AZERBAIJAN COMPLETES THE YEAR WITH "FIVE OUT OF FIVE"

Azerbaijan's economy in 2010 once again demonstrated resilience to external and internal challenges - statistics show that the country's economic performance has grown by 5 per cent over the past 12 months.

Although in the past decade, the average annual economic growth rate was over 14 per cent, it is totally wrong to talk about the slump in growth rates as a sort of negative factor, since there is a substantial growth in the entire Azerbaijani economy. And now each percentage increase is of great significance for the country's 40-billion-dollar economy.

On the other hand, we must take into account that the whole world is experiencing a post-crisis period, for which non-standard challenges are typical. While developed countries are looking for a way out of the deep crisis, emerging economies are either not so much affected by it or have already overcome it.

In such circumstances, of course, the 5-per-cent growth in Azerbaijan can be considered to be a sufficiently adequate indicator. This is the opinion of leading officials at the government's economic block and representatives of international financial institutions, which they expressed in brief interviews with the Region plus.

Chairman of the Azerbaijani State Securities Committee (SSC) Rufat Aslanli:

- In 2010, the country's economy demonstrated several important structural phenomena - continued economic growth, a low level of inflation and increasing investment activity.

Despite very serious global issues, the primary success of Azerbaijan is that we achieved a stable macroeconomic environment. Inflation is at an acceptable level - 5.7 per cent in 12 months, which allows households and the corporate sector to keep their savings. On the other hand, this level of inflation makes it possible to invest in the economy.

The third main result is the preservation and expansion of investment activity in the country, i.e. in 11 months investment in the economy grew by about 15 per cent and reached 7.8 billion manats. These investments allow us to achieve economic development in subsequent years. The structure of investment has seen some positive changes, i.e. today more than 75 per cent of investments come from domestic resources, and, very importantly, about 67 per cent of investments were made in the non-oil sector.

A very important change in the structure of the economy is its growth due to the non-oil sector, which is the result of economic diversification. The non-oil sector is now the main source of economic growth, as it is twice as much as the overall GDP growth. It is the guarantor of stability, since the oil sector is very vulnerable - especially to external shocks, while the non-oil sector, which is aimed primarily for domestic consumption and ensures stable growth, employment and settlement of social issues, is becoming less vulnerable.

Last year, the economy of Azerbaijan strengthened its external positions, i.e. the foreign exchange and gold reserves continued to grow and reached about $ 30 billion, which is quite a substantial sum of money to carry out further medium-term government programmes, as well as new projects which will be the basis for a more dynamic economic growth in the future.

In 2010, we achieved positive social results. Overall, a very important aspect of economic processes was observed not only in 2010, but also in the past three years. Throughout the world, the question of employment and social welfare in different countries and regions is the keystone, and in Azerbaijan, the growth in incomes and average wages evolved in a positive direction.

With regard to the securities market, it continued to take shape in 2010. The next decade sets the task of broadening channels of funding for economic growth. In this case, capital markets can and should play a more significant role. In this sense, 2010 saw basic innovations in the medium-term strategy, which will serve more meaningful results in the future. This year, the strategy will be transformed into a national programme, which is very important as the infrastructure goes beyond the mandate of the State Securities Committee. In this context, different government agencies need to take more coordinated action.

Over the past period, very serious preparatory work has been carried out for the international standardization and improvement of the legislative base. The law "On Investment Funds" has already been adopted, and now intensive work is under way to prepare bylaws, which will make it possible in the future to form and develop collective investment schemes required for developing markets. Also, the SSC has almost completed the development of the legislative framework for corporate behaviour and protection of shareholders and investors' rights. The law will come into force this year.

In parallel, the State Committee began to develop new legislation "On securities and stock markets", and the project has been announced as a priority in 2011. It will create a basis for a more qualitative jump on Azerbaijan's stock market and make it possible to develop this segment of the economy more effectively.

President of the State Oil Company of Azerbaijan Rovnaq Abdullayev: 

- In 2010, we achieved great success in the oil and gas sector, which is the leading sector of our economy. Last year, along with the extraction of hydrocarbons, SOCAR continued the drilling of new wells and exploratory drilling to find new productive fields and prospects.

In November, the company announced the discovery of the Umid major gas field in the Azerbaijani sector of the Caspian Sea. The discovery of the deposit has already caused great repercussions in the world, and this event will be of great importance for the energy potential of Azerbaijan on the world market. According to SOCAR experts, the amount of reserves at the deposit is 250 billion cubic metres of gas and 40 million tons of condensate. SOCAR plans to begin drilling a second exploratory well at the Umid field in mid-2011. While drilling the second well, all the peculiarities of the deposit, which were identified in the process of drilling the first well, will be taken into account.

In general, Azerbaijan produced 51.5 million tons of oil and 27 billion cubic metres of gas in 2010. Of the total amount produced, 8.5 million tons fall to SOCAR, which extracts oil from onshore and offshore fields at its own expense. The remaining 43 million tons of crude oil fell to the Azerbaijan International Operating Company (AIOC), which produces Azeri Light oil at the Azari-Ciraq-Gunasli block of fields. Of the total amount of gas produced in the country in 2010, 7.2 billion cubic metres of gas are the share of SOCAR. At the end of 2010, the volume of gas stored in two underground storage facilities amounted to 3.1 billion cubic metres.

