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1 BLACK SEA TRADE AND DEVELOPMENT BANK BD AZERBAIJAN Countr ry Strategy THESSALONIKI APRIL, 2015

2 AZERBAIJAN COUNTRY STRATEGY TABLE OF CONTENTS TEXT: I. Summary of Recent Developments and Outlook II. III. Overview of Current BSTDB Portfolio Review of Country Strategy : Post Evaluation IV. BSTDB Operational Priorities for TABLES: Table 1: Basic Macroeconomic Indicators at a Glance Table 2: Active BSTDB Portfolio as at end December 2014 Table 3: Post Evaluation of Country Strategy 1

3 Table 1: Basic Macroeconomic Indicators at a Glance for AZERBAIJAN Key Long Term Foreign Currency Sovereign Risk Rating at 31 March, 2015 Moody s: Baa3 S&P: BBB Fitch: BBB Proj Proj Population (Million) Avg Exch. Rate (Manat/ US$) Inflation (CPI Avg.) 7.9% 1.1% 2.4% 1.4% 1.3% 3.0% 4 Average monthly wages (US$) GDP (Manat million) 52, , , , , , GDP US$ million 65, , , , , , GDP per capita (US$) 7,285 7, , , , , Real GDP growth, % 0.1% 2.2% 5.8% 2.8% 2.5% 2.0% 9 Official Unemployment (end of period) % 5.4% 5.2% 5.0% 4.9% 5.5% 5.6% 10 Industrial Production Growth, % 8.2% 3.9% 0.9% 1.7% 1.2% 1.3% 11 Agricultural Production Growth % 5.8% 6.6% 4.9% 2.6% 3.1% 2.5% 12 Domestic Credit Growth % 2.3% 33.4% 10.2% 35.3% 6.0% 12.0% 13 Domestic Credit/ GDP 19.2% 24.4% 25.3% 33.8% 37.4% 37.7% 14 Foreign Direct Investment $US million 4, , , , , , FDI/ GDP 6.7% 7.6% 8.5% 10.7% 8.1% 9.5% 16 Consolidated Budget Balance/ GDP, % 10.9% 4.1% 1.7% 2.8% 8.7% 1.5% 17 Total External Debt US$ million 8, , , , , , Total External Debt/ GDP 12.3% 13.7% 12.4% 15.1% 21.1% 20.0% 19 Public External Debt/GDP 7.6% 8.3% 8.2% 8.6% 14.6% 14.1% 20 Private External Debt/ GDP 5.3% 5.2% 3.9% 4.6% 6.4% 6.0% 21 Exports $US million (Goods) 33, , , , , , Imports $US million (Goods) 9, , , , , , Trade Balance $US mn (Goods) 24, , , , , , Trade Balance/ GDP 36.6% 31.4% 27.8% 25.2% 20.4% 21.6% 25 Current Account Balance $US mn 17, , , , , , Current Acct. Bal./ GDP 26.0% 21.4% 16.6% 13.9% 7.2% 9.2% 27 Forex Reserves (end period exc gold) US$ m 10, , , , , ,013.3 Sources: Central Bank of Azerbaijan Republic, IFS IMF February 2015, IMF Article IV Consultation, Report No. 14/159 June 2014, EIU Country Report Azerbaijan March

4 AZERBAIJAN COUNTRY STRATEGY I. Summary of Recent Developments and Outlook Azerbaijan has had one of the fastest growing economies globally since the 1990s. After experiencing a decline in output in excess of 60% in the early 1990s the country s turbulent first years of independence and a period in which it initiated its transition from a centrally planned to a market oriented economy it has posted positive rates of growth every year since Real growth between 1996 and 2014 has averaged 10.5% annually, although this figure conceals considerable variation from year to year; Azerbaijan has experienced double digit growth in nine years, including the three year period were real GDP growth exceeded 25% each year, while there have been other years with marginal growth. In contrast to the most of the rest of the Black Sea Region, which contracted by 6.5%, as well as much of the rest of the global economy, Azerbaijan achieved exceptional growth of 9.3% in 2009, during the global economic recession which resulted from the 2008 global financial crisis. Growth of the Azerbaijani economy has outpaced the rest of the Black Sea Region during the post recession period, but has slowed markedly and averaged a more modest 3.2% per annum (vs. 2.6% for the Region). Azerbaijani economic output has not correlated to Black Sea Region averages, nor to those of other geographic areas. Instead, it has closely correlated to levels of oil and gas production in Azerbaijan and the global prices of these commodities, particularly in the pre 2009 period. As energy development projects initiated in the 1990s became operational, they boosted economic output in Azerbaijan and the influx of energy receipts passed through and fostered growth of other sectors of the economy especially construction and non tradeable services. This energy driven growth has increased incomes and living standards substantially, and while social and regional income disparities exist, inequality has declined since 2001 and poverty rates have fallen drastically, by over 44 percentage points 1 ; from a low income country with nominal GDP per capita around US$ 416 in 1996, by end 2014 Azerbaijan had become a middle income country with income per head of approximately US$ 7985, an astonishing 19 fold