WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IDA FINANCING AGREEMENT 4913-AZ AND IBRD LOAN AGREEMENT 8039-AZ

Public Disclosure Authorized Public Disclosure Authorized WATER USERS ASSOCIATION DEVELOPMENT SUPPORT PROJECT IDA FINANCING AGREEMENT 4913-AZ AND IBRD LOAN AGREEMENT 8039-AZ Special-Purpose Financial Statements and Independent Auditors' Report For the Year Ended December 31, 2016 Public Disclosure Authorized Public Disclosure Authorized

TABLE OF CONTENTS Page INDEPENDENT AUDITORS' REPORT 1-2 SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016: Special-purpose balance sheet 3 Statement of summary of sources and uses of funds 4-5 Statement of designated account 6-7 Statement of expenditure and summary sheet withdrawal schedule 8-9 Notes to the special-purpose financial statements 10-14

iaker TILLY AZERBAIJAN YEARS OFEXCELLENCE Audit, Tax and Consulting Demirchi Tower, 16th floor Khojaly Avenue, 37 AZ1025, Baku Azerbaijan T:+ 994 (12) 404 7 666 F:+ 994 (12) 404 7 667 office@bakertilly.az www.bakertilly.az INDEPENDENT AUDITORS' REPORT To the Management of the Water Users Association Development Support Project: Opinion We have audited the Special-Purpose Financial Statements of the Water Users Association Development Support Project (the "Project"), which comprise the Special-Purpose Balance Sheet as at December 31, 2016, and the Statement of Summary of Sources and Uses of Funds, the Statement of Designated Account and the Statement of Expenditure and Summary Sheet Withdrawal Schedule ("SOE and SSWS") for the year ended December 31, 2016 and a summary of significant accounting policies and other explanatory notes (hereafter collectively referred to as the "Special-Purpose Financial Statements") financed under the International Development Association (the "IDA") and International Bank for Reconstruction and Development (the "IBRD") through credit number 4913-AZ (hereafter collectively referred to as the "Financing Agreement") and loan number 8039-AZ (hereafter collectively referred to as the "Loan Agreement"), respectively. In our opinion, the accompanying Special-Purpose Financial Statements present fairly, in all material respects, the financial position of the Project as at December 31, 2016, the cash receipts and disbursements on behalf of the Project and transactions passed through the Project's special accounts for the year ended December 31, 2016 in accordance with IPSAS "Financial Reporting under the Cash Basis of Accounting" and relevant provisions of the Loan Agreement as described in Note 2 of the Special-Purpose Financial Statements. In addition, with respect to the SOE and SSWS, all payments reported are eligible for financing under the respective Loan Agreement and adequate documentation have been maintained to support the claims for withdrawal. Basis for Opinion We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditors' Responsibilities for the Audit of the Special- Purpose Financial Statements section of our report. We are independent of the Project in accordance with the International Ethics Standards Board for Accountants' Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with these requirements and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. An independent member of Baker Tilly International

Emphasis of Matter-Basis ofaccounting and Restriction on Distribution and Use BAKER TILLY AZERBAlJAN We draw attention to Note 2 to the Special-Purpose Financial Statements, which describes the basis of accounting. The Special-Purpose Financial Statements are prepared to assist the Project's Implementation Unit in complying with the financial reporting provisions of the Loan Agreement referred to above. As a result, the Special-Purpose Financial Statements may not be suitable for any other purpose. Our report is intended solely for the Project Management Team, the Government of the Republic of Azerbaijan, the IDA and the IBRD and should not be distributed to or used by parties other than Project's Implementation Unit, the IDA and the IBRD. Our opinion is not modified in respect of this matter. Responsibilities of Management for the Special-Purpose Financial Statements Management is responsible for the preparation and fair presentation of the Special-Purpose Financial Statements in accordance with IPSAS and relevant provisions of the Loan Agreements as described in Note 2 to the Special- Purpose Financial Statements, and for such internal control as management determines is necessary to enable the preparation of Special-Purpose Financial Statements that are free from material misstatement, whether due to fraud or error. Auditor's Responsibilities for the Audit of the Special-Purpose Financial Statements Our objectives are to obtain reasonable assurance about whether the Special-Purpose Financial Statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors' report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these Special-Purpose Financial Statements. As part of an audit in accordance with ISAs, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: * Identify and assess the risks of material misstatement of the Special-Purpose Financial Statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; * Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Project's internal control; * Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. June 22, 2017 Baku, the Republic of Azerbaijan

