Regions and Countries

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

Country Strategy and Program Update 2005-2006: Azerbaijan

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II. Implementation of the Country Strategy and Program

A. Progress on Poverty Reduction

11. The main challenge for the Government in the new millennium remains how to address the serious poverty situation in the country. According to revised data from the 2002 Household Budget Survey, 46.7% of the Azerbaijani population lived below the national poverty line and 10% were living in extreme poverty in 2002.⁴ Although the progress in achieving the Millennium Development Goals (MDGs) is hampered by inconsistent data, general indications are that there has been an improvement over the last year in several areas. MDG, social, and environmental indicators are given in Appendix 1, Tables A1.1, A1.3, and A1.4, respectively

12. Over the past year, the Government has been implementing its new national poverty reduction strategy, the State Programme on Poverty Reduction and Economic Development (SPPRED).⁵ On 26 May 2004, a high-level national poverty conference was held in Baku to review the progress achieved during the first year of implementation and seek guidance for the second year of the SPPRED. A progress report⁶ prepared for the conference was informative, transparent, and well received by the international funding community. The initial SPPRED implementation has generally fulfilled most expectations and, moreover, has provided an excellent framework for dialogue within the Government and between the Government and the funding agencies on issues relating to poverty reduction. The SPPRED's main tasks for its second year of implementation are to (i) improve prioritization and sequencing of the actions in the SPPRED policy matrix, (ii) agree on realistic poverty targets, and (iii) commence monitoring of the agreed targets. ADB will continue to assist in the implementation of the SPPRED through capacity building of the SPPRED Secretariat.⁷ Given the good quality of the progress report, it will serve as the poverty assessment in preparation of the CSP.

B. Progress in the Country Strategy and Program Focus Areas

13. To date, ADB has approved one loan, 11 technical assistance (TA) projects, and two Japan Fund for Poverty Reduction (JFPR) grants for Azerbaijan. Given the early stage of ADB's public sector lending operations in Azerbaijan, there has been somewhat 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, social infrastructure, and transport.

1. Assistance for Internally Displaced Persons

14. The IDP population remains one of the most poor and disadvantaged groups in the country and, as such, it is identified as an important vulnerable group of the population in the SPPRED. Overall, about 63% of the displaced population live below the poverty line, compared with 47% of the general population. The total number of IDPs and refugees is estimated at around 1 million, of whom about 575,000 are IDPs. It is estimated that about 150,000 of the IDPs still live in public buildings, tented camps, dugouts, unfinished buildings, and railway wagons. IDPs continue to suffer from lack of adequate water supply and sanitation, as well as health and education services. Malnutrition is very common among the IDP population (26% compared with 10% nationwide), as is infant mortality. Unemployment among IDPs is a serious problem, as it is estimated that 47% of refugees and IDPs were unemployed in 2002. According to the World Food Program, the share of IDPs unable to meet their basic food and non-food requirements increased by 16% from 1998 to 2001.

15. The SPPRED identifies several directions for assistance, including the rehabilitation of the non-occupied areas near the ceasefire line, provision of improved housing for 5,000 families, upgrading infrastructure in IDP camps, addressing employment issues for IDPs, education and health, and development of a new repatriation plan. Since 2001, the Government has been addressing the needs of the IDP population more actively than in the 1990s. The adoption of several presidential decrees in 2001 and 2002 regarding the situation of IDPs, together with the allocation of large proceeds from the State Oil Fund (SOF), has led to an improvement in the socioeconomic conditions of IDPs. ADB is assisting, through funding of a pilot project in Mingechevir city, the transfer of 412 households to a new resettlement area and the rehabilitation of public schools occupied by these IDPs.⁸ A second project to provide basic social infrastructure is programmed for 2005 and may include one or more of the following activities: (i) continued support for the improvement of IDPs' housing conditions and the construction of new settlements, (ii) improvement of education opportunities of IDP children and young adults, and (iii) support for immediate livelihood and income-generating opportunities

2. Sector Priorities

16. Overall, ADB has made moderate progress during the last year in meeting the sector objectives of the existing IOS. The greatest progress has been seen in the agriculture and rural development sector, where ADB has provided its first loan (for flood mitigation) and has expedited assistance for rural finance development.

