Countries and Regions

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p. 2 of 4 BACK | NEXT I. Development Situation II. Implementation of the Country Strategy and Program III. Portfolio Management Issues IV. Country Performance and Lending Levels

Country Strategy and Program Update 2002-2004: Azerbaijan

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II. Implementation of the Country Strategy and Program

A. Poverty Reduction

11. According to official statistics (1995), the poverty incidence was over 60 percent of total households. More recent preliminary information indicates that (i) the number of poor has remained unchanged (due to the limited job and income opportunities), and (ii) the income gap between the poor and the rich has widened.

12. In line with the IOS, ADB’s assistance for poverty reduction is phased as follows. First, ADB will support the Government’s initiatives in the poverty assessment and strategy formulation processes. The two main activities are assistance for (i) poverty data analysis, and (ii) preparation of the national poverty reduction strategy. ADB has approved a small-scale technical assistance (TA) to the State Committee of Statistics, which will help build capacity within the agency to ensure that latest statistical data from annual household income and expenditure surveys will be available to economic policymakers for poverty analysis.⁴ ADB will also assist the Government in preparing its national program for poverty reduction (NPPR). ADB’s involvement will be closely coordinated with the Government’s Steering Committee for NPPR, the MOED, and other external agencies such as IMF, United Nations Development Programme (UNDP), and World Bank. ADB will initiate its poverty reduction partnership process in Azerbaijan with the preparation of poverty analysis paper in late 2001. A high-level forum and a poverty reduction partnership agreement are scheduled in the first quarter of 2002.

13. Second, ADB’s sector operations in Azerbaijan will have a strong poverty reduction focus. The proposed basic infrastructure development project in 2002 will provide much needed local water supply, sanitation, and other community-level infrastructure in a few secondary towns. The proposed Samur-Apsheron water supply and irrigation projects (to be implemented in two stages) aim to improve the livelihoods and health conditions in northeast Azerbaijan, through provision of irrigation services for the poor farmers. Five of the seven loans programmed for 2002-2004 are classified as poverty, including core poverty, interventions. This accounts for 77 percent of the total lending volume for that period.

14. Third, ADB will support the Government’s efforts to assist IDPs. ADB’s assistance will aim at helping the IDPs to: (i) gain equal access to essential public services that are available to other population groups in local communities, and (ii) achieve self-reliance and reintegration into the economic mainstream. ADB assistance to IDPs will be undertaken in a phased manner. First, ADB will start processing in 2001 a project to aid the integration of IDPs in Mingechevir City into the economic mainstream, with financing from the Japanese Fund for Poverty Reduction (JFPR). Second, a project to finance new IDP settlements will be undertaken in 2004. The processing of this project will depend on successful resolution of several important issues, including undertaking of studies on voluntary relocation of IDPs, their future economic activity prospects in the new settlement areas, and their legal titles to the property in the new areas.

Thematic Priorities

1. Economic Growth

15. One of the three main strategic objectives in the IOS is to promote sustainable economic growth. Given the severity of poverty in Azerbaijan, economic growth must be relied upon as the most effective and sustainable way to reduce poverty. Growth and development in the rural areas, secondary towns, and in the non-oil sector, upon which most of the poor rely on for their daily living, is essential.

16. Given the geographic situation in the Caucasus Region, efficient road infrastructure is of vital importance to ensure efficient trade flows and, thereby, balanced development of Azerbaijan’s economy. Existing major roads need repair in many parts of the country and the deterioration appears to be accelerating. The IOS supported the need for road rehabilitation, including the improvement of rural roads connected to the main road network. The present system of organization, financing, and management in the road sector must be reformed. The reform focus should include enhancing the policy-making and regulatory capacity of the newly established (but as yet unstaffed) transportation ministry, improving road safety, reducing vehicle emissions, and introducing private participation especially in road maintenance and the financing of road projects. Two road loans have been included in the 2002-2004 program to improve the central and the southern Azerbaijan road systems.One of the three main strategic objectives in the IOS is to promote sustainable economic growth. Given the severity of poverty in Azerbaijan, economic growth must be relied upon as the most effective and sustainable way to reduce poverty. Growth and development in the rural areas, secondary towns, and in the non-oil sector, upon which most of the poor rely on for their daily living, is essential.

2. Human Development

17. Social and economic reforms have proceeded steadily and the Government has remained committed to fighting poverty. However, the social indicators in Azerbaijan have not improved significantly in recent years. Although the country’s human development index improved marginally from 0.706 in 1997 to 0.719 in 1999,⁵ disturbing developments in individual indicators have emerged. For instance, enrolment of preschool children declined from 181,000 in 1990 to 112,000 in 1999. Moreover, while the quantity of medical personnel and health infrastructure may be adequate, the quality of health care services has deteriorated. Detailed social and environmental indicators are given in Appendix 2.

18. In pursuit of the IOS objective of enhancing human development, ADB’s assistance will focus on addressing the most pressing basic needs of the population. ADB’s planned assistance in developing basic infrastructure services, such as water supply and sanitation in secondary towns and rural communities, will improve the living conditions of the affected population. Likewise, ADB’s assistance for the IDPs, through development of social infrastructure in selected locations, will address the basic human needs of this severely disadvantaged group. ADB does not envisage assisting in the education sector or for social protection due to the presence of other donors in these areas, notably World Bank. Assistance to the health sector is considered in the latter part of the program, but would depend on the progress of sector reforms.

