The Azerbaijani economy is facing a massive crisis due to the systemic failure of the government to enact reforms. Global oil prices drop and the COVID-19 pandemic is widening the chasm between the haves and have-nots.
About the Author: Gubad Ibadoghlu, senior policy analyst at the Economic Research Center
In 2020, disobedience and sabotage of regulatory and security bodies were added to the ongoing problems of economic monopoly, corruption, distrust in the financial sector, and distrust of society. As a result, the socio-economic crisis, and the epidemiological and environmental crises are leading the state toward an abyss.
The current crisis in the Azerbaijani economy is comprehensive and fast moving. This can be argued by the following tendencies:
1) According to the State Statistics Committee, in May of this year, GDP production in Azerbaijan declined by 1.7 percent, but in fact the economy shrank by 3.9 percent. This is because GDP increased by 2.2 percent in April and decreased by 1.7 percent in May.
2) Compared to the same period last year, the GDP decreased by 884 million AZN in March, 1.6 billion AZN in April and 1.7 billion AZN in May. Thus, GDP for the last three months decreased by 4.2 billion AZN, or 22 percent, to 14.9 billion AZN, compared to the same period last year: in March, April, and May 2019, the GDP amounted to 19.1 billion AZN.
3) In the first quarter of 2020, the country’s balance of payments showed a deficit of $1 billion 343 million 500 thousand. In the 1st quarter of 2019, a surplus of $2 billion 19 million was formed in the balance of payments.
The balance of payments deficit was formed due to the balance of $ 646.3 million in the country’s current account, a deficit of $ 1 billion 394.1 million in the financial account, and a deficit of $ 595.7 million in errors and omissions.
4) In January-May this year, compared to the same period last year, industrial production decreased by 26.4 percent, construction and installation work by 17 percent, and tourist accommodation and catering services by 41 percent.
The above-mentioned negative macroeconomic and sectoral trends will continue for some time, because the factors that cause it are ongoing.
I do not link the current crisis solely with the pandemic and fluctuations in oil prices. The crisis was inevitable this year due to the failure of the reforms that have been expected for years.
Failures to Reform
At the same time, according to the Ministry of Energy, in January-May 2020 15.2 billion tons of oil (including condensate) were produced in Azerbaijan – a decrease of 2.6 percent or 463,000 tons compared to the same period last year.
According to the “Declaration of Cooperation,” Azerbaijan should maintain daily crude oil output at 554 thousand barrels in May-July of the current year, as shown in Table # 1. In order to fulfill its obligations for reducing oil production, daily crude oil production should be reduced to 434 thousand barrels at ACG field and 120 thousand barrels at SOCAR company (Azneft Production Unit (PU), JV and Operation Company (OC)) and should be kept at the reduced level.
|August -December 2020
|Other operational companies
Table 1. Obligations for reducing oil production in Azerbaijan, thousand barrels
Source: Ministry of Energy of Azerbaijan Republic
Economy in the Pandemic
Having to reopen and then close again put a financial strain on shops, restaurants, and other businesses. Although such businesses were partially reimbursed by the state when they were first closed, they did not receive any economic support the second time they were closed. If this continues, businesses will likely be forced to cut jobs, especially to reduce fixed costs. This will lead to a second and more massive wave of unemployment.
In addition, the easing of the lock-down will not lead to the functioning of all sectors of the economy.
Since the Ministry of Economy did not include agriculture in the list of economic sectors affected by the pandemic, farmers will not benefit from the government’s economic stimulus package. Also, the restriction of economic relations between the regions and Baku during the special quarantine period and between the regions and Russia, the main exporter of agricultural products, also hinders the sales of agricultural products, which may lead to a decline in agricultural production in the near future.
Tourists from abroad and hospitality services will not be able to recover from the effects of the pandemic for a long time.
The Azerbaijani economy is shrinking under three-way pressure due to untimely reforms, the pandemic, and the drop of oil prices in the world markets.
The government’s failure to fulfill its commitment to economic reform over the years has increased the cost of further reforms and made it impossible in the current situation.
The government’s unsystematic and incomplete measures to neutralize the effects of the pandemic on the economy significantly reduce the ability of economic agents to operate and limit their chances to recover what they have lost.
As for oil prices, the current price is still below the $55 per barrel used to forecast the state and the Oil Fund’s budget revenues. This has a negative impact not only on the reduction of budget revenues, but also on foreign trade turnover and the balance of payments.
The pressure created by these effects again increases the risk of devaluation of the national currency. The Azerbaijani economy is facing a long and deep recession.