MACRO YEAR

Thanks to large-scale reforms and the rapid development of the non-oil sector, Azerbaijan’s economy is quickly recovering from the negative impact of falling global oil prices in 2014–16. The oil sector has always been the key sector of the national economy, but price oscillations have greatly accelerated measures to diversify the economy, create a competitive business environment, develop small and medium enterprises (SMEs), tourism, agriculture, information and communication technologies (ICT), and create attractive investment climate. In 2019, judging by the published macroeconomic forecasts, it is expected that Azerbaijan's economy as a whole will grow and significant progress will be achieved in various areas of the non-oil sector.

Primary results

If in 2016 the decline in the gross domestic product (GDP) was 3.1% and 4.5%  in the non-oil sector, in 2017 Azerbaijan achieved an economic growth of 0.1% amidst the growth rate of non-oil GDP (2.7%) and the continued decline in the oil industry (5%).

The government’s efforts to stimulate the development of the private sector, open new large enterprises, create industrial and agrarian parks, and implement large-scale infrastructure projects in 2018 had a positive effect. As a result, the economic growth of Azerbaijan reached about 2%, and the growth rate of non-oil GDP - 3.4%. It is noteworthy that about 70% of total investment in the national economy in 2018 was observed in the non-oil sector.

Influential international financial institutions and rating agencies have obviously noticed and praised the success of Azerbaijan.

Thus, according to the World Bank’s Doing Business 2018 report, Azerbaijan was in the list of the ten most reformist countries in the world thanks to the largest number of economic and institutional reforms conducted during the year. Progressing in this report by 32 steps compared with 2017, Azerbaijan ranked 25^th best among 190 countries and a leading position among the CIS countries.

In his address made at the opening ceremony of several enterprises at the Sumgayit Chemical Industrial Park, Azerbaijani President Ilham Aliyev underlined that "such an achievement in the ranking is a logical result of the reforms." "Doing Business reports are the main factor making investors to invest money in the economies of the reported countries. Obviously, the overall stability and development in Azerbaijan further stimulates local and foreign investors. It is no surprise that over the past fifteen years, the investors have invested $250 billion in the national economy," President Aliyev said.

Global Competitiveness Index is another important indicator for investors and businessmen, which is calculated annually by the World Economic Forum (WEF) for 140 countries in the world.

In 2017, Azerbaijan was ranked the 35th in this index - the highest in the entire history of Azerbaijan’s membership in this study. Although in 2018 Azerbaijan was recorded at the 69^th level, the country ranked 31^st in terms of business development. Its positions also improved in such indicators as infrastructure, public institutions, ICT potential and labour market.

According to President Aliyev, the reports of the Davos Forum should be analysed in detail, and the situation with poor indicators should be improved in order to further enhance the competitiveness of the national economy.

Incidentally, the WEF’s macroeconomics indicator for Azerbaijan in 2018 still took into account inflationary processes in the country. However, according to primary data, in 2018 inflation in Azerbaijan slowed down to ±3.5% from 12.9 % in 2017.

"Inflation in Azerbaijan is falling, positively contributing to monetary policy. As a result, the CBA reduced the refinancing rate this year four times - from 15% in February 2018 to 9.75% in October 2018," reports the Transition Report 2018-19 of the European Bank for Reconstruction and Development (EBRD). It also points to an increase in capital investments in the non-oil sector in January-September 2018, which leads to an increase in non-oil exports of goods and services.

"The surplus of the current account balance of payments in Azerbaijan is growing and, by the end of 2018, it will reach 6.6% of GDP against 4.1% of GDP in 2017," the EBRD reports.

The president of Azerbaijan pointed out these positive trends in his speeches. "We are solving important tasks for the country, we are implementing investment and infrastructure projects, we are providing solutions to social issues, at the same time we are increasing our foreign exchange reserves, which have already reached $45 billion. I am sure that they will grow further by the end of the year. This is a very important factor for our further successful development,” president noted. He added that “Azerbaijan is pursuing a very thoughtful economic policy and in the future there are no serious problems for the economy of Azerbaijan.”

Positive predictions

Macroeconomic forecasts for 2019, announced by the government during the presentation of the budget, also point to the trend of stability. Thus, it is assumed that GDP growth will be 3.6%, while the corresponding indicator in the non-oil sector is expected to be at 3.9%, and in the oil sector - 3.1%. Inflation will remain within 3-4%.

