5 November 2024

Tuesday, 16:02

GLOBAL CHALLENGES

Azerbaijan's economic forecast: between hope and reality

Author:

01.08.2024

Like many other countries, Azerbaijan has become a focal point for the global economic crisis. Notwithstanding the aforementioned circumstances, the government maintains an optimistic outlook with respect to developments in the second half of the year. It anticipates not only higher rates of economic growth but also an increase in government revenues. Nevertheless, as is the case with any economic model, there are variables that could affect the realisation of these plans.

 

Oil: Foundation and Challenge

In July, the International Monetary Fund (IMF) maintained its global growth forecast at 3.2 per cent for 2024, while the World Bank (WB) raised it by 0.2 percentage points to 2.6 per cent in June. The global economy is characterised by a number of uncertainties in the first half of 2024, including geopolitical and geo-economic tensions, trade fragmentation, price fluctuations in global commodity markets and weakening disinflationary trends.

The average price per barrel of crude oil in 2024 is projected to be within the range of $75-85, according to estimates from international financial institutions.

Given that the oil industry constitutes the primary engine of the Azerbaijani economy, fluctuations in oil prices have a direct impact on state revenues and investments. It should be noted that the government has set the price of oil at $75 per barrel in the adjusted budget. However, geopolitical tensions, climate change and the transition to "green" energy create significant uncertainty in the global oil market.

In light of these challenges, the Government of Azerbaijan has formulated forecasts based on a range of potential scenarios for oil price movements. Consequently, a $10 change in the price of crude oil results in an increase or decrease in consolidated budget revenues of Azerbaijan by approximately ₼0.8b.

Concurrently, the Ministry of Finance anticipates that consolidated budget revenues will be ₼0.8b less in the $65 scenario and ₼0.8b greater in the $85 scenario.

In summary, the projected consolidated budget revenues at an oil price of $65 are estimated to be ₼42.7b, $70 - 43.5b, $80 - 43.9b, and $85 - ₼44.3b. In consideration of the planned transfer from the Oil Fund to the state budget and the actual revenues for six months of this year in 2024, at a price of a barrel of crude oil at $65, the consolidated budget will exhibit a deficit of ₼2.9b, $70 - 2.5b, $80 - 1.7b and $85 - ₼1.3b.

Furthermore, the value of HNFAR's assets is susceptible to fluctuations in oil prices. A $10 change in the price of oil could potentially impact the value of these assets by up to $0.4b.

The global economic environment is a significant factor influencing Azerbaijan's economic landscape. The ongoing conflict in Ukraine, the global rise in inflation, and the increase in interest rates in major economies are all influencing the Azerbaijani economy. The IMF and the WB have expressed cautious optimism, but they have also highlighted the continued high level of risk.

Notwithstanding the aforementioned circumstances, the Azerbaijani government has revised its macroeconomic forecasts upwards. The latest projections indicate that the gross domestic product (GDP) is anticipated to expand by 3.8% (equivalent to ₼121.3b), while the non-oil GDP is expected to grow by 5.5% (reaching ₼84.7b). Previously, the figures were 2.4% and 4.6%, respectively.

The initial forecast of inflation in Azerbaijan for the current year, which was 5.3%, was significantly adjusted downwards and reached 2.7%. This suggests that the country's economy is more resilient to external shocks than previously assumed.

The increased investment in infrastructure and diversification of the economy, along with the growth in non-oil sectors, are all indicative of a more robust economic outlook.

The latest data indicates that the Azerbaijani treasury is set to collect ₼36.4b, while expenditures are projected to reach ₼39.7b. This indicates that the budget will remain in deficit, although the authorities maintain that this is a manageable situation. For a period of six months, the budget was executed with a surplus, which was, in addition, almost twice as much as that recorded for the corresponding period of 2023.

What factors underpin these seemingly austere figures? First and foremost, there is a discernible strengthening of the non-oil and gas sector. If the forecasts are accurate, the treasury will receive approximately 51.2% of all revenues. This represents an increase of 1.4 percentage points in comparison to the initial plan. This growth can be attributed to a number of factors, including the development of small and medium-sized businesses, an expansion of the tax base and optimisation of tax administration.

The oil and gas industry continues to exert a dominant influence on the Azerbaijani economy. Despite a slight deceleration in global energy prices, the oil and gas sector continues to demonstrate consistent performance.

It is therefore anticipated that the income tax revenues of contracting organisations operating under production sharing agreements for the Azeri-Chirag-Guneshli (ACG) project will increase by ₼280 million (75.7%) and ₼325 million (20.2%) for the Shah Deniz project.

This suggests that the economy is becoming more diversified and less dependent on fluctuations in oil prices. Consequently, this should enhance the stability of the national currency and facilitate the resolution of social issues.

Consequently, 43.7% of the total tax revenues generated by the oil and gas sector are derived from transfers from SOFAZ, 14.2% from the profits of contracting organisations operating within the PSA on the Azeri-Chirag-Guneshli project, and 42.1% from the Shah Deniz project.

 

What's next?

The Azerbaijani budget can be considered a roadmap for economic development, reflecting the government's ambitions and vision for the future. Nevertheless, the actualisation of these plans will be contingent upon a number of factors, both internal and external.

For instance, an additional ₼535 million is anticipated to be received by the treasury as a consequence of an increase in customs duties and tax revenues from imports. Consequently, the revised state budget for 2024 stipulates customs duties at ₼6.435b, representing a 9.1% increase compared to the initially approved figure. This increase can be attributed to a number of significant factors. The projected value of imports for 2024 has been revised upwards by $1.3b, or 8.7%, in comparison to the preceding estimates, reaching a total of $17.5b. Nevertheless, the revenue generated by the State Customs Committee during the first four months of this year has already surpassed the projected amount by ₼131m, representing a 7.1% increase. This suggests that economic activity and imports at the beginning of the year are higher than previously anticipated.

Concurrently, the government has opted to augment expenditure on public investment. Despite the expansion of the non-oil sector, further enhancements are still required. At the present time, a considerable amount of financial resources is being directed towards the advancement of agro-industrial parks.

An additional ₼1b is to be allocated for the development of infrastructure and the restoration of territories that have been liberated. Specific focus is directed towards Garabagh and Eastern Zangezur, where the Great Return programme is being actively implemented. This year, over ₼5b has been allocated for its implementation.

The aforementioned evidence indicates that economic forecasts for 2024 present an optimistic scenario for Azerbaijan, with projected GDP growth and stable revenues from energy resources. Nonetheless, the principal determinants of the national budget remain the global economic context and oil prices, which will exert a direct influence on budgetary parameters and macroeconomic stability.

The combination of novel challenges and prospects should facilitate the successful implementation of the revised budget. In addition, the ability of the economy to adapt to changing external conditions and to utilise internal resources effectively will remain a crucial factor.


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