RECENT ECONOMIC DEVELOPMENTS
The Azerbaijani economy had a very modest recovery in 2017, as a rebound in the non-oil economy was offset by a contraction in the oil sector due to substantial OPEC-led cuts in oil production and capacity constraints. The non-oil sector rebounded by 2.7% year-on-year (y-o-y), supported by benign public financing, stronger external demand, and improved confidence in response to recovering oil prices. On the downside, and despite higher oil prices, oil GDP contracted by 5% y-o-y.
Annual year-end inflation declined from 15.6% in 2016 to 7.9% in 2017. The high inflation rate recorded for food items (9.4% y-o-y) was due to a strong external demand for agricultural products. To curb inflation, the central bank continued to tighten the monetary policy stance by actively absorbing manat liquidity using deposit auction operations and the issuance of notes.
Higher oil prices, sluggish import growth, and expanded non-oil exports helped improve Azerbaijan’s balance of payments in 2017. Exports expanded by 50% y-o-y, led by a rise in oil exports, as oil prices recovered (oil exports accounted for 90% of total exports), while imports increased by 3% (compared to a drop in 2016). Non-oil exports increased by 22%, supported by stronger external demand, mainly from Russia. The current account recorded an estimated surplus of 4.3% of GDP in 2017.
The tightening monetary policy, improved external environment, and transfers from the Oil Fund to the central bank helped to maintain a broadly stable exchange rate at 1.7 AZN per U.S. dollar in 2017.
High inflation adversely affected household income and reduced real purchasing power. In 2017, the increase in the minimal cost of living and nominal average wages by 11.6% and 6%, respectively, was not sufficient to compensate for higher prices. As a result, poverty likely increased in 2017 and was probably worsened by the 50% cut in the coverage of the country’s most important social assistance program.
Azerbaijan’s economy is projected to expand by 1.8% y-o-y in 2018, supported mainly by the fiscal stimulus. Growth is expected to accelerate in the medium term, driven by an expansion of natural gas production, as the main pipeline that will deliver gas to Europe from the Shah-Deniz II field will be operational by end-2018.
Since the OPEC deal has been extended until the end of 2018, Azerbaijan’s crude oil output is not expected to decline much further. Moreover, average oil prices will firm up somewhat in 2018 relative to 2017 and are projected to stabilize at robust levels in the medium term. Non-oil GDP growth is expected to accelerate in 2018, fueled by an 83% y-o-y increase in budgeted public investment. Nevertheless, growth in the non-oil economy is expected to remain moderate due to a protracted recovery of the banking sector and a weak business environment.
The Government of Azerbaijan plans a fiscal stimulus in 2018 by boosting capital spending, which will be primarily financed by an increase in budget transfers from the sovereign wealth fund. The consolidated fiscal balance is likely to be slightly positive in 2018 and is estimated to average 1.3% of GDP in the medium term, as oil prices remain firm and gas exports rise.
To contain inflation, the central bank needs to continue tightening monetary policy. Azerbaijan’s external sector is expected to continue to improve due to an increase in hydrocarbon production and a continuation of non-oil export growth, supported by a rise in external demand and enhanced government support to exporters of non-oil products. However, spending cuts on social protection, as well as only a moderate economic recovery, are not conducive to poverty reduction.
Last Updated: Apr 18, 2018