Economy of Azerbaijan in 2022. The most used and remembered word is inflation

The 2022 is over. But what else will we see if we look at the economy of Azerbaijan in the retrospective of the year?

Economist Farid Mehralizadeh answers ASTNA questions regarding the state of the Azerbaijani economy in 2022.

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Question: What will 2022 be remembered for in the Azerbaijani economy?

Answer: I believe that in 2022 the most frequently used word by economists in Azerbaijan was “inflation”. It should be noted that at present the inflation rate in the country is close to 14%. This is the highest rate recorded in the country since 2008. In the 21st century in Azerbaijan only in 2007-2008 the inflation rate was higher than this year. Imagine that even during the period of devaluation, when the national currency depreciated by half, such high inflation was not recorded in the country. If we look at inflation related exclusively to food, we will see that this figure is 22%. It should also be considered that in Azerbaijan, about 60% of the population's expenditures are food products, and among low-income groups, this figure is even higher. For this reason, I think that also, in the coming years, 2022 will be remembered for a sharp rise in prices.

Another important change is related to the structure of energy revenues. Thus, for many years, about 90% of Azerbaijan's export earnings have been formed from energy resources. This includes both the sale of oil and the sale of natural gas. Traditionally, most of the Azerbaijan's energy income was formed from oil, and a smaller part from natural gas. However, this year we have witnessed a serious increase in Azerbaijan's revenues from natural gas exports. According to the State Customs Committee, in the first 11 months of this year, 50% of Azerbaijan's export earnings came from crude oil, and 41% from natural gas. I note for comparison that last year the share of oil sales in exports was 62%, and the share of natural gas - 23%. In this regard, the increase in the volume of natural gas exported by Azerbaijan, as well as the rise in prices for this energy carrier, has sharply increased the share of natural gas in the country's export earnings.

Another moment during this year is the massive increase in remittances sent to the country. If in the first 9 months of 2021 $772 million was sent to Azerbaijan from abroad, then this year this figure increased to $2 billion 779 million. Such a significant increase in the volume of money transfers to the country is due to an increase in money sent from Russia to Azerbaijan, about 5.5 times.

Another notable moment during the year was that the country's land borders remained closed. In a few months, it will be three years since the closure of Azerbaijan's land borders, and this factor, of course, continues to create additional difficulties for many.

Q: What was the rate of economic growth or inflation this year?

Answer: According to the Committee of Statistics, in the first 11 months of this year, Azerbaijan's GDP grew by 4.8%. This is lower than in the same period of last year (5.3%). However, keep in mind that growth in 2021 was larger due to the base year effect as the economy contracted in 2020. It should also be considered that GDP growth rates lag inflation. In this regard, it is impossible to talk about real GDP growth. A decrease was also recorded in the production of industrial products. Industrial production, registered for 11 months of this year, decreased by 1.1% compared to last year. Over the year, agricultural production decreased by 3.4%. The cost of information and transport services increased by 15.4%. In the transport sector, an increase in the volume of freight traffic by 13%, passenger - by 36%. In this regard, it becomes obvious that growth rates in most industries lag inflation.

Question: What factors were most associated with inflation?

Answer: There is not one reason for the exacerbation of inflation, there are several. And the seriousness of this problem is also due to the fact that several different problems affect the rise in prices. From this point of view, one of the most important issues was the emergence in the global economy since the beginning of the pandemic of problems related to the disruption of the supply chain. It should be borne in mind that over the past few years, the cost of transportation has increased dramatically. The growth of these costs, of course, leads to an increase in the cost of production. On the other hand, the start of the Russian-Ukrainian war since the beginning of this year has also accelerated the rise in prices. Because both countries are important players in global agriculture. Both countries are among the largest exporters, especially in the grain market. The limitation of the export opportunities of these countries due to the war also led to an increase in food prices. The Russian-Ukrainian war has affected inflation, including in terms of its impact on energy markets. Because of the war there was a significant increase in energy prices. These increases are also an indirect cause of price increases for many products and services.

Along with these factors, some regions have recently seen a decline in yields due to growing environmental problems around the world, drought and other factors. From this point of view, environmental factors are also able to influence inflation. At the same time, it must be taken into account that, in general, people's expenses are growing, and they are thinking about how to increase their income in order to cover the growing expenses.

Question: Does Azerbaijan, which is more dependent on imports, have the opportunity to avoid the consequences of the recession experienced by the world economy.

Answer: In today's world, one can say that all countries are integrated into the world economy. That is, there are no problems with the import of some products. It should also be taken into account that imports are involved in the formation of the cost of any product, even if we produce it ourselves. We can produce any agricultural product by ourselves. However, again, its seeds, fertilizers or agricultural machinery will be provided through imports. Since the provision of the entire production process at the expense of internal resources requires very large resource costs. This includes both economic resources and qualified personnel and technological potential, which Azerbaijan does not have in the current conditions. However, in some cases, we are eyewitnesses of the fact that even the simplest products are not produced in Azerbaijan.

I think that one of the reasons for this is the limited competitive environment in the country. In this regard, the liberalization of the economic environment in Azerbaijan, providing convenient access to the market for both domestic and foreign players, improving tax and customs activities, ensuring property rights and the rule of law, can lead, along with the solution of many problems, to positive changes in reducing the country's dependence on imports. If this happens, it can be beneficial not only from a financial point of view, but also from an employment point of view.

Question: How can you assess the economy of Azerbaijan in 2022?

Answer: Since energy prices on world markets in 2022 will be higher than expected by the government, the overall situation can be considered satisfactory. However, the traditional problems of the Azerbaijani economy have not gone away. In 2022, the share of energy revenues in exports even slightly increased. In this regard, the share of the country's energy sector in the formation of Azerbaijan's export and budget revenues remains so high that it continues to be a risk factor for the Azerbaijani economy at any time. It should be borne in mind that in recent years the formation of energy prices has been influenced by geopolitical issues no less than economic factors. In this regard, we may witness an unexpected decline or a sharp increase in energy prices. Therefore, without an increase in the country's non-oil revenues, without a revival of the business climate, the risk factors we have mentioned will persist. This year, poverty and unemployment rates have decreased compared to last year, but, nevertheless, these figures are still high compared to the period before the pandemic. Therefore, a simple comparison with the last year in assessing the state of the Azerbaijani economy can be misleading. Because the effects of the pandemic are still being felt. I hope that the coming year will be better in terms of the well-being of the population in the country.