“The government needs to think about serious changes”

The International Monetary Fund (IMF) has distributed the October issue of the World Economic Review report, which presents forecasts for the economic growth of countries. According to the report, the Fund predicts that this year the real growth of the Gross Domestic Product (GDP) in Azerbaijan will be 3.7%. Last year this growth was 5.6%.

According to the report, in 2023 the expected growth of the Azerbaijani economy will be 2.5% lower than this year's forecast. It is predicted that in 2027 GDP growth will be 2.5%. Looking at the results of Azerbaijan's other two neighbors in the South Caucasus - Armenia and Georgia - it becomes clear that the growth rates of the economies of these countries in the coming years will outpace those of Azerbaijan. According to IMF forecasts, in 2023 the Georgian economy will grow by 4%, and Armenia - by 3.5%. In 2027, Armenia's economic growth is expected to be 4.5%, while Georgia's economic growth is expected to be 5.2%. It is assumed that in 2027 the economic growth rates of the other two countries of the South Caucasus may almost double the economy of Azerbaijan.

How can Azerbaijan, which is called the most economically developed country in the Caucasus region, fall behind Armenia and Georgia?

Economist Farid Mehralizadeh answers ASTNA questions.

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Q: The International Monetary Fund released the October issue of the World Economic Review report, which highlights the forecasts for the economic growth of countries. First of all, I would like to know your attitude to this report. How accurate are the criteria on which the report is based and how accurate can it be?

Answer: The International Monetary Fund is one of the most influential international economic organizations in the world. The Organization has been consistently making such forecasts for a very long time, and the IMF's forecasts for countries influence the formation of expectations, as well as investment decisions in relation to them. It should also be taken into account that the forecasts of this structure are calculated on the basis of the real economic indicators of the respective countries that have formed recently. In this regard, in most cases we observe that although not always one to one, but in most cases, figures close to the IMF forecast are actually fixed.

Question: According to the report, the Fund predicts that the real growth of the Gross Domestic Product (GDP) in Azerbaijan this year will be 3.7%. According to growth forecasts, Georgia and Armenia are ahead of Azerbaijan. If in 2022 the IMF expects the growth of the Azerbaijani economy by 3.7%, then in Georgia this figure is 10.4%, and in Armenia - 7%. Consequently, this year the economic growth indicators of Georgia and Armenia may be two to three times higher than the corresponding indicators related to the Azerbaijani economy. Why do you think?

Answer: Several factors can influence this. For example, it should be taken into account that in 2020, during a period when there were serious difficulties due to the pandemic, as in many other countries, the economies of all three countries of the South Caucasus decreased compared to 2019; then the  decline in the economy of Azerbaijan amounted to 4.2%; in the economy of Georgia it was 6.8%, and in Armenia - 7.4%. From this point of view, the pace of economic recovery after the lifting of pandemic restrictions may affect these indicators. On the other hand, it should be noted that both Georgia and Armenia were among the main places where citizens and companies who left Russia went after the Russian invasion of Ukraine. In this regard, it can be said that this process could also have had a greater impact on economic activity in both countries.

Question: The report notes that in 2023 the expected growth of the Azerbaijani economy is by 2.5% less than this year's forecast. It is predicted that in 2027 GDP growth will be 2.5%. Compared with the results of Azerbaijan's other two neighbors in the South Caucasus - Armenia and Georgia - it becomes clear that the growth rates of the economies of these countries in the coming years will outpace Azerbaijan. According to IMF forecasts, in 2023 the Georgian economy will grow by 4%, and the Armenian economy by 3.5%. The forecast for Azerbaijan is 2.5%. It is expected that in 2027 the economic growth of Armenia will be 4.5%, and Georgia - 5.2%. In the same year, the expected growth of the Azerbaijani economy is only 2.5%. Thus, it is assumed that in 2027 the economic growth rates of the other two countries of the South Caucasus may almost double the economy of Azerbaijan. How correct is this prediction? What is the IMF conclusion based on? How can Azerbaijan, which is called the most economically developed country in the region, the Caucasus, fall behind Armenia and Georgia?