SPECIAL-PURPOSE BALANCE SHEET AS AT DECEMBER 31, 2016 ASSETS AND CUMULATIVE USES OF FUNDS Note December 31, December 31, 2016 2015 Cash at bank 3 1,451,495 794,651 Cumulative uses of funds 100,844,672 90,501,432 Advances to region support units 16,265 16,265 Accumulated exchange rate differences 123,344 104,299 TOTAL ASSETS AND CUMULATIVE USES OF FUNDS 102,435,776 91,416,647 SOURCES OF FUNDS Cumulative IDA Funds 69,365,850 62,648,290 Cumulative IBRD Funds 3,200,000 1,890,678 Cumulative Project Account 29,869,926 26,877,679 TOTAL SOURCES OF FUNDS 102,435,776 91,416,647 Approved and si d o"ehodf the P ect Management: ta ayev Gulbahar Mammadova Project Director!Chief Accountant June 22, 2017 June 22, 2017 Baku, the Republic of A?erb ian Baku, the Republic of Azerbaijan The notes on pages 10-14 form infilga part of these Special-Purpose Financial Statements. 3

STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31, 2016 OPENING BALANCE December 31, December 31, Cumulative 2016 2015 to date December 31, 2016 IDA Designated Account 4913-AZ 411,123 1,481,807 IBRD Designated Account 8039-AZ 308,658 - Project Account 74,870 691,626 TOTAL OPENING BALANCE 794,651 2,173,433 ADD: FUNDS RECEIVED IDA Credit Number 4913-AZ Designated Account advances - - 3,000,000 SOE and SSWS replenishment 6,717,560 8,163,064 62,795,791 Direct payments - - 3,570,059 Total IDA Credit funds 6,717,560 8,163,064 69,365,850 IBRD Loan Number 8039-AZ Designated Account advances - 500,000 500,000 SOE and SSWS replenishment 1,309,322 1,382,678 2,692,000 Front-end fee - - 8,000 Total IBRD Loan funds 1,309,322 1,882,678 3,200,000 Government of Azerbaijan Project Account 2,992,247 4,056,487 29,869,926 Total Government of Azerbaijan funds 2,992,247 4,056,487 29,869,926 TOTAL FUNDS RECEIVED 11,019,129 14,102,229 102,435,776 LESS: EXPENDITURE Expenditures paid through IDA Credit Number 4913-AZ Works (4,010,969) (7,282,302) (51,869,949) Goods (86,564) - (4,637,420) Consulting services (1,126,587) (1,517,446) (9,206,271) Training (500,624) (200,697) (1,010,823) Operating costs (189,360) (233,303) (1,413,308) Total expenditures paid through IDA Credit Number 4913-AZ (5,914,104) (9,233,748) (68,137,771) Expenditures paid through IBRD Loan Number 8039-AZ Works (1,372,637) (1,560,317) (2,932,954) Operating costs (20,849) (13,703) (34,552) Total expenditures paid through IBRD Loan Number 8039-AZ (1,393,486) (1,574,020) (2,967,506) 4

STATEMENT OF SUMMARY OF SOURCES AND USES OF FUNDS FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) December 31, December 31, Cumulative 2016 2015 to date December 31, 2016 Front-end fee 8039-AZ - - (8,000) Government of Azerbaijan Works (2,221,428) (3,728,656) (23,045,685) Goods (42,192) - (1,941,274) Consulting services (434,936) (572,225) (3,495,570) Training (198,338) (65,931) (332,153) Operating costs (138,756) (199,200) (916,713) Total Government of Azerbaijan expenditure (3,035,650) (4,566,012) (29,731,395) TOTAL EXPENDITURE (10,343,240) (15,373,780) (100,844,672) FOREIGN EXCHANGE RATE DIFFERENCES Project Account (19,045) (107,231) (123,344) TOTAL FOREIGN EXCHANGE RATE DIFFERENCES (19,045) (107,231) (123,344) Advances to regional support units - - (16,265) CLOSING BALANCE IDA Designated Account 4913-AZ 1,214,579 411,123 IBRD Designated Account 8039-AZ 224,494 308,658 Project Account 12,422 74,870 TOTAL CLOSING BALANCE 1,451,495 794,651 Approved and signed chalf Tro)M, anagement: Ai usta ayev Gulbahar Mammadov Project Director Chief Accountant June 22, 2017 //June 22, 2017 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages 10-14 form an integral partof these Special-Purpose Financial Statements. 5