17. Flood Mitigation. ADB's involvement in flood mitigation is an immediate response to assist the Government to address serious, recurring floods in Azerbaijan. Floods have caused widespread loss of life and property and reduced income-earning opportunities. Moreover, floods have worsened the living standards of the poor, negated progress in reducing poverty, and often cause the non-poor to fall into poverty. Without protection from floodwaters, the whole rural asset base has been at risk in certain areas. To address this urgent need, ADB provided a loan for flood mitigation in late 2003.⁹ The loan addresses flooding in 12 districts in four flood-prone areas of Azerbaijan and includes both structural and nonstructural measures for flood protection. Among the nonstructural measures are: watershed management, flood forecasting and warning, flood zoning, and capacity building for flood preparedness. An associated advisory TA to establish a river basin and flood management cell within the State Amelioration and Irrigation Committee to initiate integrated river basin management has also been provided. ¹⁰

18. Micro and Rural Finance Development. To address the problem of underdeveloped financial services, which have impeded rural development, ADB will provide support to increase bank and microfinance activities in rural areas and communities outside Baku. This assistance follows from the recent decree for the development of regions outside Baku, is listed as a specific measure for poverty alleviation in the SPRRED, and has been accorded particularly high priority by the Government.¹¹ Development of sustainable microfinance and enhancement of private sector bank services in rural areas are consistent with both the IOS and the ADB Microfinance Strategy,¹² and with the importance accorded to integrated financial sector growth. The key timing of this intervention will meet a critical juncture in agriculture and rural development in Azerbaijan.

19. At present, Azerbaijan has 41 private commercial banks and two state-owned commercial banks. With combined assets of $1 billion (14.5% of GDP), the banking system dominates Azerbaijan's financial sector.¹³ Weaknesses in the financial system include lack of depth of both physical presence and financial services to the overall population; underdeveloped laws, corporate governance, and regulatory oversight; lack of trust in deposit-taking institutions and investment options; large nonperforming loans; and lack of service innovation to meet demand for financial services. Virtually all financial services have been focused on oil, construction, and trade in Baku. Financial services in the areas outside Baku have been nominal, and funding of agriculture and related agribusiness has been neglected.

20. Currently, financing needs in areas outside Baku are met by varying combinations of rural households' own savings, remittances from relatives in Baku and abroad, moneylenders and other informal sources, and (to a minor extent) banks. Demand information indicates that effective demand exists in 65% of the rural population for significant additional loans for small and medium enterprise development and on-farm medium- and long-term investment. A credit market of up to $740 million annually can easily be envisaged, but this would be one that the banking industry, with $1 billion in assets, could not service at the current time.

21. ADB's proposed assistance would include a loan, an advisory TA, and an application for a JFPR grant. Two TA projects¹⁴ have effectively laid the groundwork for the proposed assistance by undertaking the following preparatory activities: drafting a law on microfinance institutions and amendments to existing laws and regulations governing credit unions; carrying out detailed surveys on rural and microfinance institutions, households, and beneficiaries; and convening the first national workshop on rural finance and microfinance in Azerbaijan.

22. Water Supply and Sanitation. ADB's involvement in the water supply and sanitation sector aims to expand and upgrade infrastructure, support institutional reform for decentralized service delivery, and establish new water utilities with adequate operational and managerial capacity. To this end, ADB has provided a grant for preparing an investment project to rehabilitate water supply and sanitation services in the secondary towns of Goychay, Agdash, and Nakhchivan.¹⁵ The proposed investment project will improve the living and health conditions of people in the three towns through better access to, and safer, water supply and sanitation services. An associated advisory TA will strengthen the capacity of the Government in the efficient regulation of water supply and sanitation services, and to promote integrated water resources management.

