AZERBAIJAN: SUCCESSFUL MINISTERIAL-LEVEL

C O N F I D E N T I A L SECTION 01 OF 03 BAKU 000573

SIPDIS

SIPDIS

E.O. 12958: DECL: 04/15/2016
TAGS: ECON EFIN PGOV PREL AJ
SUBJECT: AZERBAIJAN: SUCCESSFUL MINISTERIAL-LEVEL
MACROECONOMIC BUDGET SEMINAR ENDS WITH HOPE FOR FURTHER
REFORMS

Classified By: AMBASSADOR RENO L. HARNISH III PER 1.4 (B,D).


1. (SBU) SUMMARY: Ambassador Harnish hosted the first ever
ministerial-level seminar on macroeconomic, budget and
public investment planning strategies that brought together
the Ministers of FinQce and Economic Development, National
Bank Chairman and other high-level Government of Azerbaijan
officials. Presentations by the World Bank and the Public
Investment Policy Project USAID contractor focused on steps
the GOAJ needs to take to improve its macroeconomic framework
and budget preparation; they also sparked debate between the
ministers and IFI representatives on the GOAJ's budget
process. At times, ministers disagreed with one another on
the establishment of a budget council and development of a
long-term economic strategy plan and also complained about
the lack of GOAJ internal coordination. As a result of the
seminar, the Ministers and National Bank Chairman left with a
stronger understanding of the importance of efficient budget
preparation and the critical role that government
coordination plays in managing the country's oil wealth,
alleviating poverty and developing the non-oil sector. As a
followQn to the seminar, the GOAJ will hopefully take
several proposals under consideration, including the creation
of a high-level macroeconomic and budget council. END SUMMARY


2. (SBU) On April 12, Ambassador Harnish hosted a four-hour
long ministerial-level seminar on macroeconomic, budget and
public investment planning strategies with the Government of
Azerbaijan. The Ministers of Finance and Economic
Development, National Bank Chairman, Deputy Speaker of the
Parliament, and representatives from the President's office,
Ministry of Transportation, Customs Committee, international
financial institutions and diplomatic corps attended the
seminar. The World Bank, the USAID contractor managing the
Public Investment Policy Project (PIPP),the Deputy Minster
of Finance and the head of the Economic Policy and
Forecasting Division of the Ministry of Economic Development
delivered key budget process presentations that sparked a
lively discussion among the participants. The PIPP
presentation in particular, with its dynamic budget flow
diagram, led Economic Development Minister Babayev to whisper
questions privately to his deputy minister.

MINISTERS STRESS KEY THEMES
--------------


3. (SBU) In their opening statements, Finance Minister Avaz
Alakbarov and Economic Development Minister Heydar Babayev
expressed positive and negative aspects of the GOAJ's budget
process. Finance Minister Alakbarov highlighted the
tremendous importance of sound and efficient budget planning
and coordination. He also stressed the need for GOAJ
monitoring and assessment of macroeconomic indicators and
their effect on the overall economy. Alakbarov noted that
the GOAJ is dedicated to public sector inQstment, reduction
of poverty and rural regional development. He added that
Azerbaijan's accelerated growth rate, increasing state budget
expenditures, growing inflation and currency appreciation
will make meeting the GOAJ's goals complicated. Alakbarov
stressed the need to strengthen control over public
expenditures by improving internal controls and audits. He
acknowledged the role of the newly automated treasury system
(funded by the U.S.) in improving the analysis of
expenditures.


4. (SBU) Economic and Development Minister Heydar Babayev
told the group that the GOAJ is aware of the economic
problems and challenges. He said that the country's rapid
growth rate, increasing inflation and integration into the
global economy has complicated the government's ability to
manage the economy and develop the non-oil sector. Babayev
stressed that oil revenue management was critical to
long-term success. He stated that national Qdget priorities
need to fit with national goals and priorities. He said that
only integrated inter-ministerial work could help solve the
problem of unsatisfactory linkages between national and
sectoral economic planning and the budget. He touched on the
need for improved capacity of civil servants. Babayev
outlined the major goals of the GOAJ, including increasing
growth, properly managing oil revenues, alleviating poverty,
improving infrastructure and developing the non-oil sector.
Accomplishing all these goals, while maintaining an efficient
budget process that meets the entire country's needs, will be
a challenge for the GOAJ's economic decision makers.


5. (SBU) National Bank Chairman Elmar Rustamov noted that the
development and institutionalization of a macroeconomic

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framework was critical to developing an efficient budget. He
stated that he supported the drafting of a long-term
government economic plan, with inputs from IFIs, that would
focus on sound economic decision making, poverty reduction
and development of the non-oil sector economy. He added that
institutional cooperation in the GOAJ needed to be
strengthened. He supported the idea of creating an economic
council, an idea presented in the World Bank and PIPP
presentations.

