The Executive Board of the International Monetary Fund (IMF) has completed the third review of the Azerbaijan Republic's performance under a three-year, SDR 80.45 million (about US$119 million) Poverty Reduction and Growth Facility (PRGF) arrangement. The completion of this review enables the release of a further SDR 12.87 million (about US$19 million) immediately, which will bring total disbursements under the arrangement to SDR 41.84 million (about US$62 million). The PRGF arrangement was approved on July 6, 2001.
The Poverty Reduction and Growth Facility is the IMF's concessional facility for low-income countries. PRGF-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners, and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that each PRGF-supported program is consistent with a comprehensive framework for macroeconomic, structural, and social policies, to foster growth and reduce poverty. PRGF loans carry an annual interest rate of 0.5 percent, and are repayable over 10 years with a 5 Ѕ-year grace period on principal payments.
Following the Executive Board discussion, Agustнn Carstens, Deputy Managing Director and Acting Chair, said:
"Azerbaijan's macroeconomic performance remains impressive, with strong and broad-based GDP growth, low single-digit inflation, and a stable exchange rate. Structural reforms continue to advance and Azerbaijan's external position is expected to remain strong. While these achievements have contributed to increased per capita income and improved income distribution, poverty nonetheless remains widespread and the economy remains vulnerable to a sustained sharp drop in oil prices. The authorities therefore need to implement the planned structural reforms speedily, particularly in the energy and banking sectors. In addition, continued progress in improving governance will help to further improve the environment for private sector-led growth.
"The authorities' mix of fiscal and monetary policies for 2004 is appropriate. While the overall fiscal deficit is projected to increase modestly in 2004 in light of the pressing needs for infrastructure and social spending, the non-oil deficit will remain well within the estimated long-run sustainable level. In addition, recent measures to reunify the enterprise profit tax and to reduce VAT exemptions significantly will further improve the efficiency of tax administration and broaden the tax base. The new budget systems law that was adopted in May 2003 has ensured a closer integration of the state and oil fund budgets into a consolidated budget, and has also improved accountability.
"Efficient use of Azerbaijan's oil wealth is essential to ensure continued income growth and poverty reduction, and the authorities intend to adopt a long-term strategy for the use of oil revenue in early 2004. The successful implementation of such a strategy will require increased transparency of government spending, as well as further improvement of the authorities' institutional capacity for project evaluation, implementation, and monitoring.
"Monetary and exchange rate policies remain appropriate, and should continue to aim at maintaining low inflation while preserving the competitiveness of the economy and remaining consistent with the goal of non-oil growth. The strong growth in monetary aggregates that started in 2002 has continued, and represents a welcome increase in money demand. However, the authorities are encouraged to review developments during 2004 closely, to ensure that macroeconomic stability is maintained and the banking sector's credit portfolio remains healthy.
"In the banking sector, progress continued toward the privatization of the two remaining state-owned banks that dominate the domestic market, International Bank of Azerbaijan (IBA) and BUS Bank, although at a slower pace than anticipated. Going forward, it is important to ensure the speedy privatization of IBA and BUS Bank in order to increase competition as well as adopt in a timely fashion the new laws on the banking system and the central bank.
"Progress in energy sector restructuring has been mixed. While gas and electricity collections from end-users continued to improve, and the State Oil Company of the Azerbaijan Republic (SOCAR) has started to pay taxes on the basis of the tax code, the combined fiscal and quasi-fiscal energy-related subsidies grew modestly in 2003, following a sharp reduction in 2001 and 2002. The authorities will therefore need to ensure the implementation of the planned measures to exercise effective government control of the utility companies' financial operations through strict budget constraints on these enterprises. The authorities should continue to work toward the eventual adoption of an automatic adjustment mechanism for the domestic gas and oil products prices, to ensure they remain in line with world market prices, while at the same time designing a safety net to protect vulnerable groups. The corporatization and privatization of these enterprises should also be accelerated," Mr. Carstens said.
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