Over the past months, the government has engaged reforms within all the different sectors of the economy. In this regard can you give our readers a brief overview of the economic and financial performance of Azerbaijan?

Though we gained independence in 1991, reforms began 5 years later because of the conflict with Armenia and foreign aggression. After President Heydar Aliyev came to power in 1993 army, economy began to develop in a stable environment.
Beginning 1995 we began reforms in the banking sector with the support of the international financial institutions. I have to note that we had a very old style soviet banking system that was a centralized planned banking model from structural point of view. After gaining independence as all of the post soviet republics we had to create our own and new banking system and currency. IMF and the World Bank joint mission has completed the financial sector assessment programme. And they highly evaluated the financial sector including the banking sector. Our main achievement after 8 years of reforms is the establishment of the financial-banking sector that fully comply with the requirements of the world market. And the financial-banking sector exists and operates within the real market economy that has been established in the country.
We have passed through 3 generations of bank legislature in Azerbaijan and very lately we introduced a draft law on banking in Azerbaijan which totally answers the standards and European directives (New Law on Banks passed in January 2004). The banking sector is the only sector of the economy of Azerbaijan that has been completely standardized.

So it means that you have set up all the infrastucture in terms of legislation in order to use those international standards. When do you expect those new laws to be enacted for the banking sector and the National Bank itself?

We have all the legislation and legal basis corresponding to the European standards. The laws under the discussion of the Parliament have been worked out based on the systems of IMF and they fully answer the European directives which are set for the whole European Union and starting from January 1, 2004 this law will be in force. The second law is the European model law. The main principle of the law is the independence and transparency of the National Bank as a central bank. These are the third generation laws. By enacting these laws we can say we have fully completed the standardization of the banking system legislature to the international standards.
Deposit insurance system will be introduced in the new law January 2004.

The second direction of our reforms is the restructuring process of the State banks. Before we had 4 State banks and now we have only 2 and we are going to start the privatization over those 2 banks. We want to carry out the privatization with the support of the international strategic investors which is very important for Azerbaijan.
At the beginning about 250 banks with very little capital were established in Azerbaijan. Those were unstable financial institutions. Now we have significantly consolidated this system. The total capital of the banks now makes up $2.5 mn though at the beginning it was $10,000. Now we have only 45 banks.

Therefore, we shall witness more concentration and mergers between banks in the near future?

We think that the banking system must be consolidated and capitalized. At the same time we are for the institutional difference within the banking system. We establish microfinancial institutions for poor people in the regions, create mortgage institutions to stimulate the construction process. We seriously think about it and we support its establishment and expansion.
Private banks presently dominate in this sector and we think that these banks will be the major source of economic development in Azerbaijan.

Do you believe banks currently have the means to be more flexible and adaptable to the small and medium size companies' needs?

Resources are not enough. But the banking sector is the most dynamic economic sector in Azerbaijan. We have higher dynamics in GDP growth rates, people's deposits. But fast growing private sector needs more resources. That's why we are thinking of consolidating of the banking sector and creating potential for attraction of foreign resources to the economy, capitalization of the banks. Lately we have removed all the limits for foreign bank capital participation in our local banking system and we are the only CIS country taking this measure. The law on it passed in the Parliament in December.

We also assume that great oil revenues of the country will stimulate the resource capacity growth in the banking system. The government will introduce new funds through commercial banks for distribution of oil revenues for development of the private sector. The volume of the money distributed through the commecrial banks will increase in near future. We use all the opportunities of the international financial institutions such as the IMF, EBRD, IFC and others for this purpose.

How would you assess the contribution of the Oil Fund to the socio-economic development of the country?

I think the money allocated by the Oil Fund for the economic development is enough.
We consult with the IMF in terms of macroeconomic objectives. And you know that too rapid use of oil revenues for the economic development may lead to the Holland decease. And we also know that too small use of the money may not satisfy the demand for it. That's why we support the optimal use of oil revenues. Presently by the president's order we are working together with IMF on the strategy for the use of oil revenues of the country. Our global strategic objective is to minimize our dependence on oil revenues and diversify the country economy.
Today we have up-to-date electronic payment system in Azerbaijan corresponding to the world standards. The representatives of banking system of some developing countries have lately been in our bank and they got interested in this system. We implement this system with the help of the international financial insitutions.
Today the banking system is the only sector in Azerbaijan answering the international standards in accounting and financial reporting.

Do you think it will improve significantly the efficiency within the interbank system?

On one hand it enables us to build a supervision system based on world standards, on the other hand it lets us implement our project on meeting international corporate standards in banking sector and we have already worked out this project together with PRICE.
We implement the institutional reforms through the technical cooperation and integration.

Is the National Bank satisfied with the current level of foreign exchange reserve?

Some years ago we had only $10 mn of foreign exchange reserves and now it is more than $700 mn. At present it is more than $1.5 bn together with the Oil Fund's reserves. We expect significant increase of it in the coming years. And we have a very efficient management of foreign exchange reserves. We think that foreign exchange reserve is very important factor for the national currency stability and for the economy on the whole.

Do you believe the privatization process will enhance inflow of foreign investment and at the same time enable a further increase of foreign exchange reserve?

I think we have a very good opportunity for that because we are on the way of new generation of economic reforms. We consolidate our technical base to carry out those reforms. Our ideology is that the state sector must be optimal and not too large. The government should not be directly involved in commercial activity. Even in the developed countries the government is a very bad businessman and banker. That's why we are planning to carry out the privatization of the big state banks and the main goal is to develop market economy in this sector and foreign investment.

To what extent do you expect total actives of the Azerbaijani banks to grow over the next 5 years?

We are seeking for our own economic miracle. Some countries have reached this economic miracle.
By 2015 we are planning to increase our GDP by 4 times. The first increase by 2 times will happen in 2008. Of course the oil sector will play a crucial role in it. But we want non-oil sector to play a significant role in GDP growth. Our task is to increase the bank assets up to $8-10 bn. We plan to do it in the coming 10-12 years. For example I would say that such volume of investments have been attracted by the oil industry. We will get the main part of the resources by ourselves but in order to attract foreign investors we have begun implementation of the 2nd generation of reforms the aim of which is to standardize all the elements of the business climate in order to make it very attractive for the local and foreign investors.
We are very optimistic and we think to accomplish all these tasks together with our new president.