Azernews.Az

Non-oil Gross Domestic Product (GDP) is expected to recover to 4.2 percent in Azerbaijan in 2010, but downside risks remain, Nienke Oomes, who heads the International Monetary Fund mission in the country, announced upon conclusion of the IMF Executive Board’s consultations with Azerbaijan.
She told a news conference that oil GDP is projected to grow by only 1.3 percent, implying overall GDP growth of only 2.7 percent.
"Along with the recovery of the non-oil sector and the rise in international commodity prices, inflation in 2010 is expected to increase slightly to 4 percent. Growth will be lower if businesses remain pessimistic or external demand recovers only modestly."
Oomes said that given that oil production will likely no longer be the main source of growth from now on, the medium-term outlook for the Azerbaijani economy depends strongly on whether non-oil exports, which currently account for only 5 percent of total exports, will be able to take over as the driver of the economy. "Realizing this, the authorities are committed to developing a non-oil export strategy that focuses on further improving the business environment."
Assessing Azerbaijan’s economic performance in 2009, the IMF experts concluded that the Azerbaijani economy "has withstood the impact of the crisis relatively well, but has not been immune to it".
"Overall GDP grew at an impressive 9.3 percent during 2009, but non-oil GDP growth slowed from 16 percent in 2008 to 3 percent in 2009. The large drop in international oil and other commodity prices caused fiscal and export revenues to fall by more than 30 percent. In addition, a number of state-owned enterprises (SOEs) and banks faced difficulties rolling over short-term foreign liabilities, which triggered a liquidity shortage in the banking system, and contributed to a sharp decline in credit growth. As international commodity prices fell, average annual inflation dropped dramatically from more than 20 percent in 2008 to 1.5 percent in 2009."
The IMF official said the government responded to the global financial crisis with effective fiscal policy measures. First, it limited the budgetary impact of the large drop in oil prices by allowing the oil fund to still transfer the budgeted amount of resources to the state budget. Second, it provided a large capital injection and government-guaranteed loans to help the state oil and aluminum companies stay current on their foreign debt obligations. Third, the government adjusted for the fall in revenues by cutting non-priority spending and by financing only ongoing capital investment projects. As a result, the government managed to keep the non-oil fiscal deficit broadly stable and was still able to increase social spending. The 2010 budget targets a narrowing of the non-oil deficit, while allowing for cuts in profit and income taxes.
Oomes also announced the IMF’s overall assessment of the Azerbaijani economy and its suggestions. Directors commended the authorities’ prudent policy responses to the impact of the global crisis, which helped maintain macroeconomic and financial stability and robust GDP growth. Going forward, the key challenges are to preserve the hard-won stability and diversify the sources of economic growth, the IMF said.
Notably, the IMF officials supported the intention not to increase spending in 2010 even if oil prices turn out to be higher than budgeted, given the room to improve expenditure efficiency and the need to significantly reduce the non-oil deficit to secure medium-term fiscal sustainability. Directors commended the authorities on making Azerbaijan the first country to be fully compliant with the principles and criteria of the Extractive Industries Transparency Initiative. They looked forward to greater transparency on the expenditure side and reforms to lower the current expenditure burden and the financial support to state-owned enterprises, cut tax exemptions, and simplify the tax system.
Directors agreed that the authorities’ decision to maintain a stable exchange rate had served the country well during the crisis, by reducing inflation, preventing further dollarization, and "avoiding a negative impact on households’ and banks’ balance sheets."
IMF directors further commended the authorities’ skilful monetary and financial sector responses during the crisis. They also welcomed the authorities’ commitment to developing a non-oil export strategy that focuses on enhancing competitiveness and improving the business environment through further progress with tax, customs, and financial sector reforms. Also, they welcomed the authorities’ continued commitment to join the World Trade Organization.*