UNJUSTIFIED PESSIMISM

Azerbaijan has been cooperating with international financial institutions, namely the International Monetary Fund  (IMF), the World Bank (WB), the European Bank for Reconstruction and Development (EBRD) etc. for more than 16 years - since 1992. Azerbaijan has certainly benefited much from this cooperation. A number of strategically important projects are being implemented in Azerbaijan with the assistance of international financial institutions. The government is also following their recommendations on further economic development. For example, IMF recommendations were taken into consideration when preparing state programmes to speed up the socioeconomic development of the country. At the same time, the forecasts of international financial institutions concerning the rate of inflation do not always coincide with those of the government. A number of our economic experts have even objected to the fact that IMF experts, while speaking about spurts in inflation, for some reason "compare Azerbaijan to Zambia". The IMF still believes that the influx of oil dollars, the country's dependence on oil and its growing budget expenditure will inevitably lead to greater inflation, depreciation of the national currency (the manat) and, consequently, a decline in living standards and in the country's attraction of investors. These purely monetary postulates do not always materialise. This time a heated media debate has arisen over the mid- and long-term economic development forecast published in the IMF World Economic Outlook, 2008. 

There is and will be oil 

The data was prepared using the statistical methodology of the Organization for Economic Cooperation and Development (OECD). According to the IMF, in 2011 the pace of economic growth in Azerbaijan will reach a minimum level - 1.6 per cent, while in 2012 and 2013 the volume of GDP will fall by 1.7 and 2.6 per cent respectively. In other words, a negative dynamic for the GDP is expected in Azerbaijan as early as 2012. According to IMF/OECD experts, whereas in 2007 GDP in Azerbaijan was 23.4 per cent, in 2008 it will not exceed 18.6 per cent, while in 2009 it will drop to 15.6 per cent.

The local media quickly suggested that such a "negative IMF forecast" is explained by the fact that 2012 will see a peak in oil production from the Azeri-Chirag-Guneshli (ACG) block in the Azerbaijan sector of the Caspian Sea. Beyond that period oil production is not expected to increase further.

In other words, if Azerbaijan begins to produce less oil, the country's economic growth will stop. Two factors, however, were not taken into consideration: an increase in gas production and development of the non-oil economy.

A few days later the IMF permanent representative in Azerbaijan, Koba Gvenetadze, brought some clarity to certain aspects of the IMF report on Azerbaijan.

"The predicted reduction in Azerbaijan's GDP in 2012 by 1.7 per cent should not be seen as the beginning of an economic recession, as various media outlets suggest. The decrease in GDP reflects mid-term oil production dynamics. According to oil production plans and proven hydrocarbon reserves, oil production will peak in 2011 and begin a gradual decline afterwards. Considering the share of the oil sector in the country's GDP, the plan suggests that from 2012 GDP will start to fall. At the same time, this indicator must be viewed in the context of the high GDP growth which has been observed in Azerbaijan since 2004. This process is closely connected with growing oil production. Of course, if production increases further, due to the discovery of new fields or more effective operation of the existing ones, then the IMF will reconsider its GDP forecast," Koba Gvenetadze said.

The IMF representative indicated that these forecasts had been prepared within the fourth stage of consultations with Azerbaijan and were reflected in the report. "Positive developments in structural reform, improvement in the business environment, modernization and enhancement of the infrastructure are conducive to rapid growth in the non-oil economy. As oil production reduces, the non-oil sector must become the driving force of economic development in Azerbaijan. Most important for the people of Azerbaijan is the creation of permanent jobs and a continuous improvement in well-being. These objectives depend on how the development of the non-oil sector is organized," says the report.

As is evident, the IMF forecast was linked to the dynamics of oil production in Azerbaijan. According to a prediction by the British Royal Institute of International Affairs, the peak of oil production of 1.3 million barrels a day in Azerbaijan will occur in 2012-2013. "The increase in oil production and export in Azerbaijan is due to the largest offshore field, Azeri-Chirag-Guneshli, which is operated by bp," the report says.

British analysts think that gas production in Azerbaijan will peak at 0.5 million barrels of oil equivalent between 2011 and 2016, due to the Shah Deniz gas condensate field. It is emphasised that "in the near future Azerbaijan will be able to alleviate slightly its dependence on oil".

In the meantime, in June 2008, at the opening ceremony of the Oil and Gas 2008 anniversary exhibition, Azerbaijani President Ilham Aliyev said oil production would exceed 50 million tons this year and in 2009 - 60 million tons. It is also known that from 2012 to 2015 Azerbaijan will be producing 66-67 million tons of oil a year. According to the head of state, Azerbaijan has enough energy resources for the next 100 years.

