Azerbaijan's economic growth prospects will remain weak in the next few years and inflation is expected to gradually decrease from the current level of 10.6%, the International Monetary Fund (IMF) said in a report released on September 15.

The multilateral agency noted the multitude of shocks that the government has had to grapple with, including low oil prices, currency devaluations in its main trading partner countries, and a contraction in hydrocarbon production, praising Baku for its efforts to adjust its monetary policy by floating the manat in 2015 and to consolidate its fiscal accounts.

However, the IMF team recommends that Baku focuses on fiscal consolidation by limiting tax exemptions and improving tax administration; that it communicated monetary policy more transparently in order to anchor expectations and reduce uncertainty; to continue efforts toward economic diversification away from hydrocarbons; and to more closely monitor the banking sector, by continuing to take action against non-viable banks and restructuring the largest bank in the country, International Bank of Azerbaijan (IBA), with a view to its privatisation, the fund said in a report released after completing Article IV consultations.

Azerbaijan's economy slid into recession this year, and its GDP is expected to contract by 2.4% in. Baku has moved swiftly to appease early popular discontent with its crisis management by increasing pensions and salaries for state employees, tightened monetary policy by raising the refinancing rate from 3% in January to 15% in September to reduce inflationary pressure on the currency, reduced its capital expenditure by a factor of 2.5 and closed 10 banks that were undercapitalised following a drastic depreciation of the manat in 2015. As inflation skyrocketed and borrowers began to default of dollar-denominated loans, the banking sector gradually became embroiled into a full-fledged crisis, on the back of fast declining asset quality, capitalisation and profitability.

Recent developments in foreign exchange markets point to a possible further devaluation of the currency, and have prompted an unprecedented demand for foreign currency and worries of worsening conditions for the banking sector.