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Azerbaijan: IMF Directors Urge Accelerating Reforms

Washington, 18 August 1998 (RFE/RL) -- The Executive Directors of the International Monetary Fund (IMF) have urged Azerbaijan to speed the pace of reforms to meet the "severe challenges" the country faces, especially in reducing high unemployment and dealing with poverty in the non-oil sector.

In their annual review of Azerbaijan's economy, the directors said they regretted the limited progress the government had made in restructuring its spending, but also cautioned that with lower oil prices cutting revenues, the government should avoid across-the-board budget cuts.

The annual review, known as the article four consultation, is conducted each year with each member state of the IMF. It was held June 26 with the 24 directors, who represent all 183 member nations in running the fund's daily business. It was released publicly Monday.

In a background report, the IMF staff noted that following the breakup of the Soviet Union, Azerbaijan's real GDP (gross domestic product or the size of its economy) declined by 60 percent. But it said that with the signing of the first oil production sharing agreement with foreign investors in 1994, the situation improved.

Coupled with strong reform programs, the fund staff said that inflation was brought down to near zero since late 1997, the manat currency has been strengthened, and GDP growth had risen to around 9 percent in the first quarter of this year.

The directors, in assessing Azerbaijan's situation, commended the authorities for their success in stabilizing the economy through low inflation and strong growth.

However, they said, progress on structural reforms had been mixed, with "significant differences" remaining between various sectors of the economy. That is why, the directors said, it is important that reform efforts be accelerated to deal with rising unemployment and poverty in all non-oil areas of the economy.

The IMF directors said they welcomed the revenue measures already taken to partially offset the impact of lower oil prices, but some directors encouraged Baku to considered additional measures to make sure falling oil prices don't raise the deficit.

The directors also noted that large capital inflows being brought into the country by oil development places upward pressure on the value of the manat, so urged the government to strengthen monetary policy and move to better develop domestic markets for credit and treasury bills.

Azerbaijan was urged by the IMF directors to broaden and speed-up structural reform efforts, especially in the agricultural sector, so as to assure that the country's economic recovery helps all sectors and improves the climate for private sector development.

Another problem area is that of banking, said the directors, and delays in solving the problems of four state-owned banks could hamper private sector development -- particularly small and medium size enterprises -- and threaten the recovery of the non-oil economy.

"It is essential that the privatization of both the International Bank and Savings Bank be completed to schedule," warned the IMF directors, and that "quick and firm actions" be taken to address the problems of the other two state-owned banks.

The directors noted that one-third of all banks in Azerbaijan are not in compliance with prudential regulations and urged better banking supervision.

Finally, the directors welcomed the government's plan to tackle governance issues forcefully, improve fiscal transparency and strengthen the country's legal framework.