Pandemic or Oil

Recent indicators of a decline in the Azerbaijani economy are becoming more dependent on a pandemic than on oil. This is the interpretation of the situation by Azerbaijani officials, who were once taken by surprise in a situation when the coronavirus pandemic brought down the export-oriented Chinese economy (its share in world GDP is 20%), and then, according to the domino principle, the remaining non-oil economies, and then raw materials appendages, among which was Azerbaijan (more than 80% of its exports are energy).

“Of course, business activity has declined due to the coronavirus pandemic. We are also affected by fluctuations in world oil prices and liabilities to OPEC +. Undoubtedly, the GDP of Azerbaijan, as well as the revenues and expenditures of the state budget will be reduced, however, we do not want to rush to forecasts on these issues,” Finance Minister Sharifov said on June 3.

Please note that coronavirus is in the first place of the cause and effect relationship between the crisis and the economy, and then by the way are fluctuations in world oil prices. The Minister said it as if they had never hesitated.

In fact, it was more correct to say that a decline in oil prices by more than two times in the first months of the year caused a sharp deterioration in the economy. According to the results of five months of this year, the average export price of Azerbaijani oil amounted to about $ 36 per barrel. And now it does not reach $ 40, while the state budget of Azerbaijan for the current year has been drawn up based on the average export price of oil at $ 55 per barrel.

Sharifov doubted that in the current year, GDP would show growth of 3%, as previously predicted, and indicated as a possible new guideline the result of 4 months of 2020 - the GDP growth rate of 0.2%.

According to the law “On the State Budget of Azerbaijan for 2020”, approved at the end of 2019, its revenues were expected at 24.13 billion manat, and expenses - 26.9 billion manat.

President Ilham Aliyev said that it is necessary to reduce budget expenditures in several areas. But what is at stake is not yet clear. The Ministry of Finance also adheres to uncertainties.

As a result of discussions at the beginning of June in the government and parliament, it is clear that the size of the transfer from SOFAZ to the state budget-20 - 11.35 billion manat - will not be reviewed.

As of May 1, such foreign exchange reserves (including SOFAZ assets, government deposits and CBA foreign exchange reserves) exceed $ 47 billion and are close to 100% of GDP, providing coverage for 54-month imports.

Such a policy will subsequently lead to a decrease in the reserves of the Oil Fund in the face of a decrease in oil revenues. Only 300 million were received in April. This figure will grow, but it is unlikely to return to the level of 2019. In addition, the non-oil sector fell into complete stupor and a budget gap from non-oil losses will have to be patched with petrodollars.

The government is trying to save a face whose makeup was exposed by a drop in oil revenues.

“The country's economy has sufficient financial immunity and a safety cushion,” Ali Asadov said at a government meeting on March 12.

“The volume of reserves allows us to finance goods and services for 3 years without a break,” said Economy Minister Mikail Jabbarov at the same meeting, noting that “over the years, the dependence of the Azerbaijani economy on oil prices has declined significantly. The pressure with the exchange rate is more psychological. Even if no changes are made, our reserves will help us to continue our sustainable activities for 20 years. ”

“During high oil prices, strategic foreign exchange reserves were increased ... This gives us the opportunity in such situations to have the means and tools to counter,” the chief banker assured. At the same time, he noted that all these shocks come from abroad, and not from the economic processes in Azerbaijan.

Just a few examples, but they reveal the degree of strategic thinking of members of the government. But in any case, without noticing it, they use oil underhandedly and thereby secretly panicky recognize the dependence of economic policy on oil.

Applying for international loans in exchange for various concessions, such as the denationalization of systemically important enterprises with foreign capital, is also evidence of a hidden panic.

Negotiations on loans with the European Bank for Reconstruction and Development, as well as with the Asian Development Bank, began the day before at the level of senior officials.

The economist Rovshan Agayev, commenting on the government’s plans to commercialize state-owned enterprises, noted that the government begins to consider this issue every time a crisis strikes.

And now let's move on to the forecast of our analytical service ASTNA, which was presented to the readership on January 7, 2020, before the global coronavirus crisis and the fall in oil prices.

In the article “Economic Expectations from 2020”, professor of the American Rutgers University Gubad Ibadoglu quite confidently and clearly predicts the crisis in Azerbaijan, which indicates its non-pandemic and not even energy nature.

It seems that it will be important for the reader to read this visionary article in order to more objectively realize the situation in which the country is located.

We do not gloat, in any case. We are just trying to reach out to those who are sitting in high offices and looking at the world with virtual eyes.

Economic expectations from 2020

Gubad Ibadoglu

2020 will not be easy for the Azerbaijani economy. During the year, the most challenging is expected to be in the area of budget revenue generation and regulation of expenditures. Because the tax exemptions; the increase in minimum wage and pensions; 20-40% increase in salaries in the civil service and budget sphere, law enforcement agencies, and the judiciary; and consumer credit compensation in foreign currency increased fiscal expenditures by about 3% of GDP in 2019 and the fiscal growth expected by 2020 from these sources will not be less than 5% of GDP.

