The International Monetary Fund and Reforms in

Just after collapse of

USSR

all post-Soviet republics took the path of constructing democratic states with the market economy and got involved in vast systemic changes. Such institutions as International Monetary Fund and the World Bank played a key role almost in all of these reforms. They have provided both financial and technical support.

The main principles of the economic reforms in all transitional countries were based on so called “Washington Consensus”. Main recommendations of the Washington Consensus are the following:

Transition to independence in Azerbaijan Republic was notable for some specific connected to each other features:

1. Military conflict with

Armenia

, which took place within the territory of Azerbaijan

3. Beneficial geopolitical situation and clash of interests of the great states in this region as a result.

Though vehicle of transition should be “initially fueled” by massive foreign governmental assistance - moral, intellectual, technical and financial (Islam 1993),

Azerbaijan

lacked such aid. For example, the share of

governmental assistance has been the largest in most of the fSU countries, but not in

Azerbaijan

. In fall of 1992 in response to strong electoral pressure by Armenian diaspora in America US Congress adopted Section 907 to the Freedom Support Act which deprived

Azerbaijan

of direct governmental assistance financed by

budget. Thus country has been forced to rely on other sources such as external borrowing.

All these factors together had serious negative repercussions for the development of stable political and economic situation. Stability was achieved only after coming to power of Heydar Aliyev in June 1993, who made a comeback by taking advantage of a military coup lead by pro-Russian Colonel Suret Huseynov against the rule of the Popular Front (PFA) government. Suret Huseynov obtained the post of Prime Minister, but after substantial disagreements on the strategy of economic policies Suret Huseynov was dismissed.

Cease-fire in Karabakh and final agreement with multinational oil giants on oil fields in the Caspian sector of

Azerbaijan

and signing $7 billion contract with Azerbaijan International Operation Consortium (AIOC) in 1994 as a result also contributed to establishment of stable pre-conditions for launching the radical reforms.

Financial Aid and Reforms

At the same time Government started negotiations with International Monetary Fund about funding the economic reforms in

Azerbaijan

joined the IMF on September 18, 1992 . Its quota is SDR 117.0 million (about $175million). However, till that time

Azerbaijan

did not apply for any credits to IMF.

Experts of IMF prepared stabilization program, for which implementation $ 46 million were given in April of 1995 (STF[1]). This was a beginning of the long and fruitful cooperation between IMF and

Azerbaijan

The first program's main aims were to limit the decline in real GDP to 6 percent, reduce monthly inflation to about 2 percent by the end of the year, and limit the external current account deficit to below 10 percent of GDP and restore a sound external reserve position to the central bank.

This comprehensive stabilization and reform program that

Azerbaijan

started in early 1995 was extremely successful in achieving macroeconomic stabilization. It brought about a rapid reduction in inflation from a monthly rate of over 50 percent in late 1994 to an average of 2-1/2 percent during the past six months. Significant progress was achieved in establishment of monetary stability, as a result of stable nominal exchange rate and a rapid accumulation of foreign reserves. Although recorded real output has continued to decline, there was growth in such spheres as trade and services.

Progress in structural reforms was not that big. Although in early 1995 some progress was made in improving the functioning of the marketplace by unifying and liberalizing the exchange regime, centralizing foreign exchange holdings in the central bank, abolishing the state order system, and eliminating subsidies, the pace of structural reforms slowed, in particular in the area of privatization.

In November of 1995 IMF approved credits (Stand-by[2] and STF Drawing) for

Azerbaijan

totaling about $132 million to support the Government's 1995-96 economic reform program. Its aims were further reduction of inflation through tightening of monetary policy, fiscal adjustment, with a reduction of the overall budget, structural reforms (restructuring the financial sector, rationalizing the price structure, achieving rapid progress in privatization, and initiating the enterprise restructuring process) as well as reforms of benefits system.

Next two credits (ESAF and EFF) were approved in December 1997 with the total sum of $64 million. By this time macroeconomic environment stabilized, e.g. reduction of inflation and the resumption of growth. Rapid progress was made in developing market-based mechanisms. ESAF[3] and EFF[4] credits were given for medium-term strategy and 1998 Program.

Medium-term economic policy strategy was aimed at speeding up the transition to a market economy and developing the country’s oil resources without adverse impact on the rest of the economy. The aim was to avoid negative consequences of financial inflows from oil such as unbalanced economic development characterized by a strong appreciation of the real exchange rate and the crowding out of the non-oil economy (Dutch disease). In structural reforms, and the highest priority was given to public sector management reform, bank restructuring and privatization, and a fair process of enterprise and land privatization.

