The IMF assessed the results of the development of the Azerbaijani economy in 2022-23 and shared its forecasts until 2029

Following the results of the November expert mission regarding the review of Article IV of cooperation between Azerbaijan and the IMF, the International Monetary Fund (IMF) published an extensive statement on its website (21 paragraphs and tables of forecasts), in which, along with the country's economic successes, it presented its recommendations on "weak points"

(https://www.imf.org/en/News/Articles/2023/12/11/mcs121123-azerbaijan-staff-concluding-statement-of-the-2023-article-iv-mission).

According to the Fund's experts, the slowdown in inflation and reaching a single-digit level are positive; a strong financial external position supported by high world prices for oil and gas (the country's main export products, which provide foreign exchange earnings); growth of foreign exchange reserves of the Central Bank; improvement of the situation in the banking sector.

At the same time, representatives of the IMF mission that visited Baku pointed to the persistence of certain risks of vulnerability of the Azerbaijani banking sector; to fluctuations in the pace of economic growth.

According to the published tables, the growth of Azerbaijan's non-oil GDP in 2023 will amount to 4.2% (thanks to the transport and construction sectors), in 2024 - 3.6%, in 2025-2028 – an average of 3.5% per year.

The decline in the oil sector in 2023 will amount to 1.5%, in 2024-2028 the decline will decrease and will average 0.5% per year.

According to IMF forecasts, in 2023 the nominal GDP of Azerbaijan will amount to $76.8 billion against $78.7 billion in 2022, GDP in 2024 is expected to be $79.7 billion, in 2025 - $82.8 billion, in 2026 – about 86.2 billion, in 2027 – $89.7 billion, in 2028 - $93.8 billion.

The International Monetary Fund (IMF) forecasts Azerbaijan's GDP growth at 2.4% in 2023 and 2.3% per year in 2024-2028.

The average annual inflation in Azerbaijan in 2023 will slow down to 9.4% (almost in line with government forecasts) from 13.9% in 2022 due to a decrease in global prices for food, non—food types of goods and services, in 2024 to 4.7%, but in 2025 it will accelerate to 5%.

In 2026, inflation may slow down again to 4.5%, and in 2027-2028 – to 4% per year. Due to high world prices for hydrocarbons, the current account surplus of Azerbaijan's balance of payments for 2023 is projected at 12.4% of GDP (in 2022 – 29.8% of GDP), for 2024 – 13.4% of GDP, for 2025 – 10.5% of GDP, for 2026 - 8.5% of GDP, for 2027 – 7.7% of GDP, for 2028 – 5.9% of GDP.

According to the IMF experts' expectations, the foreign exchange reserves of the Central Bank of Azerbaijan will grow from year to year, which by 2029 will reach $12.281 billion (by the end of 2022, the CBA's foreign exchange reserves were $8.996 billion).

According to IMF forecasts, by the end of 2023, the Central Bank's foreign exchange reserves may amount to $11.281 billion (an increase of 25.4% compared to 2022). And in 2024-2028, the annual growth of the Central Bank's foreign exchange reserves is estimated at $200 million.

Among the factors contributing to the growth of CBA reserves is the limited demand for foreign currency on the Central Bank's shares.

As for the assessment of the assets of the State Oil Fund (the basis of the country's strategic foreign exchange reserves), there is a discrepancy in the forecasts of the IMF and the government.

Thus, according to IMF estimates, by the end of 2023 SOFAZ's assets will amount to $51.12 billion (an increase of 3.5% compared to 2022), by the end of 2024 - $52.819 billion, by 2025 - $53.205 billion. In 2026, SOFAZ's assets will increase to $53.425 billion, in 2027 - $53.744 billion, in 2028 - $54.524 billion. By the end of 2022, SOFAZ's assets amounted to $49.369 billion.

As of September 30, 2023, SOFAZ's assets, according to official data, amounted to $55 billion 524 million (an increase of 13%).

According to the forecasts of the Azerbaijani authorities, SOFAZ's assets may amount to $58.6 billion by the end of 2027, with an average oil price of $80 per barrel in 2023-2027. With an average oil price of $60 per barrel, SOFAZ's assets will amount to $50.5 billion by 2028. With oil prices averaging $70 per barrel, SOFAZ's assets will amount to $54.4 billion by the end of 2027.

In turn, IMF experts believe that in 2023 the price of Azerbaijani oil (including the premium) will be $82.5 per barrel (in 2022 - $98.4 per barrel), in 2024 - $81.9/bar, in 2025 - $78/bar, in 2026 - $74.7/bar, in 2027 - $71.9/bar, in 2028 - $69.5/bar.

The IMF pointed out the low price for Azerbaijani gas (a controversial assessment): the average price of Azerbaijani gas in 2023, according to the Fund's analysts, will be $384.8 per 1,000 cubic meters (in 2022 - $740 per 1,000 cubic meters), in 2024 - $393.1 per 1,000 cubic meters, in 2025 - $291.7 per 1 thousand cubic meters, in 2026 - $362.6 per 1 thousand cubic meters, in 2027 - $322.6 per 1 thousand cubic meters, in 2028 - $319 per 1 thousand cubic meters.

In general, the IMF urged the authorities not to forget about the volatility of the hydrocarbon market, especially given the Russian war in Ukraine and the aggravation of the situation in the Gaza Strip.

