Baku Falls Out with IMF

The International Monetary Fund has halted funding to Azerbaijan after a quarrel over economic reform.

Baku Falls Out with IMF

The International Monetary Fund has halted funding to Azerbaijan after a quarrel over economic reform.

Thursday, 19 December, 2002

Azerbaijan and the International Monetary Fund are engaged in a bitter quarrel, with the IMF condemning the Baku government's economic reform programme and the Azerbaijanis responding that they prefer to pursue their own line, without IMF help if necessary.

The dispute took a new public turn on December 14, when the local IMF office in Baku accused the government of a breach of its earlier commitments, and of pursuing the wrong economic policies.

Azerbaijan has received more than 150 million US dollars in IMF loans since 1992. In the past, the two sides have always managed to reach a mutually acceptable compromise over their quarrels. But the relationship between the two sides cooled off about six months ago and has since gone from bad to worse.

This autumn the IMF froze its third tranche for Azerbaijan of the Poverty Reduction and Growth Facility loan, worth 16 million dollars. The programme, which was agreed in June 2001, promised to give Azerbaijan a total of 80 million dollars over three years.

On December 2-11 a group of IMF inspectors - headed by the the European department's south-eastern division head John Wakeman-Lynn - visited Baku in attempt to try and find a way out of the impasse. However, fund officials reported that, "no mutually acceptable solution was reached on the agenda".

Three hotly-disputed points are at the heart of the quarrel - the spending of Azerbaijan's National Oil Fund, NOF, which accounts for one third of the national budget, taxation reform and the government's refusal to raise domestic oil prices.

With regard to the oil fund, the IMF took umbrage at Azerbaijani president Heidar Aliev's July 30 decree, which drew on the fund to finance 30 per cent of Azerbaijan's contribution to building the Baku-Ceyhan oil pipeline.

The IMF's Baku office objected that the decree violated the guidelines of the oil fund, under which it could only be used to finance public welfare programmes and never commercial projects.

"Enforcement of this decree weakens the logic and consistency of Azerbaijan's budget policy, and jeopardises the nation's macroeconomic stability," an official at the IMF Baku office told IWPR.

In response, Azerbaijani officials point out that the same presidential decree commits the National Bank to transferring 118 million dollars of its hard currency reserves to the oil fund. In other words, the National Bank is ultimately covering the pipeline construction costs.

"The conflict makes no sense," argued independent financial consultant Nazim Imanov. "The funds that make up the NOF are simply part of national revenue, no more, no less. Azerbaijan is at liberty to dispose of this money as it sees fit."

The Azerbaijani government enjoys public support for its taxation policy, however. On November 26 the government introduced new amendments to the tax code, which provide for different rates of corporate profit tax for different industries and regions.

The IMF has now demanded the repeal of the amendments. "International experience shows that regional tax differentiation fails to boost regional growth," the IMF Azerbaijani office declared. "[Our] view is that these amendments compromise the integrity of the fiscal code and erode Azerbaijan's economic policy."

The government begged to differ. "The system really works and several major industrialised economies use it, including the United States," said Finance Minister Avaz Alekperov.

Ali Alirzaev, deputy chairman of the Azerbaijani parliament's economics commission, also believes that the proposed tax amendments will foster business growth in the provinces.

"I think the IMF is afraid that more businesses will be incorporated in the regions with the lowest tax rates, but will actually operate in the capital," Alirzayev told IWPR. "Well, that is certainly a risk, but at this juncture we have no choice but to take it. It's the only way we can give regional companies a shot in the arm."

Azerbaijani authorities and public alike are also opposed to the IMF's recommendation to stop subsidising domestic sales of imported natural gas, crude oil and fuel oil, and the fund's insistence that prices be brought up to international levels.

The IMF has given Azerbaijan a year to increase its wholesale crude oil prices from the current 45.5 dollars per ton to 80-100 dollars. Fund consultants argued that this would increase the profitability of the National Oil Company of Azerbaijan - which provides more than one third of national revenue - would increase, and that would eventually help reduce poverty.

The government strongly disagrees. "An increase in crude fuel prices will cause a general price hike of at least 2.3 times for all consumer products. The government certainly cannot afford to raise wages and social security payments accordingly," Alirzayev told IWPR.

The World Bank has estimated that more than 60 per cent of Azerbaijanis live below the poverty line. According to the Trade Union Confederation of Azerbaijan, the average wage today is just under 50 dollars a month, while pensions and benefits are worth less than 30 dollars.

"The gap between consumer prices and incomes is already wide enough," said Orkhan Kerimov, president of the Economic Development Association. "An abrupt price increase would only inflame social tensions. The reform should be gradual,"

President Aliev has endorsed this position, saying, "We cannot meet this IMF requirement. The living standards in Azerbaijan are not high enough."

The IMF argues that while it does not want to see higher prices hitting consumers, the producers need to be paid more. "The difference in rates must be compensated individually to low-income families," said IMF's European director John Odling-Smee on a recent visit to Baku.

The failure of the two sides to reach a compromise on the matter led to the aumtumn freezing of the Poverty Reduction and Growth Facility loan tranche.

Finance minister Alekperov is putting a brave face on the turn of events. "Well, I guess we are not getting the 10 million dollars the IMF had pledged by year-end to replenish our hard-currency reserves," he said. "But we have other sources we can draw on, so we won't suffer unduly."

Alekperov said the dialogue with the IMF might continue, but not "unless the fund takes a more constructive stance".

Nurlana Gulieva is a correspondent with Echo newspaper in Baku

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