increase. In real terms, the economy has grown around 630% between Notwithstanding the significant benefits of the energy based boom, one consequence is that the economy s dependence on oil and gas output levels has increased over the years. Moreover, as global prices for oil and gas are determined internationally and have exhibited high volatility, the economy s vulnerability to sudden changes in oil prices has also grown. This includes windfalls from sudden increases, which can fuel inflation, and even moreso sudden declines which can bring recessions, reduce fiscal revenues and constrain investment and consumption in other sectors of the economy which benefit from the availability of energy related financial receipts. This vulnerability has been mitigated to some degree by the establishment of the State Oil Fund (SOFAZ), an offshore stabilization fund into which windfall energy receipts flow during periods of high prices, and may be drawn down and released for expenditure in the domestic economy during periods of low prices so that investment and consumption contractions are smoothed out. This strategy sterilizes revenues and reduces the inflationary pressures they generate for the domestic economy. 1 Republic of Azerbaijan 2011 Article IV Consultation, IMF Country Report no. 12/5, January 2012 (see Box 2) 3

5 Nonetheless, and as has been the case going back at least a decade, the principal challenge for the Azerbaijani economy in coming years will be to achieve a greater degree of diversification with respect to its sources of growth and new wealth creation. On the supply side of the economy Azerbaijan s industrial sector, which includes energy extraction, accounted for over 60% of GDP production at end Agriculture, despite its considerable potential, accounted for less than 6% of GDP production, a figure that declined as industry s share grew in the previous decade, but has largely held steady in recent years. Azerbaijan s services sector accounted for around 33% of production, by far the smallest figure of any country in the Black Sea Region. One indication of increasing diversity is that the share of services has increased from 27.9% in 2010, although this is also partly attributable to declines in oil output in 2011 and The effect of oil and gas is observable in the lower rates of GDP growth in 2011 and 2012 (See Table 1). Stabilization of oil output levels, combined with increased growth of non oil GDP on the order of 10% led to higher overall growth in 2013 (to 5.8%), but declining oil prices resulted in a slowdown in 2014 to 2.8%, while growth in the non oil sector also slowed, due to a decline in construction. Energy receipts have allowed Azerbaijan to defy a trend of lower investment in recent years observed in much of the Black Sea Region. Public investment has been high, and has been increased counter cyclically in slower energy production years to mitigate output shortfalls. Just as importantly, much has been devoted to the modernization and expansion of Azerbaijan s infrastructure, especially in the transport sector. This has provided an immediate boost to growth as well as enhancing the longer term growth potential of the economy. Foreign direct investment has also remained robust over the years: it fell to 6.5% of GDP during the 2009 global recession year but recovered quickly and has averaged nearly 8.0% of GDP between The majority of FDI takes place in the energy sector. Azerbaijan s key macroeconomic indicators have been robust for a number of years, but dependent upon the impact of energy and energy price levels. Despite the high public investment spending, the central government has posted fiscal surpluses for over a decade, although in recent years the trend has been downward and for 2014 the surplus was around 2.8% of GDP. Moreover, transfers from energy related receipts accounted for more than 50% of revenues, with the non oil primary deficit regularly over 40% of non oil GDP. Similarly, Azerbaijan has posted double digit (as a share of GDP) current account surpluses since 2006, boosted by a high trade balance surplus that reached an estimated 25.2% of GDP in As over 90% of export receipts are energy related, other tradeable sectors of the economy have suffered in relative and absolute terms over the years the non oil current account deficit (as a share of non oil GDP) was an estimated 19% in Azerbaijan s public debt level is extremely low, and stood at around 11.2% of GDP at end 2014, of which around three quarters was owed externally (8.6% of GDP). It has been trending up in recent years, but remains low and manageable. Private sector external borrowing is extremely limited. At end 2014, the share of external debt liabilities in bank balance sheets stood below 20%. Despite the solid macroeconomic indicators, the dependence on energy production (and price levels) was highlighted by the dramatic 34% devaluation of the manat, versus the US dollar, in February Declining energy prices in late 2014 quickly worsened Azerbaijan s terms of trade and increased pressures on both the balance of payments and on the government budget. With the 4

