OPPORTUNITIES INSTEAD OF LOSSES

The already tense global geopolitical climate was further inflamed in April by an unprecedented trade war declared by US President Donald Trump against most of the world’s nations. By the end of the month, however, the American leader’s overconfident tone had softened somewhat. Yet the process was already in motion, and countermeasures from his opponents were quick to follow.

Regarding the 10% tariff imposed by the US on imports from Azerbaijan, the impact on the country’s economy is expected to be minimal due to the low volume of goods exported. Nevertheless, the Central Bank of Azerbaijan (CBA), responsible for inflationary stability, assures that it can manage these "economic up-n-downs."

Uncertain Consequences

At the latest press conference, CBA Chairman Taleh Kazimov repeatedly emphasised the word "uncertainty" when commenting on the global climate’s impact on Azerbaijan’s macroeconomic situation. Indeed, the frequent shifts in decisions and agreements often outpace even the direct participants in the process. While the world speculates about potential winners in this large-scale game and its consequences, Azerbaijan remains optimistic regardless of the outcome.

"Several European and Asian countries, faced with high tariffs, are already focusing on new markets, which could increase supply and reduce prices," noted Kazimov. He added that Azerbaijani producers might boost export volumes by offering compliant alternatives.

As for whether the tariff war will trigger sharp price hikes in Azerbaijan, the CBA does not anticipate such an effect. "Additional research and time are needed to determine the exact scale of the impact," Kazimov stated.

The CBA’s calm is further underscored by its decision to maintain the benchmark interest rate at 7.25%—a repeated move that also serves as a signal to investors. The message is clear: stability with cautious optimism. Meanwhile, the bank has slightly revised its 2025 inflation forecast downward to 5.3% (0.2% lower than January’s projection), while raising the 2026 forecast from 3.8% to 4.3%. This adjustment reflects potential price increases in partner countries.

"The current monetary policy aims to keep inflation within the target range and stabilise expectations. Our baseline scenario remains unchanged: annual inflation will stay within the target band (4±2%) in 2025 and 2026," the CBA emphasised.

However, rising prices in Azerbaijan’s trade partner countries could add 2.57 percentage points (p.p.) to domestic inflation in 2025 and 1.74 p.p. in 2026. According to Kazimov, domestic demand from the state and households may exert inflationary pressure of 1.5 p.p. this year and 2 p.p. next year. Additionally, 2025 state budget expenditures could raise inflation by 0.43 p.p.

Per IMF data, the commodity price index fell 2.7% month-on-month in March but rose 2.6% year-on-year. The weighted average annual inflation among trade partners reached 9.6% compared to the same period last year.

Azerbaijan’s primary exports—oil and gas—remain central to price volatility concerns. In April, oil prices dipped below the $70/barrel threshold set in the state budget. Kazimov urged calm, noting that budgets are based on annual averages and the situation could improve. The CBA expects global oil prices to exceed $70/barrel in 2025–2026, with a precise forecast due in July.

The CBA chairman also projected 2025 natural gas prices at $304/thousand cubic metres, down from January’s forecast of $349.

Facts and Figures

Despite global turbulence, the CBA has maintained the manat’s stability against the US dollar for years. Whether this will continue amid the dollar’s global depreciation remains to be seen.

"The nominal effective exchange rate of the manat is expected to strengthen by 2.2 p.p., though we don’t anticipate a sustained slowdown in growth," said CBA Director General Vugar Ahmadov. Over the past year, the manat’s nominal effective exchange rate in the non-oil sector strengthened by 1.8%.

Kazimov noted that the AZIR index—reflecting weighted average interbank interest rates—has hovered near the benchmark rate (7.25%) for over a year, enabling effective liquidity control despite fluctuations. However, he lamented the current inactivity of Azerbaijan’s interbank market, as banks directly meet client demand.

"In 2023, the interbank market was more active. Now, other financial markets, especially exchanges, are busier. This is expected, as 30–35% of forex demand is met by the State Oil Fund of Azerbaijan. Banks primarily serve their clients," he explained.

Crucially, the manat remains stable, backed by ample strategic reserves. As of April 1, 2025, these reserves stood at nearly $73.8 billion—85.1% held by the State Oil Fund and 14.9% by the CBA. Year-on-year, reserves grew by $4.74 billion, with the Oil Fund’s assets rising by $5.37 billion and CBA reserves declining by $627.9 million.

The current account balance is also projected to remain positive, with a $4 billion surplus in 2025 and $3.5 billion in 2026. In 2024, the surplus was $4.7 billion, down 43.3% from 2023.

The CBA has slightly adjusted its GDP growth forecast for 2025 to 3.3%, with non-oil sector growth at 5.2%.

For now, the world must wait to see how the trade landscape reshapes itself—even if Trump loosens his grip.