Identifier
Created
Classification
Origin
06BAKU1798
2006-12-11 06:31:00
CONFIDENTIAL
Embassy Baku
Cable title:  

AZERBAIJAN: IMF REPRESENTATIVE BRIEFS REVENUE

Tags:  ECON EFIN ETRD PREL AJ 
pdf how-to read a cable
VZCZCXRO1338
RR RUEHDBU
DE RUEHKB #1798/01 3450631
ZNY CCCCC ZZH
R 110631Z DEC 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 1941
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1897
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001798 

SIPDIS

SIPDIS

DEPT FOR EB ASSISTANT SECRETARY DANIEL SULLIVAN AND BOB
POLLARD
DEPT PLEASE PASS TO USTR SHAUN DONNELLY, PAUL BURKHEAD AND
BETSY HAFNER
TREASURY FOR ASSISTANT SECRETARY CLAY LOWERY, DAS NANCY
LEE, AND JEFF BAKER
USAID FOR DREW LUTEN

E.O. 12958: DECL: 12/11/2016
TAGS: ECON EFIN ETRD PREL AJ
SUBJECT: AZERBAIJAN: IMF REPRESENTATIVE BRIEFS REVENUE
MANAGEMENT GROUP ON MACROECONOMIC TRENDS


Classified By: DCM JASON HYLAND, PER REASONS 1.4 (B, D)

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 001798

SIPDIS

SIPDIS

DEPT FOR EB ASSISTANT SECRETARY DANIEL SULLIVAN AND BOB
POLLARD
DEPT PLEASE PASS TO USTR SHAUN DONNELLY, PAUL BURKHEAD AND
BETSY HAFNER
TREASURY FOR ASSISTANT SECRETARY CLAY LOWERY, DAS NANCY
LEE, AND JEFF BAKER
USAID FOR DREW LUTEN

E.O. 12958: DECL: 12/11/2016
TAGS: ECON EFIN ETRD PREL AJ
SUBJECT: AZERBAIJAN: IMF REPRESENTATIVE BRIEFS REVENUE
MANAGEMENT GROUP ON MACROECONOMIC TRENDS


Classified By: DCM JASON HYLAND, PER REASONS 1.4 (B, D)


1. (C) SUMMARY. The IMF Resident Representative provided an
overview of Azerbaijan's macroeconomic environment at a
November 30 meeting of the Friends of Azerbaijan Revenue
Management Group. Azerbaijan's GDP is projected to grow by
32 percent in 2006, while the non-oil sector fiscal deficit
has grown to 30 percent, highlight the economy's increasing
reliance on energy. Official inflation data for 2006
indicates that inflation remains tame at 12 to 13 percent.
IMF inflation estimates, however, indicate that the real rate
of inflation stands closer to 20 percent as the GOAJ
continues to manipulate CPI data. The money supply has
increased 110 percent so far in 2006 and the value of the
Azerbaijani manat has held steady against the U.S. dollar
since the National Bank shifted monetary policy stabilizing
the exchange rate. Calling the 2007 budget "moderately
expansionary," the IMF representative noted that the final
list of large capital expenditure projects, however, would
not be announced until early 2007. The IMF recently learned
that the Government of Azerbaijan (GOAJ) had been able to
spend the entire budget for 2006, surprising many economic
observers. The RMG group also expressed concern that a
Russian Presidential Decree banning all foreign workers
operating in bazaars, retails shops, kiosks and other areas
by April 2007 would have a negative impact on Azerbaijan's
economy, although Minister of Economic Development Babayev
downplayed the decree's impact. END SUMMARY.

MACROECONOMIC ENVIRONMENT
--------------


2. (C) At the November 30 Friends of Azerbaijan Revenue
Management Group (RMG) meeting, the IMF Resident
Representative briefed the group on the current macroeconomic

environment, noting that the economy continues to grow
quickly. Azerbaijan's Gross Domestic Product is projected to
increase by more than 32 percent in 2006. He stated that the
non-oil sector fiscal deficit had increased from 12 percent
in 2005 to more than 30 percent in 2006, highlighting the
economy's reliance on the energy sector and shrinking role
played by the non-oil sector. In addition, the IMF had
recently learned that the GOAJ had successfully spent its
entire 2006 budget expenditures. In early 2006, the economic
consensus was that the GOAJ would be able to spend only a
portion of the approximately USD 4 billion budget due to weak
government oversight and economic structural limitations.
Transparency of GOAJ spending and procurement remains a major
concern with increasing government budgets.