6 manat exchange rate pegged to the US dollar, Azerbaijan also faced a decline in competitiveness from the general appreciation of the dollar in late 2014, especially vis a vis its most important trading partners (e.g. Georgia, Russia, Turkey among BSEC countries) whose own currencies had weakened. The devaluation was accompanied to a move towards a monetary policy that focuses primarily at inflation targeting and permits more exchange rate flexibility. Instead of pegging the manat exchange rate to the value of the dollar, the Central Bank of Azerbaijan (CBA) will target a US dollar euro basket. The devaluation is expected to boost energy revenues in manat terms and will also constrain imports, thus leading to improvement in the current account balance in It will also impact the 2015 fiscal balance favorably, giving a boost to revenue levels. The flip side, however, is that inflation will almost certainly rise. Since 2009, Azerbaijan has experienced single digit rates of inflation, with average annual CPI at 1.1% for 2012, 2.4% for 2013, and 1.4% for The CBA targets inflation of 5 7% for 2015, with risks weighted towards the higher side of that range. The devaluation will also create challenges for the banking sector, although its small overall size relative to the economy, and the low degree of external borrowing it has undertaken should limit the negative fallout. Some banks may require recapitalization, possibly with official involvement, and given the long standing desire of authorities to consolidate the banking sector, some small non systemic financial institutions which are unable to adjust may either be absorbed by larger institutions or else be allowed to fail. In addition, new lending is likely to decline as banks rebuild their balance sheets. However, the risk of a financial crisis is low, and authorities have ample resources to intervene should systemic pressures arise. Energy production will remain an important feature of the economy and a key determinant of change to overall GDP, but non oil and gas sectors need to develop for sustained and more broad based growth to be possible during This is especially crucial because new energy projects are not expected to come into production until 2019 or so, and until then energy sector is likely to be flat and subject to price fluctuations. On current trend, growth during the period will likely in the 2 4% range, with the non energy sector taking the lead and growing at an expected 5% per annum. II. Overview of Current BSTDB Portfolio As of 31 December, 2014, the active BSTDB portfolio in Azerbaijan amounted to 21 operations approved by the Board of Directors (BoD), involving an investment of million. Out of this total amount, 19 operations were signed for million and the outstanding disbursements were at million. Azerbaijan ranks third as a destination for operations by BSTDB, in terms of BoD approved operations, with 11.4% of the total portfolio, fourth in terms of signed operations, with 10.5% of the total portfolio, and third in amounts outstanding, with 14.8% of the total portfolio. The Bank has made concerted efforts to identify suitable operations for financing in Azerbaijan. Relative to the Bank s active portfolio at the end of 2010, Board approvals increased by 172%, signings by 120%, and amounts outstanding by 235%. 5

