IMF warns Azerbaijan on oil dependence, business climate

(Reuters) - Progress has so far been "elusive" for Azerbaijan in its efforts to diversify the economy away from a dependence on oil and gas, and it must press a fight against corruption to improve the business climate, the International Monetary Fund said.

Former Soviet Azerbaijan, a mainly Muslim country between Russia and Iran, has tried to reduce its dependence on energy as oil production begins to plateau, using fuel revenues to spur other sectors of the economy, such as industry and agriculture.

But foreign investment has flagged, with corruption cited as one of the biggest hurdles to doing business in Azerbaijan.

"The top priority for Azerbaijan is to reduce the heavy dependence on the oil and gas sectors by pursuing decisively the government's medium term fiscal consolidation strategy," the IMF's mission chief for Azerbaijan, Raja Almarzoqi, said in an emailed response to questions from Reuters.

"The vision '2020: Looking to the Future' envisages a more diversified economy but progress is still elusive, partly on account of delays in much needed reforms in the business climate."

Almarzoqi said Azerbaijan, which ranks 80th in the World Bank's ease of doing business survey, should reduce trade barriers and press anti-corruption programmes.

Azerbaijan, which has been courted by the West as an alternative to Russia as an energy supplier, saw a net inflow of foreign direct investment of $2.6 billion last year, down on the previous three years, according to the World Bank.

The IMF forecasts 4 percent economic growth in Azerbaijan this year and 3.5 percent in 2015, down from 5.8 percent in 2013, driven by a decline in oil output and a slowdown in non-oil growth of 7.5 percent in 2014 and 6.0 percent next year.

Economic growth has slowed dramatically with oil production beginning to plateau since the oil-fuelled boom of 2003-2007, when the economy expanded by an average 21 percent per year.

Almarzoqi said it had been resilient to any impact from the Ukraine crisis but warned it was threatened by lower oil prices, which have fallen to just under $80 a barrel. Azerbaijan's budget for 2015 is based on a price of $90 a barrel.

"A sustained and sharp decline in the oil price ... could impact the non-oil GDP growth given the limited space to conduct countercyclical fiscal policy," Almarzoqi said, responding to questions from Washington.