BAKU, Azerbaijan, Feb.19. Risk-based
supervision, adoption of Basel III will strengthen Azerbaijan’s
financial stability, said Anna Bordon, the International Monetary
Fund (IMF) mission head to Azerbaijan, Trend reports.

“Looking ahead, GDP in Azerbaijan is expected to grow at 2.1
percent in 2026, amid continued weakness in oil and gas production
and some acceleration of non-oil GDP growth, before moderating to 2
½ percent in the medium term. Inflation is projected to fall to 5.0
percent by end-2026 and to 4.0 percent by end-2027, assuming the
unwinding of external inflationary pressures and continued fiscal
consolidation. The external position is expected to weaken, with
shrinking trade surpluses due to declining oil production. However,
the current account balance is still projected to remain positive
in 2026-27. The combined CBA and SOFAZ reserves will continue to
grow but at a slower pace. Risks to the outlook remain broadly
balanced, but external uncertainty is high,” she noted upon
completion of the mission visit to Azerbaijan during February
4-17.

Bordon went on to add that the medium-term fiscal consolidation
is appropriate and will ensure intergenerational equity and support
external sustainability.

“A clear and comprehensive strategy based on identifying
concrete revenue and expenditure measures will enhance the
credibility of fiscal consolidation. Efforts to improve SOE
profitability and reduce their subsidies, rationalize tax
incentives, and strengthen tax administration and compliance should
continue.

While inflation is projected to fall, close monitoring of risks
to inflation and responding to inflation surprises will be
important, given elevated external uncertainty and still developing
monetary policy passthrough. The interbank market rates remain
close to the policy rate, reflecting successful management of
excess liquidity by the CBA. Material improvement in the
passthrough to the broader economy will require further development
of a risk-free yield curve, and continuing progress in addressing
long-standing structural issues such as dollarization, high
operating costs, and low competition in the banking sector,” he
added.

The IMF mission head believes that maintaining the current
countercyclical capital buffer calibration is appropriate, given
the slowdown in credit growth, while the implementation of the
liquidity coverage ratio and the planned introduction of the net
stable funding ratio will support the resilience of the banking
sector.

“The recent adoption of risk-based supervision will strengthen
prudential oversight and, along with the gradual adoption of Basel
III and the ongoing enhancements to the financial safety net, will
strengthen financial stability and further increase the public
confidence in the banking sector,” she added.