It is worth mentioning that at present a total of 46 production wells are operating in the ACG field. Their combined daily flow rate is 800,000 barrels (110,000 tons) of oil and 27-28 million cubic metres of gas. By late 2008, bp, the operator of the Azerbaijan International Operating Company, intends to reach a maximum daily production of 1 million barrels from ACG. Whereas until recently the total oil production from ACG was expected to be around 5.6 billion barrels, the latest statement by bp-Azerbaijan President Bill Schrader suggests that "bp hopes to increase this figure to 9 billion barrels". The increase is expected to occur due to the application of new production technology and the development of the Balakhani suite. The Chirag-Balakhani project is scheduled for sanctioning in late 2009.

According to forecasts by SOCAR, by 2015 annual gas production in Azerbaijan will reach 47.6 billion cubic metres, which is 2.8 times more than in 2007. Within Stage-1 of the Shah Deniz project only a fifth of the field's reserves will be produced, while Stage 2 will provide 20 billion cubic metres. Local experts and the government are confident that this figure can be exceeded by another 10 billion cubic metres.

At the same time, Shah Deniz contains only a fraction of Azerbaijan's gas reserves, both confirmed and those awaiting confirmation. Also on SOCAR's agenda are five prospective structures - Umid, Babak, Naxcivan, Abseron and Zafar-Masal, where exploration activities are due to commence shortly.

It is clear that Azerbaijan will be producing many more hydrocarbons, both under existing contracts and from ongoing exploratory activities. It is also worth pointing to the continuously rising prices of oil and gas in the world markets.

As well as increasing oil and gas production, the Azerbaijan government is working to enhance the non-oil sector. Priority is being given to the development of such strategically important sectors as agriculture, transport, tourism etc. As a result, according to the National Bank of Azerbaijan, the non-oil GDP in the first six months of 2008 reached 5,694.6 billion manats, which is 15.6 per cent higher than the data as of 1 July 2007 (3,688 manats).

Crisis ruled out

However, let's refer to expert opinion.

According to the president of the Azerbaijan Foundation for Economic Reform, Azar Amiraslanov, "the IMF forecast does not rest upon a crisis in Azerbaijan in the given period".

"Moreover, the expected reduction in economic growth in the mid- and long-term is nothing new. It is quite natural. In fact, a similar forecast was developed and included in the draft budget for 2008 by the Azerbaijan government even before the IMF. A similar prediction was also expressed by the World Bank earlier this year," said Mr. Amiraslanov.

According to the economist, on 29 July the Baku office of the IMF issued a statement saying the forecast had been wrongly interpreted in the media.

 "Any manipulation of the forecasts of international financial institutions based on pessimistic scenarios, an economic recession and the forthcoming financial crisis are completely unfounded. We view such speculation as an attempt to cast a shadow on Azerbaijan's development prospects," Amiraslanov stressed.

He said an economic crisis is usually characterized by a growing number of bankruptcies, staff redundancies and weakening of consumer demand.

"Azerbaijan is showing completely opposite tendencies. In the mid- and long-term future, the trends of economic development are expected to be further invigorated. Experience shows that an economic crisis usually results from a financial one. Azerbaijan is not expected to experience a financial crisis in 2012-2013. In fact, the financial foundation of the state will grow stronger and the spending capacity of the population will increase. Crises and economic slumps occur under the influence of a multitude of closely intertwined factors evolving in a negative direction. If such factors are not observed, such an eventuality is out of the question," continued Mr. Amiraslanov.

The economist is sure that the speculation about the decline in oil production leading to a recession, unemployment and higher poverty is completely unrealistic. "Those talking about an absence of impact by oil production and oil revenues on living standards are predicting growing poverty. The reduction in the rate of growth of GDP in Azerbaijan in the forthcoming period is quite natural and will be explained by the absence of a considerable increase in oil production. Economists are aware that a prolonged and sharp increase characterized by high figures is unrealistic."

Amiraslanov believes that the future development of the service sector, the processing of agricultural products and the tourism, transport and communication sectors will contribute to the growth of the non-oil economy, leading in turn to further economic growth.

At the same time, the economist thinks that when creating different economic development scenarios it is necessary to provide an effective assessment of the country's transit potential as well. "For instance, Georgia expects this factor to form 40-50 per cent of its GDP, while in Azerbaijan this factor is not taken into consideration at all," said Amiraslanov.

Another important contributor to the GDP is the volume of investment. In other words, it is necessary to take into consideration the positive impact of domestic and external investment, as well as exports, on GDP. Therefore, in conditions of a dynamic increase in consumer expenditure and the overall expenditure of the state sector, the GDP is highly unlikely to go into decline.

Amiraslanov also indicated that the full-field development of the Azeri-Chirag-Guneshli fields in the Azerbaijan sector of the Caspian Sea, the possible exploration of new oil and gas and gas condensate fields, soaring oil prices and the trends in non-oil sector development would guarantee further economic growth and lead "not only international organizations but also state bodies to update their previous forecasts".

