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The World Bank is likely to cut its economic growth forecast for Azerbaijan and recommend to the government that it reduce reliance on oil revenues and press ahead with structural reforms, the bank's local manager said on Monday. A crash in oil prices last year sent the Azeri economy into crisis, forcing the central bank to adopt a floating manat rate and take measures to try to prevent a collapse of the banking sector.
"Current growth forecast for 2016 is 0.8 percent but it is most likely be revised in the wake of latest developments," Larisa Leshchenko said in an emailed response to Reuters questions. She did not provide a new forecast. "Sharp fiscal consolidation, substantial fragilities in the banking sector and expected low oil prices are the main factors which adversely affect the economic outlook."
Azerbaijan's economy contracted by 3.2 percent year-on-year in January-February compared with growth of 4.2 percent in the same period last year, the State Statistics Committee said last month. Economic growth slowed to 1.1 percent last year from 2.8 percent in 2014. The government forecasts 1.8 percent growth in 2016. Leshchenko said Azerbaijan's economy was undergoing a painful process of adjusting to low oil prices, but there were also "substantial opportunities for diversification of the economy."
"In particular, tradeable sectors such as agriculture, manufacturing may benefit from the devalued currency and become more competitive in domestic and foreign markets," she said. The oil and gas sector accounts for 95 percent of Azerbaijan's goods exports, 67 percent of fiscal revenues and 40 percent of the gross domestic product.
Leshchenko said the government would need to address several short term and long term challenges, including reducing reliance on oil revenues and reducing dollarisation and the amount of non-performing loans, as well as improving the business environment. The World Bank was discussing with the government a set of medium- and long-term measures to move towards a new private-sector led growth model and increase the country's resilience to external shocks, she said. "We know that the government is developing a comprehensive programme of structural reforms, and the World Bank ... stands ready to provide necessary support," Leshchenko said.
She said the bank would soon start final negotiations on a $50 million loan earmarked for improving economic opportunities for internally displaced persons. The bank said last week it had decided to issue a $140 million loan to finance a road repair project in Azerbaijan. Earlier this year, the International Monetary Fund and the World Bank were discussing possible financing aid for Azerbaijan. Yet, Baku did not take a final decision on requesting any support.

Copyright Reuters, 2016

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