STATEMENT OF DESIGNATED ACCOUNT AS AT DECEMBER 31, 2016 IDA Credit Number 4913-AZ Account held at: Account no: International Bank of Azerbaijan OJSC 38190028409330119120USD Opening IDA Designated Account 4913-AZ balance as at January 1, 2016 411,123 Add: IDA replenishments during the period from January 1, 2016 to December 31, 2016 6,717,560 Total outstanding amount advanced to IDA Designated Account 4913-AZ 7,128,683 Less: Closing Designated Account balance as at December 31, 2016 carried forward to the next period 1,214,579 Amount of eligible expenditures paid through designated account during the year 5,914,104 Total advanced amount during 2016 7,128,683 Discrepancy - Opening IDA Designated Account 4913-AZ balance as at January 1, 2015 1,481,807 Add: IDA replenishments during the period from January 1, 2015 to December 31, 2015 8,163,064 Total outstanding amount advanced to IDA Designated Account 4913-AZ 9,644,871 Less: Closing Designated Account balance as at December 31, 2015 carried forward to the next period 411,123 Amount of eligible expenditures paid through designated account during the year 9,233,748 Total advanced amount during 2015 9,644,871 Discrepancy 6

STATEMENT OF DESIGNATED ACCOUNT (Continued) AS AT DECEMBER 31, 2016 IBRD Loan Number 8039-AZ Account held at: Account no: International Bank of Azerbaijan OJSC 38190038409330119120USD Opening IBRD Designated Account 8039-AZ balance as at January 1, 2016 - Add: IBRD advances during the period from January 1, 2016 to December 31, 2016 308,658 IBRD replenishments during the period from January 1, 2016 to December 31, 2016 1,309,322 Total outstanding amount advanced to IBRD Designated Account 8039-AZ 1,617,980 Less: Closing IBRD Designated Account 8039-AZ balance as at December 31, 2016 carried forward to next period 224,494 Amount of eligible expenditures paid through designated account during the year 1,393,486 Total advanced amount during 2016 1,617,980 Discrepancy - Opening IBRD Designated Account 8039-AZ balance as at January 1, 2015 - Add: IBRD advances during the period from January 1, 2015 to December 31, 2015 500,000 IBRD replenishments during the period from January 1, 2015 to December 31, 2015 1,382,678 Total outstanding amount advanced to IBRD Designated Account 8039-AZ 1,882,678 Less: Closing IBRD Designated Account 8039-AZ balance as at December 31, 2015 carried forward to next period 308,658 Amount of eligible expenditures paid through designated account during the year 1,574,020 Total advanced amount during 2015 1,882,678 Discrepancy - Approved and signed ehalf-of jct Management: Akif 1stafyev Project Director Gulbahar Mamma 1 4 a Chief Accountant June 22, 2017 June 22, 2017 Baku, the Republic of Azerb an,a Baku, the Republic of Azerbaijan The notes on pages 10-14 fo anintegraj partaihese Special-Purpose Financial Statements. 11 7