This year, SOCAR has an extensive programme of activities, including the updating of Azerbaijan's gas system to ensure that 90 per cent of the population is supplied with gas by the end of 2012.

Plans for 2011 also include the modernization of the processing complex. AzarKimya will get two units that will help increase the production of polyethylene and polypropylene. As part of the measures taken last year, AzarKimya increased its total output from 26 to 40-42 per cent of its design capacity. The construction of the two units this year will help increase the amount of end products, which will contribute to the development of the petrochemical industry.

Along with this, work is continuing to create the petrochemical and refining complexes, and the concept and feasibility study of the project, which includes the construction of the country's new oil refineries, gas and chemical plants, will be prepared next year. Azerbaijan has increased its gas production, so SOCAR is tasked with organizing the further processing of gas to manufacture a good product.

Deputy Chairman of the Central Bank of Azerbaijan Xaqani Babayev:

- In 2010, the global economy gradually began to emerge from recession. However, the recovery in the global economy, which began after the crisis, as well as structural and macroeconomic problems in the leading economic centres, including the fiscal imbalance, contributed to an uneven and unstable growth. At the same time, the presence of significant risks in the global financial system gave rise to high volatility on financial markets.

Despite this difficult situation, the Azerbaijani economy continued to grow in the past year and macroeconomic stability was maintained. In general, Azerbaijan was able to eliminate the effects of the global crisis and to further strengthen the financial stability of the country's economy, as well as significantly increase foreign exchange reserves.

According to macro-economic monitoring surveys, the number of enterprises, which increased their production volumes and turnover, grew last year, and there were positive developments in restoring the capacity of banks to attract funds from abroad, increase external financial flows into the country and raise export prices in the payment balance.

In nine months, the current account surplus grew by 6 per cent in comparison with the same period of 2009 and approached $12 billion. This covered the deficit of the capital account and led to an increase of $9.7 billion in foreign exchange reserves, raising them to $30 billion.

The Central Bank maintained the nominal exchange rate of national currency at a stable level, which appreciated by 0.6 per cent against the US dollar. To this end, the CBA made additional injections into the country's foreign exchange market, which resulted in volumes of intervention exceeding $1 billion.

To sustain business activity in the country, the CBA did not revise its monetary policy until late October, keeping interest rates at 2 per cent, the rate of compulsory redundancy - at 0.5 per cent and leaving the window of liquidity open.

As a result of Central Bank operations, the expanded manat money supply grew by 20.2 per cent, which led to lower interest rates.

But at the end of the second half of the year, the CBA, considering the growth in aggregate demand, inflation and projections on the balance of payments, raised interest rates to 3 per cent from 1 November, and in order to regulate the influence of foreign factors on the money supply, a norm of compulsory redundancy for foreign loans at 0.5 per cent was introduced.

To ensure the stability of the banking sector, the CBA carried out several activities during the past year to strengthen risk management systems and management capacity, increase the level of financial backup and recover assets in banks. Also, capitalization programmes were adopted, and banks began to implement them. A new framework for managing liquidity was approved, and preparations began for the implementation of new regulations.

Along with the growth in bank performance, the qualitative parameters of banking assets stabilized, which allowed the credit debt of the real sector and the public to banks not to exceed 5 per cent. Banks established reserves for potential risks. The banking sector also maintained an optimal level of profitability and investment attractiveness. The capital adequacy of the banking sector is 16.8 per cent while the norm is 12 per cent.

Among the achievements of the banking sector is the strengthening of regional expansion. Credit investments of banks in the regions of the country increased by more than 12 per cent, while the number of branches totalled 316.

We should also note that access to financial services in the regions and the level of competition will expand even more following the launch of the postal banking system.

The head of the IMF office in Azerbaijan, Aggun Qadirli:

- Azerbaijan's economy is recovering from the global financial crisis. After the fall in the rate of growth in non-oil GDP from 16 per cent in 2008 to 3 per cent in 2009, this index grew by 6 per cent in January-November 2010.

Despite the growth in the non-oil sector, GDP in 2010 decreased to 5 per cent against 9.3 per cent in 2009 due to the slower growth in oil production. Last year saw an increase in inflation, and in November, it reached 7.4 per cent. It is expected that by the end of the year, it will be at 7-8 per cent due to higher prices for food products and increased government spending.

Due to the growth in non-oil GDP, in particular, increasing public spending (about 5 per cent of non-oil GDP in June as a result of the correction of budget projections), the country's economy grows at a faster pace than our Fund expected during consultations with the IMF in February- March 2010. At the same time, oil GDP is growing in line with the Fund's forecasts.

Within the framework of the fiscal policy, according to IMF experts, Azerbaijan's non-oil deficit should be substantially reduced in the medium-term in order to ensure medium-term fiscal sustainability in light of the fleeting oil boom. Much of the consolidation can be achieved by improving the efficiency of public spending.

In the financial sector, measures should be taken to resolve the issue of problem loans, but as the financial sector is recovering, liquidity support should be discontinued to limit fiscal risks and prevent inflation. The IMF also recommends increased cooperation with the International Bank of Azerbaijan through privatization.

Meanwhile, the artificial maintenance of the rate of the dollar retains its relevance in the short-term, while even greater flexibility will be beneficial in the medium-term. Within the framework of structural reforms, economic diversification should be accelerated by further improving the business environment, in particular, modernizing tax and customs systems and structural reforms in the financial sector.