POSITIVE DEVELOPMENTS

The Azerbaijani economy both withstands negative external pressure and even improves its development statistics. The current level of Azerbaijan's annual economic growth (6.2%) is two times higher than the global average forecast for 2022. According to Natig Amirov, head of the Economic Policy and Industry Department of the Presidential Administration, this means the rise of Azerbaijan’s authority in the global economy.

Azerbaijan's Minister of Economy Mikayil Jabbarov believes this was possible thanks to "the completeness and consistency of measures taken by the government under the President during the pandemic, as well as the results of economic and structural reforms, the management of state enterprises as a single unit and the constantly improving business environment".

External background and internal realities

The International Monetary Fund (IMF) has recently worsened its forecast of global GDP growth by 0.4 and 0.7 percentage points in 2022 and 2023—to 3.2% and 2.9%, respectively, compared to the April estimate.

According to IMF experts, this is because "the global economy weakened by the pandemic has suffered several shocks". For example, higher-than-expected inflation, especially in the US and major European countries, has led to a "tightening of financial conditions". In addition, global GDP has been affected by the pandemic-related slowdown of the Chinese economy as well as the situation in Ukraine.

As for Azerbaijan's neighbours and its key trading partners, the situation in Russia is well known. According to the overwhelming majority of international experts, even withstanding the sanctions, stagnation cannot be avoided in the Russian economy.

On the other hand, Turkey's inflation forecast for the current year is rising. Turkish Central Bank’s governor Sahap Kavcioglu said that it is now expected to be 60.4% instead of the previously forecast 42.8%.

"I must also say that there is a lot of speculation regarding the world economy undergoing a downturn. Influential international bodies, financial institutions have already admitted recession as inevitable. We should also be prepared for this," President Ilham Aliyev said at a meeting on the results of the first six months of this year.

Nevertheless, amid this rather difficult external developments, all leading rating agencies and global organisations are raising their forecasts for economic growth in Azerbaijan. It is difficult to disagree with them thanks to the data from 1H2022. Thus, Azerbaijan’s economy grew by 6.2%, while the non-oil sector of the country grew by 9.6%. At the same time, the value added in the non-oil and gas industries increased by 11% in total, including in the non-oil and gas processing (15%), transport (27%), tourism and catering (86%) and information and communication (14%) sectors. With non-oil exports rising by over 25%, the foreign trade surplus was $12.1 billion.

"These are very good results, and we see them in real life as well, because it allows us to increase salaries and pensions. Population income has increased by about 20%. Indeed, inflation eats up some of this growth. But it is just over 12%. This is a general trend all over the world. Even in countries where inflation might have been 0-0.5%, 1%, today it is approaching double digits. It is a common trend, and we are part of the global economy," President Aliyev said.

Curbing inflation

Inflation is a real problem all over the world. As M. Jabbarov noted at the same meeting, compared to last June the price of wheat increased globally by 30%, crude palm oil - by 50%, butter - by 29%, sunflower oil - by 45% and buckwheat - by 43%. At the same time, by the end of June 2022, natural gas prices on global markets rose by 42% compared to the beginning of the year, while the spot price of a barrel of Brent oil increased by 53%.

It is clear that prices in Azerbaijan cannot remain stable amid the ongoing trends. In January-June this year inflation in the country reached 12.9%, while the price index for food products increased by 19%. The government approved the Special Anti-Inflationary Policy Plan to combat this negative phenomenon that, as President Ilham Aliyev pointed out, affects incomes of the population. The plan provides a set of measures to ensure healthy competition in food markets to prevent price manipulations. "In addition, we are trying to maintain the level of self-sufficiency in the local market for food products in the minimum consumer basket, to ensure the sustainability of imports and effective control of exports of these products, expansion of their domestic production," Mr. Jabbarov said.

Chairman of the Central Bank of Azerbaijan (CBA) Taleh Kazimov believes that inflation will be curbed and will be reduced to a single digit next year if the external environment is favourable. During a press conference he said that seasonal factors are expected to have a restraining effect on inflation this and next months. "Over the past two months, there has been a seasonal decline in food prices and lower logistics costs," Mr. Kazimov said. But he added that despite deflation of 0.1% in June, there is still an upward trend in annual inflation. "According to our estimates, at the end of 2022, the inflation rate will be lower than the current levels. Under favourable conditions in external markets, inflation could be in single digits in 2023," Mr. Kazimov said.

Currency stability and investment

CBA considers the current situation in Azerbaijan's economy to be sufficiently stable. Following a board meeting on July 29, the bank kept the discount rate at 7.75% for the third consecutive time this year.

One of the reasons is the strengthening of the nominal effective exchange rate of manat amid the depreciation of the national currencies of Azerbaijan's key partner countries. T. Kazimov said that presently the volume of cash currency purchases by banks from the population exceeds the amount of sales, also due to the growth of remittances to the country. So, in June the volume of net purchases of cash currency by banks reached $109.8m, which is the maximum for the last 7 years.

Therefore, CBA is not going to change the manat/US dollar exchange rate policy given the reduced demand for dollars at currency auctions.

The balance on the currency market also helps ensure the growth of Azerbaijan’s foreign exchange reserves, which in January-June 2022 increased by 1.8% (to $54.2b). This is also a striking indicator of economic stability amid the reduction of the share of external public debt to 16.6% of GDP by July 1, 2022. As President Ilham Aliyev pointed out, "it can be considered one of the best results in the world. In fact, it is".

All these factors ultimately affect the most important stimulus for economic development—investment attractiveness. Minister Jabbarov points out that the growth rate of investment in fixed assets in the first half of this year was in the positive zone compared to previous months. Due to these factors the real growth of investments in fixed assets in the non-oil and gas sector reached 18.5% and added value in the construction sector grew up to 8%. Of course, the large-scale construction and reconstruction works in the liberated territories also played an instrumental role here. "We clearly predict that the Great Return will remain a driver of economic growth for us," said Mr. Jabbarov.

President Ilham Aliyev recently approved the strategy of social and economic development of Azerbaijan for 2022-2026, according to which Azerbaijan plans to increase foreign direct investment in the non-oil sector of the economy by 50-75% by 2027 ($11.1b in 2011-2021).

Certainly, in the current state of frequent changes, upheavals and crises, implementation of the strategy is a difficult task. But let us hope that Azerbaijan will be able to keep a firm balance on the global economic platform.