KEEPING THE BALANCE

Over the past year, the world economy has suffered a lot from the pandemic. It is now much more difficult to invent a life-saving economic solution than a vaccine against the virus. Internal problems mixed with external influences, volatility in the global oil market, surges in currency markets, etc. There is too much pressure on the governments, which sometimes do not have time to come up with anti-crisis plans.

As soon as the situation becomes more or less balanced, the oil price reach the desired level, including for the Azerbaijani economy, as another external shock occurs. Apparently, the Central Bank of Azerbaijan will again have to raise its ‘shield’ to protect manat from fluctuations and the economy from negative influences.

The world is expecting positive news

Global economy has lost over $3.5 trillion due to the coronavirus pandemic, which is twice as much as during the 2008 crisis. This indicator was recently announced by the Deputy Foreign Minister of Russia Sergei Vershinin. According to him, experts assess the situation as the largest global crisis since the Second World War.

However, international analysts and financial institutions still hope that it will be possible to change the situation for better this year. According to the First Deputy Managing Director of the International Monetary Fund (IMF) Geoffrey Okamoto, vaccinations and additional financial stimulus packages open up prospects for more dynamic global economic growth in 2021. “In January, we forecast global growth in 2021 at 5.5%, but we expect stronger growth due to additional financial stimulus packages, especially in the US, as well as due to the extension of the vaccination coverage,” Okamoto said.

Meanwhile, IMF suggests that total per capita income in emerging markets and developing countries, excluding China, will be 22% lower in 2020-2022 than it was before the pandemic. This will cause about 90 million people to be below the poverty line since the beginning of the pandemic.

But developed countries will also have a hard time: economists are revising downward forecasts of economic growth in the eurozone amid the third wave of COVID-19 and tightening restrictions, according to Financial Times. Thus, analysts at Morgan Stanley warned that if the restrictions are in effect for a few more months, it will lead to "another lost summer" and reduce the GDP of Spain and Italy by 2-3%. Barclays economists now expect travel restrictions in Europe to be lifted only by the end of the second quarter, "which will weaken domestic demand and, as a result, imports."

In contrast to Europe, the situation seems more optimistic for the United States thanks to the Biden administration’s almost $2 trillion stimulus package for the national economy and the expected infrastructure spending. Moreover, it is expected that these measures will have a positive impact not only on the American economy, but also on the economies of other countries, putting pressure on aggregate demand upward. Thus, at least exporters of raw materials, including oil, will benefit, which certainly means economic growth.

Currency balance despite shocks

Being hopeful is good but it is still quite difficult for governments to resist the global crisis. Any decision taken to keep the economy afloat can backfire and cause negative trends not only within the country, but also in the region.

For example, the hard-achieved balance in the Azerbaijani economy due to the rise in oil prices at the beginning of this year was threatened by another collapse of the Turkish lira.

The currency crisis in Turkey was provoked by the decision of the Turkish Central Bank to raise the discount rate by 2% in order to prevent the growth of the inflation rate. President Recep Tayyip Erdogan did not agree with this position and replaced the head of the Central Bank by Shahab Kavcioglu, who supports the soft monetary policy. However, on March 22, the Turkish lira collapsed and reached a 17% decline in the exchange rate in just a week.

Economists from Turkey's trading partners are cautiously hinting that the depreciation of the lira could effect the currencies of their countries and other developing countries. For example, there is already some fluctuation in the exchange rate of the Russian rouble, the Kazakh tenge, etc.

Azerbaijan, which has extremely close economic relations with Turkey, has once again experienced a wave of concerns about the fate of manat. Over the past year and a half, there were rumours about manat’s devaluation. Yet the Central Bank has repeatedly made such talks useless, urging to trust its ability to keep the course of the national currency at the stable level.

In his recent tweet, Elman Rustamov, Chairman of the Board of CBA, assured that the bank is closely monitoring the situation in the economies and financial systems of partner countries.

“Azerbaijan maintains macroeconomic stability, including the balance in the foreign exchange market. There is also a decrease in dollarization. The upward trend in global oil prices has a positive effect on the stability in the foreign exchange market. Therefore, we do not expect an impact of the depreciated Turkish lira on the exchange rate of the Azerbaijani manat. Azerbaijan has enough financial resources to maintain the balance in the foreign exchange market and the current macroeconomic stability,” E. Rustamov noted.

At the same time, the economist, member of the parliament Vugar Bayramov believes that the situation with the Turkish lira cannot pass Azerbaijan completely unnoticeable. There will be an increase in Turkish imports to Azerbaijan, which will positively affect the volume of bilateral trade. “Every year the volume of trade with Turkey is growing, having reached $4.5 billion last year. Thus, Turkey has become the second trade partner of Azerbaijan after Italy, and with a positive balance in favour of Azerbaijan,” V. Bayramov said. He thinks that if the Turkish lira does not improve its position, then Azerbaijan will also get cheaper Turkish goods, which will have a positive effect on the inflation rate in the country.

Comforting forecasts

Recently, the Central Bank of Azerbaijan had to make a decision on the base rate but, unlike its Turkish counterparts, it did not risk to change it. The rate was kept at the level of 6.25%, with the lower threshold at 5.75% and the upper one at 6.75%. CBA justified its decision by the latest inflationary tendencies, the possible influence of cost and demand factors on prices in the short and medium term. “Our analysis shows that there is no significant change in the balance of risk factors for inflation,” the CBA statement says.

According to CBA, the balancing factors are the rise in oil prices, improvement in the external balance, and the stability of the exchange rate, which is the key point of its monetary policy. “Although non-monetary inflation has increased slightly, core inflation remains stable. According to estimates, by the end of the year inflation will remain within our target indicators,” CBA reported.

Economic experts generally justify the cautious position of the CBA: along with the pandemic, the national economy should be able to process the flow of funds for the restoration of the liberated territories in Garabagh with the most positive overall effect.

According to economist Rashad Hasanov, in order to increase economic activity, especially in the post-pandemic period, to speed up the recovery process, CBA theoretically had to pursue a softer monetary policy in order to maintain economic activity. But inflationary pressures are limiting the regulator's ability to manoeuvrer.

According to expert Jafar Ibrahimli, CBA is waiting to see the effect of the existing base rate, which is likely to continue for a couple of months: “Now the central banks around the world are maintaining their base rates at the lowest level to ensure economic activity during the pandemic.”

Meanwhile, according to statistical data on Azerbaijan's economic development, we can see barely visible, yet positive trends of the improving economic activity. In fact, a lot depends on the duration of the lockdown measures and external influences.

However, according to CBA, recession in the non-oil sector of Azerbaijan has practically stopped. In January-February 2021, growth in the non-oil industry reached 12.1%, in agriculture - 2.3%, and in transport and storage – 10.9%.

“According to the results of monitoring in the real sector of the national economy, the index of business confidence in trade and services in February tended to grow as compared to the previous month. Positive dynamics was observed in the received orders for construction,” CBA statement says.

CBA expects the recovery process continue in both external and internal demand in the short and medium term. At the same time, domestic demand will be supported by stimulating fiscal, monetary and macroprudential policies. Therefore, local economists are positive about the possibility of achieving the 3.4% economic growth target set in the state budget this year, while international financial institutions in their forecasts are still limited to 2%. However, if the balance in the oil market remains until the end of the year and vaccination will ease lockdown restrictions at least in the summer, then we can safely hope that foreign analysts will change their minds.

Indeed, this year there is another powerful incentive to support and increase economic activity in Azerbaijan - the beginning of large-scale works to restore the liberated territories. CBA, the government and economists believe that this will have the most positive impact on the economy, turning the crisis into new opportunities.