6 March 2021

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CURRENCY

RESET AND RECOVERY

Despite the critical year of 2020, the Azerbaijani economy gives encouraging signs

Author:

15.01.2021

Almost all the economists begin wrapping up the results of 2020 with “it was a difficult year”. Indeed, the world economy has not suffered from a crisis and stagnation of such a magnitude for many decades. The events of the past year touched Azerbaijan as well: in addition to prolonged lockdowns, the country also lived through a 44-day war with Armenia, when the enemy caused great damage to businesses too.

Nevertheless, the forecasts show an almost 2% growth in Azerbaijan in 2021.

 

Difficulties of 2020

In fact, 2020 started quite well for the Azerbaijani economy, with high rates of economic development (over 3%), new programs and projects to strengthen the non-oil sector, high hopes for stabilizing oil prices...

But already in March, the government announced the first lockdown in the country, followed by another and another... Most of the enterprises and retail companies switched to rendering services online in full or partially. Due to the drop in demand, oil prices fell below expectations, and it was necessary to adjust the price of oil in the state budget not at $55, as originally planned, but at $35 per barrel. As a result, in order to cover the budget deficit that grew to 4.9% of GDP, the volume of transfers from the State Oil Fund to the state budget increased to ₼12.2 billion, which made it possible to maintain macroeconomic, financial and currency stability in the country.

In October, with the start of hostilities in Garabagh, Armenia bombed Ganja and the border districts. Businesses suffered damages estimated at millions of manats.

The economic recession was inevitable, exceeding 4% by the end of 2020, although the summer forecast of the government was 5%.

But on the whole, in such a difficult year, the authorities have managed to ensure macroeconomic stability. As President Ilham Aliyev noted at the meeting dedicated to the results of last year, in comparison with other countries, Azerbaijan came out of the situation with the least losses largely thanks to an 11% growth in the non-oil industry. “Our oil production has decreased. At the same time, we had to reduce production in line with the OPEC+ deal. Then oil prices fell. If it were not for this oil factor, our economy would have shrunk even less. But the growth of the non-oil industry by more than 11% means the development of the real economy, the non-oil economy,” President Aliyev said.

The sector of agriculture was also able to remain relatively stable despite objective difficulties with a 2% growth.

Most importantly, with all the load on SOFAZ and a decrease in revenues during the last year, the fund increased the revenues by 0.5%. The reserves of the Central Bank of Azerbaijan increased by 1.8%, which means that, in general, the country's foreign exchange reserves were not only preserved, but even slightly increased. Considering that Azerbaijan had to spend considerable billions of manats to fight the pandemic, support the entrepreneurs, wage the war, etc., this is a really great achievement.

 

Optimism of 2021

No matter how unfortunate can be plans and forecasts, it is impossible to move forward in the economy without them either.

2021 is definitely a year of hope. There are many theories and assumptions that the world will no longer be the same as before. But optimists continue to believe in the imminent end of the pandemic and the beginning of the revival of the global economy this year. The path to return to square one can be long, but it is important to keep going.

The published macroeconomic forecasts for this year and the parameters of the state budget show Azerbaijan among the optimistic states thanks to a positive attitude both in the government and in society after the victory in the war for the liberation of the occupied territories. “Extensive reconstruction and construction works in the liberated territories will play an instrumental role in the active growth in our non-oil sector, macroeconomic indicators for 2021, and the national economy as a whole,” Minister of Economy Mikayil Jabbarov said at the meeting on the results of last year. He explained that these factors make the government forecasts more optimistic compared to the October forecasts of the International Monetary Fund and the World Bank on Azerbaijan: “We can say that we forecast the growth rate to be twice as high. If they predict a growth rate of between 1.7-2%, then based on the adopted parameters, we plan an economic growth rate of 3.4%,” Mr. Jabbarov said.

International financial institutions also recognise that Azerbaijan’s economy will benefit from investments for the restoration of Garabagh. The World Bank’s World Economic Outlook published in January also notes that the stabilization of oil prices will contribute to the expansion of economic activity in Azerbaijan in 2021. According to the World Bank, Azerbaijan's GDP growth will be 1.9% and 4.5% in 2021 and 2022, respectively.

As for another important economic indicator – inflation – the monetary policy of the Central Bank of Azerbaijan for 2021 is aimed at keeping the rate within the 4±2%, although last year it did not exceed 3%. Interestingly, IFIs are more optimistic about this parameter. According to IMF analysts, the growth of the consumer price index in Azerbaijan in 2021 should be similar to last year.

 

Future plans

Nevertheless, the state budget for 2021 is again projected to be in deficit – 4.1% of GDP. But at the same time, incomes (by 5.4%) and expenses (by 3.8%) will also grow. State expenses are expected to be ₼28.5 billion. Traditionally, the bulk of expenditures (almost 40%) are planned to cover social obligations of the government.

Obviously, the oil sector will again prevail in providing income, but it is important that, compared with 2020, the forecast for the growth of budget revenues from the non-oil sector is 15%.

By the way, the state budget revenues for 2021 are based on the oil price of $40 per barrel, while in the state budget for 2020 and in the initial draft for 2021, the price was taken at $35 per barrel.

President Ilham Aliyev believes that the global oil prices in 2021 are unlikely to be lower than $50 per barrel. “Of course, it is difficult to make forecasts, but since the pandemic ends this year, the economic activity will increase; mutual visits, air transport and other areas will open, and the demand for fuel will be high. It is highly likely that the oil price will not fall below $50 per barrel,” Mr. Aliyev said.

According to the president, the revenues of the state budget for 2021 are based on the oil price of $40 per barrel. Current oil prices will bring in a certain surplus this year. He suggested using the surplus either to reduce transfers from the State Oil Fund to the state budget (₼12.2 billion in 2021), or for projects to restore Garabagh.

Interestingly, the government expects that this year five large state-run companies – SOCAR, Azerbaijan Railways CJSC (AZD), Azerishig OJSC, Caspian Shipping Company (ASCO) and Azerenerji OJSC will pay dividends to the state budget (₼46 million).

According to the Accounting Chamber, the government expects to receive dividends from the state-run companies and banks ₼168.05 million in 2021, which is 60.4 times more than the forecast for 2020. The lion’s share of these revenues (₼120 million) will be provided by the International Bank of Azerbaijan (IBA), the country's largest bank.

According to M. Jabbarov, in addition to expanding the sources of income for the state budget, this revenue will contribute to the implementation of an economic model to diversify and establish the new investment and business environment in the country. “Currently, the relevant issues are related to implementing new reforms and accelerating the solution of outstanding economic and administration problems,” Jabbarov said.

No matter how optimistic the forecasts for 2021 may look, there are external risks such as the pandemic. We still do not know how long the lockdown will continue to interfere with economic processes; how the economies of neighbouring countries and the trade partners of Azerbaijan will develop, what the situation with the currencies and our economy will be. The government will have to overcome the effects of all these factors, while servicing external debt, subsidizing local producers, supporting business, etc...

In addition to strengthening the role of small and medium-sized businesses, the government will also have to focus on the development of the digital and innovative economy in Azerbaijan. The ultimate goal is the growth of the national economy's self-sufficiency and its export potential.

The government hopes that the forecasts will be realized and there will be no new surprises in 2021. Let’s hope too and stay tuned to optimism.


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