ASSESSMENT OF MEASURES IN THE BANKING SECTOR

The IMF pointed to the tightening of the CBA's monetary policy. Since mid-2021, the CBA has been regulating the interest rate, which was eventually reduced to 8.5 percent in November 2023.

"The CBA has significantly increased reserve requirements to eliminate excess liquidity in the banking sector. In the period from August 2022 to August 2023, he collected mandatory reserves in national and foreign currencies in several stages," the experts of the IMF mission noted. The capital adequacy ratio was 18.5 percent in September 2023.

Lending continues to expand, especially for households, although at a slower pace due to tighter regulatory measures. "De-dollarization trends continue in the field of deposits and loans, accompanied by a decrease in net open currency positions. The share of restructured loans has decreased, but remains high, and the classification of non-performing loans (NPL) still does not have adequate quality criteria," the Fund said in a statement.

In general, the Fund's experts urged the Central Bank to be cautious about further interest rate cuts.

"External factors, which were the main driving force behind the fall in inflation, may reverse...If deflation continues, fiscal policy for 2023 will be tougher than planned, wage growth will slow down, and adverse food price shocks will not materialize. Then it will be possible to consider further reduction of the Central Bank's rates," the Fund believes.

The IMF welcomed the launch of permanent mechanisms for providing and sterilizing liquidity, expanding the range of open market operations and steps to develop the infrastructure of the interbank market. The interbank market has become more active, and in September 2023, interbank interest rates moved inside the interest rate corridor.

"However, the impact on bank lending rates has not improved yet. The authorities should continue their efforts to modernize monetary policy, including by strengthening the analytical and forecasting potential of the Central Bank and improving communication," the statement said.

The mission also pointed out that "official authorities should remain vigilant about the risks associated with restructured loans." "We recommend that the authorities continue to conduct comprehensive credit quality assessments, including through stress tests and thematic inspections, as well as accelerate the process of resolving problem loans," the document says.

The Fund's experts noted that "despite recent progress in the banking sector, the financial sector plays a limited role in supporting the economy of Azerbaijan." "The country is still dominated by several conglomerates, and financial accessibility is at a low level...The IMF mission hopes for a comprehensive assessment of the role of the financial sector in the economy, including identifying and eliminating areas of cost inefficiency in banks, such as high operating costs. It is also necessary to support the development of digital financial services, such as open banking and financial technologies, to stimulate competition and expand financial accessibility, especially for small and medium-sized enterprises," the Statement said.

BUDGET AND KEY DRIVERS

The IMF welcomed the authorities' continued commitment to medium-term fiscal consolidation. "We forecast a reduction in the non-oil primary deficit by about 2 percent of non-oil GDP by 2024, reflecting mainly moderate spending growth in accordance with the budget for 2024. The basic medium-term forecast shows a further reduction in the deficit, assuming: (i) continued moderate growth in current expenditures and a gradual reduction in capital expenditures in accordance with the medium-term spending plan of official bodies; (ii) the expiration of the income tax exemption for the private non-oil sector by 2026; and (iii) the absence of further erosion of the tax base as a result of new tax holidays and exemptions. Based on these assumptions, it is projected that the non—oil primary deficit will decrease significantly to about 15 percent of non-oil GDP by 2028, while the ratio of public debt to GDP will increase moderately by about 3 percent of GDP and will amount to about 21 percent," the Statement concluded.

The IMF called on the government for "sustained fiscal consolidation due to the projected decline in hydrocarbon production and revenues."

"We welcome the authorities' reasonable medium-term spending plan and urge the authorities to remain prudent in spending, including further curbing wage growth, rationalizing subsidies, gradually increasing domestic energy prices and reducing capital expenditures...In the long term, measures will be required to increase non-hydrocarbon revenues. Therefore, it is necessary to continue efforts to improve tax administration, expand the tax base and explore new sources of budget revenues," the document says.

The IMF recalls that Azerbaijan has adopted a Development Plan until 2030, a roadmap to reduce dependence on hydrocarbons and promote a more sustainable and diversified economy.

"The plan recognizes that in order for the private sector to become an engine of growth and employment, it is necessary to improve the business environment, including by increasing transparency and fighting corruption; improve the efficiency of state-owned enterprises and increase competition; and expand renewable energy sources. The authorities have already simplified licensing procedures, increased financial transparency, expanded the provision of public services through a single window and approved a National Action Plan to combat Corruption. We welcome the amendments to the legislation that enhance the independence of the Judicial and Legal Counsel, and the upcoming implementation of the recently adopted law on public procurement. Nevertheless, we call for further progress in strengthening the ownership rights system, introducing an asset disclosure regime already enshrined in law, and further increasing the transparency of beneficial ownership, especially in the extractive industry," the experts of the IMF mission noted.

In the last paragraph of the Statement, the Fund's analysts recalled the country's commitments on the green climate agenda.

"The authorities are improving the legislative and institutional environment to promote the renewable energy sector. The cost of timely implementation of all projects to meet these obligations will be significant. We urge the authorities to consider additional measures to reduce the potential financial burden, such as phasing out direct and indirect subsidies for fossil fuels and tightening energy efficiency regulations. This will not only help Azerbaijan fulfill its climate commitments, but will also contribute to the development of the renewable energy sector as a future driver of economic growth and employment, while maintaining financial prudence," the IMF mission noted.