7 Table 2: Active BSTDB Portfolio as at end December 2014 in Azerbaijan All Figures in Euros Million BoD Approval Date Approved Amount AccessBank (former MFBA) Equity International Bank of Azerbaijan (Trade Finance)* Signed Amount Amount Outstanding 14 Oct 01/ 9 Oct 06/ 1 Feb ** 14 Jul 01/ 15 Nov 02/ 01 Mar Unibank (TF)* 1 Oct Respublica Bank (TF)* 10 Jun Respublica Bank II (TF)* 16 Jun 07/ 19 Sep Equity to ADM CEECAT Recovery 21 Jul Turan Bank (TF)* 21 Jul 11/ 11 Apr SEAF Caucasus Growth Fund 2 Dec Demirbank Bank to Bank Loan 2 Dec Demirchi Property* 2 Dec Unibank SME II* 27 Apr Azer Turk Bank SME II* 23 Jun Finca MSME* 1 Mar TBC Kredit MSME* 26 Apr Unibank SME III* 26 Apr AccessBank SME III* 21 Jun Demirbank SME III* 20 Sep AccessBank SME IV* 21 Jun Embawood* 21 Jul IBA Agribusiness SME* 19 Sep Garant Holding* 28 Nov Total * Financing for Operation provided in USD ** Amount outstanding represents valuation of equity investment III. Review of Country Strategy : Post Evaluation The current evaluation was performed by the Bank s Evaluation Office as per the respective Evaluation Policy. It reveals the performance of the Bank s Country Strategy for Azerbaijan. Its goal is to provide accountability to the Board of Directors and Board of Governors as well as facilitate the decision making by the Bank s Management and Boards on the eventual update of the country strategies. The evaluation of the respective country strategy compares the stated 2014 targets with actual results as of end of 2014, and provides a country oriented overview and evaluation rating. The Country Strategy was approved by the Board of Directors in early 2011, reflecting an in depth independent evaluation of the implementation of the BSTDB s earlier strategies, conducted by the Evaluation Office. It was aligned with the objectives of the Bank s Business Plan and was therefore evaluated in that context. 6

8 The implementation of the Country Strategy was consistent with the Business Plan implementation and exceeded the investment targets by over 60%. As the Bank s operations remained too concentrated in the financial sector and unable to cover some of the sector priorities of the Strategy, such as the sector of energy and infrastructure, the evaluation performance rating assigned to the implementation of the Strategy is Satisfactory. A more comprehensive overview is presented in the table below. Table 3: Country Strategy Azerbaijan Post Evaluation of Country Strategy for Azerbaijan TARGETS RESULTS Sectors/Priorities 1. Financial sector: lending / equity: SME and Trade Finance focus. Target: approved/ signed ( million) Actual: approved/ signed ( million) 88/78 160/126 Evaluation Summary Approved volume: 182% Signed volume: 162% 2. Energy/ Infrastructure: energy (efficiency, downstream, alternatives, environment), transport, retail, municipal, water/sewage. 3. Manufacturing: processing, importsubstitution. 4. Agribusiness: food processing, distribution, infrastructure. 5. Construction: transport, cross border cooperation, large projects, wholesale, retail/distribution, office, tourism, etc. 2. Sector coverage: 2.1.Equity CEECAT Fund (SME) 2.2. Int. Bank of Azerbaijan (Trade Finance) 2.3. Respublica Bank II (Trade Finance) 2.4. SEAF Caucasus Fund (SME) 2.5. Demir Bank (SME) 2.6. Turan Bank (Trade Finance) 2.7. Demirchi Property (real estate) 2.8. Unibank SME II 2.9. Azer Turk Bank SME II Finca (MSME) TBC Kredit (MSME) Unibank SME III AccessBank SME III Demirbank SME III AccessBank SME IV Embawood (furniture) IBA Agribusiness SME 7

9 2.19. Garant Holding (consumer staples) The Bank covered about half of its sector priorities and was not able to reach its non financial sector targets, particularly in energy and infrastructure. 2. Performance Rating: Satisfactory While volume targets were exceeded by over 60%, the concentration in the financial sector remained too high, without sufficient sector diversity, intended by the Strategy. IV. BSTDB Operational Priorities for The Bank s role and priorities are defined (i) in accordance with the priorities and targets laid out in its Medium term Strategy and Business Plan and (ii) country needs and objectives, as well as (iii) available resources, strategies and policies of BSTDB. In this respect, BSTDB will seek viable opportunities and will continue closely monitoring the developments in the Azerbaijan economy in order to stand prepared to support bankable projects. In addition the Bank shall seek co financing opportunities with IFIs, public sector institutions and private partners. BSTDB will focus in the next four years on providing support for the implementation of the Government program and priorities, while responding to market demand. The Bank will consider undertaking activities and providing services as may advance its purpose, paying special attention to activities promoting export of goods and services, and development of infrastructure, including energy efficiency. In addition, through selected intermediaries, the Bank would attempt to expand its financing