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IMF: The nonhydrocarbon sector is expected to increase by 4 percent in 2018


Growth prospects are positive in the near term. With expanding public investment and social spending, the nonhydrocarbon sector is expected to increase by 4 percent in 2018. Notable improvements have been made in social protection and labor markets, including a new unemployment insurance fund, implementation of pension reform, and a shift from passive to active labor market programs, APA reports quoting official website of IFM

 

An International Monetary Fund (IMF) team led by Mohammed El Qorchi visited Baku from November 30 to December 14 to hold discussions in the context of the 2018 Article IV Consultation.

 

At the conclusion of the visit, Mr. El Qorchi made the following statement:“The economy has stabilized in 2017 thanks to active macroeconomic policies and stronger oil prices. The nonhydrocarbon economy started to expand mainly due to reviving service and agriculture sectors. Higher oil prices, better nonhydrocarbon exports, and import compression have also restored the current account surplus. Annual headline inflation, however, has remained elevated mainly due to the impact of exchange rate pass-through effects and one-off increases in administrative prices. For 2017, the mission now projects real GDP to contract by 0.3 percent, and inflation to average 13 percent.”

 

“Growth prospects are positive in the near term. With expanding public investment and social spending, the nonhydrocarbon sector is expected to increase by 4 percent in 2018. The hydrocarbon sector, on the other hand, will continue to contract. Overall, growth is projected at 2 percent in 2018, and should range between 3.5 to 4 percent in the medium term as new natural gas fields come online. As base year effects wear off, inflation should decline to 7 percent in 2018, and gradually recede. Although the restructuring of the banking sector is not complete, risks to the outlook are broadly neutral.”

 

“When the oil price shocks materialized, the authorities appropriately tightened macroeconomic policies, allowed exchange rate flexibility, and started to address banking system fragilities. With the recession now petering out and oil prices rising, there may be pressure to return to a fixed exchange rate regime and to unsustainably high public investment. This must be resisted. While oil prices have rebounded from the lows of early 2016, they are not expected to return to the lofty levels seen in 2011-14.”

 

“Fiscal spending—particularly capital spending—is set to increase markedly in 2018. While higher oil prices should help to contain the negative impact on Azerbaijan’s fiscal balances, there is a concern about the quality of public investment, and the economy’s capacity to absorb a large jump in capital spending. The government is planning to address this concern, in part, by implementing a set of fiscal rules, starting in 2019, to guide fiscal policy over the medium term. These rules would be a step in the right direction and, if well designed, improve credibility and predictability of policymaking.

 

“The most pressing challenge facing Azerbaijan is to address the vulnerabilities in the banking sector and to restart the credit intermediation process. To that end, the authorities should fully recognize the bad assets that are burdening Azerbaijan’s financial system. The prompt implementation of adequate solutions in this regard will contribute to economic growth. They have attempted to strengthen banking supervision and bank resolution with a view toward promoting financial stability. The authorities also agree that regulatory forbearance in the banking system should be removed in the near term, and reporting of banks’ financial data strengthened.”

 

“The mission would note the importance of preserving the independence of public institutions such as the Central Bank of Azerbaijan and the financial regulator (FIMSA).”

 

“The mission welcomes the authorities progress in implementing their structural reform agenda. Notable improvements have been made in social protection and labor markets, including a new unemployment insurance fund, implementation of pension reform, and a shift from passive to active labor market programs. Follow through and implementation of structural reforms, however, are critical. The impact of measures will be heavily diluted if they are not fully and vigorously applied.

 

“The team would like to thank the authorities for their openness, candid discussions and their hospitality”

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