WHERE THERE IS NO CRISIS

The world has probably not seen in the New Year with such feelings of alarm and uncertainty for a long time. The world economic crisis is ensnaring more and more victims. The lack of a coordinated approach in the development of anti-crisis measures by existing interstate institutions, consideration of the political situation and the sluggish reaction of some countries to rapidly developing tendencies make it difficult to forecast how the crisis will develop and what its consequences will be. The scenarios currently proposed are mainly pessimistic.

One step away from a Great Depression

In the recent period, the governments of the leading world economies, including the USA, Japan and the European Union, have approved the allocation of hundreds of billions of dollars for the stabilization of the economic situation. However, experts believe that the economic crisis is not yet receding.

The International Monetary Fund and its director, Dominic Strauss-Kahn, are making especially pessimistic predictions. He believes that insufficient fiscal measures taken by the authorities to arrest the decline in the world economy may result in 2009 being even more difficult than expected. In an interview with the BBC, he said that the IMF will probably have to lower its forecasts of world economic growth in January, adding that "2009 will be a really bad year". "I am especially alarmed by the fact that our prognosis, which is quite gloomy anyway, will become even gloomier, if the necessary fiscal measures are not taken," Strauss-Kahn said.

The IMF urges governments to increase the amount of money allocated and to temporarily lower taxes to 120,000 billion dollars, or to 2 per cent of the annual volume of world output in order to fill the gap created by the decline in private demand caused by the credit crunch, Reuters reports.

A leading economist at the International Monetary Fund went even further than his boss and warned of a new Great Depression. Olivier Blanchard said, in an interview with the French newspaper Le Monde, that the world has encountered a crisis of unique proportions and, in order to prevent it from worsening, governments may have to make additional financial injections into the economy. "National governments and central banks should use all their power and potential to prevent a Great Depression," the IMF expert said.

According to Blanchard, it may be that it will be necessary to allocate more than three per cent of gross domestic product in order to stimulate the economy. For EU countries, this would mean doubling the investment necessary, since it is currently planned to spend 1.5 per cent of GDP to overcome the consequences of the financial and economic crisis.

In his opinion, in this situation state investment in such projects as the construction of new bridges and the refurbishment of schools may be of greater benefit than tax cuts. "Tax privileges will probably result in citizens saving their money for a rainy day," he said.

There is a positive aspect as well…

Against this background, it is even more interesting what IMF "optimists" think about the prospects for the development of the Azerbaijani economy. In mid-December, Baku was visited by an IMF mission led by Valeria Fichera. This is not the first time that she has prepared a review of the Azerbaijani economy and, despite IMF traditions, she always comes up with a positive assessment. This time many expected a gloomy conclusion from Mrs Fichera, since officials in the country had begun to talk of a tangible, though not catastrophic, impact of the crisis on the situation in Azerbaijan.

"We reviewed the Azerbaijani state budget for 2009 and the situation in the Azerbaijani economy against the background of the world financial crisis. We also examined the situation surrounding the banks and the policy being pursued by the country's National Bank, and we confirm that the banking system in Azerbaijan remains steady. The Central Bank of Azerbaijan has lowered the interest rate and requirements for budget reserves. We think that these decisions were correct, since the Azerbaijani economy could have been adversely affected by the psychological pressure of the world crisis, but it proved possible to avoid this. There are no significant problems in the banking system of Azerbaijan," Fichera said, in commenting on the results of her visit to Baku.

The main topic of discussion among experts in Azerbaijan has recently been the draft state budget of 2009, against the background of the raging crisis. Some economists are convinced that it should have been drafted more carefully in view of the gloomy predictions regarding the world economy. Azerbaijan is integrating into the world community, many businesses have partners abroad and some even depend on cooperation with them. The decline in the volume of world output cannot but affect our country. The price of 70 dollars per barrel for oil, on which the main calculations of the budget are based, has been harshly criticised by a number of economists, who believe that the government should have been more cautious on this issue, due to the unpredictability of the oil market.

But… the IMF, which is always hard to please, assessed the government's draft budget as steady this time, saying that it will help the country to live through 2009 with greater confidence. The IMF believes that in the country's foreign assets, the position of the government and the National Bank are steady, and all the policy decisions made by local agencies are totally substantiated and correct. "The National Bank and the Ministry of Finance have a good understanding of the risks and are ready to counter them. Unlike other countries, Azerbaijan has not encountered large-scale capital flight and the corresponding problems, which allows the National Bank to react to risks more effectively. At the same time, official agencies should continue to keep track of the situation," Fichera said.

How about the collapse of the oil market and the dramatic slump in the price of fuel, on the export of which the Azerbaijani economy still depends heavily? It turns out that there is no threat to the Azerbaijani budget for 2009 from the slump in world oil prices, because the budget is financed mainly by transfers from the State Oil Fund. "The government drew up the budget when oil prices were high but, even in the current situation, we see no risk," Fichera assured us.

She said that the volume of transfers from SOFAR into the state budget is stable, regardless of oil prices. "The proportion of the budget which depends directly on fluctuating oil prices is relatively small," Fichera said. "According to our estimates, the overall fiscal situation of the budget will be positive, even with an oil price of 40 dollars per barrel. I mean that the Oil Fund will continue accumulating additional resources if the price is higher than 40 dollars. If we take into account that by the beginning of the year SOFAR had accumulated 10 billion dollars, and transfers from SOFAR totalled about 4 billion dollars, the Fund will still have at least 7 billion dollars if oil revenues continue coming in. In other words, in the short-term there is no risk for the budget of 2009," Fichera pointed out.

As for the medium-term, everything here depends on how market prices behave in the next two or three years. If they remain at a high level, it will be necessary to adjust the budget, but this will be done gradually. "At current prices, there will be no deficit in the consolidated budget of 2009. The revenues of the State Oil Fund and the state budget will be sufficient to finance state spending," the head of the IMF mission pointed out.

Maximum growth and minimum inflation

At the same time, the IMF still believes that economic growth in Azerbaijan in 2009 will be the highest of CIS countries - 12 per cent, with 6 per cent growth in the non-oil sector. "This is slightly lower than in the previous year, but since growth is expected to be zero per cent on the world scale, this is quite satisfactory," Fichera said.

The rate of inflation will fall to 9 per cent in 2009, from the 17-20 per cent forecast for this year. This is a positive effect of the world crisis. However, this is not the final conclusion of the Fund's experts - the forecasts will be reconsidered in June 2009, when the impact of the international situation on the economy is identified. "We expect a growth in agriculture and in infrastructure, because demand for the products of these sectors will be on the increase, however, no growth is expected in sectors such as industry, especially in heavy industry," the head of the IMF mission said.

As for the dependence of the country's economy on the oil sector, Fichera thinks that the government has taken a number of measures in this area. As a rule, however, their effect will become clear only at a later stage. "We think that such reforms as the registration of businesses by a 'one-window' system and reforms to the Tax Code will yield results some time later. Currently, the government is preparing draft changes and amendments to the Tax Code which will be put up for debate by parliament in May. The IMF is ready to render technical assistance to the government on this issue if requested, and we know that, on the whole, they are aiming tot maintain competitiveness in the business environment of Azerbaijan," Fichera said.

In a word, the IMF is sure that the economic future of Azerbaijan is safe. The government will continue diversifying the economy and one of its main components is a programme of state investment, including "improvements to the road infrastructure, the supply of water and energy, and sewerage - this is very important for bringing investment into the country".