Azernews.Az

BAKU – Azerbaijan’s economy is expected to grow by 5.5% and the consumer price inflation rise to 7% in 2011, the United Nations estimates.

The UN’s annual regional social and economic report released Friday said that in recent years, the country has enjoyed large and growing oil exports and was among the fastest growing economies in the subregion. However, as existing oilfields reach their productive capacity, oil output is slowing down, according to the Economic and Social Survey of Asia and the Pacific 2011.

Azerbaijan’s hydrocarbon sector accounts for some 55% of gross domestic product and over 80% of export earnings and as such, GDP growth itself slowed down to 5% in 2010 from over 9% in the previous years.

Non-oil activities, driven largely by public investment in infrastructure but also trade and services, are playing a greater role in driving the economy, the report said.

The industrial sector expanded by 2.6% and retail sales grew by 8.8% in 2010. The agricultural sector, however, contracted, as grain production declined sharply due to poor weather conditions, particularly flooding.

Azerbaijan received budgetary boosts from recovery in global demand and higher oil prices. The government amended its budget target and increased its transfers from the State Oil Fund in order to finance infrastructure and social programs.

The UN also cited a strong growth in trade. It said current account surplus increased from 23.6% of GDP in 2009 to around 26% in 2010. The economy ran a trade surplus of $14.7 billion in 2010, higher than the surplus recorded in previous year.

Oil and refined petroleum products continue to account for the largest share of export earnings. Among the largest imports were food products and capital goods such as machinery, metals and transport equipment.

The survey said inflation in Azerbaijan is steadily rising, spurred by food prices. It said higher food and commodity prices and increased government spending led to an acceleration of consumer price inflation from 1.5% in 2009 to 5.7% in 2010.

The UN said that while the central government budget recorded a large surplus, efforts could be made to reduce a significant non-oil fiscal deficit.

It said that in 2009, the National Bank of Azerbaijan cut reserve requirements of commercial banks to increase liquidity and support economic activities. As inflationary pressures set in, however, policy rates were raised in late 2010 and again in March 2011. At the same time, the financial authorities committed to maintaining the stability of the banking system and to ensuring sufficient liquidity in the financial system, to support economic growth in the short- and medium-term.

In its future outlook and policy challenges, the report said the pursuit of broad-based growth and development of the non-oil sectors were the principal economic policy challenges in 2010. The government is expected to use its State Oil Fund to finance social spending and infrastructure projects, and to increase investment in the non-oil sectors, such as agriculture and manufacturing. Greater efforts are needed to diversify the economy and institute market-based reforms to boost competitiveness, the report said.

In its assessment of Asia-Pacific, the report said developing countries in the region will continue driving the global economy in 2011, amid new challenges.

Strong growth is projected at 7.3% against last year’s 8.8% pulling developing countries out of the "Great Recession" of 2008/09. Still, the 2011 regional growth outlook is subject to downside risks, notably from the return of high food and fuel prices, sluggish recovery in rich nations, a deluge of volatile capital inflows and the after-effects of natural disasters, although the regional economic impact of Japan’s recent earthquake and tsunami will be less severe than might have been initially expected, the report said.

Along with moderate slowdown in growth in 2011, most economies are likely to see an increase in inflation from rising food and oil prices, says the survey.

The report said estimates show that rising food and oil prices could lead to 42 million additional people in poverty, joining the 19 million already affected in 2010. In a worst-case scenario with food price inflation doubling in 2011 and average oil prices at $130 per barrel, the achievement of the Millennium Development Goal (MDG) for poverty could be postponed by up to half a decade in some developing countries in the region, according to the report.