OREANDA-NEWS. February 16, 2011. An International Monetary Fund (IMF) staff mission, led by Mr. Nadeem Ilahi, visited Baku on February 7-15, 2011. The mission met with senior government officials and representatives of the private sector, civil society and the diplomatic community, and the discussion paved the ground for the 2011 Article IV consultation, expected in the second half of 2011. The mission issued the following statement at the end of the visit:

“The Azerbaijani economy continues to recover from the global economic crisis. Non-oil economic growth was strong in 2010, largely spurred by high public investment spending, though inflation rose rapidly in 2010, driven largely by rising global food prices. There are increasing signs of inflation expectations becoming entrenched.

“Prospects for 2011 are also promising, but rising inflation, expected to reach 10 percent by end-2011, pose macroeconomic challenges. The main challenge for policymakers would be to contain inflation expectations, while fiscal policy would also need to contain demand pressures.

“Fiscal expansion, financed by oil revenues, has been the main driver of non-oil growth in recent years, but the increasing risk of overheating calls for moderation in 2011. Spending restraint in 2010 appears to have resulted in a lower-than-expected non-oil deficit, which, in turn, helped with restraining inflation. The mission advocates spending restraint again in 2011, and welcomes the authorities’ intention to undertake spending in line with absorptive capacity. Efforts to ensure medium term fiscal sustainability are warranted, even if the prospects for more hydrocarbon resources materialize. This could be achieved through raising non-oil revenues, making government spending more efficient and allowing space for sustainable private non-oil sector to develop further.

“The signs of overheating in 2011 call for monetary policy to be tightened. The recent policy rate increase and the move to greater exchange rate flexibility are appropriate steps, and should be accompanied with greater policy coordination, transitioning to an inflation targeting framework, and enhancing banking system’s ability to deal with exchange rate risk. The Central Bank’s plan to sterilize liquidity is welcome.

“The financial system has weathered the global crisis and the authorities have recently taken some steps to improve supervision. While system-wide liquidity and capitalization appear adequate, private sector credit growth is sluggish. The mission supports the authorities’ intention to privatize the International Bank of Azerbaijan, after restructuring it, and urges prompt action to start the resolution process to preserve financial stability.

“The sharp rise in global food prices warrants additional, well-targeted social transfers to the poor, who tend to bear a heavy burden of rising inflation. The authorities’ recent campaign to target monopoly practices and public sector corruption is welcome, and needs to be pursued in a comprehensive manner to remove economic distortions and public sector inefficiencies.

“The mission wishes the authorities well in their efforts to maintain macroeconomic stability, improve governance, and pursue a broad-based, high growth path.”