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Countries and Regions Country Partnership Strategies Document
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Country Strategy and Program Update 2004-2006: Azerbaijan
II. Implementation of the Country Strategy and ProgramA. Progress on Poverty Reduction12. The main challenge for the Government in the new millennium is how to address the serious poverty situation in the country. According to data from the 2001 Household Budget Survey3, nearly 50% of the Azerbaijani population lived below the national poverty line and 17% were living in extreme poverty in 2001. The findings of the survey have been used to build up a poverty profile for Azerbaijan, which indicates that (i) the poverty head count appears to have improved somewhat since the last income survey in 1995, but direct comparison is not possible due to differences in the methodology used; (ii) individuals in urban households have a higher risk of being poor than those in rural households; (iii) gender does not appear to be a significant factor, with males and females having an almost equal probability of being poor; and (iv) households headed by a person with internally displaced person or refugee status have a significantly higher risk of poverty than other households. Preliminary data from the 2002 Household Budget Survey4 appear to bear out the findings of the earlier survey. 13. Over the last year, the Government has been actively formulating its new national poverty reduction strategy. In late 2002, the State Programme on Poverty Reduction and Economic Development (SPPRED) 2003–2005 was unveiled at a high-level conference in Baku and subsequently approved by a Presidential Decree on 20 February 2003. The SPPRED identified six strategic thrusts: (i) creation of an enabling environment for income-generating opportunities, (ii) macroeconomic stability, (iii) quality of and equity in access to health and education, (iv) infrastructure improvements, (v) social protection reforms to serve the vulnerable more effectively, and (vi) better conditions for refugees and internally displaced persons. The SPPRED’s main weaknesses are its lack of proper prioritization and sequencing of the actions in its policy matrix, as well as the lack of poverty targets. Despite these weaknesses, the SPPRED provides a good framework for dialogue within the Government and between the Government and the donors on issues relating to poverty reduction. ADB assisted in the preparation of the SPPRED through assistance for capacity building of the SPPRED Secretariat5 and the State Statistical Committee.6 14. The Government is now commencing with the implementation phase of the SPPRED. In terms of its initial activities, the SPPRED Secretariat (formerly National Program for Poverty Reduction Secretariat) is setting up the Poverty Monitoring Unit and preparing a training needs assessment. In addition, the Government recently established an Advisory Board7 to provide overall guidance, as well as reactivated the original 15 sector working groups, which were the main inter-government coordination mechanisms during the formulation phase of the SPPRED. ADB is assisting in the implementation phase through provision of international and domestic consulting expertise in the areas of poverty reduction, rural development and human capital development assistance to the SPPRED Secretariat.8 ADB’s involvement is closely coordinated with that of other external agencies such as the World Bank, United Nations Development Programme (UNDP), and Deutsche Gesellschaft für Technische Zusammenarbeit (GTZ). 15. In parallel with its assistance for the SPPRED, ADB has initiated its poverty reduction partnership process in Azerbaijan. A first draft poverty partnership agreement (PPA) was discussed with the Government in May 2003. The next draft will be discussed once the SPPRED Poverty Monitoring Unit’s poverty targets are ready and can be compared with those currently in the PPA. It is envisaged that the PPA can be signed in the first quarter of 2004. B. Progress in the Country Strategy and Program Focus Areas16. To date, ADB has approved 10 technical assistance (TA) projects and two Japan Fund for Poverty Reduction (JFPR) grants. However, ADB’s lending operations in Azerbaijan have not yet begun. It is envisaged that public sector lending will start this year, but this depends on accelerated processing of the first lending project on both the ADB and Government sides. Given the early stage of ADB’s public sector lending operations in Azerbaijan, there has been less progress in the pursuit of strategic sector objectives than had been envisaged in the IOS. Despite this, ADB has maintained unchanged its focus on assistance for IDPs and three sector priorities: agriculture and rural development, water supply and sanitation, and roads. 1. Assistance for Internally Displaced Persons17. The SPPRED places great importance on the improvement of the conditions of the estimated 1 million refugees and IDPs in Azerbaijan. The IDP population remains one of the most poor and disadvantaged groups in the country, with 63% of the IDP population living below the poverty line, as compared to about 50% for the general population. The majority of IDPs live in poor temporary conditions and suffer from lack of adequate water supply and sanitation, and health and education services. Malnutrition is very common among the IDP population (26% as compared to 10% nationwide), as is infant mortality. Unemployment among IDPs is also a serious problem, as it is estimated that only about 20% of IDPs are employed and earn regular wages. 18. The SPPRED identifies several directions of assistance, including rehabilitation of the non-occupied areas near the cease-fire line, provision of improved housing for IDP families most in need, upgrading of infrastructure in IDP camps, addressing employment issues for IDPs, provision of better education and health, and formulation of a new repatriation plan. The Government has in the past allocated large proceeds from the State Oil Fund to improve housing and socioeconomic conditions of IDPs.9 ADB is assisting, through funding of a pilot project in Mingechevir City, the resettlement of 412 households to a new resettlement area and the rehabilitation of public schools currently occupied by these IDPs.10 A second project to provide basic social infrastructure (e.g., housing, education) and/or microfinance services to IDPs is programmed for 2005 and will draw upon the lessons learned from the ongoing pilot project. 