slow the rapid growth in private sector credit, particularly consumer loans.

"Near-term economic prospects are generally positive, though with an increasing risk of overheating and the deepening of fiscal vulnerabilities. Overall GDP growth is expected at around 4 percent in 2013 and similar levels over the medium term, driven by government spending. With the non-oil economy hitting capacity constraints and expansionary fiscal policy, headline inflation is projected to reach 7 percent by end-year, above the CBA's 5-6 percent target range, for an annual average of 3½ percent. Inflation could rise to above 6 percent over the medium term. Projections for the external position remain favorable, sustained by continued high oil prices. Risks emanate mainly from a fall in oil prices given Azerbaijan's low reliance on non-oil exports. But large foreign assets could provide sufficient buffer to mitigate the impact of future shocks, including a sharp and sustained decline in oil prices," the report says.

However, the IMF believes that critical challenges lie ahead, as continued expansionary policies may be fueling short-term risks to macroeconomic stability.

The directors considered that high oil prices at present offer a good opportunity to adjust the course of economic policies from a position of relative strength.

The IMF cautioned that continued growth in public spending is exacerbating the budgetary dependence on oil revenues and increasing the risks from a fall in global oil prices. Accordingly, they encouraged the authorities to undertake a moderate front-loaded fiscal consolidation, which would create room for private sector activity.

"Fiscal adjustment could be achieved by improving the efficiency of public spending, including through a better selection of capital projects, and by strengthening public financial management and revenue collection," the report reads.

The fund also backs the readiness of the CBA to tighten monetary policy if price pressures intensify. It also suggested that the CBA discontinue its direct lending to the real economy, which was meant to be a temporary response to the global economic crisis.

Looking ahead, the IMF executives agreed that a gradual move toward greater exchange rate flexibility would improve the economy's ability to absorb shocks as the share of non-oil exports grows.

The IMF Executive Board welcomed ongoing efforts to preserve financial sector stability, including by recapitalizing some banks and adopting prudential measures to contain the growth of consumer credit.

It also voiced support to the government's 2020 vision of making Azerbaijan a competitive and diversified economy.

The development of non-oil exports will require ambitious structural reforms to reduce barriers to trade and competition, improve the business climate, facilitate access of private companies to capital, and combat corruption and money laundering, the IMF concluded.

Azerbaijan approved Development Concept "Azerbaijan 2020: A Look into the Future" in late 2012. The need for such a concept is explained by the fact that the country is entering a new phase in its development.

The key strategic vision of the concept is to take into consideration the existing opportunities and resources to achieve sustainable economic growth and social prosperity in Azerbaijan, ensure effective state governance, rule of law and complete exercise of all human rights and freedoms, and reach a development stage characterized with an active status of civil society in the country's public life.