INFLATION HIGHER THAN OFFICIAL DATA
--------------


3. (C) The IMF rep stated that official inflation has
remained muted at 11.2 percent and the GOAJ expects year-end
inflation to total between 12 and 13 percent. Due to the
long lag between spending effects and inflation, the IMF
believes that GOAJ's large expenditures (begun in June 2006)
would eventually hit the economy in early 2007.
Unofficially, the IMF estimates that inflation is much higher
than official totals, reaching as high as 18 to 20 percent.
Due to a statistical quirk, the GOAJ is currently using
average 12 month inflation data which lowers inflation to 8.5
percent, accomplishing a 2005 President Decree to maintain
single-digit inflation. The IMF representative highlighted
that salaries had increased 30 to 40 percent so far in 2006,
leading many observers to question the GOAJ's official
consumer price index data.

MONETARY POLICY
--------------


4. (C) The IMF rep said that money supply increased 100
percent for the first 11 months of 2006 and would probably
reach 120-130 percent by year's end. The Azerbaijani manat's
steady appreciation against the U.S. dollar appears to have
slowed since July as the National Bank of Azerbaijan has
shifted its monetary policy. In 2005 and early 2006, the NBA
had been allowing dollars to circulate in the foreign
exchange market allowing the manat to appreciate and holding
back inflationary pressures. After a presidential speech

BAKU 00001798 002 OF 002


highlighting the need for a stable exchange rate, the NBA
appears to have started converting dollars to manats rather
than pushing the foreign exchange on to the market, and
stabilizing the manat-dollar exchange at 0.88 manat to the
dollar. As a result, the manat in real terms will likely
show no appreciation against the dollar in 2006. In 2005,
the manat appreciated seven percent against the dollar.

2007 STATE BUDGET
--------------


5. (C) Regarding the 2007 State Budget, the IMF rep said that
Parliament had made no material changes and that it would be
signed by the president in the next two weeks (budget details
reported septel). Calling the budget "moderately
expansionary," the IMF rep noted that expenditures had
increased 60 percent while revenues increased 53 percent.
The final list of large capital expenditure projects,
however, would not be announced until early 2007.

AZERBAIJANIS IN RUSSIA
--------------


6. (C) The RMG group also discussed the November Russian
Presidential Decree banning all foreign workers operating in
bazaars, retails shops, kiosks and other areas by April 2007.
The group agreed that this measure was certainly focused on
Georgians working in Russia, but that it would also affect
some of the 2-3 million Azerbaijanis living and working in
Russia. The IMF rep noted that the GOAJ had created a
commission led by a Deputy Prime Minister to examine the
situation. One participant noted that if Azerbaijanis were
unable to work in Russia, long a source of badly needed
remittances, it could create a difficult political and
economic situation for the GOAJ. In a separate meeting with
the Ambassador December 5, Economic Development Minister
Babayev confirmed that the GOAJ had created a special
commission led by First Deputy Prime Minister Eyyubov to
review the recent Russian anti-foreign worker decree.
Babayev downplayed the decree's impact on Azerbaijan,
predicting that only 10,000 Azerbaijani workers would return
from Russia to Azerbaijan and that Azerbaijan's economy could
easily absorb these workers.

COMMENT
--------------


7. (C) Azerbaijan's economy continues to charge ahead and
will most likely be the fastest growing in the world again in
2006, expanding at more than 30 percent. The IMF resident
representative's overall view of the economy continues to be
cautious as official quantitative economic data does not
always highlight imminent problems. The relative fiscal
restraint of the 2007 State Budget is a positive development,
along with large increases in public heath and education
sectors. In 2007, the GOAJ will continue to increase
salaries leading possibly to higher inflation. The lack of a
transparent business environment and corruption remain two of
the major challenges facing GOAJ economic decision-makers.
HYLAND