WORLD BANK AND PIPP PRESENTATIONS
--------------


6. (SBU) World Bank economist Christos Kostopoulos and PIPP
Chief of Party Mete Durdag delivered well-informed and
detailed presentations on the need for a macroeconomic
framework, the role of the Azerbaijani budget law, current
institutional weaknesses and several proposals to improve the
overall process. Kostopoulos noted that the GOAJ's
budget law was a good building block to develop a more
integrated and efficient budget process. Kostopoulos
reviewed the role of key actors in the budget process,
including the State Oil Fund with the National Bank, Ministry
of Finance and Ministry of Economic Development. He
highlighted the circular links between public expenditures
and inflation, stressing the importance of macroeconomic
forecasting. Kostopoulos presented the group with several
proposals, including the establishment of a joint call
circular from MOF and MED and the creation of a high-level
budget council.


7. (SBU) Durdag from PIPP led a detailed and intricate
presentation on the overall budget process model. His flow
diagram prompted Minister Babayev and Deputy Minister
Jabbarov to discuss privately the different linkages. Both
PIPP and the World Bank's presentations provided an
informative view into the budget process, its strengths and
weakness, and, most importantly, helped GOAJ officials to
identify the main weaknesses in the current budget process
and consider concrete, practical steps to eliminate those
weaknesses.

GOAJ BUDGET PRESENTATIONS
--------------


8. (SBU) Deputy Finance Minister Azer Bayramov and the head
of the Economic Policy and Forecasting Division of the
Ministry of Economic Development Shahin Sadigov gave budget
presentations that outlined the government's budget framework
and challenges. Both speakers noted positive and negative
aspects of GOAJ budget operations. Bayramov noted that large
public capital expenditures can have a negative effect on the
economy and cause increased inflationary pressures. He
stated that the GOAJ needed to create a realistic
macroeconomic and budgetary framework that would facilitate
the efficient use of funds, development of the rural sectors
and promote sustainable development. Sadigov also
highlighted the importance of the macroeconomic framework in
order to obtain a correct economic forecasting model. He
added that the lack of coordination in the government made it
difficult to develop a long-term economic outlook strategy
plan.

IFIs AND BP SUPPORT GOAJ BUDGET REFORM EFFORTS
-------------- -


9. (SBU) Representatives from the IMF and World Bank
expressed their strong support for GOAJ efforts to improve
the budget and public investment planning process. The IMF
resident representative welcomed the creation of a high-level
economic and budget council. He added that it was essential
for the GOAJ to meet its objectives and effectively manage
its long-term oil revenues. He stated that the council could
keep high-level economic decision makers informed real-time
on the state of the economy and facilitate adjustments to
government budgetary expenditures. The new World Bank
Country Director, Gregory Gedrzdgczak, added that Azerbaijan
could learn from the European Union countries that
experienced large financial inflows from the EU, noting Spain
and Ireland's successes. BP's Chief Economist for CIS,
Vladimir Drebentsov, told the group that as an important
stakeholder in Azerbaijan's successful economic development,
BP was ready to assist the GOAJ in building capacity. He
noted that BP is supporting macroeconomic programs at Oxford
University and that GOAJ could send relevant officials for
training. BP and the State Oil Fund are also collaborating
to establish a macroeconomic forecasting model.

BAKU 00000573 003 OF 003



POSITIVE END TO SEMINAR WITH SOME GOAJ DISAGREEMENT
-------------- --------------


10. (SBU) The seminar closed with Finance Minister Alakbarov
agreeing to the establishment of a high-level economic and
budget council. He stated that creating a macroeconomic
working group with the National Bank and Economic Development
Ministry would not be a problem and was something the GOAJ
should accomplish. He requested IMF and USAID assistance in
developing a long-term (25 years) GOAJ economic strategy plan
document. Alakbarov noted that the GOAJ needed to establish
a macroeconomic framework, expand the system for monitoring
of public expenditures, and increase capacity at the Chamber
of Accounts and other ministries. He also noted that
extra-budgetary expenditures was an important issue that the
GOAJ needed to manage, adding that the lack of general
governmental coordination was a problem.


11. (SBU) In his closing remarks, Minister Babayev surprised
the audience by plainly stating that the GOAJ did not need to
establish a high-level economic and budget council. He
stated that the GOAJ already had the capacity to perform this
function. He also informed the group that the GOAJ had
already written and presented the President's
office with a long-term economic strategy. This led to a
brief back and forth discussion with the National Bank
Chairman, highlighting the lack of internal discussion and
coordination in the government. Babayev did recognize that
the GOAJ needed to make a better effort to include all
ministries in the budget process.

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

12 (C) The successful organization of this seminar has been a
long-standing goal of the U.S. and the international donor
community's Revenue Management Group. GOAJ budget planning
and coordination has been a major area of weakness. With
this year's 65 percent increase in public expenditures and a
similar increase projected for the 2007 budget, the GOAJ
needs to formalize its budget preparation process in order to
prioritize capital spending projects and avoid significant
macroeconomic disruptions. In addition, this seminar
highlighted the critical role of the National Bank in
preparing the budget and the importance of using
macroeconomic modeling to predict effects on the economy. It
is widely known that the National Bank was shut out of the
2006 budget process and provided only limited macroeconomic
input. As a result, most economic and financial observers
expect higher inflation, currency appreciation and a
weakening of the non-oil sector. From this seminar, the
international community will expect that the GOAJ take
critical steps to strengthen its budget and macroeconomic
formulations. If Minister Babayev's closing comments are
indicative of leading GOAJ thinking, it could be a long road
to developing a sound budget process that incorporates all
ministries and stakeholders.
HARNISH