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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

IV. Country Performance and Lending Level

A. Proposed Lending Level

29. Azerbaijan is classified as a B1 country, which makes it eligible for resources predominantly from the Asian Development Fund (ADF). The actual annual ADF lending level will be determined every year from 2002, based on the country’s performance on economic and social developments. The assessment of performance will be based on (i) macroeconomic stability, (ii) social development and poverty reduction, (iii) governance, and (iv) portfolio performance. Under a base case scenario, ADF assistance would be expected to be about $70 million over the three year 2002-2004 period, while a high case scenario could raise lending as high as $85 million over three years, and a low case scenario would lower lending as low as $55 million. The triggers in these lending cases are shown in Appendix 3, page 6.

30. The low case scenario assumes no major progress in the macroeconomic and social situation, limited progress in key sectoral reforms, including governance, limited progress in finalizing a national poverty reduction strategy, and a weak portfolio performance. 31. Under the base case scenario, the Government will need to demonstrate continued commitment to macroeconomic stability, steady progress of structural reforms in selected sectors, institutional reforms toward good governance, satisfactory progress in preparing its poverty reduction strategy, and good portfolio performance.

32. Under the high case scenario, strong macroeconomic performance, especially in the non-oil sectors, improved progress of structural reforms in additional sectors (energy and health) vis-à-vis the base case, and strong improvement in good governance would be evident.

33. Azerbaijan is also eligible for ADB’s assistance funded by its Ordinary Capital Resources (OCR) for revenue-earning projects. The OCR assistance to Azerbaijan could be amounted up to the same level of the ADF assistance during 2002-2004.

B. Loan Program

34. The loan program for ADF and OCR during 2002-2004, as agreed upon by the Government, is in Appendix 3. In view of Azerbaijan’s unfamiliarity with ADB’s policies and procedures and its limited absorptive and implementation capacity, a modest lending program is designed during the initial stage. The lending program consists of seven public sector loans totaling $168 million. No loan is programmed for 2001. During 2002-2004, five of the seven programmed loans (77 percent of the total lending) are classified as poverty, including core poverty, interventions. In view of the limited capacity during the initial years of operations, the program focuses in four selected areas: assistance for IDPs, rural development, water supply and sanitation, and roads. The selection of these areas is based on the following considerations:

  1. support is critical for combating poverty, especially among IDPs;
  2. the priorities in the Government’s development strategy;
  3. areas that are in line with the Azerbaijan IOS, but focused on selected areas in view of the limited capacity;
  4. areas in which other funding agencies are not very active (e.g., water supply and sanitation, and secondary towns); and
  5. sectors, such as rural development and roads, in which ADB has a comparative advantage in Central Asian countries.

35. In conjunction with ADB’s lending program, ADB will actively pursue loan and grant cofinancing from official sources to effectively address the important sectoral and thematic issues in Azerbaijan. As appropriate, commercial cofinancing and guarantee opportunities will also be explored for viable projects.

C. Technical Assistance and Economic and Sector Work Program

36. The TA and economic and sector work (ESW) program for 2001-2004 is aimed at supporting lending operations and strengthening the capacities of the Government and executing agencies. The TA program covers 18 TA projects totaling $10 million (Appendix 3).

37. The ESW program is formulated in close consideration of the lending and TA activities during 2001-2004, and is aimed at providing input to policy dialogue and ADB’s overall assistance to Azerbaijan. The ESW program (Appendix 4) will focus on the following:

  1. macroeconomic analysis for better understanding of the country’s economic situation, and for policy dialogue with the Government;
  2. poverty analysis and studies to provide analytical support for poverty reduction;
  3. structural reforms for effective strategies for sector development and regional cooperation; and
  4. policy and institutional reviews to support good governance.

38. Appendix 5 provides the project selection briefs and TA concept papers for ADB’s proposed activities.

D. Summary of Changes

39. This is the first year in which a country programming paper is being prepared for Azerbaijan. Therefore, there are no changes vis-à-vis last year.


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