INFLATION DOWN TO SINGLE DIGIT

The latest statistical data shows stable and promising development of Azerbaijan's economy in the first half of 2023 amid tense external background. The country is also struggling with inflation—a negative trend of recent years and a real scourge for the economies of many countries. Regardless of its nature—imported or artificial—the situation does not make businesses and citizens feel any better. Concerns about inflation have been expressed at the highest level. The Central Bank promises to use all its tools to achieve a single-digit figure by the end of the year.

It is known that even the minimal doses can make poison work for good. It is also true for a small percentage of inflation, which can boost exports from the country.

Peak of inflation behind

"It is obvious that double-digit inflation should make us think. I hope that by the end of the year, inflation drops to a single-digit figure. There are both natural and subjective reasons, which should be studied more seriously. It is also necessary to give proposals on measures to take by the end of the year, because a 12% inflation is certainly undesirable amid the overall economic potential of Azerbaijan and our economic results," President Ilham Aliyev said at the meeting on biannual socio-economic results.

Despite the growth of consumer price index, Azerbaijan also recorded a macroeconomic stability supported by the monetary policy of the Central Bank in 1H2023. One of the important points here is the stability of the national currency's (Manat) exchange rate against the US dollar over the past six years. According to President Aliyev, this is one of the rare phenomena in the world practice, especially under the current conditions. "Macroeconomic stability naturally affects the country's economy. But it has the most serious impact on our living standards in the first place," Aliyev added.

Earlier, Chairman of the Central Bank of Azerbaijan Taleh Kazimov said that the fixed exchange rate regime in Azerbaijan unambiguously justifies itself. "Decreasing national currency exchange rate in the main partner countries had a downward effect on the prices of products imported to Azerbaijan. The fixed exchange rate regime also justifies itself in terms of inflation," Kazimov said.

Average annual inflation and the 12-month inflation rates for this year are expected to be 10.4% and 8.9%, respectively. Although the government's preliminary estimates for autumn 2022 showed the average annual forecast for 2023 at 6.9%.

Either way, this is less than the estimates of international financial institutions. For example, S&P Global Ratings predicts an average inflation rate of 12% for Azerbaijan in 2023, compared to almost 14% in 2022. But after that, it should gradually decline to 5% until 2025. "The current upward price pressure is due to the economic effects of the post-pandemic period, food price inflation and global trends, as Azerbaijan imports a wide range of goods from abroad, while the dynamics of inflation abroad have a significant impact on it," the report said.

However, local analysts believe that Azerbaijan has left behind the peak of inflation. This will be reflected in the statistical data by the end of the year. The calculation is based upon the prices for 256 types of goods and services in Azerbaijan. Still, the question is how much the slowing down inflation will actually affect the food prices.

There's enough money

Experts also do not rule out some positive impact of inflation on Azerbaijan's export potential. Thus, the country's foreign trade surplus in 1H2023 was about $10b. "If these rates are maintained, imagine what indicators we can achieve by the end of the year. This will definitely have a direct impact on ensuring macroeconomic stability," President Ilham Aliyev said.

He drew attention to the fact that Azerbaijan's non-oil GDP growth exceeded 3% in January-June 2023, while the growth of non-oil industrial production reached 6.5%.

True, the very nominal volume of GDP in this period reached ₼60.3b, i.e., the real economic growth is estimated at 0.5%. But this is due to the decline in the oil and gas sector by 2.1%, which is an expected and inevitable process. According to the updated forecasts, Azerbaijan's GDP growth for 2023 is expected to be 1.8%, including 4.9% in the non-oil sector and 1.5% decline in the oil sector.

President Aliyev believes that strengthening discipline in the financial sector, continuing reforms in the tax and customs authorities, ensuring transparency ensure improvement of the Azerbaijan's financial situation. "All these factors allowed us to revise the budget and make clarifications in the middle of the year. This is very good, as the volume of collected funds far exceeds the forecasts," Ilham Aliyev said.

He added that Azerbaijan's external debt is about 10% of GDP.

"A few years ago, we set a goal for our external public debt to be less than 10% of GDP. We have already achieved this goal. In absolute terms, our debt is only $6.7b, i.e., about 10% of GDP," President Aliyev said.

Available sufficient funds help Azerbaijan to solve the priority tasks faster, with one of them being the reconstruction of Garabagh and Eastern Zangezur. "I can say that everything is going faster than we planned. We have mobilised all our forces," Ilham Aliyev said. According to him, the government ensured the return of former IDPs to Talysh and Lachin this year. The next group will return to Zabukh and Sus villages of Lachin district by the end of the year. "Thus, by the end of the year, our citizens will fully settle on their ancestral lands, in one town and four villages. It is planned to reconstruct a total of 100 settlements within the first phase of the Great Return Programme," President Aliyev said.

The implementation of almost all works is carried out at the expense of Azerbaijan. According to the investment programme, about ₼12b should be spent by the end of this year.

In short, the economic development model chosen by Azerbaijan, in which the key factor is stability, justifies itself, although it is sometimes criticised for excessive restraints. This enables the country to independently achieve the most important economic goals.