FINANCIAL PARTNER

Azerbaijan has been a reliable and committed partner of the International Financial Institutions (IFIs) since the early days of its independence. It has also maintained its own vision on domestic financial policy, which sometimes differs from the views of foreign experts. The soundness of its decisions has enhanced its credibility among the same IFIs.

The country has overcome its dependence on loans from these institutions and now enjoys a mutually beneficial partnership with them. This is important because IFIs are not only lenders and supporters in times of need. They also shape a regional policy of financial and economic development and boost the image of their member countries. The latest news from the Azerbaijan-IFI partnership shows that the country's image remains positive and strong.

EBRD: focus on infrastructure

The European Bank for Reconstruction and Development (EBRD) has been a key player in financing various initiatives in Baku, investing €3.62 billion in 189 projects. The EBRD's current portfolio in Azerbaijan reaches €897 million to support 31 projects. The Bank's main focus is on infrastructure development, which accounts for about 90 per cent of its funds. The remaining 10 per cent goes to projects in industry, agriculture and finance.

The partnership, which slowed down during the pandemic crisis, resumed last year, and the lending volume to projects in Azerbaijan increased by 81.4% over the year. This is impressive, considering that the most productive year of co-operation in the last 7 years was 2017. Moreover, getting a loan from IFIs usually involves long and complex procedures.

The signing of a major loan agreement with the EBRD by Azerbaijan Caspian Shipping Company (ASCO) and Azerbaijan Investment Holding for the purchase of two Handysize dry bulk carriers demonstrates that the EBRD is a vital partner for Azerbaijan's sustainable growth and prosperity and that their co-operation will continue to expand. Under the agreement, 70 per cent of the funds (€38.71 million) will come from the EBRD credit line and the remaining 30 per cent will be covered by ASCO's own resources. Azerbaijani Economy Minister Mikayil Jabbarov said that "the implementation of the agreement will help to strengthen regional communications and trade relations, increase transit cargo traffic and improve competitiveness through diversification of route directions."

The EBRD will also assist ASCO in improving its corporate governance practices and climate change-related disclosures. This will enable ASCO to address decarbonisation in the shipping sector and pave the way for its first sustainability-related financial instruments.

Given that the EBRD plans to allocate $750 million for projects in Azerbaijan in 2023-2025, we can expect more announcements of new ventures in the near future.

Worldwide support

The World Bank (WB) also values its co-operation with Azerbaijan, as the Bank's manager Stefanie Stallmeister told Mikayil Jabbarov. She praised the successful partnership with the WB in the areas of improving the investment environment, public-private partnership, innovations, management technologies, entrepreneurship support and others. She also emphasised that the international organisation she represents will pursue this policy to achieve Azerbaijan's development goals.

The World Bank (WB) has already funded 49 projects in the republic, totalling $3.2 billion. Three more projects are currently underway. But this number may grow soon, as the WB and the government of Azerbaijan are working actively within the new Partnership Framework Strategy. This document reflects Azerbaijan's main strategic directions and development plans in the short and long term. It also aligns with the roadmap for expanding co-operation with the World Bank, which aims to address regional and global challenges, enhance private sector development and mobilise its capital.

Future areas of co-operation could include supporting the creation of "smart villages", implementing some projects under the Baku 2040 Master Plan, and developing renewable energy sources. Climate change, greening and digitalisation are also part of this agenda. These are the key priorities of the developed world. The WB's country report on climate and development estimates that Azerbaijan will need $44 billion in investments to achieve sustainable development and decarbonisation by 2060. By then, the global economy is expected to reach net zero emissions.

Some shifts in the co-operation vector are understandable, as Azerbaijan's demand for long-term financing of capital and infrastructure projects in the traditional energy and oil and gas logistics sectors has partly declined. On the other hand, there is more interest in programmes in the fields of alternative energy, diversification of the non-oil economy, credit support for small and medium-sized businesses, investment flow in digital transformation, and the foundations of Industry 4.0. 

IMF consultation

The International Monetary Fund (IMF), with which Azerbaijan has had relations only at the level of assessment missions for a long time, also approves of these items. In 2005, the government limited its co-operation with this leading world donor to recommendations and technical assistance and refused to borrow from the fund.

The IMF regularly conducts and publishes the results of consultations with the government of Azerbaijan. In its latest detailed report, the fund observes positive trends in the diversification of the economy in the country. This will require reforms to improve governance, limit the role of state-owned enterprises, and decarbonise the economy. "Progress in enhancing financial transparency and judicial independence, as well as ongoing efforts to increase private sector involvement in state-owned enterprises and improve their financial situation, will help improve the business environment, boost private investment, and increase productivity. The implementation of the MONEYVAL recommendations is also important. The Azerbaijani authorities' efforts to meet their climate commitments are welcome," the IMF says.

The fund's experts, while backing the Central Bank of Azerbaijan's monetary policy, advised caution before further easing. "Inflation has returned to the target range, the Central Bank cut rates in November 2023 after tightening by 275 points from mid-2021 to May 2023 and raising reserve requirements. However, inflation risks from external and domestic factors remain. Therefore, fiscal consolidation, slower income and wage growth, and the absence of adverse food price shocks are needed before further easing can be considered," the IMF notes.

The IMF economists also suggested the government take measures to reduce the impact of state-owned enterprises on the economy of Azerbaijan. However, this is already being done: in 2024, proposals will be prepared to sell to private investors a part of state shares in large state-owned companies, including in SOCAR, AzerGold CJSC, ASCO, BakTelekom, AzTelekom, ABB Bank. Metin Eynullayev, head of the State Service for Property Issues under the Ministry of Economy, noted that the government has an interest in attracting foreign investors in the privatisation process, but there are still restrictions on land rights (only lease is possible).

The IMF continues to advise separating commercial from non-commercial activities in state-owned enterprises. Recommendations also include increasing the transparency of state-owned companies and encouraging further private sector participation.

Overall, the IMF assessment emphasises the need for Azerbaijan to cautiously navigate external uncertainties while pursuing prudent fiscal and monetary policies and structural reforms to promote inclusive and sustainable growth.