23. Early Childhood Development. ADB's involvement in the early childhood development (ECD) subsector responds to the priority accorded to addressing child health and education concerns in the Government's SPPRED. The proposed ECD project will contribute to progress toward key health-related MDGs by addressing malnutrition, morbidity, and mortality issues related to ECD. ADB's project is aimed at improving the development status of children aged up to 8 years with a focus on promoting psychosocial development and mitigating micronutrient malnutrition and mortality due to common childhood illnesses.

24. ADB's assistance to the transport sector will focus on physical rehabilitation, institutional reform of sector institutions, and development of main regional road linkages. The geographic focus of ADB's assistance will be on areas outside Baku as a means of fostering more balanced regional development. The Government recently accorded higher priority to rehabilitation of the two main highway corridors (central and north-south), in line with the State Programme on Socio-Economic Development of the Regions for 2004-2008. ADB's projects are aimed at improving two segments of the central road corridor and one segment of the north-south road corridor. ADB's policy dialogue in the sector may 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 Priorities

25. The analysis provided in the CSPU (2004-2006) regarding ADB operations vis-à-vis thematic priorities remains valid and relevant. Updating is provided on a selective basis for the four areas, which will be the focus of assessments in 2004.

26. Sound governance is critical for economic and social development. The state's role should be as a market enhancer, to improve the business and investment environment and ensure transparency and accountability of market players. In this regard, Azerbaijan needs to develop its institutional capacity to regulate a modern market economy, encourage transparency and openness in government activities, deal effectively with the tendency of private sector operators to favor insider dealings, and 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 the Government in creating a modern competition policy framework with an effective antitrust authority.¹⁶ In 2004, ADB will also initiate preparatory work for its governance assessment, which will provide key inputs both for future policy dialogue with the Azerbaijan authorities on matters of governance and for ADB operations.

27. 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. The Government has implemented new legislation to support foreign investment and strengthened banking legislation. New accounting laws that reflect international standards are presently being reviewed by Parliament. The Government is also pursuing privatization, having successfully divested a number of electricity distribution companies using concession agreements. ADB is preparing a private sector assessment that will review the Government's policy on developing the private sector and identify areas where assistance can potentially be provided.

28. In line with the SPPRED, and in coordination with other state stakeholders, the Ministry of Ecology and Natural Resources prepared the National Program on Environmentally Sustainable Socioeconomic Development for 2003-2010, which was approved by the President of Azerbaijan in 2003. This program calls for increased coordination of activities in environment protection areas and identifies urgent environmental problems. In 2004, ADB will undertake two activities linked to the environment: (i) an urban environmental profile to investigate the scope of needs and importance of pursuing environmental improvements in the urban environmental agenda, and (ii) a country environmental analysis to review the Government's environmental policies and recommend areas for possible ADB assistance.¹⁷

29. In line with the SPPRED, the Government has been undertaking activities to implement its National Action Plan on Women's Issues. A gender assessment will be prepared under a regional TA that will review the Government's policy on gender and identify key gender issues for poverty reduction.¹⁸

C. Highlights in Coordination of External Funding

30. ADB closely coordinates its activities in Azerbaijan with other international institutions, including the World Bank, International Monetary Fund (IMF), United Nations Development Programme (UNDP), UNICEF, European Bank for Reconstruction and Development (EBRD), and the Islamic Development Bank, as well as with bilateral aid agencies with representative offices in the country (see Appendix 1, Table A1.5). 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. Several funding agencies, including EBRD, UNDP, and United States Agency for International Development (USAID), are preparing new country strategies this year, which represents a good opportunity for ADB to coordinate its activities for the preparation of the thematic or sector assessments this year and the CSP in 2005 with the work being undertaken by these other agencies.

