On May 29, the International Monetary Fund (IMF) noted that Azerbaijan’s medium-term fiscal consolidation path remains appropriate for ensuring both intergenerational equity and external sustainability. The IMF staff estimated that maintaining a non-oil primary deficit (NOPD) at around 6–6.5 percent of non-oil GDP would help secure a stable real annuity across generations. According to the assessment, reaching this level within approximately 10 years would require an annual fiscal adjustment of 1.2–1.6 percent of non-oil GDP starting from 2026. This trajectory, the Fund noted, aligns with the authorities’ fiscal rule target of reducing the deficit to 13 percent of non-oil GDP by 2029. At the same time, the IMF emphasized that these projections carry significant uncertainty and depend on external conditions, particularly hydrocarbon revenues.

The Fund further stressed that any unexpected revenue gains from higher-than-forecast oil and gas prices should be saved rather than spent, in order to support fiscal stability. Given Azerbaijan’s relatively low public debt levels, the IMF assessed that the planned consolidation path contributes to a low risk of sovereign stress and supports external sustainability.

The IMF addressed monetary policy, recommending that the Central Bank of Azerbaijan consider increasing its key interest rate if inflationary pressures intensify due to rising imported food prices. The IMF noted that keeping the policy rate unchanged is currently consistent with the expected normalization of domestic demand and the gradual closure of the output gap. However, it warned that inflation in 2026 is expected to rise mainly due to external factors, particularly global food prices, before gradually declining toward the midpoint of the target range by 2027. The Fund also pointed to elevated external uncertainty, including potential shocks from global commodity markets, which could push inflation above the Central Bank’s target range. It added that uncertainty around the neutral interest rate and the still-developing monetary transmission mechanism require the Central Bank to remain ready to respond decisively to unexpected inflation developments.

According to IMF projections, average annual inflation in Azerbaijan is expected to reach 6 percent in 2026, before declining to 4.2 percent in 2027, 4.1 percent in 2028, and stabilizing at around 4 percent between 2029 and 2031. The IMF also assessed Azerbaijan’s banking sector as broadly resilient, citing strong capital adequacy and profitability indicators. However, it warned that elevated deposit and credit concentration, as well as persistent financial dollarization, continue to pose risks. The Fund recommended continued implementation of Basel III standards and Financial Sector Assessment Program (FSAP) recommendations. These include strengthening the resilience of systemically important banks through newly introduced capital buffer requirements, fully implementing Basel III rules by January 2027, and ensuring effective rollout of risk-based supervision introduced in 2026.

The IMF further emphasized the importance of moving toward consolidated supervision to strengthen oversight of the banking sector as a whole. It also welcomed progress in developing resolution frameworks for systemically important banks and called for legal reforms to expand the Central Bank’s powers over bank resolution and deposit insurance systems. Finally, the Fund highlighted the need to reinforce Azerbaijan’s emergency liquidity assistance framework. It noted that ongoing technical assistance and planned legal amendments would enhance the Central Bank’s capacity to respond effectively to liquidity stress in the financial system.