NON-OIL SECTOR BOOM

Azerbaijan has been maintaining stable economic growth for many years. Although the indicators are not as high as before, the non-oil sector continues to ensure the growth of GDP. Preliminary results of the end of 2019, as well as the published forecasts of the macroeconomic situation in 2020 also confirm this trend.

Tenths of GDP

Thanks to reforms aimed at developing the non-oil sector, in 2019 its share in the national GDP increased by 3.1% reaching 59.7%. Accordingly, the share of the oil sector in GDP decreased from 43.4% in 2018 to 40.3% in 2019.

In 2020 and in the next three years, according to forecasts of the Azerbaijani government, the active policy of economic diversification will continue with the major drive being the development of the non-oil sector.

Unlike in 2019 (11 months), when the growth rate of the non-oil sector in Azerbaijan was 61% ahead of the oil sector, in 2020 this difference will increase to 90%. The share of the oil sector in Azerbaijan’s GDP is expected to reach ₼28.7 billion this year, and non-oil ₼54.6 billion.

In 2021, the gap between the growth of the oil and non-oil sectors of Azerbaijan will increase by almost 91%. At the same time, the share of the non-oil sector in total GDP both in 2020 and in 2021 will be 65.6%.

At the same time, for the first time in recent years, in 2020 the oil and gas sector will again outperform the non-oil sector. This serious growth rate (4.5% in 2021 against 0.9% in 2020) will be related to the increase in gas production as part of large-scale energy projects implemented by Azerbaijan. In subsequent years, the rate of oil and gas growth will again decline, while in the non-oil sector, the growth rate will remain at 3.3-3.8%.

According to government forecasts, annual GDP growth from 2020 will be at least 3%, while in January-November 2019, GDP growth rate barely exceeded 2%. And this is the highest rate in the last five years.

According to the Executive Director of the Centre for Analysis of Economic Reforms and Communications, Vusal Gasimli, this was ensured by a 3.5% growth in the non-oil sector. At the same time, the growth of the non-oil industry was recorded at 13.9%, in crop production - 11.3%, in the information and communication services - 15.9%, in tourism - 11.1%. At the same time, the government still expects positive indicators in the construction, transport and logistics sectors of the economy.

The 3% growth indicator for 2020 is included not only in the state budget, but also in strategic roadmaps. In subsequent years, the growth trend will continue - 3.7% in 2021 (due to gas production), 3.1% - in 2022 and 3.2% - in 2023.

Obviously, this is far from the limits of the real potential of the Azerbaijani economy. The leadership has repeatedly expressed dissatisfaction with the slow pace of reforms. On the other hand, according to experts, it is difficult to expect higher growth rates after the economy has grown 3.3 times over the past fifteen years.

Nevertheless, experts believe that ensuring adequate growth rates is inevitable in any case, because the demographic situation in the country is positive and the population is growing quite quickly. So, in terms of average population growth rate, Azerbaijan is among the top 5 countries in Europe, and per capita GDP growth is 1.2%, which cannot be considered satisfactory. This can lead to convergence with the countries of the region over which we have superiority, that is, their indicators can come close to ours, which, of course, is extremely undesirable.

Period of industrialisation

So, why is it so difficult to achieve more impressive growth rates of GDP in Azerbaijan? According to experts, one of the main reasons is the saturation of industrial potential. Due to Azerbaijan's lack of access to oceans, a higher growth in industrial production is not necessary, because it is not so easy to find profitable markets for manufactured products. But this does not mean at all that Azerbaijan refuses to develop industry and agriculture - this will be continued. However, experts say that today it is necessary to put more emphasis on the services sector, which are expected to be the most promising sector in the future. If in 2020-2023 industrial production in Azerbaijan will increase by 14.1%, then the information and communications sector - by 30.1%, the tourism sector - by 24.9%.

Interesting trends in globalisation are also observed in the world: if earlier large companies built the value chain on the basis of commodities, now it is gradually moving toward the service sector and digitalisation. "Therefore, we must increase the number of electronic services in order to join the global trend ahead of the pace. This suggests that Azerbaijan should change its vision of the ways of economic development," V. Gasimli believes.

According to Gasimli, the goal of such large-scale reforms in Azerbaijan in 2019 was to prepare the country for the next stage of development, which will focus specifically on the latest world trends.

At the same time, according to international organizations (European Bank for Reconstruction and Development, World Bank, etc.), higher economic growth rates in Azerbaijan are possible with continued reforms. They should be aimed at allowing the non-oil private sector to play a more significant role in shaping the country's GDP.

At the same time, EBRD forecasts that the growth of the Azerbaijani economy will be 2.8% in 2019 and 2.4% in 2020. And this explains the fact that the volatility of commodity prices represents the main risk for growth prospects for the coming period. At the same time, significant liquidity buffers support the economy's resistance to external shocks, since the Central Bank's total foreign exchange reserves and the State Oil Fund’s assets are approximately equal to the nominal GDP for 2019.

A similar conclusion is made by the WB, which also forecasts the growth of the Azerbaijani economy in 2019 at the level of 2.5%, 2020 - 2.3%, in 2021 and 2022 - 2.1%. According to the Bank's Outlook for the World Economy: Slow Growth, Political Challenges, the long-term growth of the Azerbaijani economy also depends on eliminating vulnerabilities in the financial sector. In addition, investment in human capital, improving the quality of education will have a positive effect on the pace of economic growth. At the same time, the WB indicates that Azerbaijan, like other oil-producing countries of the region (Russia, Kazakhstan), remains vulnerable to strong fluctuations in prices and volatility in commodity markets.

As to the macroeconomic situation in Azerbaijan, by implementing large infrastructure projects, the government was not only able to maintain a balance of payments surplus (current account surplus for the first 9 months of 2019 was 11.6% of GDP), but also increased foreign exchange reserves. Today, their total amount exceeds $50 billion, reaching 70% of GDP. Thus, in the future Azerbaijan will have a very impressive financial reserve for solving important economic problems and ensuring the security of the state as a whole.

No danger of inflation

The positive balance of payments also allows keeping inflation at a low level in Azerbaijan. The trade balance has a 6-billion-manat surplus, which by the end of 2019 will be even greater thanks to the import of monetary gold. The state budget surplus for only 11 months reached about ₼1 billion.

It is known that if there is no pressure of these two balances (payment and budget) on inflation, then there will be no serious fluctuations in prices. In addition, a balance between supply and demand is also observable in the local foreign exchange market. There is even an excess of currency, which is observed at deposit and banknote auctions of the Central Bank. This also indicates a lack of pressure on inflation in the medium term.

That is why the Central Bank announced that it did not expect serious changes in inflation dynamics in 2020. According to the chairman of the Central Bank, Elman Rustamov, CBA will try to keep and maintain inflation in 2020 at 4%. It should be noted that the government of Azerbaijan expects an average annual inflation of 4.6% in 2020.

"The government forecast of inflation and the target inflation rate of the Central Bank remain unchanged at about 4±2%. This will lead to an increase in real income," the CBA chairman said.

Of course, the rise in consumer prices in Azerbaijan is associated with a number of risks - both global and domestic. Among the global risks, CBA primarily notes a lower than expected global economic growth, continued protectionism and possible fluctuations in oil prices in the context of geopolitical instability. "Internal risks include the expansion of the money supply as a result of fiscal activity and fiscal deficit, inflationary expansion of consumer loans, as well as asymmetric expectations," CBA notes.

Since last year, the monetary policy of the Central Bank of Azerbaijan has focused on inflation, and not on the stability of the national currency. The more stable this indicator, the easier it will be for the government to adhere to the implementation of other macroeconomic forecasts.