ADB Sees Azeri Economy Shrinking

The Asian Development Bank sees the economy in oil-rich Azerbaijan contracting by 1.3% this year mainly due to declining oil production, but returning to growth in 2018, the bank’s local manager told Reuters.

The ADB’s previous estimate for Azerbaijan’s gross domestic product growth in 2017 was a 1.1% contraction.

The slide in the price of oil, which with gas accounts for about 75% of the state revenues and 45% of gross domestic product, has hit growth, the budget, the balance of payments, the manat currency and foreign exchange reserves.

Azeri GDP declined 1.4% year on year in the first half of this year, and Moody’s said last month it expected Azerbaijan’s economy to contract for a second consecutive year in 2017. Azeri GDP shrank by 3.8% last year. The government expects the economy to grow by 1% this year.

“Growth resumption is expected in 2018 with the onset of production from the Shah Deniz gas field and some recovery of activities by the private sector,” Nariman Mannapbekov, ADB’s country manager said, adding that growth forecast for 2018 was 1%.

He praised some positive developments in the non-oil sector, but said that banking sector restructuring, growing public debt, and inflation remained among the short-term challenges.

The ADB, one of the major lenders to Azerbaijan, expects annual inflation to accelerate to 14% this year, up from an earlier estimate of 9%, and to slow to 10% in 2018 with a more stable currency and in the absence of utility tariff increases.

Annual average inflation stood at 14% in the first eight months of 2017, mainly due to a 16% rise in electricity tariffs. With inflation rising, the central bank maintained its policy rate at 15%.

Mannapbekov said that the banking sector stabilized after creditors restructured $3.3 billion in foreign obligations of the state-owned International Bank of Azerbaijan in return for government bonds. “However, a robust trend in lending still needed to be seen,” he said.

According to the central bank, lending has declined by 39% since the beginning of 2016 up to July 2017. “It seems that the level of non-performing loans has reached its bottom and some capitalized banks are making initial efforts to gradually build-up their loan portfolios,” Mannapbekov said.

He said the ADB was still in the process of considering providing financial assistance to improve the railway sector in Azerbaijan. Such help might amount to $400 million. “However, no decision has yet been made and we have not reached the loan negotiations stage,” Mannapbekov said.