The increase in GDP growth rates compared to 2018 is associated with the growth of gas production from the Shah Deniz field, as well as with the implementation of the objectives for the development of the non-oil sector.

Minister of Economy of Azerbaijan Shahin Mustafayev and the EBRD experts have repeatedly pointed out this in their reports. "In 2019, Azerbaijan’s GDP growth will amount to 3.5%. We expect Azerbaijan’s GDP to grow gradually in 2018-2019, including due to the expansion of gas production and increasing export potential of Azerbaijan," Eurobank reports.

According to another international financial institution, IMF, increasing gas production in Azerbaijan may lead to an increase in oil GDP in 2019 by 5%. "Daily gas production in Azerbaijan in 2018 will be 0.41 million barrels of oil equivalent (boe) versus 0.31 million boe in 2017, and in 2019 it will increase to 0.54 million boe," report IMF experts.

International rating agency Fitch Ratings expects the acceleration of the growth rate of the Azerbaijani economy in 2019 "due to the restoration of public confidence and increased budget spending." As indicated in the Fitch Ratings’s report on the developing countries of Europe, "Azerbaijan with Macedonia and Slovakia will become the three countries of the region, where in 2019 economic growth will be accelerated."

By the way, according to IMF estimates, by the end of 2018, exports of goods and services from Azerbaijan will be $23.8 billion (in 2017 - $19.8 billion), and in 2019 it will increase to $25.6 billion. The fund believes that imports in Azerbaijan in 2018 will be $19.2 billion, and $19.6 billion in 2019. Imports are influenced by the development of Azerbaijan’s industry (equipment purchase) and the growth of the purchasing power of the population, whose cash incomes are three times higher than inflation rate (positive indicator).

EBRD believes that “moderate diversification of the economy has good prospects for medium-term economic growth in Azerbaijan, much work should be done to strengthen the role of the non-oil economy.”

Great expectations

Obviously, the government of Azerbaijan understands the need to implement this tremendously important task. It is therefore expected that in the coming year, a number of sectors of the non-oil industry will develop.

For example, tourism. Azerbaijan plans to double the number of tourists visiting the country by 2023 and bring this indicator to 5 million people annually. In 2017, almost 2.7 million tourists were recorded in Azerbaijan (20% more than in 2016), the growth rate for 2018 was about 6%, but with the creation of the State Agency for Tourism Development, involving foreign experts taking into account the plans of Azerbaijan Airlines CJSC and foreign airlines in 2019, it is expected that the tourist flow in Azerbaijan will increase. The beginning of passenger transport scheduled for 2019 via the Baku-Tbilisi-Kars-Istanbul railway can also contribute to this. In general, the government is going to allocate ₼49.3 million from the state budget for the development of tourism.

Another very promising area is agriculture. In recent years, much attention has been paid to the development of the agricultural sector and the increase in employment in the regions (support for farmers, subsidies). For the first 9 months of 2018, growth in agriculture was 4.3%. It accounts for 37-40% of the total number of employed people in Azerbaijan. The share of agricultural sector in GDP is still about 7%, but growth is planned due to the creation of 45 agriculture parks (several of them are already operating) on ​​the total area of ​​192 thousand hectares, as well as the organization of commercial family farms.

Also in 2019, it is planned to increase grain production by 5% (to 3.5 million tons), cotton  by 13% (to 300 thousand tons), meat, dairy and other products. In this regard, special attention is paid to the regions. In 2018, the third State Program on the socioeconomic development of the regions ended, which, as President Aliyev said, "was even overperformed." In 2019, the implementation of the fourth program should begin, the work on which is at the final stage.

All these developments are impossible without the further development of small and medium-sized businesses. This year, the Ministry of Economy launched the State Agency for the Development of Small and Medium-Sized Businesses, which should provide support to small and medium-sized businesses through a new electronic portal, SME houses, and consultations with large companies to provide subcontracting work.

Ministry of Economy will continue to use the investment promotion system. To date, more than 300 investment promotion documents have been issued, with the total volume of project investment reaching ₼2.7 billion and 20,000 jobs created.

According to President Ilham Aliyev, “improvement of local production is one of the most important factors for the successful development of Azerbaijan.” Therefore, judging by plans and forecasts, 2019 will be a year of deep reforms in the non-oil sector, aimed at increasing the production and export of local products, which ultimately stimulates the activation of all related industries and will help achieve the main goal – reduction of dependence on the oil sector.