As for public finances, the export losses caused by the projected decline in oil production this year and the expected price fall will not be compensated for by increased revenues from gas export. According to the Oil Fund's approved budget[1], the budget revenues for 2020 are expected to be 12,384 million manats, and expenditures – 11,589 million manats, which means a 20 percent decrease in revenues compared to the previous year and a 0.6 percent decrease in expenditures. Therefore, by 2020, resource revenues will be reduced as a whole. Compensation for losses due to its reduction will depend on the level of development of the non-oil sector. All these changes will affect the rate of economic growth during the year too. The Ministry of Economy predicts that gross domestic product (GDP) will increase by 3.0 percent in real terms to 83.3 billion manats, as well as non-oil GDP by 3.8 percent in real terms to 54.6 billion manats in the country in 2020. The Ministry of Economy also says GDP growth is expected to be 3.7 percent next year, with a significant jump in oil sector growth because of a sharp increase in gas processing by 2021[2]. However, international organizations have declared that the rate of economic growth predicted by the government of Azerbaijan will be lower and do not share the optimistic forecasts of the Ministry of Economy. Thus, the Asian Development Bank[3] and the European Bank for Reconstruction and Development[4] predicted that the real GDP growth in Azerbaijan would be 2.4 percent this year. In the updated Europe and Central Asian report[5] released last October by the World Bank, GDP growth in Azerbaijan was predicted to be 2.3 percent in 2020 (1.2 percent less than June forecasts) and 2.1 percent in 2021 (1.6 percent less than June forecasts).

The World Bank’s forecasts of a significant slowdown in growth rate (1.2 percent in 2020, 1.6 percent in 2021) following recent changes in the growth rate expected in Azerbaijan for the current and next year stem from the anxiety in the national economy perspectives. There are many reasons for the slowdown in the growth rate. Initiatives and government support to improve the business environment in the country are not effective due to the lack of economic freedoms and independence of the judiciary. The slowdown in structural reforms, the elimination of  fair competition opportunities through state-backed natural monopolies and the private sector sponsored by the political elite illustrate the prospects for the development of the non-oil sector as hopeless. At the same time, the surplus of financial accounts is steadily declining as the demand for imported goods grows due to the inability of the non-oil sector to replace imports. Thus, the share of the surplus of financial accounts in GDP is expected to decline from 5.9% in 2018 to 4.4% in 2021. Moreover, the non-oil fiscal balance will increase in the coming years.

A continued rapid increase in gas production this year increases Azerbaijan's dependence on hydrocarbons, increases the impact of external shocks on national economy management, and increases risks. Uncertainty stemming from tensions in the Middle East, war-torn Iranian-US relations, and an expected slowdown in the region and global economic growth could also reduce the demand for Azerbaijani exports. Furthermore, recent volatility in oil prices, under the influence of speculative and non-economic factors, increases financial sensitivity, complicates the strategic allocation of resources and the planning of public investment.

Although there is no possibility of a devaluation of the national currency in the current year, the delay to transition to the floating exchange rate regime slows down to regain confidence in the manat. This has a negative impact on the mutual efficiency of the relationship between the financial and banking sector and the real economy. Although in a report prepared by the Center for Analysis of Economic Reforms and Communications[6] based on the results of monitoring and evaluation of “the Strategic Roadmap for the National Economy Perspectives” for 2017, a floating exchange rate regime is expected to be introduced in Azerbaijan by 2020, the Central Bank and the foreign exchange market are not ready for this. Because, as imports have increased in recent years, export performance is also deteriorating.

On the other hand, legalization of the shadow economy, inadequate distribution of income among low-income population due to weakening of the struggle against monopoly and corruption, increasing rate of closure of jobs, reduction of vacancies, rising food prices, as well as growing endemic diseases will either plunge the population into poverty or stimulate migration by 2020. All of these will increase the difficulty of ensuring macroeconomic stability in the coming years. According to the estimates of the Economist Intelligence Unit[7], this can also be seen in the table data compiled based on key indicators of the Azerbaijani economy over the next 5 years.

Table 1. Key Indicators of the Azerbaijani Economy (2018-2024)

Source: Economist Intelligence Unit

a Actual. b Economist Intelligence Unit forecasts.

[1] https://oilfund.az/report-and-statistics/budget-information/41

[2] http://maliyye.gov.az/scripts/pdfjs/web/viewer.html?file=/uploads/static-pages/files/5dad5bfc9e366.pdf

[3] https://www.adb.org/countries/azerbaijan/economy

[4] https://www.ebrd.com/where-we-are/azerbaijan/overview.html

[5] https://www.worldbank.org/en/region/eca/publication/europe-and-central-asia-economic-update

[6] http://ereforms.org/

[7] https://store.eiu.com/product/country-report/Azerbaijan?zid=storeemail&utm_source=mthlystorepromo&utm_medium=email&utm_name=storeemailnov19&utm_term=country_