VZCZCXRO6545
RR RUEHDBU
DE RUEHKB #0219/01 0451342
ZNY CCCCC ZZH
R 141342Z FEB 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 9604
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1474
RUCPDOC/DEPT OF COMMERCE WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC

C O N F I D E N T I A L SECTION 01 OF 02 BAKU 000219 
 
SIPDIS 
 
SIPDIS 
 
E.O. 12958: DECL: 02/14/2016 
TAGS: ECON EFIN PREL PGOV AJ
SUBJECT: AZERBAIJAN: IMF READOUT ON ECONOMY IN LATE 2005 
AND EARLY 2006 
 
REF: BAKU 205 
 
Classified By: Ambassador Reno L. Harnish III, Reasons 1.4 (b)(d). 
 
¶1. (SBU) SUMMARY: According to the IMF resident 
representative, the slowdown in inflation during the last 
quarter of 2005 was due primarily to a combination of nominal 
appreciation in the manat and a deceleration in money growth. 
 In addition, it appears that many businesses did not raise 
prices in late 2005, following through on a Presidential 
Decree of May 2005 ordering a delay in price increases.  The 
Consumer Price Index in January 2006, however, increased 1.3 
percent, indicating that prices have started to rise.  The 
IMF noted that the GOAJ had still not yet prepared a list of 
capital expenditure projects, although a mysterious 
government decree has allowed spending on a select number of 
projects to begin.  The IMF warned that GOAJ spending plans 
for 2006 were a direct threat to the competitiveness of the 
non-oil sector and could lead to currency appreciation.  END 
SUMMARY. 
 
¶2. (SBU) At the February 2 meeting of the Revenue Management 
Group, the IMF reported that recent monetary data, which 
showed a sharp slowdown in the rate of growth of the broad 
money supply, confirmed that the slowdown in inflation in the 
last months of 2005 was related to a combination of nominal 
appreciation in the manat and a deceleration in money growth. 
 The IMF noted that these factors may have been associated 
with political uncertainties connected with the November 
parliamentary elections and the expectation among some 
members of the public that the manat would depreciate to 
5,000 to the U.S. dollar on January 1 following the 
redenomination. There was also the likelihood that President 
Aliyev's May 2005 instruction to monopolists to delay price 
increases may have carried over through the pre-election 
period.  The Consumer Price Index in January 2006, however, 
increased 1.3 percent, indicating that prices have started to 
rise. 
 
¶3. (C) On the fiscal front, the IMF reported that the capital 
budget for 2006 had not yet been established and discussions 
continue between the Cabinet of Ministers and the 
President,s office.  The approved amount of possible capital 
expenditures could total close to USD 1 billion.  A contact 
at the National Bank told EconOff that this "free"  money 
represented a serious threat to the balance of the economy. 
The IMF also noted that a mysterious decree had been issued 
by the Cabinet of Ministers in mid-January that allowed 
spending on selected projects to commence.  The IMF and 
Embassy have not been able to locate this decree and a 
contact at the National Bank told EconOff that he had not 
heard of the decree. 
 
¶4. (C) The IMF resident representative commented that Fitch's 
recent long-term rating report on Azerbaijan (which confirmed 
the BB (stable) sovereign rating) must have come as something 
of a disappointment to the GOAJ as it had been expecting an 
upgrade, as evidenced by GOAJ interest in a Euro-bond issue 
later this year and the rapid build-up of foreign assets by 
the State Oil Fund (SOFAZ) and the National Bank.  There are 
rumors that Moody's is planning to come to Azerbaijan shortly 
to perform a sovereign debt rating.  In previous discussions, 
Minister of Economic Development Babayev had told Ambassador 
Harnish that the GOAJ wanted to receive an "investment grade" 
sovereign debt rating in order to attract more international 
capital. 
 
¶5. (SBU) The IMF representative also discussed the potential 
for manat appreciation and the impact on the competitiveness 
of the non-oil sector.  He indicated that the spending plans 
of the GOAJ were a clear threat to the competitiveness of the 
non-oil sector and could lead to excess demand which would 
appreciate the real effective exchange rate. This real 
appreciation would put pressure on both the nominal exchange 
rate and on prices.  The split between the two would depend 
on the National Bank policies - but in either case the 
competitiveness of the non-oil sector would be undermined. 
Experience suggested that the nominal appreciation of the 
manat is limited by political factors to about 10 percent per 
year and that remaining demand pressures would spill over 
into inflation. 
 
¶6. (SBU) The IMF will send a technical assistance mission to 
Baku in late-February to review the appropriateness of the 
mid-2005 change in CPI methodology.  There are suspicions 
that this change may have resulted in a systematic downward 
bias in the headline inflation numbers.  This visit this will 
be followed by an Area Department mission in mid-April. At 
 
BAKU 00000219  002 OF 002 
 
 
that time there may be a better indication of the GOAJ,s 
intentions for a possible precautionary stand-by arrangement. 
HARNISH