Economic expectations from 2022

To assess the expectations for the current year, let's first look at the results of the main economic indicators of the previous base year, as well as the established trends and emerging trends at the macro, business, and household levels.

At the macro level, although the situation on world markets last year was characterized by a steady recovery in global demand and particularly favorable oil prices for Azerbaijan, the pace of economic growth in Azerbaijan in 2021 lagged behind global economic growth. So, while the global economic growth rate was expected to be 5.9 percent in 11 months, Azerbaijan's GDP grew by 5.3 percent. At that time, the average price for Brent oil was $ 71, which was 65% higher than the average price of the previous year ($ 43). In November 2021, compared to the same period last year, energy prices increased by 2.1 times, non-energy prices by 24.7 percent, and according to the Food and Agriculture Organization of the United Nations, world food prices rose by 27.3 percent annually. Thus, although the rise in energy prices on world markets has accelerated inflation in energy-importing countries, import inflation in Azerbaijan has been higher for other reasons. So, the average annual growth of the import price index in January-October last year reached 21.4 percent.

According to official statistics, in November 2021, annual inflation was double-digit - 11.1 percent - compared to November 2020, and the average annual inflation was 6.2 percent in January-November. Average annual core inflation, excluding regulated prices, as well as seasonal product price changes, amounted to 3.9 percent in January-November 2021. According to other estimates, the increase in utility tariffs in the name of liberalization of prices, to which only domestic spending factors, especially government regulation, are applied, has formed a quarter of annual inflation.

In addition, the producer price index last year tended to increase. In October, compared to the same period last year, the producer price index in the processing industry increased by 29.9 percent, the agricultural producer index - 14.4 percent, the price index for domestic freight transportation by road with increasing transportation costs - 11.7 percent annually.

As the average annual growth of the export price index in January-October last year was 46.9 percent, the foreign trade surplus in 11 months of 2021 increased 2.8 times compared to the same period last year and reached $ 9.4 billion. Non-oil exports increased by 44% and non-oil imports by 9%. In the first nine months of last year, in the current account of the balance of payments, the surplus amounted to $ 3.9 billion, or 11 percent of GDP. In the context of the surplus balance of payments, the country's strategic foreign exchange reserves, including assets of the State Oil Fund, increased by 4.4 percent ($ 2.2 billion) in 11 months to $ 53 billion, and the Central Bank's reserves increased by 10.2 percent to more than $ 7 billion.

Thus, in the first 11 months of 2021, the gross domestic product increased by 5.3 percent in real terms, including 6.4 percent in the non-oil and gas sector. Economic growth in the non-oil and gas sector was mainly due to the commercial sector. So, in the same period, the non-oil and gas industry grew by 20.9 percent and agriculture by 3.8 percent.

Characterizing the situation at the business level last year, it should be noted that although a number of institutional steps were taken in this direction, including decrees of the President of the Republic of Azerbaijan on measures to improve management in the field of state support for entrepreneurship, management of industrial parks, industrial districts, and agro-parks, management of the State Oil Company, although state-owned companies and banks have been transferred to the management of the Azerbaijan Investment Holding, a number of issues arising from these decrees have not been resolved. Furthermore, it was not enough for businesses to take advantage of the opportunities gained in the liberated territories. The largest contractors for government orders to restore infrastructure in the liberated areas were mainly Turkish companies. Last year, companies operating in the export-oriented non-oil sector suffered sustained losses due to exchange rate differences due to the stability of the Azerbaijani manat against the US dollar and the appreciation of the Azerbaijani manat against the euro. Last year, local production and services also suffered from declining purchasing power and restrictions during the pandemic.

As for households, the decline in consumer purchasing power has been compounded by chronic problems such as impoverishment and stratification, as the growth rate of their expenditures has repeatedly outpaced the growth of incomes. During the pandemic period, there was no coverage of the deficit due to reduced access to credit for households; at the same time, the level of overdue household debt has increased over the past year.

As you can see, we are entering 2022 with different conditions at different levels, and in general, we are entering the new year with complex global conditions and difficult local conditions. In particular, due to the active growth of inflation last year, the increase in wages, social benefits, student scholarships, and the minimum amount of pensions this year, The additional manat, which is expected to be used mainly for consumption in cash, will increase inflationary pressures and create higher inflation in 2022. Moreover, high inflation expectations of consumers and businesses, as well as rising prices in global markets and increased transportation costs in foreign trade, will make 2022 more expensive than the year we left. In the current year, the exchange rate policy, which stimulates imports, and the customs policy, which artificially increases costs, will increase the share of imported goods in the consumer market, both physically and in value. Although the Central Bank of Azerbaijan (CBA)'s ultimate monetary policy goal in 2022 is to keep inflation in the 4 ± 2% corridor as it did last year, the CBA will not be able to keep inflation in the 4 ± 2% corridor this year as it did last year, and this year's average annual inflation will be higher than the year we left. This year, food inflation is expected to be higher than non-food and service inflation, which will further complicate the living conditions of low-income people. On the other hand, the increase in excise rates, tariffs, and utility tariffs will further increase inflationary pressures from 2022.

The GDP growth rate for this year will be lower than last year. The main reason for this is the positive and high GDP growth rate in the base year. Last year's high growth was due to the 4.9 percent recession in the previous year. The same trend will be observed not only nationally but also globally. So, according to a report by the International Monetary Fund in October, the global economy is projected to grow by 4.9 percent in 2022. The process of economic growth in developed and developing countries is expected to take place at different rates, depending on the scope of vaccinations, the duration of the restrictions, and the sustainability of stimulus measures. Thus, economic growth is projected at 4.5 percent in developed countries and 5.1 percent in developing countries. According to official forecasts, the real economic growth rate in Azerbaijan in 2022 is expected to be 3.9 percent, including 4.9 percent in the non-oil sector. Among the factors contributing to the growth in the current year is the continuation of favorable conditions for the oil and gas business in the world market. So, the consensus price for 2022 is estimated at $ 70.9 per barrel, including $ 64.5 by the IMF. In general, global demand for oil is projected to continue to grow in 2022.

This suggests that in 2022 the country will have enough reserves to protect its foreign exchange reserves and maintain the stability of the manat against the US dollar. The continuation of this policy and the postponement of devaluation is expected in 2022 as well. Because the current government sees this issue as a socio-political issue, not an economic one.

If we look at the budget through 2022, we will see that the consumer side of the budget is more than the investment side. Therefore, this year, budget-funded investments in the reconstruction of the liberated territories remained the same as last year - at 2.2 billion manats - but investment expenditures for other purposes were reduced. The already weak link between total expenditures and the growth rate of the non-oil sector will further weaken in 2022 as a result of rising non-productive and non-profit budget expenditures. If no fundamental changes are made during the year to increase budget transparency and fight corruption, then the balance between the two indicators presented above will further decrease.