1. SUMMARY: During the Ambassador's July 28 introductory
call on National Baku of Azerbaijan (NBA) President Elman
Rustamov, Rustamov said Azerbaijan's year-to-date growth
hovered around 40%, while inflation over the last six months
was nearly six percent. Rustamov reviewed the progress that
Azerbaijan has achieved in the economic and banking sectors,
but admitted that much work needs to be done. Rustamov said
that economic reform will act as a catalyst to political
reform and because of this pursuing economic reform is
important. END SUMMARY.



2. During a July 28 meeting the National Bank of Azerbaijan
President Elman Rustamov briefed the Ambassador on
Azerbaijan's recent economic growth. He reported that
Azerbaijan has seen approximately 40 percent growth in its
overall economy and 90 percent growth in the energy sector.
He also said that the 2006 budget will increase by
approximately 90 percent. The level of foreign currency held
in the central bank has doubled (time period not stated). He
said that over the past six months inflation has been six
percent. Rustamov reported that of the entire finance
sector, 90 percent is in the banking sector.



3. Despite the rapid economic growth in Azerbaijan, there
were still no foreign banks in Azerbaijan that did
significant business. Rustamov said that foreign banks were
welcome in Azerbaijan, and seemed perplexed as to why more
foreign banks were not operating in Azerbaijan. He then
agreed with the Ambassador that this was likely the result of
what is viewed by potential banks as a poor business and
legal climate. Rustamov laid out the following priorities
for the NBA in the coming years: ensuring financial and
macroeconomic stability through better coordination of
macroeconomics policy, increased transparency in the banking
sector, strengthening of the national bank so it can have the
modern, classical functions of a central bank, solving the
basic problems of the banking sector and privatization of
banks. Rustamov said that with the continued cooperation of
the World Bank, European Bank for Reconstruction and
Development, and USAID, that the path of liberal reforms that
has been started in the banking sector will continue.



4. Rustamov was proud to report that Azerbaijan has the best
electronic payment system amongst the CIS countries. He also
mentioned that the "postal bank" project and microcredit are
two important projects for the regions of Azerbaijan that
will make a big difference in the lives of ordinary people.
Rustamov said that these are only two areas where the banking
sector is having positive impacts on other sectors of the
economy. Additionally, the NBA has established banking
programs at a university in Baku.



5. On the negative said, Rustamov said that there remains a
very large informal economy in Azerbaijan, which hinders some
reform efforts. For example, one of the reasons that the
recently passed law on mortgages has not been successful is
because while most people have enough income to qualify for
the mortgage, they do not have enough legal income that can
be officially verified, which results in a large number of
individuals not qualifying for a mortgage. Rustamov said
that while NBA was currently involved in the mortgage
process, this function would be separated from the Central
Bank on one or two years.



6. (SBU) COMMENT: The NBA's ability to manage fiscal
policy will be key to the GOAJ's ability to stave off
inflation and Dutch Disease over the next few years. The
weak overall banking sector, combined with a recent GOAJ
decision to nearly double the 2006 budget (septel) make the
NBA's task all the more difficult. END COMMENT.
HYLAND