Answer: I believe that the main point here is connected not with the high forecast for Georgia and Armenia, but with the low forecast for Azerbaijan. Because the figures announced for Georgia and Armenia for the coming years are not extraordinary growth figures and are close to the results of these countries in previous years. As for the decline in expectations for the growth of the Azerbaijani economy in the coming years, I think this is traditionally associated with the high dependence of the Azerbaijani economy on resources. Currently, more than 90% of the country's export earnings are generated by oil and gas resources. In this regard, the report also notes that in the next few years, the average oil price is expected to be lower than this year. On the other hand, in recent years we have seen a decline in oil production in Azerbaijan. All these factors may lead to the fact that in the coming years Azerbaijan's oil revenues will decrease, and this will generally lead to the growth of economic activity at a lower rate. Therefore, the weak diversification of the Azerbaijani economy and such a high dependence on energy resources always lead to the preservation of high risks for our economy.

Question: The Fund assumes that in 2023 the inflation rate in the country will be 9%. The Central Bank of Azerbaijan usually aims for the country's inflation rate of 4%. In Armenia, this forecast is 6%, in Georgia - 3.8%. In terms of inflation, we are also ahead of neighboring countries. Why is  the inflation in our country higher than in other countries?

Answer: One of the most serious problems of the world economy at the present time is high inflation. In Azerbaijan, inflation indicators are also recorded, which can be considered record-breaking. According to official data, food prices have risen by 22% compared to the same period of last year. Government officials attribute the rise in prices mainly to external factors and claim that inflation is "imported". Indeed, the production of a product by the country itself does not mean that there will be no price increase associated with this product, because the formation of the value chain of products includes imported components. However, I believe that the increase in the production of local food products and food products can to some extent affect the level of inflation. On the other hand, the report of international structures notes that customs duties in Azerbaijan are much higher than in the countries of the region. Limited competitive opportunities subsequently make it even more difficult for Azerbaijan to manage the situation associated with inflation.

Question: The IMF assumes that by 2025 oil prices will decrease slightly, reaching $76. Does this price suit Azerbaijan?

Answer: The experience of recent years shows that when preparing the budget for the beginning of the year, the government basically calculates the average oil price in the range of $40 to $50. If during the year oil prices are higher than expected, the budget is revised. And this year we have witnessed the same situation. In the middle of the year, changes were made to the budget, and the average oil price was set at $85 per barrel. From this point of view, I think that oil prices in the range of $70-80 can help the Azerbaijani government meet its budgetary obligations. However, it should be kept in mind that one of the most difficult things that economists have faced in recent years has to do with forecasting. Because successively events occur that can have an impact on the world economy. Therefore, these surprise events can fundamentally change the course of the process. It should be borne in mind that these changes are associated not only with economic factors, but also with geopolitical, medical and other factors.

Question: What steps should the authorities take so that the IMF's forecast for Azerbaijan be wrong?

Answer: First of all, of course, it is necessary to reduce the dependence of the country's economy on energy resources to such a high level, to switch to a value-added economy. To do this, it is necessary to improve the country's economic environment in the country - ensuring equality of opportunity, the rule of law, improving customs and tax policies, and expanding access to financial resources. Along with this, another important factor is the development of human capital, the formation of a skilled workforce. A study published by the World Bank on the Azerbaijani economy also notes that the population growth rate in Azerbaijan is declining and the population is aging. At the same time, the country is facing depletion of hydrocarbon reserves. Asset diversification is not up to the mark, and the contribution of the non-oil and gas sector to growth is limited. With all this, the long-term simulation of World Bank growth shows that, if no policy measures are taken in the face of these obstacles, then the average annual economic growth of Azerbaijan in 2024-2050 can be 0.5%, and GDP per capita in the next 30 years will increase by only 11%. And this is a rather low figure. Therefore, in order to overcome pessimistic expectations about the near future of the Azerbaijani economy, the government needs to think about serious changes.