Azeri Macroeconomic Policies Producing Results

The International Monetary Fund has said Azerbaijan’s economy stabilized in 2017 thanks to active macroeconomic policies and “stronger oil prices”.

“Growth prospects are positive in the near term,” Mohammed El Qorchi, the fund’s mission chief to the country, said in a statement following his 15-day visit to Baku to assess Azerbaijan’s economy, Anadolu Agency reported.

With expanding public investment and social spending, the non-hydrocarbon sector is expected to increase by 4% in 2018, he added.

The IMF expects the country’s growth rate to be 2% in 2018 but this should range between 3.5 to 4% in the medium term as new natural gas fields come online.

As base year effects wear off, inflation should decline to 7% in 2018, and gradually recede, the fund said. El Qorchi said the non-hydrocarbon economy started to expand mainly due to reviving service and agriculture sectors. “Higher oil prices, better non-hydrocarbon exports and import compression have also restored the current account surplus,” he said.

But the fund said the country’s annual headline inflation remained elevated mainly due to the impact of exchange-rate pass-through effects and one-off increases in administrative prices.

For 2017, the mission now projects real GDP to contract by 0.3%, and inflation to average 13%, it said. Oil prices, Brent crude, have been rising steadily to above $60 in December from $45 per barrel in June 2017.

The fund praised improvements made in social protection and labor markets, including a new unemployment insurance fund, implementation of a pension reform and a shift from passive to active labor market programs.

“When the oil price shocks materialized, the authorities appropriately tightened macroeconomic policies, allowed exchange rate flexibility and started to address banking system fragilities,” El Qorchi reported.

“With the recession now petering out and oil prices rising, there may be pressure to return to a fixed exchange rate regime and to unsustainably high public investment. This must be resisted,” the mission chief added.

Fiscal spending—particularly capital spending—is set to increase markedly in 2018, he said. “While higher oil prices should help to contain the negative impact on Azerbaijan’s fiscal balances, there is concern about the quality of public investment, and the economy’s capacity to absorb a large jump in capital spending,” the statement read.