Economic activity accelerated in Azerbaijan in 2013 as oil output stabilized while non-oil growth continued at close to 10 percent, IMF said.

Inflation remained low and the external position strengthened further. President Aliyev won a third term in the October election. Favorable economic prospects and large buffers provide an opportune environment to speed up reforms.

In an environment of high oil prices but with a relatively short oil production horizon, the overarching challenge for Azerbaijan remains bringing fiscal policy to a sustainable position while accelerating structural reforms to foster broad-based private sector-led growth. 

IMF staff recommends: 

• Pursuing a growth-friendly fiscal consolidation strategy by cutting investment projects with small growth returns and advancing decisive reforms to improve the business environment and thereby create opportunities for private investment; 

• Maintaining monetary policy in a neutral stance while improving the transmission mechanism and taking steps to enable greater exchange rate flexibility in the medium term; and 

• Fostering private sector–led growth in the non-oil sector by ensuring financial stability, promoting the deepening of financial markets, strengthening governance, and removing barriers to competition and trade. 

Previous Consultation: During the 2013 Article IV Consultation, Directors encouraged the authorities to: (i) undertake a moderate front-loaded fiscal consolidation based on a rules-based fiscal framework; (ii) discontinue the Central Bank’s direct lending to the real economy; (iii) strengthen the supervisory framework and adopt prudential measures to contain the growth of consumer credit; and (iv) advance ambitious structural reforms to reduce barriers to trade and competition. Since then, the authorities have signaled a change in the course of economic policies by approving a budget for 2014 that contains government spending, unwinding part of the central bank’s directed lending to the real sector, and adopting measures to rein in consumer credit. The pace of reforms aimed at strengthening the fiscal framework and improving governance and the business climate remains slow.