programs in favor of SMEs and trade finance. Based on the BSTDB Business Plan, the Bank would expect on average to sign two to three new operation each year, for approximately million. Over the four year period, this connotes eight to eleven new commitments (signed operations) for approximately 115 million (a range of million). These indicative targets are based on the Base Case Scenario of the MTSBP, and given appropriate circumstances and sufficient operational opportunities the Bank would make efforts to exceed this level. In case of higher regional economic growth rates, increased demand for Bank funding, and an improved situation in financial markets, a phased increase in the average number and size of operations would allow the Bank to move towards achieving the targets envisaged 8

10 under the High Case Scenario. Moreover, at the Mid Term Review, depending upon performance and prospects, the above targets may be revised upwards 2. Areas for BSTDB Financing: The Bank will pay particular attention to operations which promote diversification of the economy, including the promotion of small and medium scale projects in the non oil sector which generate development and cooperation impact. BSTDB will focus on the economic development of Azerbaijan, by providing financing for bankable operations in the country, with special emphasis in transportation, agriculture and agribusiness, processing industries, manufacturing and development of micro, small and medium sized enterprises. Trade Finance and Financial Sector BSTDB s Trade Finance and Financial Sector Strategy have been created in order to develop a network of financial intermediaries, through which to deliver trade finance, SME finance and mortgage products. Since BSTDB began operations, the following products have been introduced through selected financial intermediaries in Azerbaijan for the purpose of trade finance, mortgage finance and SME development: Combined Trade Finance (export/import) product; Medium term Multiple Buyer products; Medium Term Micro and SME Finance product; Medium Term Mortgage product. Moreover, the Bank (i) invested in the equity of Accessbank (Former Microfinance Bank of Azerbaijan) in order to facilitate the creation of a micro finance institution in Azerbaijan, and (ii) it has participated in equity funds in which firms in Azerbaijan were eligible beneficiaries. By developing a network of financial intermediaries in Azerbaijan, BSTDB intends to support Azerbaijan s emerging private financial sector. BSTDB considers support for this sector an important strategic priority and will devote efforts to upgrade its presence. For the period, the Bank will avoid new mortgage financing, while giving priority to (i) agribusiness loans to enhance food security and (ii) socially focused lending such as entrepreneurial loans targeted to women, under its Micro and SME loan facilities, where applicable. The Bank already works with a number of financial intermediaries in Azerbaijan providing trade finance products and micro, small and medium enterprise (MSME) medium term lending. Such activities will continue to represent a priority for the Bank, since the financial sector is rapidly developing, and the small size of non oil sector firms often renders conducting direct operations with these enterprises as uneconomical (due to scale) or too difficult (due to informational difficulties and complexity of reaching out to small firms). The Bank remains committed to a proactive strategy of working with Azerbaijani commercial banks and as the needs of Azerbaijani banks and SMEs evolve, the Bank will adapt in order to meet the changing needs as effectively as possible. 2 Under no circumstances would targets be revised downwards unless the lower case scenario of the BSTDB Business Plan were to be followed. 9

11 Projects (i) financing trade, particularly for promoting imports of capital goods and manufacturing equipment from other BSEC countries, and (ii) supporting the development of micro, small and medium sized enterprises were successfully implemented by the Bank in previous years. Considering the emergence the non oil private sector is, it is expected that BSTDB s trade finance facilities will also help to support export oriented companies in coming years. For existing operations, the Bank is likely to increase amounts available under existing trade finance facilities and to renew and/or increase Micro and SME loan facilities where performance is good and prospects are