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InterviewsJuly 5 2010

Samir Sharifov

Azerbaijan's finance minister tells The Banker about the country's strategy to diversify its economy away from a dependence on oil exports and addresses international questions about the government's fiscal transparency. Writer Michelle Price
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Samir Sharifov

An oil-rich economy, Azerbaijan was enjoying a major economic boom when Samir Sharifov was plucked from his role as the head of Azerbaijan's State Oil Foundation and appointed minister of finance in 2006.

But while oil has swollen Azerbaijan's gross domestic product (GDP) growth and built more than a few careers, it is also proving problematic, exposing the country to the vagaries of the global commodities market. In 2003, the Azerbaijani government developed a roadmap for restructuring the country's economic base that included promoting rural development and diversifying Azerbaijan's non-oil-based output.

Between 2003 and 2009, the Azerbaijani economy nearly tripled in size with thriving non-oil sectors - including construction, banking and real estate - posting double-digit growth. Hailed internally as a great success, the economic plan was last year extended to 2014, says Mr Sharifov.

A glance at the latest forecasts tells a more subdued story, however. While the country's economy grew at a remarkable 9.3% in 2009, non-oil GDP growth slowed from 16% to just 3% for 2009, according to the International Monetary Fund (IMF). Moreover, non-oil exports still account for just 5% of the country's export base, whose ongoing dependence on oil is borne out in projected GDP growth rates for 2010 and 2011: dented by relatively low oil production, these are expected to slump sharply to just 2.7% and 0.6%, respectively.

Mr Sharifov appears unfazed by the IMF's outlook. "We have very high respect for the IMF and its projections, but we cannot say that all IMF projections can be taken for granted. We will take note of these projections, but in the first three months of 2010... we have demonstrated more than 5% GDP growth compared with 2009," he says.

Following impressive growth rates of 25% for 2007 and 10.8% for 2008, the Azerbaijani economy will naturally experience a relative slowdown, argues Mr Sharifov. "With the higher value of the economy, the growth rate will slow," he says. "I still believe that the economy will demonstrate a sufficiently high growth rate [for 2010]."

Nevertheless, Mr Sharifov acknowledges the ongoing predominance of energy exports when asked about the Word Trade Organisation (WTO), to which Azerbaijan is currently negotiating entry. "[Entry] is one of our strategic goals, [but] the conditions of our accession and other important issues have yet to be decided," he says.

"For smaller countries such as Azerbaijan, membership presents some opportunities and some challenges. Opportunities include access to bigger markets but, at the same time, all other WTO members get much easier access to our markets. Unfortunately, Azerbaijan's exports are still not very highly diversified and, from this point of view, under the WTO there would be more imports coming to Azerbaijan than going out, under present conditions."

Fiscal transparency

For the WTO and other multilateral agencies, including the IMF and the Organisation for Economic Co-operation and Development, Azerbaijan's opaque fiscal framework remains a concern. In a March 2009 report on the Azerbaijani economy and sovereign finances, the IMF refers to a lack of transparency on public spending and urges the government to improve "expenditure efficiency".

But Mr Sharifov rejects the IMF's implied criticism. "We cannot understand what the IMF sees as a lack of transparency in government spending. Sometimes the IMF is trying to present this information in a very distorted manner," he says.

"All the information on our budget is available. The budget is subject to very thorough parliamentary discussion. Information on the draft budget is available to the mass media and on our website. The cabinet submits to parliament a report on the execution [of the budget], so information on how the budget was spent is available. Frankly speaking, I do not understand these views [on a lack of transparency]; these views are not substantiated and have no grounds," he says.

The good news for Azerbaijan and Mr Sharifov is that non-oil GDP growth is expected to recover in 2010. A strong financial sector and improved access to credit will play an important role in boosting non-oil industries, but the banking sector has been hit, if not too hard, by the global financial crisis. In 2009, many state-owned enterprises and banks experienced difficulties rolling over short-term foreign liabilities, which led to a shortage of system liquidity and a consequent decline in credit growth.

Although the Central Bank of Azerbaijan took swift action, reducing the reserve requirement on deposits, cutting the refinancing rate and injecting $1.1bn into the banking system, the latter remains fragile, particularly in terms of asset quality, as Mr Sharifov concedes. "The banks in Azerbaijan, like elsewhere, still have problems with non-performing loans and [the ratio] is higher than it was before. [That] is one of the issues that we have to address," he says.

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