3. Gender and Development

19. Similar to other former Soviet republics, Azerbaijan’s legal and administrative systems protect women from discrimination. However, transition in the past 10 years has brought considerable economic and social costs and, in some cases, more on women than on others. ADB will pay close attention to gender and child development issues in Azerbaijan. The lack of adequate nutrition endangers the physical and mental development of the poor, especially the 25 percent of IDPs who suffer from chronic malnutrition. A grant assistance⁶ to arrest the trend in micronutrient deficiencies in selected countries in Central Asia is being considered for extension to Azerbaijan. In addition, a project preparatory TA for early childhood development will strengthen the protection of children and improve prenatal women’s health.

4. Good Governance

20. Another of the IOS’ main strategic objectives is supporting good governance and institutional strengthening. The major difficulties in this regard have been the lack of participation, predictability, transparency, and accountability in key governmental and market institutions. The Government is currently in the midst of a major restructuring exercise, and the World Bank is assisting the Government on a project for public sector reform program. ADB’s assistance for governance will carefully take into account these activities in determining its future strategy. In 2001, ADB will initiate the work on governance assessment, including a review of the new institutional structure of the Government. The governance assessment will be a key input into future policy dialogue and ADB operations. Through ongoing dialogue, ADB will support the Government’s anticorruption policy in line with the two Presidential decrees on combating corruption.

21. Capacity building of public institutions for improved governance is a critical element for achieving poverty reduction. In addressing institutional strengthening issues, ADB’s assistance will follow the two-pronged approach presented in the IOS (para. 7). To address the IOS’s first prong of direct assistance to the poor, ADB will provide immediate institutional strengthening assistance to the NPPR process, and to addressing the needs of the IDPs at central and local levels. In terms of the second prong, ADB has already approved assistance to the Ministry of Finance to strengthen the capacity of the Macroeconomic Policy Group (MPG) to formulate sound economic policy,⁷ and a TA project is proposed in 2002 to strengthen MOED’s ability to fulfill its mandate. Over the medium-term, ADB will help prepare a public investment program, build capacity in financial institutions, and strengthen Government’s ability to undertake effective public budget management.

22. Two important aspects of governance that need to be embodied in ADB’s assistance are (i) adoption of lessons learned by other funding agencies, and (ii) ensuring the full commitment of the Government to ADB’s activities. In terms of lessons learned, ADB will support the extension of the so-called MPG model,⁸ to other agencies such as the MOED to strengthen its capacity to implement the NPPR and to formulate a policy on competition. In terms of Government commitment, the level of institutional change and capacity building required are substantial, and Government cooperation, support and resources will be needed to achieve this task. The Government needs to consider the use of their own resources to ensure that institutions can support the substantial policy reforms, implement the investment initiatives, and provide the needed support services to the emerging private sector.

5. Private Sector Development

23. Private sector development has suffered from excessive bureaucracy as a result of nontransparent and inconsistent policies and rules. In particular, much needed management skills and technology have been slow to come in for existing enterprises, and little new domestic and foreign investments has flowed into the non-oil sector. In line with the IOS strategy for assisting non-oil sector development, ADB will help develop SMEs. As a first step, ADB will provide assistance to capacity building for MOED, which is responsible for SME development. Second, assistance will be extended to MOED to examine and further develop the recently-prepared State Program for the Development of Small and Medium Enterprises in Azerbaijan (2001-2003) and to formulate a policy on competition. Depending on the results of these activities, a loan for SME development could be considered in 2005 (project preparatory TA is scheduled in 2004). Assistance to SMEs will have an important impact on the country by helping it to achieve a more balanced sector and regional development.

24. With the unveiling of the new privatization program by the Government (para. 5), ADB will closely investigate possible support for private sector activities in Azerbaijan. A private sector assessment planned for first quarter of 2002 will review the Government’s policy on restructuring and privatization in the various sectors.

6. Environmental Protection

25. Environmental degradation is widespread in Azerbaijan, and has not fundamentally improved during the transition to a market economy. Among these problems are the issue of water quantity and quality, and the issue of land degradation. In its proposed assistance for Samur-Aspheron water supply and irrigation project, ADB will help to relieve the problem of water shortage and water quality. Similarly, the proposed assistance for flood protection and irrigation will assist to address related land degradation issues, including inefficient watershed management.

7. Regional Cooperation

26. Azerbaijan has great potential as a hub for regional social and economic activities and for transits between Asia and Europe. Developing regional markets will be particularly important due to the emphasis on developing the non-oil and agriculture sectors.

27. Due to Azerbaijan’s geographical proximity and similarities in the transition experiences, ADB’s support will have a strong focus on subregional economic cooperation with ADB’s developing member countries in Central Asia. ADB is currently assessing the ways to integrate Azerbaijan into the current regional cooperation program in Central Asia. Important areas of regional cooperation may include energy, transport, and cross-border trade. ADB could also facilitate sharing of development experience. One policy issue common to several developing member countries relates to administration of oil and mineral funds in the Central Asian Region. The Government has expressed strong interest in working with ADB in these areas.

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