favorable. In such cases, the Bank will pay due attention to the question of on lending costs. The Bank is cognizant that nominal rates of micro lending tend to typically be high due to the unsecured nature of the financing, high administrative costs, etc. but will do its best to ensure that the financial intermediaries shall charge interest on sub loans at an aggregate rate which is proportionate to the risks and costs, while also providing an acceptable return on capital employed. In addition, the Bank will seek to increase the number of financial intermediaries; while it will seek to change any if their performance is unsatisfactory. The Bank hopes to find suitable partners to support the development of leasing, as well. It is an area of great potential in Azerbaijan and the Bank intends to use the leasing product not only for financing capital expenditure of SMEs but also for other companies as an effective financing tool for the promotion of regional trade. Medium term credit lines opened to leasing companies for trade related purposes will enable them to offer their customers finance for capital expenditures on imports from other countries in the region. The Bank will also consider the option to take equity participations in selected financial institutions and funds. Moreover, the Bank will maintain regular contact with complementary international financial institutions (IFIs) such as EBRD, IFC, EIB, DEG and KFW to seek ways to coordinate activities and share experiences, given the opportunities which exist for joint involvement. Energy and Infrastructure (E&I) Given existing E&I needs, so long as projects are bankable, the Bank will be offering its support. Azerbaijan has sizeable hydrocarbon energy reserves, and achieving increases in the exports of oil and gas requires substantial financial resources for new investment and maintenance of existing transportation links, including oil and gas pipelines. The Bank will consider projects which intend to increase the supply of energy resources through transport networks with strong environmental and other positive externalities. The Bank also expects that there exist bankable business opportunities to provide financing for downstream operations, particularly for oil and natural gas transportation, expansion of retail networks, the building of storage facilities and industrial parks, and the construction of new and/or modernization of existing petrochemical facilities (including refineries) to improve product quality and environmental acceptability. BSTDB will be willing to explore whether the Government of Azerbaijan is able to provide sovereign guarantees for E&I projects. Should a sovereign guarantee be necessary and possible, it shall primarily be sought for an extremely high priority activity in which the guarantee would also 10

12 serve as a signaling mechanism of the Government s commitment to/ ownership of the operation in order to facilitate greater resource mobilization and broader participation. The Bank will focus on projects that envisage modernization and expansion of conventional energy infrastructure in order to facilitate power generation, transmission and distribution inside and outside Azerbaijan. Alternative energy sources such as hydro power, wind and solar are enhancing the potential in this field, while also helping to address a number of environmental issues. Hence, BSTDB will seek to support economically viable projects in the renewable energy sector as well. Azerbaijan has a need for further development and improvement of its infrastructure including municipal and urban infrastructure. The Bank will focus on projects supporting efficient waste management and rehabilitation of the water sewage and water supply networks. In terms of financing instruments, the Bank s energy and infrastructure priorities will primarily focus on medium to long term debt financing products to both local and international companies operating in Azerbaijan. Such financing may be used for the purpose of financing corporate development needs, capital expenditures, financing of working capital requirements, refinancing of existing debts, as well as for sound project finance structures. The Bank will work in cooperation with EBRD, IFC, EIB, KWF, DEG, Proparco, ADB, Eurasian Development Bank, other IFIs, commercial banks and ECAs in joint energy and infrastructure sector projects as an important source of project co financing as well as institutional knowledge transfer. The Bank will continue