FINANCIAL TURBULENCE

The global economy has demonstrated resilience in the face of geopolitical instability, inflationary pressures and the tightening of monetary policy by major central banks. Azerbaijan, as with other countries, has experienced external shocks, which have had an impact on its balance of payments last year.

For instance, the average export price of Azeri Light last year was around $84 per barrel, which supported the country's trade balance. However, medium-term forecasts indicate a gradual decline in revenues from hydrocarbon exports, underscoring the necessity to fortify the non-oil sector in order to address future challenges. Despite external risks, Azerbaijan continues to maintain a current account surplus.

Deficit and Surplus

According to the Central Bank of Azerbaijan (CBA), the country's balance of payments recorded a deficit of $438m by the end of 2024, contrasting with a surplus of $5.36bn the previous year. The reduction of the country's strategic foreign currency assets to $438m is explained by the implementation of a number of strategically important projects and activities, as well as an increase in government spending in foreign currency associated with the payment of large financial liabilities.

As the CBA emphasises, the balance of payments in 2024 was affected by multidirectional trends in the external environment. The decline in the current account surplus to $4.67bn (-43.9% by 2023), the growth of the negative balance of the financial account by 16.5% to $5bn (mainly due to the reduction of financial liabilities), the decline in the foreign trade surplus by 31.1% to $8.82bn, and the growth of the non-oil sector deficit by 18.5% to $10.4bn are particularly noteworthy.

Concurrently, the surplus of transport and tourism services, along with heightened foreign investment inflows, exerted a favourable influence. Conversely, the balance of payments for 2023 was predominantly shaped by escalating oil and gas prices in global commodity markets, along with augmented exports from the non-oil and gas sector.

The current account recorded a surplus of $8.3bn, while the capital and financial balance incurred a deficit of $4.3bn. The surplus in the balance of payments has led to a growth of $5.4 billion in the country's strategic foreign exchange assets. During the period, oil prices averaged $86 per barrel, and non-oil and gas exports increased by 11.1 per cent to $3.3bn.

Azerbaijan also saw a significant inflow of foreign direct investment, reaching $7 billion in 2024, with repatriation of investments reaching $7.3 billion.

Azerbaijan's largest investors are primarily from the UK ($1.8 billion) and Türkiye ($1.2 billion), with Hungary ($1 billion), Cyprus ($746 million), and the UAE ($490 million) also among the top five. Azerbaijan's foreign investments totalled $1.8bn, with the majority directed towards the UAE ($458m), Türkiye ($249m), Georgia ($165m), the UK ($111m) and Uzbekistan ($93m).

Notably, the country's net financial liabilities decreased by $2.29bn last year, which is 2.2 times more than the year before. This was achieved through an increase in the volume of attracted direct investments by 5.8% to $7.1bn, a decrease in repatriation of attracted investments by $7.3bn (+5.8%), an increase in oil bonus by $457.8m (-2.8%), a decrease in portfolio investments by $960.9m (+38.4%), and a decrease in other investments by $1.564bn (+2.7 times).

Meanwhile, the portfolio investment deficit last year, according to balance of payments data, was about $1.7bn.

Samir Nasirov, Director of the Statistics Department of the Central Bank, provided an explanation for this, attributing it to the fact that last year, residents of Azerbaijan invested $700m in foreign securities. In addition, Azerbaijan early redeemed its securities (Eurobonds) worth $960.9 million: "We consider investments in foreign securities to be a positive factor for the country's economy. Consequently, allocating liquid funds to foreign debt securities will lead to an increase in interest income in the subsequent period," Nasirov stated.

Concurrently, as previously referenced, the transport and tourism services balance in 2024 was in surplus, signifying that these two sectors exerted a favourable influence on the country's balance of payments. Specifically, the transport services balance recorded a surplus of $1.3 billion, driven by an increase in freight traffic, including transit operations. The balance of tourism services recorded a surplus of $451 million, which is 32 per cent higher than in 2023.

Remittances

The subject of remittances is frequently commented upon by analysts. In 2024, Azerbaijan received just over $1 billion in remittances, with $527 million sent out of the country.

