PRESIDENT ALIYEV SEEKS BILATERAL "PERMANENT

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E.O. 12958: DECL: 11/28/2016
TAGS: ECON EFIN ETRD EAID PREL PGOV AJ
SUBJECT: PRESIDENT ALIYEV SEEKS BILATERAL "PERMANENT
WORKING GROUP" ON MACROECONOMIC POLICY AND DEVELOPMENT

REF: BAKU 1274

Classified By: AMBASSADOR ANNE E. DERSE PER REASONS 1.4 (B, D)


1. (U) This is an action request. Please see paragraph 5.


2. (C) In a one-on-one meeting with the Ambassador on
November 23 (see septel for discussion of energy issues),
President Aliyev, recalling his discussion with U.S.
government officials in Istanbul last July about an
intensified bilateral economic dialogue, enthusiastically
welcomed the proposed February 2007 launch of the Economic
Partnership Commission. "Practical, concrete results, not
just intentions" are needed from the EPC, he said. He said
he is especially interested in having the EPC help Azerbaijan
address its serious macroeconomic policy challenges and a
longer term development strategy for Azerbaijan. Azerbaijan,
he worried, "is facing huge energy revenue inflows, and we
can make mistakes because we don't have experience." He said
Azerbaijan urgently needs advice and regular consultations on
this challenge. Similarly, Azerbaijan needs advice to craft
a sensible long term development strategy, Aliyev said. "We
have water, power, road" and other projects, but they "need
better coordination" in the framework of a long term
development strategy. Hiring a full time outside advisor or
consultant to the government as Kazahkstan did is sensitive
because "one problem we have in Azerbaijan - a big problem -
is that everyone thinks they know everything," he said.
Nonetheless, advice is urgently needed. He proposed the U.S.
and Azerbaijan establish a "permanent working group that can
work with us on this" under the EPC, as a vehicle for regular
consultations and a neutral forum to introduce expert views
and advice.


3. (C) In an earlier conversation with the Ambassador,
Executive Director of the State Oil Fund (SOFAZ) Shamar
Movsumov made a similar plea. Noting that establishment of
the EPC is "the best thing the USG could have done" to assist
Azerbaijan's efforts to address successfully its economic
challenges, he also urged that the EPC focus on "very
strategic issues" of liberalization, macroeconomic management
and development. Movsumov hopes the EPC would address
questions such as "a development strategy for ten years -
what do we need to construct? What do we need to invest in?"
He also underscored the importance of concrete results. For
example, he said, Azerbaijan has high unemployment, and is
desperately in need of technical, vocational and service
workers, who can be trained in six to ten months but such
training is not taking place. A concrete recommendation from
the EPC could spur a GOAJ effort to meet this need.


4. (C) In this connection, Movsumov noted the immense value
of the macroeconomic model that BP had provided the GOAJ, at
his request, and which had been located in SOFAZ (as a
"neutral" forum with respect to the Central Bank, the
Ministry of Economic Development and the Ministry of Finance,
all of whom had vied to host the model. Full report reftel).
He said he had held a first meeting of the two Ministers and
the Central Bank Governor and demonstrated through the model
the tradeoffs in terms of GDP at varying levels of inflation.
The model showed that if Azerbaijan experienced inflation
much higher than 25-27 percent, it would lose over time
almost USD 25 billion in GDP. He said that the model had
made an important impression on Economic Development Minister
Babayev, who is now a firm proponent of the view that the
GOAJ must "address inflation through liberalization."
Movsumov said that a similar model that could concretely
illustrate the benefits and costs of WTO accession could help
persuade those who are skeptics.


5. (SBU) Action Request: Given our interest in successful
GOAJ management of its new oil wealth and development
challenges, Aliyev's interest in establishing a "permanent
working group" on macroeconomic policy and development to
hold regular consultations is positive. We ask that
Washington agencies develop the concept for such a group that

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can be launched as a deliverable at the EPC.
DERSE