VZCZCXRO3472
RR RUEHDBU
DE RUEHKB #0573/01 1040936
ZNY CCCCC ZZH
R 140936Z APR 06
FM AMEMBASSY BAKU
TO RUEHC/SECSTATE WASHDC 0145
INFO RUCNCIS/CIS COLLECTIVE
RUEHAK/AMEMBASSY ANKARA 1578
RHMFISS/CDR USEUCOM VAIHINGEN GE
RUEATRS/DEPT OF TREASURY WASHDC
RUEAIIA/CIA WASHINGTON DC

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 
 
BAKU 00000573  002 OF 003 
 
 
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