to ensure that all BSTDB operations in Azerbaijan meet sound banking principles and comply with the Bank s Environmental Rules and Procedures. BSTDB Energy and Infrastructure strategy in terms of banking instruments: Project Finance limited recourse transactions; Corporate recourse financing transactions; Exploration of financing in the form of Equity; Co financing of transactions with other IFIs, commercial banks and ECAs; Participation in syndicated facilities for E&I deals in Azerbaijan Areas of particular focus in Energy and Infrastructure: Oil and natural gas upstream, midstream and downstream projects, including oil and gas transportation pipelines, refineries and storage, Energy (conventional and renewable) generation, transmission, distribution and storage, Transportation and transport infrastructure Telecommunication and Information Technology Services, Municipal and Social infrastructure of all kinds The Bank will focus on medium scale projects in the non oil sector with development and cooperation impact. The Bank will focus on the economic development of Azerbaijan, by providing financing for bankable operations in the country, with special emphasis on transportation, agriculture and agribusiness, and manufacturing. 11

13 Regarding general industries, there has been significant progress in recent years. However, the country still depends mostly on imports for various industrial goods, and it depends heavily on local investors for development of the non oil sector. Increasing capital accumulation allows local investors to be involved more in medium and large scale investments in the non oil sector. The Bank will continue to seek business opportunities in the non oil sector that create tax revenues and employment especially in less developed regions of the country. Investments with strategic partners that bring know how and new technologies to the country will be given priority. The recent rehabilitation and modernization works in the metallurgical industry, in addition to new investments in petro chemical and agribusiness industries, offers good opportunities in this respect. Petro chemical industry The petro chemical industry is a strategically important one due to the fact that the country has large oil reserves. The country has significant competitive advantage in this sector which is in very early stages of development. Innovative and modern petro chemical facilities will enable realization of increased added value in Azerbaijan's raw materials business as well as broader access to the world market. Thus, there may be some good business opportunities within the next four year period for BSTDB to become involved. Agriculture and Agribusiness Azerbaijan has vast potential in the agriculture sector. Major agricultural products include grapes, cotton, tobacco followed by citrus fruits, and various vegetables. Livestock, dairy products, and wine and spirits are also important farm products. Consumption of poultry products has increased rapidly in recent years and supporting local poultry production will be important to meet the increasing demand and to substitute for imports. BSTDB will support the agribusiness sector through financing food processing and poultry projects. The Bank will give priority to projects targeting productivity increases in agriculture via infrastructure modernization, development of distribution channels of agricultural products and establishing financing mechanisms for farmers in their activities. Infrastructure and construction sector BSTDB will give priority to projects in transportation, in particular cross border cooperation operations with other member countries which focus on additional road and rail transportation, as well as the improvement of port facilities. The construction sector has continued to grow in recent years, and the demand for modern office buildings as well residential buildings has been sustained. The recent devaluation of the Manat may have an impact on this demand. The Bank will follow the changes in the construction market and should it find feasible projects, it will continue its support in this sector. BSTDB will strengthen its cooperation with the Ministry of Economy and Industry in order to identify opportunities in projects that are strategically important for the country. An important area for BSTDB will be co financing of private sector operations with the Azerbaijan Investment Company OJSC (funded from the Oil Fund) which provides equity for the non oil sector. 12