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 2016 IDA Credit Number 4913-AZ Advance Works, goods, Total payment consulting Advance services, payment/ training and Replenished/ operating costs Direct 0001-888,524 888,524 0002 1,000,000-1,000,000 0003-79,219 79,219 0004-499,976 499,976 0005-622,712 622,712 0006-648,290 648,290 0007-569,712 569,712 0008 1,000,000-1,000,000 0009-997,708 997,708 0010-924,453 924,453 0011-1,057,217 1,057,217 0012-910,047 910,047 0013 1,000,000-1,000,000 Total applications reimbursed during the year ended December 31, 2012 3,000,000 7,197,858 10,197,858 0014-2,021,412 2,021,412 0015-2,733,601 2,733,601 0016-2,200,131 2,200,131 0017-1,706,316 1,706,316 0018-2,553,043 2,553,043 0019-2,340,941 2,340,941 0020-655,899 655,899 0021-2,969,131 2,969,131 0022-1,908,555 1,908,555 0023-782,607 782,607 Total applications reimbursed during the year ended December 31, 2013-19,871,636 19,871,636 0024-939,129 939,129 0025-2,282,521 2,282,521 0026-2,289,465 2,289,465 0027-2,353,614 2,353,614 0028-1,620,979 1,620,979 0029-2,286,625 2,286,625 0030-1,930,793 1,930,793 0031-1,744,738 1,744,738 0032-2,821,820 2,821,820 0033-2,184,517 2,184,517 0034-2,462,799 2,462,799 0035-1,498,732 1,498,732 Total applications reimbursed during the year ended December 31, 2014-24,415,732 24,415,732 8

STATEMENT OF EXPENDITURE AND SUMMARY SHEET WITHDRAWAL SCHEDULE FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) Advance Works, goods, Total payment consulting Advance services, payment/ training and Replenished/ operating costs Direct payment 0036-1,504,694 1,504,694 0037-933,127 933,127 0038-2,418,089 2,418,089 0039-2,177,772 2,177,772 0040-1,129,382 1,129,382 Total applications reimbursed during the year ended December 31, 2015-8,163,064 8,163,064 0041-1,840,299 1,840,299 0042-335,078 335,078 0043-1,243,042 1,243,042 0044-1,114,163 1,114,163 0045-1,029,128 1,029,128 0046-1,155,850 1,155,850 Total applications reimbursed during the year ended December 31, 2016-6,717,560 6,717,560 Total applications reimbursed as at December 31, 2016 3,000,000 66,365,850 69,365,850 IBRD Loan number 8039-AZ 0001A 500,000-500,000 0002-291,635 291,635 0003-496,852 496,852 0004-289,177 289,177 0005-305,014 305,014 Total applications reimbursed during the year ended December 31, 2015 500,000 1,382,678 1,882,678 0006-121,342 121,342 0007-308,670 308,670 0008-174,223 174,223 0009-260,147 260,147 0010-182,535 182,535 0011-262,405 262,405 Total applications reimbursed during the year ended December 31, 2016-1,309,322 1,309,322 Total applications reimbursed as at December 31, 2016 500,000 2,692,000 3,192,000 Approved and signed on half pf-ttfe oectianagement: Akif Mutfa v_ Gulbahar Mammadov Project Director Chief Accountant June 22, 2017 June 22, 2017 Baku, the Republic of Azerbaijan Baku, the Republic of Azerbaijan The notes on pages 10-14 form Itegal partof ese Special-Purpose Financial Statements. 9

NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 1. DESCRIPTION OF THE PROJECT Water Users Association Development Support Project (the "Project") of the Republic of Azerbaijan (the "Recipient") was formed between the Recipient, the International Development Association ("IDA") and the International Bank for Reconstruction and Development ("IBRD") under a Financing Agreement Number 4913-AZ and Loan Agreement Number 8039-AZ dated October 25, 2011 in the amount of SDR 48,900,000 and USD 3,200,000, respectively. The Project's original completion date of June 30, 2016 has been extended to June 30, 2017. The overall project objective is to improve the effectiveness and financial viability of on-farm irrigation water distribution and management in the Project area. The Project consists of the following components: Component A: Institutional Strengthening and Capacity Building Institutional strengthening and capacity building of the Project Implementing Entity, the central support unit, the raion water users associations support units and the regional support centers, through the provision of goods, consultants' services and training; as well as rehabilitation and construction of the offices of the said regional support centres through the carrying out of works. Capacity building of eligible Water User Associations (the "WUAs") through the provision of goods, consultants' services and training. Provision of operations and maintenance equipment and management and management facilities to eligible WUAs through the carrying of works, and the provision of goods and consultants' services. Strengthening the capacity of the Project Implementing Entity to exercise the responsibility of state supervision of the WUA's activities pursuant to the Law on "Amelioration and Irrigation" through the provision of goods, consultants' services and training. Preparation of selected studies, research and demonstration pilots in irrigation and drainage, integrated water resource management; and related institutional areas through the carrying out of works, provision of goods and consultant services. Component B: On-farm Irrigation and Drainage Rehabilitation Rehabilitation of on-farm irrigation and drainage systems for eligible WUAs in selected raions through the carrying out of works and the provision of consultants' services. Component C: Project Management, Monitoring and Evaluation Support for project management and implementation activities including monitoring and evaluation through the provision of goods, consultants' services and training. 10

NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Statement of compliance The Special-Purpose Financial Statements have been prepared on the cash basis of accounting in confonnity with International Public Sector Accounting Standards ("IPSAS") "Financial Reporting under the Cash Basis of Accounting" issued by the International Public Sector Accounting Standards Board of the International Federation of Accountants and incorporate the principal accounting policies from the "Guidelines: Annual Financial Reporting and Auditing for World Bank Financed Activities". Other basis of preparation criteria The Special-Purpose Financial Statements are prepared under the historical cost basis of accounting. Source funding and government contributions are recognized when the related cash is received or paid out on the Project's behalf. Expenditures are accounted for on the basis of actual disbursement of funds from the Project's accounts. Foreign currency transactions and translation The reporting currency is United States dollars ("USD"). Items included in the special purpose project financial statements are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the "functional currency"). The functional currency of the Project is USD. 3. CASH AT BANK As at December 31, 2016 and 2015 the Project had cash at bank balances with International Bank of Azerbaijan CJSC ("IBA") as follows: December 31, December 31, 2016 2015 IDA Designated Account in USD 4913-AZ 1,214,579 411,123 IBRD Designated Account in USD 8039-AZ 224,494 308,658 Project Account in AZN 12,422 74,870 Total cash at bank 1,451,495 794,651 4. CUMULATIVE USES OF FUNDS Cumulative uses of funds comprise the following: December 31, 2016 December 31, 2015 IDA 4913-AZ share 68,137,771 62,223,667 IBRD 8039-AZ Share 2,975,506 1,582,020 Government of Azerbaijan share 29,731,395 26,695,745 Total cumulative uses of funds 100,844,672 90,501,432 11

NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) 5. BASIS OF FUNDING AND ELIGIBLE EXPENDITURE The following table specifies the categories of eligible expenditures that may be financed out of the proceeds of the Financing, the allocations of the amounts of the Financing to the category, and the percentage of expenditures to be financed for eligible expenditures in the category: Category IDA Financing Agreement 4913-AZ Amount of the Percentage of expenditure Financing allocated to be financed (expressed in SDR) (Net of VAT) (1) Works, goods, consultants' including audit, training and operating costs 48,900,000 83% Total eligible expenditure 48,900,000 The following table specifies the categories of eligible expenditures that may be financed out of the proceeds of the Loan, the allocations of the amounts of the Loan to each Category, and the percentage of expenditures to be financed for eligible expenditures in each category: Category IBRD Loan Agreement 8039-AZ Amount of the Percentage of Loan allocated expenditure (expressed in USD) to be financed (Net of VAT) (1) Works, goods, consultants' including audit, training and operating costs 3,192,000 83% (2) Front-end Fee 8,000 (3) Premia for interest rate caps and interest rate collars _ Total eligible expenditure 3,200,000 6. DESIGNATED ACCOUNT The Recipient has established a Designated Account at a commercial bank acceptable to the IDA and TBRD in accordance with the Financing Agreement and Loan Agreement. Designated Account is established, managed, replenished and liquidated in accordance with the IDA and EBRD's "Project's Operations Manual" and detailed arrangements agreed upon between the Recipient, the IDA and the TBRD. The Designated Account of the Project is maintained in USD with EBA. 7. METHOD OF DISBURSEMENT The methods of disbursements were as follows: Advance - IDA and EBRD may advance proceeds in accordance with the Financing Agreement and Loan Agreement into a Designated Account of the Recipient to finance eligible expenditure as they are incurred and for which supporting documents will be provided at a later date. Direct funding - IDA and IBRD may make payments, at the Recipient's request, directly to a third party for eligible expenditure. 12

NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) Reimbursement procedure - IDA and IBRD may reimburse the Recipient for expenditure eligible for financing pursuant to the Financing Agreement and Loan Agreement that the Recipient has prefinanced from its own resources. Commitment procedure - IDA and EBRD may pay amounts to a third party for eligible expenditure under special commitments entered into, in writing, at the Recipient's request and on terms and conditions agreed between the IDA, the EBRD and the Recipient. 8. METHOD OF WITHDRAWAL IDA and IBRD Designated Accounts Designated Account is designated disbursement account of the Project to effect the payment of eligible expenditure, within defined limits, which do not require individual authorization from the IDA and TBRD. Available amounts were drawn down within the limits determined by the relevant Financing Agreement and Loan Agreement for the payment of eligible expenditure for sub-contractors from the Designated Account. Direct payments from the IDA and IBRD Designated Accounts Under this method, the Project management prepares applications based on supporting documents which are submitted to the IDA and EBRD. Payments are made from the Loan Account directly to the contractors. Project Account The Project maintains a separate account in the State Treasury Agency where the Government funds are accumulated. The funds are further disbursed to sub-contractors based on the shares of expenditure to be incurred by each funding source. Statement of expenditure ("SOE'9 Under the SOE method, the Project forwards to the IDA and EBRD an application for reimbursement of payments already made using an application for withdrawal with SOE forms as the only documentation. 9. OPERATING ENVIRONMENT The Project's operations are conducted in the Republic of Azerbaijan. As an emerging market, at the present time the Republic of Azerbaijan is developing business and regulatory infrastructure that would generally exist in a more mature market economy. Major indicators of the Azerbaijan economy were influenced by a number of negative factors. Considering significant drop in crude oil prices starting from the second half of 2014, there continues to be uncertainty regarding the economic growth, access to capital and cost of capital in the Republic of Azerbaijan, because Azerbaijan produces and exports large volumes of oil and gas, its economy is particularly dependent on the price of oil and gas. Economic growth slowed down in 2014 and 2015 approximately 2% and 1.1%, respectively and turned negative 3% in 2016. These factors resulted in the economic slowdown to shift from prosperity to recession economy with high inflation and unemployment and decreasing GDP. 13

NOTES TO THE SPECIAL-PURPOSE FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2016 (Continued) The future economic direction of the Republic of Azerbaijan is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory and political developments. The Management is unable to predict, all developments in the economic environment which would have an impact on the Project's operations and consequently what effect, if any, they could have on the financial position of the Project. Decreasing revenues from oil exports made the Central Bank of the Republic of Azerbaijan abandon its peg policy to the basket of US dollars and Euros. In addition, CBRA devalued the Azerbaijani Manat by approximately 34% on February 21, 2015 and further on December 21, 2015 introduced a floating exchange rate that resulted in one-time devaluation of the AZN against US dollars and other major currencies by approximately 48%. The devaluation of Azerbaijani Manat continued in 2016 and resulted in 14% fall against US dollars and 9% fall against Euro by December 31, 2016. In January 2016, Standard & Poor's, international credit agency, downgraded long-term and short-term foreign and national currency sovereign rating to the speculative level. Starting from February, 2016 the Central Bank of the Republic of Azerbaijan has gradually increased refinancing rate from 3 to 15% and the minimum capital adequacy ratio was lowered from 12% to 10%. In addition, CBRA prevented speculations in the currency market by setting a limit on the currency exchange rate corridor within 4% of the official rate which was revoked in 2017 and introduced limits on the amount of foreign currency exchange. The Azerbaijani economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. While the Govermnent has introduced a range of stabilization measures and plans to expedite reforms and support to banking system in response to current economic challenges. Amidst the ongoing crisis, the government of Azerbaijan shifted its oil-oriented economic policy, dominated for two decades, to the diversification of the economy. For that purpose, a "national strategic roadmap" was adopted to formulate a correct development strategy. The implementation of the "national strategic roadmap" was assigned to the newly formed "Center for Analysis of Economic Reforns and Communications," the aim of which is analysing the effectiveness of conducted reforns and making new proposals. It is expected that recession to be short-lived, recovering to economic growth in 2017, partly due to positive effects of investments in gas projects. It is expected the GDP will growth 1.4% and the nonoil sector about 2.4%. Over the long term, Azerbaijan will benefit from production from the new gas fields, which is expected to come online in 2018. 14