IMF CONTINUES FREEZE ON FUNDS FOR AZERBAIJAN.

In late February the IMF confirmed that the US$22 million tranche of a US$57 million structural loan to Azerbaijan, initially suspended at the end of 1999 due to the Fund’s displeasure with Baku’s willingness to introduce economic reforms, remains frozen. The Fund also emphasized that discussions of a new three-year US$200 million program will not be finalized until the Azerbaijani government draws up a plan to reduce poverty and generate employment (Reuters, February 24).

Azerbaijan’s progress on key reform initiatives advocated by the Fund, especially privatization and tax reform, has been decidedly mixed. The sale of the state’s share in Azerbaijan’s largest bank, the International Bank of Azerbaijan, which had been scheduled for the first half of 1999, has been postponed until mid-2000. An audit of the bank’s 1999 operations, needed for the tender, will only be completed by March. The Azerbaijani parliament did, however, pass the first reading of a new tax code at the beginning of February. The simplified tax code would unify various laws on taxation and the activities of tax inspectors and should provide a significant boost to small business (Interfax Central Asia and Caucasus Report, February 7-13). It remains to be seen, however, when the new law will be confirmed by parliament, and how it will be implemented. In February, the government announced that–in another long-delayed response to IMF initiatives–a viable stock exchange will finally be created this spring. Within its first six months of operations the Baku Stock Exchange (BSE) is to feature trading in treasury bills, privatization vouchers, and bank deposit certificates. Following its privatization, shares of the International Bank of Azerbaijan are to be listed on the BSE, as are 10-15 percent of the shares in Baku’s Electricity Network. By 2001, shares in other privatized enterprises are to be listed on the exchange as well (Reuters, February 18).

The BSE’s creation is a necessary precondition for the second stage of Azerbaijan’s privatization program, in which stakes in the country’s largely untouched medium- and large-scale enterprises are to be sold. While the second stage has been of great interest to the IMF and foreign investors, it also has been subjected to repeated delays. Foreign investors spent significant sums purchasing privatization vouchers which, according to the government’s previous privatization program, were to be used in auctions for these firms. Delays in the privatization program then caused voucher prices to collapse. Since the vouchers expire in August, passage of new legislation is required to extend their life. The timetable for this legislation still remains uncertain, however, which casts a large shadow over prospects for the second-stage privatization program. The IMF has also proposed restructuring the public sector and auditing the state oil company, SOCAR.

Although it could tarnish Baku’s relations with other foreign investors, the suspension of IMF financing is unlikely to have a dramatic effect on Azerbaijan’s immediate economic prospects. Baku’s foreign exchange reserves are currently around US$700 million, and Azerbaijan in 2000 is expected to receive some US$200-300 million in oil revenues. Baku should receive another US$115 million in bonus payments from three big oil contracts likely to be ratified by parliament later this year (Reuters, February 24). Moreover, Baku is now enjoying strong economic growth–GDP was up some 7 percent in 1999–and relatively small debt-service payments. For all of these reasons, Azerbaijan will not be hit hard by the continued suspension of a US$22 million credit. Its oil windfall is instead likely to ease pressures to implement reforms in the non-oil sector–reforms which are needed to reduce poverty and help balanced Azerbaijan’s economic growth.

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