Publication: Monitor Volume: 6 Issue: 58

The World Bank in mid-March delayed the first US$60 million tranche of a US$200 million loan citing Azerbaijan’s lack of progress in public sector reform. This follows an IMF decision in late February to delay a US$22 million tranche of a US$57 million structural loan, also due to Azerbaijan’s poor performance on economic reform. Azerbaijan was able to dismiss the earlier decision to hold back the IMF loan given that the government is expected to receive US$200-300 million in oil revenues in 2000 as well as US$115 million in bonus payments from three big oil contracts to be ratified by parliament later this year. The government of Azerbaijan has stated, however, that it views the delay of World Bank funding with concern.

The World Bank’s second three-year structural assistance loan which was suspended is aimed at creating an environment for private sector development and increasing support for the social sector (such as pensions and education). Additional World Bank loans await approval in June for the Absheron canal ($42 million) and the rebuilding of the Azerbaijan-Georgia highway ($40 million). Public sector reforms, on which the Azerbaijani government will need to make progress to get the World Bank financing, include: improving public spending management, restructuring the government’s central apparatus and ministries, establishing an audit body for the public sector and pushing through legal and judicial reforms (Reuters, March 13). While little progress has been made in these areas, Azerbaijan has taken steps to improve its tax code (a bill awaits final approval in parliament) and has stated that the Baku Stock Exchange should be up and running by spring. One glaring problem for international financial institutions in assessing Azerbaijan’s progress on reform is the lack of movement on privatization.

The long-awaited second stage of voucher privatization, which is to privatize stakes in medium- to large-scale enterprises, does not yet appear close at hand. Much debate revolves around what to do with the vouchers distributed by the government in 1996 that were to be redeemed for shares in privatized companies. Foreign investors bought up most of these vouchers in subsequent years, but the price of these vouchers has since collapsed given continuing delays surrounding the second stage of privatization. Although the vouchers are set to expire in August, it was expected that the government, eager not to offend foreign investors, might extend their life. In March, the World Bank suggested a new proposal for privatization that would scrap the voucher options, with compensation for the current voucher holders. Privatization could then proceed through an auction. The government responded to the World Bank plan by stating that it is considering dropping the vouchers, but has not accepted the idea of compensation for voucher-holders (Reuters, March 13). Such a move would show a lack of good faith by Azerbaijan in moving forward on reform and would make the release of IMF and World Bank funding all the more difficult.