2. Sector Priorities19. ADB’s progress to date in meeting the sector objectives of the existing IOS is relatively modest. To support agriculture and rural development, ADB has recently approved two projects: first, a project preparatory TA to assist the Government to prepare an investment project to reduce the adverse impacts of flooding in four flood-prone areas of Azerbaijan;11 second, an advisory TA to assist the Government in preparing a microfinance development strategy that will identify both the appropriate policy and the institutional and legal environment to promote basic financial services in rural areas.12 Moreover, Azerbaijan was included under the regional TA to analyze and sustain rural finance systems in Central Asia.13 In the water supply and sanitation sector, ADB approved a project preparatory TA to assist the Government to identify and prepare an investment project to rehabilitate water supply and sanitation services.14 The project will improve the living and health conditions of people in three secondary towns of Azerbaijan, through better access to, and safer, water supply and sanitation services. In addition, an advisory TA has been included in 2004 to strengthen the capacity of the Government in the efficient regulation of water supply and sanitation services, and to promote integrated water resources management. In the road sector, ADB is planning to finance two loans for improving the central and southern Azerbaijan road corridors. These would be aimed at rehabilitating and improving existing highway infrastructure, as well as improving rural roads connected to the main road network. ADB’s policy dialogue in the sector would include enhancing the policy-making and regulatory capacity of the transportation ministry, improving road safety, reducing vehicle emissions, and introducing private participation in road maintenance. 3. Thematic Priorities20. The analysis provided in the Country Strategy and Program Update (2003–2005) regarding ADB operations vis-à-vis thematic priorities remains valid and relevant. Updating is provided on a selective basis, to present some specific progress or issues that may have particular implications for future operations. a. Human Development21. In the period since the last CSPU, the main development in the human development area has been the completion of the SPPRED and its adoption as the national strategy for poverty alleviation in the country. Although Azerbaijan's Human Development Index improved from 0.741 in 2000 to 0.744 in 2001, the country continues to face major challenges in key areas of human development. In the health sector, the Government adheres to the main thrusts of the ongoing health reform: rationalization of primary health care services, and introduction of cost-effective health care interventions. Important focus areas of the Government’s strategy are complete child immunization, maternal health, and stemming the rise of tuberculosis cases. In 2001, the state budget for health expenditure amounted to AZM 210 billion (3.8% of the consolidated expenditures, or 0.8% of GDP). The Government is planning to increase the spending to at least 1.2% of GDP by 2005 (5.4% of total expenditures), and more importantly, to refocus health expenditures on providing primary health care, rationalize the spending, and increase allocations for wages. Social and environmental indicators are given in Appendix 1, Table A1.3 and Table A1.4. b. Good Governance22. Sound governance and public sector reform are crucial components for economic and social development. The state’s regulatory role has to be used for improving the business and investment environment. In this regard, Azerbaijan needs both to develop its institutional capacity to regulate a modern market economy, and to push forward the separation of the state’s regulatory function from its commercial interests. ADB has initiated work to assist the Government in establishing an effective framework to promote competition and curb monopolistic behavior. An advisory TA has been provided to assist Azerbaijan in creating a modern competition policy framework with an effective antitrust authority.15 In 2004, ADB will also initiate preparatory work for its Governance Assessment to be completed in 2004. The Governance Assessment will provide key inputs for the future policy dialogue with the Azerbaijan authorities and for ADB operations c. Private Sector Development23. In line with the IOS strategy for assisting non-oil sector development, ADB will assist with suitable projects in the private sector. A framework agreement for private sector operations has been discussed and broadly agreed with the Government and, once this framework is signed, ADB will closely investigate possible support for private sector activities in Azerbaijan. A private sector assessment, planned to start in the first quarter of 2004, will review the Government’s policy on restructuring and privatization in the various sectors. d. Environmental Protection24. Environmental deterioration is widespread in Azerbaijan. The country faces problems of deteriorating air and water quality, land and biodiversity degradation, and spills from oil fields. The Government recognizes the need to address environmental problems to sustain its development and poverty reduction efforts. A national 8-year program for forestation and sustainable development has recently been approved, which aims to plant 45,000 hectares of new forests and rehabilitate 200,000 hectares of existing forests. Nonetheless, much remains to be done to improve the country’s environment. In its proposed assistance for flood mitigation, ADB will assist in addressing land degradation issues and inefficient watershed management. A country environmental analysis, to be undertaken in 2004, will review the Government’s environmental policies and recommend areas for possible ADB assistance.16 e. Regional Cooperationexperiences with ADB’s developing member countries in Central Asia, ADB has sought to engage Azerbaijan in its Central Asia Regional Economic Cooperation (CAREC) Program. Following a Ministerial Conference on Economic Cooperation in March 2002, Azerbaijan formally joined the Program and has taken part in a number of CAREC activities. C. Highlights in Coordination of External Funding26. ADB closely coordinates its activities in Azerbaijan with other international institutions, including the World Bank, IMF, UNDP, UNICEF, EBRD, and Islamic Development Bank, as well as with bilateral aid agencies with representative offices in the country. Coordination with the World Bank is particularly close, as ADB has drawn on the World Bank’s established presence and expertise to guide its initial activities. The World Bank recently formulated its Country Assistance Strategy (CAS),17 which envisages continued lending on International Development Agency terms and the start of lending on International Bank for Reconstruction and Development terms. While ADB and World Bank would both be active in some sectors, efforts have been made to ensure that activities are complementary. The activities of the major funding agencies in Azerbaijan may be seen from the Development Coordination Matrix in Appendix 1, Table A1.5. 27. In conjunction with its lending program, ADB will continue to pursue cofinancing both from official and commercial sources to address the important sector and thematic priorities for ADB operations in Azerbaijan. ADB will maintain its dialogue with the Government to identify appropriate financing for the projects that it supports during 2004–2006, specifically the use of its credit enhancement products. In terms of TAs, ADB will continue to forge agreements with funding agencies working in the same areas to coordinate the respective TA operations.18 ____________________
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