Countries and Regions

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Country Strategy and Program Update 2006: Azerbaijan

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IV. Country Performance and Assistance Levels

A. Proposed Lending Level

34. Azerbaijan is classified as a B1 country, which means it is eligible to borrow from both concessional ADF and nonconcessional OCR. The lending pipeline for 2006 is shown in Appendix 1, Table A1.9, and the updated lending program for 2005 is in Appendix 4, Table A4.1. The ADF allocation to Azerbaijan for 2005–2006, based on the revised performance-based allocation policy,²⁰ is $57.25 million, of which $54.25 million is programmed for 2006. This allocation is greater than the $34.2 million shown in the CSPU 2005–2006²¹ because of the increased availability of ADF and changes in the allocation formula.

35. Azerbaijan’s external debt was only 20% of GDP in 2004, with much of this on concessional terms, and the debt service ratio was 3.6% of exports. The Government has committed itself to an ambitious infrastructure investment program, particularly for road transport and water supply and sanitation. Given Azerbaijan’s positive macroeconomic outlook in the medium term, the country should be able to maintain its strong debt repayment capacity while increasing its level of nonconcessional borrowing if appropriate investment opportunities are identified. The revised 2005–2006 OCR lending program is $174 million, compared with $44 million in CSPU 2005–2006, reflecting increased support to the Government’s infrastructure development plans.

B. Nonlending Program

36. The nonlending program has been significantly streamlined to focus on support to lending operations and the preparation of the country strategy (Appendix 1, Table A1.10 and Appendix 4, Table A4.2). Azerbaijan has a clear need to develop a more robust lending pipeline, to avoid underutilization of its ADF allocations. Moreover, project executing and implementing agencies need capacity development to ensure projects are completed in a timely fashion. The priorities used to fine-tune the 2005–2006 TA pipeline were (i) project preparatory TA, (ii) capacity development TA in support of loan projects, and (iii) analytical work for the development of the national poverty reduction strategy and the CSP.

C. Summary of Changes to Lending and Nonlending Program

37. A number of changes in the lending program occurred because of higher planned levels of OCR and slippages in project processing. Projects in the road and energy sectors were identified for OCR financing. The Central Corridor Roads Improvement Projects I and II listed in CSPU 2005–2006 were combined into a single project (East-West Highway Improvement), and the Southern Road Corridor Improvement Project was brought forward. The project preparatory TA (PPTA) for these projects were moved forward accordingly. Micro and Rural Finance, Social Infrastructure for IDPs (renamed Social Infrastructure and Capacity Building in Regional Towns), and Early Childhood Development all experienced processing delays. The Renewable Energy Development Project was added as a standby in 2006 (the PPTA added in 2005). Basic Education (PPTA 2006) is also included as a standby project to project against underutilization of ADF in the event a firm project slips. A review of the Samur–Absheron Water Supply Project during country programming indicated that more preliminary work is required before even project preparation can begin, and the loan was therefore moved back in the pipeline.

38. The revised loan program required a number of advisory TA projects (ADTA) to be dropped in favor of PPTA projects to develop a more robust lending pipeline. The ADTA for Housing Finance System Development, Water Resources Assessment, Capacity Building for Ministry of Finance, and Integrated Urban Development were removed to free up resources for PPTA for Basic Education, Gas System Restoration in Regional Towns, and Secondary Roads Improvement. Capacity development is being addressed through lending assistance (for example, the ADF-funded capacity development component included as part of the East-West Highway Improvement Project) until the lending pipeline improves. It is envisaged that capacity development ADTA for loan executing and implementing agencies will be included in the nonlending assistance from 2007, in addition to the PPTA for new projects.

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20. ADB. 2004. Review of the Asian Development Bank’s Policy on the Performance-Based Allocation of ADF Resources. Manila.
21. ADB. 2004. Country Strategy and Program Update (2005–2006): Azerbaijan. Manila.

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