IMF Concludes 2025 Consultation: Azerbaijan's Growth Resilient, Risks Remain

Following a modest economic performance in 2023, Azerbaijan experienced a notable rebound in 2024. Real GDP expanded by 4.1%, up from 1.4% the previous year.

On March 21, 2025, the Executive Board of the International Monetary Fund (IMF) concluded its annual Article IV consultation with the Republic of Azerbaijan. The Board endorsed both the staff appraisal and the 2024 Financial System Stability Assessment (FSSA), signaling broad support for the country's economic policies and resilience amid a challenging global environment. The discussions covered macroeconomic developments, monetary and fiscal policies, financial sector health, and structural reforms crucial for sustaining long-term economic stability and growth.

Economic Recovery and Growth Drivers

Following a modest economic performance in 2023, Azerbaijan experienced a notable rebound in 2024. Real GDP expanded by 4.1%, up from 1.4% the previous year. This growth was propelled primarily by vibrant activity in the non-oil sectors, particularly construction, communication, transportation, and hospitality.

The hydrocarbon sector, which had contracted in 2023, stabilized in 2024. Although oil output declined, modest gains in natural gas production helped offset the shortfall, contributing to overall economic recovery.

Inflation Developments and Monetary Policy

Inflation increased in the latter half of 2024, reaching 4.9% by year-end. This uptick was largely attributed to adjustments in administered prices. Despite the rise, inflation remained within the Central Bank of Azerbaijan’s (CBA) target range of 4 ±2%.

The IMF directors expressed general approval of the central bank’s monetary policy stance, noting that inflationary pressures appear transitory. However, they emphasized the importance of vigilance and preparedness to act swiftly should inflation risks intensify. The progress made in improving monetary policy transmission was also commended, alongside calls for further modernization of the framework in preparation for a potential shift to a hybrid inflation targeting regime.

Fiscal Performance and Sustainability

Fiscal consolidation efforts resumed in 2024 after a pause in the previous year. The non-oil primary deficit was reduced to 20.5% of non-oil GDP, down from 22.1% in 2023, reflecting robust tax revenues from the non-oil economy.

However, the current account surplus, which had reached 11.5% of GDP in 2023, weakened due to declining global oil and gas prices. In the first three quarters of 2024, the surplus was approximately 50% lower year-over-year. Nonetheless, Azerbaijan’s external buffers remained strong, with combined CBA and State Oil Fund (SOFAZ) reserves totaling around $71 billion, equivalent to 41 months of projected 2025 imports.

While recognizing Azerbaijan's investment needs, IMF directors warned that the expansionary 2025 budget could be procyclical. They advised that any revenue overperformance or underspending be saved to avoid exacerbating inflation and to reinforce fiscal discipline. The Board also recommended the implementation of Tax Administration Diagnostic Assessment Tool (TADAT) and Public Investment Management Assessment (PIMA) frameworks to further support fiscal sustainability.

Financial Sector Resilience

The 2024 Financial Sector Assessment Program (FSAP) concluded that Azerbaijan's banking system is broadly resilient and well-capitalized. Noteworthy improvements have been made in regulatory reforms, capital adequacy, and liquidity buffers. IMF directors praised these efforts and encouraged the continuation of reforms aimed at enhancing prudential oversight, consolidating supervision, and strengthening the emergency liquidity assistance framework.

Recommendations included developing early warning systems for banking risks, expanding stress testing mechanisms, and reinforcing the resilience of systemically important domestic banks.

Risks and External Uncertainties

The IMF highlighted several risks to Azerbaijan’s economic outlook, emphasizing the fragile and uncertain global environment. Declines in hydrocarbon prices due to increased supply or reduced demand could adversely affect the nation’s growth, external balances, and fiscal revenues. Conversely, geopolitical tensions could temporarily elevate oil prices, benefiting fiscal and external positions.

Domestically, pressures to increase public spending might delay fiscal consolidation and ignite inflationary pressures, potentially undermining the credibility of fiscal rules. The inefficient performance of state-owned enterprises (SOEs) was flagged as a barrier to private sector development and economic diversification.

Structural Reforms and Diversification Goals

To foster sustainable and inclusive growth, the IMF directors underscored the need for comprehensive structural reforms. Key priorities include:

• Strengthening corporate governance in SOEs.

• Enhancing competition and creating a level playing field for private enterprises.

• Improving access to finance for small and medium enterprises (SMEs).

• Advancing governance and anti-corruption measures.

• Reinforcing the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) framework.

• Contributing actively to the global climate agenda.

The Board reaffirmed that private sector development is essential for reducing Azerbaijan's dependence on hydrocarbons and achieving long-term resilience.

Forward Outlook

Looking ahead, Azerbaijan’s GDP growth is projected to moderate to 3.5% in 2025, reflecting a slowdown in investment and stagnant hydrocarbon output. Medium-term growth is expected to stabilize at around 2.5%, aligning with potential output. Inflation is projected to remain within the CBA’s target range, assuming international commodity prices stay stable.

Though the external position may weaken in the medium term due to declining hydrocarbon production, robust foreign exchange reserves are expected to provide a substantial buffer against external shocks.

 

The IMF's latest Article IV consultation reaffirmed Azerbaijan's economic resilience and commended the authorities for their fiscal and monetary policy efforts amid global uncertainties. Nonetheless, the Board emphasized the need for continued reforms to diversify the economy, support private sector development, and strengthen institutional frameworks. These steps will be critical in ensuring fiscal sustainability, financial stability, and sustainable economic growth over the medium and long term.