The question of devalvationand the sword of damocles

The current turmoil in the world energy market is a phenomenal event that has never happened in any century. Oil prices showed not only $ 1 but even a negative price. The sharp drop in Azerilight oil prices has again raised the risk of devaluation in our society: will there be a devaluation?

The reasons for the devaluation are mainly related to the tension in the implementation of government obligations, declining foreign exchange inflows in budget revenues, narrowing of foreign exchange inflows into the country, a sharp decline in export earnings, a sharp increase in foreign debt, etc. If you pay attention, the main emphasis in each of these conditions is on meeting the country's demand for dollars. Because states need dollars, the dollars!

Then the rhetorical question arises: if citizens in the country make payments in the national currency, then why should there be a demand for dollars? According to world experience, the demand for dollars by any country can be due to three important factors: (i) the state has its own debt and wants to get dollars to pay it, (ii) since the private sector, i.e. companies, have obligations to foreign partners, they want to convert their national currencies into dollars and meet their needs in dollars to fulfill their obligations, and (iii) since those countries are dependent on imports, they have to buy and trade in dollars for the products they have to buy from abroad.

In all senses, devaluation is one way for governments to get out of trouble. Monetary structures view the national currency as a management tool through devaluation. The way to devalue the national currency is the way that optimizes government revenues but squeezes households and businesses. Governments are trying to get out of the situation by devaluing the national currency and fulfilling their obligations. However, the state sets itself free from the burden, which it has to carry as a state, by putting the burden on the shoulders of consumers and businesses. However, this heavy burden later leaves deep marks on the economy.

In what years (2015 and 2020) was the probability of devaluation high?

Now there are more grounds for devaluation. What is that ground, and what are the factors that determine it? First, let's look at the economic situation the government, which chose devaluation in 2015, faced in 2020.

The first factor is related to the ratio of oil prices.

When the devaluation began in 2015, the average oil price ranged from $ 80 to $ 90. In the state budget, one barrel of oil was predicted at $ 90.

As of today 2020, the oil price level is $ 18. In the current year's state budget, one barrel of oil was predicted at $ 55. This means that the amount that SOFAZ will convert the dollars earned from the sale of oil into manats in the foreign exchange market and transfer them to the state budget will be less than in previous years. In other words, the situation is more unfavorable now in terms of oil prices. In this regard, the current state of oil prices creates more inclination and enthusiasm for devaluation than it did then.

The second important factor. In that situation, the feeling of confidence in tomorrow in the economy was stronger than it is now. In 2015, there were stable GDP growth trends. In those years, due to normal economic conditions, the economy was closer to the stage of economic growth, rather than the stagnation phase. Already in 2017, after the stagnation of GDP, we could have hardly achieved economic growth of 2-3 percent. In those years, the global oil conjuncture worked in our favor. The world's economic machine was creating more demand for oil.

Now the economic shocks caused by the pandemic are worse than the economic situation in 2015 and even the economic crisis in 2008. In this context, a recession will be inevitable not only in Azerbaijan but also globally.   This leads to the government imagining the future more vaguely against the background of declining economic growth rates in our economy. This uncertainty creates a basis for the government to move more towards devaluation.

Third. We are losing resources to finance the current expenditures of the state budget. However, in 2015, our oil export revenues alone allowed us to fully finance our then-current expenditures. I do not talk about budget revenues from the non-oil sector as of yet. However, we need about 18 billion AZN to finance current expenditures from the state budget in 2020. 14 billion AZN of these current expenditures belongs to the article "protected expenditures". As required by the Law on Budget System, protected expenditures may not be cut or sequestrated. Our current expenditures account for 64 percent of the budget. Hence, it will not be possible to finance these expenditures. The way out of this situation will be determined by choosing one of three directions:

1. The state chooses foreign borrowing and finances current expenditures and covers the budget deficit with loans from international financial institutions;
2. By using the assets of the Oil Fund, it gets rid of the situation by ordering and transferring them to the budget;
3. It chooses devaluation and implements budget obligations by putting the burden on the shoulders of citizens;

It can get out of the difficult situation we are in by choosing one of the directions I have listed above. These are not situations that are easily managed by the state. It can drink "wine" at an expensive cost. The difficult situation in which the government finds itself is that under difficult conditions, it is necessary to choose the least harmful of the several harmful situations. While one aspect of this harmful choice is related to the global recession caused by the global pandemic, the other is due to the fact that our economy has been sitting on the oil "needle" for a long time.

However, I think that the government will choose to avoid devaluation as much as possible. Because how much did the government's blows from the devaluation in 2015, the money it spent on rebuilding the economy, the efforts to revive the market, the initiatives to ensure economic warming cost? In my opinion, the effects of the devaluation of 5 years ago have not yet been completely eliminated. It has left deep marks in our economy. Market confidence has not been restored. Investors do not "float" in the markets with all their might because they do not consider the investment climate sufficient. It looks like one foot is on the shore and one foot is in the water. Not only have the resources for the business not been fully mobilized but also business entities continue to flow migrant capital abroad as “timid birds”. Taking all this into account, if the government chooses similar devaluation again, it will be like committing suicide. Logically, a government that once “burned its mouth” should drink the next milk in fear. Because “the one whose mouth has burnt with milk shall afraid of yogurt.” This is what the government is afraid of now. It is not just citizens and businesses’ losing their minds from the devaluation.

The strategic approach dictates that the size of the Azerbaijani economy should not be allowed to shrink again. If any such steps are taken, it will show the bottom of the recession, not the transition to the middle phase. One fact must never be forgotten. While Azerbaijan's GDP before the devaluation was $ 77 billion, now it has dropped to $ 37 billion. I say with full responsibility that in order to return our economy to its pre-devaluation level, the government must create phenomenal economic programs and implement them systematically. It cannot be returned in 2-3 years. This requires a long period of over 5 years. Shrinking the economy more than twice means losing the economic potential it has gained for decades. When analyzing the fact that a 1 percent contraction in the world economy has a serious impact on employment, national income, and other macroeconomic indicators, we must look at the repeated contraction of our GDP not as an economic factor but as a political factor.

Mohammed Talibli