At the same time, qualitative, rather than quantitative, changes are expected to take place in the mid-term, as confirmed by both government and IMF forecasts. For example, whereas in 2007 the oil sector commanded 58-59 per cent of GDP, in 2011 this will fall to 47 per cent. The IMF predicts non-oil sector growth of 9 per cent and of strategic reserves to $25 billion in 2008. Analysis of the IMF forecast for 2012-2013 shows that in that period Azerbaijan must become a developed economy with stable financial traditions. While in 2006, with a growth rate of 34.5 per cent, GDP per capita was $2,469, in 2013, when the IMF predicts a 2.6-per cent recession, this index will reach $12,915. 

"In other words, Azerbaijan will become a country with a high per capita income. The IMF believes that in 2013 the per capita share of the non-oil sector GDP will constitute $7,500, while in Armenia it will be $6,400. All these data suggest that economic growth will continue, albeit at a gradually slowing rate. In absolute figures, growth indicators will save the economy," the economist concluded.

Another well-known economist, Oqtay Haqverdiyev, has told R+ that "while forecasting the future economic development of Azerbaijan, IMF experts must have taken into account the calculations of bp-Azerbaijan of 12 years ago, which suggested that after 2012 oil production would decline sharply".

This is not the case and the 12-year-old calculations had better be forgotten. Firstly, the assessment of Azerbaijan's oil reserves has been updated over the last decade. The country's gas reserves have increased. Azerbaijan today is a reliable exporter of hydrocarbons to world markets," Haqverdiyev said.

National geologists, the expert went on to say, have already established that the country has enough oil for 100 years and enough gas for 50-60 years.

"One has to understand the obvious. Let's assume that today we are producing, say, 50 million tons of oil. If a similar or a slightly higher level of oil production is achieved in the future, there will be no increase in oil production, but we will have a figure of 50 million tons a year. The same analogy can be used for GDP, i.e. if the oil and gas sector is so far the backbone of economic growth and accounts for almost 60 per cent of GDP, the GDP volume proper will not decrease. In fact, it is expected to increase. However, it will increase due to the non-oil sector of the economy. The data for the first six months of the current year is a graphic example - it appears that the non-oil economy is already booming. There are also programmes aiming to develop the non-oil economy and build a new export potential alternative to the oil sector. This cannot happen overnight. It will take decades, but at the end of the day the non-oil sector will command more than 50 per cent of GDP. We hope this can take place in the next 10-15 years. Thus there is no economic crisis on the horizon. A slight decrease in the pace of economic development may occur, but GDP will continue to increase," said Haqverdiyev.

Stakes in the non-oil sector 

There is one more factor which has not been mentioned above. The fact that no economic recession is likely to occur in the year 2012 mentioned by the IMF is also confirmed by the infrastructure development projects being designed in the country. In fact, international financial institutions no less authoritative than the IMF are expected to participate in them. For example, in the coming 12-18 months the World Bank intends to prepare new crediting projects jointly with the government to improve the road infrastructure and to conduct some environmental programmes. The WB Board of Directors has approved a doubling of the Country Partnership Strategy's budget for 2007-2010. Additional funding to the tune of $1.2 billion has been agreed for 2009-2010 ($600 million for each year), and if additional resources are required to implement the project, the bank may increase the $1.2 billion limit.

A process of privatization is also under way in Azerbaijan. Several years ago it entered its key stage - strategic privatization. The government does not view privatization as a goal in itself, but as a means of changing the form of ownership to encourage private sector development and strengthen the country's economic potential. The economic policy of the state does not consist of selling a state enterprise at the highest possible price, which may lead to the demise of the enterprise. The key objective is to revive the enterprises, preserve jobs and create new ones. Work in this direction is still under way.

Investment from the state budget is also on the increase, namely towards supporting private enterprise. When working on the state budget, the government does not count on the extremely expensive oil.

Further, comprehensive measures are being taken to contain inflation. A considerable increase in foreign trade turnover is in evidence. Azerbaijan's foreign trade turnover in the first six months of 2008 reached $20,572,261,400, which is 4.1 times higher than January-June 2007. The positive foreign trade balance for the six months constituted $14,405,825,400. 

Finally, the country's state budget has been socially oriented for several years in a row: the financing of education and health is on the increase, salaries and pensions are rising.

Economic Development Minister Heydar Babayev has stated that the implementation of projects in the oil and gas sector, which is considered to be the locomotive of the Azerbaijani economy, has laid the foundation for stable development for many years to come. He said the rate of economic development in 2008 would be in double figures and, contrary to global crises, the country would retain its leadership in terms of growth rate. Over the last four years, between 2004 and 2008, the country's economy has increased by 96 per cent. "We have doubled the economic potential and maintain a high rate on this stable foundation, thus continuing economic development - this is not an easy task of course," the minister said.

In short, even if GDP does decrease, it will not be evidence of any stagnation or negative trend in the economy…