31. 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 its operations in Azerbaijan. In this context, over the period 2004-2007, significant resources are expected to be mobilized from the Islamic Development Bank, as well as the Saudi Fund and the OPEC Fund for International Development. ADB will maintain its dialogue with the Government to identify appropriate financing for the projects that it supports, specifically the use of its credit-enhancement products. In terms of TAs, ADB will coordinate with funding agencies working in the same areas to coordinate the respective TA operations.

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4. State Statistical Committee of Azerbaijan Republic. 2004. Main Results of Household Budget Survey in 2003. Baku, Azerbaijan.
5. Azerbaijan Republic. 2003. State Programme on Poverty Reduction and Economic Development: 2003-2005. Baku, Azerbaijan.
6. Azerbaijan Republic. 2004. State Programme on Poverty Reduction and Economic Development: Annual Report, 2003. Baku, Azerbaijan.
7. ADB. 2003. Technical Assistance to the Republic of Azerbaijan for Capacity Building for Medium-Term Poverty Reduction Strategy Implementation. Manila (TA 4087-AZE, for $650,000, approved on 11 March 2003). Other TAs which have assisted with the SPPRED formulation process include: ADB. 2001. Technical Assistance to the Republic of Azerbaijan for Capacity Building for Poverty Data Analysis, Manila (TA 3664-AZE for $150,000, approved on 5 June 2001) and ADB. 2001. Technical Assistance to the Republic of Azerbaijan for Preparation of the Medium-Term National Poverty Reduction Strategy. Manila (TA 3788-AZE for $150,000, approved on 7 December 2001).
8. ADB. 2002. Technical Assistance to the Republic of Azerbaijan for Integration of Internally Displaced Persons in Mingechevir Rayon. Manila. (JFPR 9013-AZE for $2.5 million, approved on 30 January 2002) The new resettlement area was inaugurated on 8 June 2004.
9. ADB. 2003. Report and Recommendation of the President to the Board of Directors on a Proposed Loan to the Republic of Azerbaijan for Flood Mitigation. Manila (Loan 2068-AZE, for $22 million, approved on 19 December 2003).
10. ADB. 2002. Technical Assistance to the Republic of Azerbaijan for Supporting River Basin and Flood Management Planning. Manila. (TA 4301-AZE, for $500,000, approved on 19 December 2003).
11. In February 2004, the Government wrote directly to the ADB President requesting for a loan and a grant for rural finance development. The Government requested that these projects be processed on an expedited basis for approval by the end of 2004.
12. ADB. 2000. Finance for the Poor: Microfinance Development Strategy. Manila.
13. The remaining nonbank financial institutions consist of a government-owned agricultural lender, 11 microfinance institutions, 28 small credit unions, 30 pawnshops, 27 insurance companies, and 3 leasing companies.
14. ADB. 2002. Technical Assistance to the Republic of Azerbaijan for Microfinance Sector Development. Manila. (TA 4093-AZE for $400,000, approved on 11 April 2003). ADB. 2002. Regional Technical Assistance for Rural Finance in Central Asia, Manila. (TA6078-REG for $600,000 approved on 18 December 2002).
15. ADB. 2001. Technical Assistance to the Republic of Azerbaijan for Urban Water Supply and Sanitation, Manila. (TA3774-AZE for $740,000, approved on 15 November 2001).
16. ADB. 2003. Technical Assistance to the Republic of the Republic of Azerbaijan for Development of a Competition Policy Framework. Manila. (TA4126-AZE for $250,000 approved on 13 June 2003).
17. The second activity will be financed under ADB. 2003. Regional Technical Assistance for Integrating Environmental Considerations into Government Policies, Plans and Programs, Manila. (RETA6095 for $550,000 approved on 11 March 2003).
18. Proposed regional TA for Mainstreaming Gender into the Poverty Reduction Strategy in Central Asia.

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