WORLD BANK - POVERTY REDUCTION SUPPORT CREDIT
Caucasus specialist says Azerbaijan's funding depends on the commitment of its government

Caspian Business News, 28 June 2004

By Gulnaz Guliyeva

BAKU, Azerbaijan - Whether the World Bank can approve lending for the poverty reduction program in Azerbaijan in September as expected will depend on the fulfillment of commitments undertaken by the Azeri government. The World Bank is planning to support institutional capacity building and reforms in areas dealing with improving conditions for poor people through its Poverty Reduction Support Credit (PRSC).

The PRSC would support the implementation programs in the following areas: increasing the quality and access to basic education; improving the effectiveness of social protection programs; enhancing access to essential drugs and healthcare services; improving monitoring mechanisms; expanding access to financial services; and improving rural infrastructure. As planned, the total amount of the PRSC is $60 million, which will be disbursed over three years in equal tranches.

Approval of the first tranche, worth $20 million is expected in September. However, disbursement will depend on how the Azeri authorities fulfill undertaken engagements. According to the World Bank's office in Baku, the Azeri government should take prior actions, which were discussed during a visit by Christian Petersen, the lead economist for the South Caucasus, to Baku June 1-18. The World Bank mission addressed a wide spectrum of issues that it said should be put into practice by the end of July.

"I am very optimistic that we can reach a conclusion. Hopefully, all prior actions can be completed within the next month," Petersen said in a news conference. "There is a good prospect for that. I would expect that the PRSC will go to the board of directors in September".

The PRSC is part of the Country Assistance Strategy (CAS) of the World Bank in Azerbaijan, which is designed to support the State Program for Poverty Reduction and Economic Development (SPPRED). The strategic goals of the CAS are to: manage the oil boom in order to facilitate growth of the non-oil sector; generate employment opportunities through improving the business environment; building appropriate infrastructure for SME development; improve access to basic services; and help realize the oil potential within the SPPRED time-frame and targets.

According to the program, specific actions will focus on developing the budget preparation system and improving the bottom-up approach to creating the government's medium-term expenditure framework. It is also aimed at setting a transparent system for state procurement, strengthening the country's top audit institution, enhancing the effectiveness of social expenditures, improving governance, ensuring a supportive environment for private sector development, and improving the efficiency and quality of social service delivery. The measures supported by the PRSC program complement other assistance programs to Azerbaijan, particularly through the World Bank's operations in the social sectors (education, health and social services assistance) and infrastructure (energy, transport, and telecom).

According to Petersen, many of things that should be done for approval of the first tranche of the PRSC need final decisions, which must be taken by the Cabinet of Ministries, the President or the Parliament. "There are a few issues that need to be cleared up. I believe that most of these issues, which we watch together with the International Monetary Fund (IMF), have been cleared up [on] how to do it," Petersen noted. "In general, all issues have been identified, most of documents have been drafted, and they are getting approved."

A number of unresolved questions related to the progress of financial sector reforms, some taxation issues and the oil-product price mechanism were left unresolved after the mission of the IMF. The World Bank recommended that the government adjust tariffs on utility services that envisage a rising price of oil products, which is one of main unresolved issue between the government and the IMF. Recently, the government has adopted a long-term oil revenue management strategy but has not come to a final decision on the oil-product price mechanism. The Cabinet of Ministries has submitted the strategy for approval by President Ilham Aliyev.

The strategy defines the sources of oil and gas revenues and the direction of their expenditure. Petersen gave a positive appraisal of the strategy and said: "It provides good principles for linking all oil expenditures to the annual state budget preparation process."

Under the rules, the amount of annual expenditures of the State Oil Fund will be adopted by the Parliament for each year.

One of the strategic goals is the commercialization and restructuring of the State Oil Co. (SOCAR) and the separation and privatization of SOCAR's non-core assets. Also, annual consolidated financial statements are to be prepared in accordance with International Financial Reporting Standards (IFRS) and subject to audits according to International Standards of Audits (ISA).

"I think that good progress has been made in the way of restructuring SOCAR," Petersen said.

According to Petersen, applying international accounting standards will take three to four years, including training accountants, setting up new computer system, and other vital activities. "Also, it should be defined what are SOCAR's core functions as a commercial oil company. Separation of non-core activities from pure commercial businesses is probably wanted," Petersen said. "I think that SOCAR should be a joint-stock company in the future. It should be able to operate in a commercial way, be able to go to the capital market and raise capital like any other major company around the world." According to drafted plans, SOCAR restructuring should take four year.

The Parliament of Azerbaijan has begun to study the new accounting law that would establish these principles. The law will push companies to apply not only national accounting standards to commercial organizations but also, for listed companies and large groups, international financial reporting standards as well. Among the issues still in need of resolution are laws related to a new banking system and the central bank. World Bank experts, working together with the National Bank of Azerbaijan, are developing a new strategy for the banking payment system and, as Petersen said, they are hoping to make quick progress.

During Petersen's visit, the World Bank mission also addressed the budgetary system and budget regulation laws. "To improve allocative efficiency, the government has embarked on reforming the budget management process," Petersen said. "The Budget Systems Law (BSL) requires that parliament approve the deficit and expenditure ceilings of the consolidated budget, including Oil Fund expenditures, and that all expenditures be executed through the single treasury account."

The BSL introduces multi-year budgeting through the preparation of a Medium-Term Expenditure Framework (MTEF) to provide the necessary link with the SPPRED and the public investment program (PIP). According to Azer Bayramov, Azerbaijan's deputy minister of finance, the Ministry of Finance, with support from the World Bank and the IMF, has already worked out a unified budget system based on international standards. The document was approved by the Cabinet of Ministries and submitted to the presidential for approval. "We are also discussing how to support the full implementation of the budget system law and how to support more effective public expenditures for developing Azerbaijan's economy in the public sector, especially on social services, education and healthcare," Petersen said.

Petersen said that while good progress had been made in many areas, the World Bank was especially concerned with the country's health sector. "We would like to see a strong program in the health sector, because we have not seen the kind of results in terms of improvement in key health indicators, like child mortality," he said. The World Bank Health Reform, together with international donor agencies and non-governmental organizations, is piloting a number of programs that focus on improving access to and the quality of primary healthcare in selected districts. They also seek to increase surveillance, case detection and cure rates of the main communicable diseases, such as HIV/AIDS and tuberculosis.

"We are doing the basic analytical work to better understand what is needed and conducting pilot studies around the regions of Azerbaijan to see what is the best way forward," he noted. In the next six months, World Bank experts, together with the government, will develop a new strategy. Its first goal will be a focus on primary healthcare. More specifically, the government will seek to increase budgetary allocations for the healthcare needs of the population and adopt a ten-year health sector development strategy.

Work is also moving ahead on infrastructure improvements and utility services, with the World Bank and the government discussing two projects for the development of ports and railroads in the country. They are also in talks to improve services for electricity, gas and water by developing tariff policies, a modern regulatory framework, and enforcing payment discipline.

The government presented the first report on annual implementation of the SPPRED on May 26. According to the 2003 household budget survey, poverty is defined as the percentage of people living on less than a dollar a day in Azerbaijan is 45 percent of the population.

The World Bank and IMF are drafting joint assessment of the progress report poverty reduction in Azerbaijan.