In January, 1999 IMF approved loans and credits equivalent to $112 million to support

Azerbaijan

’s 1999 economic and financial program and compensate for an export shortfall as a result world oil price reduction in 1998. It was also aimed to continue structural reforms with highest priority given to reforming the public sector, tackling corruption, and improving the efficiency of the government.

In July of 2001 IMF gave to

Azerbaijan

about $100 million credit under the Poverty Reduction and Growth Facility (PRGF) in order to continue support for the economic reform of Azerbaijani Government. The main objectives of this recent reform program are maintenance of macroeconomic stability, improvement of governance, and growth of the non-oil related sectors of the economy.

Concluding Remarks

So were the “IMF style” reforms successful? Government officials tend to exaggerate success; opposition is concentrated on failures and mistakes, while IMF itself is balancing between its own interests, diplomatic etiquette, and reasonable critics.

However, IMF financed programs have been at the core of

Azerbaijan

international support. Even most fervent opponents of these reforms have to admit that they were quite successful in tackling inflation and establishment of relatively stable macroeconomic situation. However, continuation of this policy resulted in “demonetization” of economy and GDP growth is much higher than growth of M2 aggregate.

The pace of legislative and structural reforms has been slow, so that the degree of legal transition to a market economy has been one of the lowest among all transitional countries (The EBRD Transition Report 1997, 1998, 1999). The problem in case of

Azerbaijan

is high level of corruption and state capture as well as flourishing “crony capitalism”. The inflow of oil money will make such reforms more difficult. That’s why IMF paid attention to the possibility of and overly strong Azeri currency Manat to avoid “Dutch Disease” (Rosenberg and Saavalainen, 1998). IMF has also encouraged and supported establishment of so-called Oil Fund in which all revenues from oil should be concentrated.

One might say that political reasons for the relative success of the reforms in

Azerbaijan

have prevailed because of the geopolitical competition for dominance in the region and control over Caspian huge oil deposits. It could be a kind of reward to the Azerbaijani government by US in the person of IMF for its opposition to

Russia

. Such geopolitical issues let IMF not to see deep corruption or inconsistency of reforms as well as the strengthening authoritarian regime unconstrained by free elections. However, one can predict that if the government fails to discontinue its corruption-friendly policies, the IMF will change its attitude in order to protect its own reputation (Mamedov 1998).

After all I would like to attract your attention to an important issue which can be evaluated as my input into the general critics of IMF as an international financial institution and one of the main actors in the world economy and politics. IMF high level officials have explained in the their public statements that late start of its programs in Azerbaijan is a result of the war with Armenia, stressing that this organization does not support stabilization programs in any country involved in active military operations. However, such a strong commitment of IMF to pacifist ideas seems very doubtful in the light of a fact that IMF financed reforms in

Armenia

started much earlier than in

Azerbaijan

and when this country was still involved in military operations on the territory of Azerbaijan . Or that the state budget of

Armenia

prepared under the framework of IMF-driven reforms program still contains expenditures on stimulating citizens of

Armenia

to migrate to the newly occupied territories of the neighboring

Azerbaijan

(Mamedov 1998). How can we explain such a policy of “double standards”? The question is still open and could be a topic for another special research.

Islam, Shafiqul (1993): “Conclusion: Problems of Planning a Market Economy” in Islam, Shafiqul and Michael Mandelbaum eds. Making Markets. Economic Transformation in Eastern Europe and the Post-Soviet States . Council on Foreign Relations Press. New York .

Cornell, Svante E. “

Azerbaijan

: Between Authoritarianism and Democratization”, Uppsala EES Working Paper no. 56, May 2000

Rosenberg, Cristoph B. - Saalvalainen, Tapio O. “Dealing with

Azerbaijan

’s Oil Boom”, Finance&Development, September 1998

Mamedov, Ilgar (1998) Political Economy of Post-Communist Transition in

Azerbaijan

(1995-1997), MA Thesis, Political Science Department, CEU

Williamson, John, 1994, “In Search of a Manual for Technopols” in The Political Economy of Policy Reform ed. by John Williamson, Institute for International Economics, Washington D.C. 1994

1997-1998-1999 Transition Reports, European Bank for Reconstruction and Development. London

[1] STF is a temporary financing facility to provide assistance to member countries facing balance of payments difficulties arising from severe disruptions of their traditional trade and payments arrangements

owing to a shift from reliance on trading at non-market prices to a multilateral market-based trading system.

[2] Stand-by credit is letter of credit that guarantees a loan or other form of credit facility. IMF promises in this case to refund the amount borrowed if borrower defaults on repayment.

[3] ESAF is a concessional IMF facility for assisting eligible members that are undertaking economic reform programs to strengthen their balance of payments and improve their growth prospects. ESAF loans carry an interest rate of 0.5 percent a year and are repayable over 10 years, with a 5-year grace period.

[4] EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4- year grace period.