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Large forex reserves to enable Azerbaijan to mitigate risk

19 November 2014 17:08 (UTC+04:00)
Large forex reserves to enable Azerbaijan to mitigate risk

By Gulgiz Dadashova

Although oil price shocks and output disruptions remain the biggest challenges in the short term for Azerbaijan, large foreign exchange reserves give the authorities room for mitigating risk, the European Bank for Reconstruction and Development says in its latest report.

Azerbaijan’s strategic currency reserves increased by $ 3.5 billion to about $54 billion in the first nine months of 2014. For the ratio of foreign currency reserves to GDP, which is 74 percent, Azerbaijan is in the first 20 countries in the world.

The EBRD Transition Report 2014: Innovation in Transition issued on November 19 noted that the government has been successful in leveraging the country’s hydrocarbon potential over the last decade and hence in promoting growth and reducing poverty.

Azerbaijan, according to the report, saw slowdown in economic growth in the past year due to some oil output disruptions. “Growth outside the hydrocarbon sector continued, propped up by government spending. Inflation has remained subdued, while external and fiscal surpluses slowly narrowed,” the report reads.

“Growth slowed from 5.8 percent in 2013 to a preliminary 2.5 percent year-on-year in the first nine months of 2014. The unexpected decline in oil output in early 2014 weighed on growth. The non-oil sector continued to grow fast, albeit at a slower pace than before. A substantial fuel price increase in December 2013, the first since 2007, did not have a lasting effect and inflation has remained low, at 1 percent year-on-year in July 2014, constrained by stable food prices.

“With the oil price relatively stable, revenues from hydrocarbon exports remained virtually flat. Non-oil imports continued to surge, boosted by rising incomes and consumer credit. As a result, the overall current account surplus narrowed further from 22 percent of GDP in 2012 to 17 percent of GDP in 2013. The ban on some used car imports that do not meet the Euro 4 fuel standard requirement, introduced in April 2014, could temporarily reverse this trend, as evident from the preliminary imports data for the second quarter of 2014. The external buffers remained ample, with foreign exchange reserves and oil fund assets amounting to $49.1 billion (65 percent of GDP) as of the end of June 2014.

“The Central Bank of Azerbaijan (CBA) continued to maintain its policy of a stable exchange rate against the dollar.”

The financial sector intermediation continued to expand and the presence of the sovereign and of corporate in international capital markets has increased.

The report reminds that in the World Economic Forum’s Global Competitiveness Report 2014-2015 Azerbaijan maintained its relatively high position – 38th out of 144 countries – which is the second-highest ranking among the former Soviet countries.

This high ranking is largely due to a stable macroeconomic environment.

The bank also highlighted that major infrastructure projects are on track, as in 2013 Azerbaijan determined the Trans-Anatolian (TANAP) and Trans-Adriatic (TAP) pipelines as being the main routes for Caspian gas to European customers.

Diversification of the economy is recognized by the government as being an urgent priority, the bank notes. “In its Azerbaijan 2020 vision, rolled out in late 2012, the authorities viewed enhancing competitiveness and export growth as necessary steps towards developing the non-oil sector. The government’s approach to developing the non-oil sector of the economy mainly included pursuing government-sponsored infrastructure projects linked to the use of oil wealth, as well as directly intervening to stimulate product diversification, as testified by its drive to build industrial parks.”

The EBRD further stresses that to reduce dependence on the hydrocarbon sector, further progress should be made in improving the country’s business climate, reducing corruption and strengthening competition policy. “Completion of the World Trade Organization accession could increase international investment and encourage development of the non-oil sector over time,” it reads.

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