The primary contributors of remittances were Russia ($497 million), Türkiye ($176 million), the USA ($65 million), Georgia ($35 million), and Great Britain ($34 million). The same countries also feature among the top five countries from which remittances were sent by Azerbaijan, though in a slightly different order: Türkiye - $150 million, USA - $60 million, Russia - $58 million, Georgia - $45 million, Great Britain - $28 million.

Consequently, the negative financial account balance (capital outflow) was $5 billion, which is 16% above the 2023 level.

In addition, S. Nasirov highlighted that in 2020, due to the pandemic, and in 2022, due to the Russian-Ukrainian conflict, Azerbaijan received substantial remittances. In the current period, the decrease in these volumes is part of the process of economic normalisation. When comparing the figures for 2019-2020, remittances remained almost at the same level, with a slight increase in some cases.

During the 2020 pandemic and the 2022 conflict period, remittances totalled about $3.6 billion, according to the CBA. The impact of these conflicts has been felt not only in Azerbaijan but also in the CIS as a whole, affecting remittance figures. "We do not consider the current decline to be indicative of a recession, but rather as a natural adjustment. This is the right economic approach, as the peculiarities of that period have changed, and we should perceive it naturally," Nasirov emphasised. He also noted that this process has led to stability in the dynamics of remittances to the country, which is a normal phenomenon for the economy.

The CBA anticipates that these developments will have a favourable impact on long-term economic growth.

Azerbaijan's consistent repayment of state debt is also a positive indicator. Last year, $423 million was allocated for payments on public sector loans, which were previously received under state guarantees. Furthermore, Azerbaijan allocated $956 million for previously imported goods and services. According to Nasirov, these factors are crucial for maintaining macroeconomic stability.

Forecasts and Challenges

Despite the positive impact of the current account surplus on economic stability, the combined effect of the capital account deficit and the financial account deficit resulted in a $438 million reduction in the country's reserve assets, as stated by Nasirov. According to Nasirov, this figure was calculated taking into account exchange rate differences and asset revaluation.

Such processes are characteristic of economies where a significant part of income comes from the export of raw materials. While the current account surplus is formed at the expense of positive foreign trade balance, capital outflow in the form of repayment of foreign debts, import payments and financial transactions can partially offset its impact on the overall balance of payments of the country.

For Azerbaijan, reducing external debt is a crucial step in strengthening fiscal sustainability, reducing currency risks and increasing the confidence of international creditors and investors.

Azerbaijan continues to maintain a current account surplus, but its level is gradually declining due to the fall in oil and gas revenues. Concurrently, the non-oil sector deficit is widening, underscoring the imperative for proactive development of alternative economic sectors.

The World Bank forecasts that Azerbaijan's current account surplus will amount to 11.6% of GDP in 2025, but will decline in subsequent years. According to the Bank's forecasts, the current account surplus is expected to reach 5.4% of GDP in 2026, 3.8% in 2027, 3.6% in 2028, and 3.4% in 2029.

The primary factor contributing to this decline is a steady decrease in oil and gas revenues, coupled with a rise in imports of goods and services.

According to the bank's estimates, Azerbaijan's state budget and current account surplus is maintained due to high oil and gas revenues. From 2019 to 2023, the current account surplus averaged at 14.9% of GDP, while the budget surplus averaged approximately 4.1% of GDP.

"The country's fiscal policy had a pronounced pro-cyclical character, as government spending was frequently revised upwards, especially against the backdrop of high energy prices. Concurrently, rising tax revenues from non-carbon sectors have contributed to the reduction of the non-oil and gas primary deficit, in accordance with the fiscal rule," the bank notes.

The Azerbaijani government anticipates a current account surplus of 5.6% of GDP for 2025 and expects this to stabilise at 3% of GDP per year in 2025-2028, considering oil and gas production forecasts.

The central bank forecasts a current account surplus of $5.5bn in 2025, up from $4.7bn in 2024.

"Overall, we see a favourable background. This environment is conducive to maintaining macroeconomic stability. For the medium term, we forecast a current account surplus of $5bn, possibly even higher," Central Bank Director General Vugar Ahmedov emphasised during a briefing at the CBA.

The key factors influencing Azerbaijan's balance of payments in the short term will be the dynamics of oil and gas prices, volumes of transit freight traffic, growth of non-oil exports, investment activity and capital flows.

A balanced fiscal policy and the development of the non-oil sector will play a crucial role in ensuring the sustainability of the country's economy in the changing global environment.