Azerbaijan: Important Economic Events in 20162016 December 28 ( Wednesday ) 23:11:38
2016 - Most Problematic in the Past 15 Years
1. On 10 March President Ilham Aliyev announced that Azerbaijan moves to a new non-oil model of economic development.
2. On 17 March President Ilham Aliyev ordered to establish a special zone for free trade in the Alat settlement of the Garadagh district of Baku, including the territory of the new Baku International Sea Trade Port.
3. On 13 April an agreement was signed on the establishment of a transport consortium with the participation of Kazakhstan, Azerbaijan and Georgia, and a separate agreement on the Rail consortium between Kazakhstan and Azerbaijan
4. On September 9 the discount rate of the Central Bank of Azerbaijan increased from 9.5% to 15%.
5. On October 4 one of the five backbone banks in the country, Bank Standard was closed.
6. On November 22, SOCAR and the French company Total agreed on the principles of gas field development in the Caspian Sea Absheron field..
7. On 7 November, the Asian Development Bank (ADB) allocated a loan to Azerbaijan CJSC Southern Gas Corridor in the amount of $ 1 billion. ADB also provided a credit of 500 million US dollars to Azerbaijan to preserve social spending, job creation and economic diversification.
8. On December 6 President Ilham Aliyev signed a decree approving a strategic road map for the development of the economy until 2025.
9. On December 22 Asian Infrastructure Investment Bank Board of Directors approved the granting of a loan to Azerbaijan in the amount of $ 600 million for financing the construction of the Trans-Anatolian Gas Pipeline (TANAP).
10. On Dec. 23, SOCAR and BP signed an agreement on development of Azeri-Chirag-Guneshli until 2050, opening the way for a major new investment in ACG.
The finishing year 2016 was the most problematic year for the economy for the past decade and a half. For the first time there were all the signs of stagflation: a marked decline in the economy (3.9% for 11 months) accompanied by rising inflation (12.1%). To a large degree, these resulted from very passive economic policy in 2015, when the government even after two devaluations still counted on growth in world oil prices. However, in January 2016 the price dropped to $ 30, and it became clear that this policy will have to change. In March, the President announced that the country is moving towards a new model of the non-oil economy.
In 2016, many of the economic indicators deteriorated, although it would seem that all year a serious institutional groundwork was created for its development - from the reforms in customs and tax departments to supporting serious investors through favorable operating conditions in Azerbaijan and the national export support program. But significant changes have not occurred, because the macroeconomic environment has remained very unstable. The manat continued to fall in price, inflation could not be overcome, lending stopped, and the sources of economic growth could not be outlined at least roughly. Investment opportunities in the economy sharply narrowed (decline in investment in 11 months was by 28%).
In the face of the new reality the government was looking for growth in the industry and has tried to speed up the creation of favorable economic zones - industrial parks and industrial and agricultural districts. All year the number of residents in Sumgait Chemical Industrial Park has increased, and the President has sent AZN 4 million from his own Fund to accelerate the work on the creation of an industrial and technological park in Pirallahi. However, most built or planned businesses will start to give products only in 2018. And in order to stimulate the stagnating construction sector, the State Agency for Housing was created in April.
At the same time the government tried to expand the sources of foreign currency earnings - by revenues from transit, tourism and the agricultural sector. The year was marked by a keen interest in transit projects across the country. Commissioning of the Baku-Tbilisi-Kars railway was postponed to the first half of 2017, but the government is working in parallel on the project of North-South and it has already begun in part to make money. The President has created a special commission on freight rates and by the end of the year a preliminary package of documents on the corridors East-West, North-South and South-West has been ready. A special free trade zone is being created around the Baku International Sea Trade Port.
Oil industry remains almost the only stable-working sector of the economy, partly due to the diversified nature of its activities. SOCAR has been able to maintain the level of production at the 2015 level and to develop a number of projects outside the country, including the strategically important Southern Gas Corridor. Of the large number of events in the energy sector we can name the framework agreement between SOCAR and the French company Total on the principles of operating the Absheron gas field in the Caspian Sea. With Total SOCAR became a member of the consortium Ivory Coast LNG, in which it received a share of 26%. Among the rare failures of SOCAR we should note the final termination of the agreement to acquire a 66% stake in the Greek company DESFA. Partially resolved by the end of the year were a number of issues of financial support of the TANAP and TAP projects. And in December, SOCAR and BP signed an agreement on development of Azeri-Chirag-Guneshli up to 2050, paving the way for new large investments in ACG.
The most critical point of the economy was the financial system, which has largely lost its primary function of financial intermediary for the economy and creditor of the real sector. Money supply of the economy continued to decline almost all of 2016.
Postponed reforms in the banking sector, and, most of all, the two devaluations of 2015 brought the banking sector to full-fledged crisis. During the year, 10 banks were closed, among them one of the five backbone banks, Bank Standard. As of December 23 depositors of the 10 closed banks received compensation from the Deposit Insurance Fund in the amount of 721 million 57 thousand manat. Next in line are about ten banks.
At the beginning of 2016, a floating rate of the manat was declared. The constantly declining rate of the manat put a need before the government to take a number of urgent measures to control the currency flow. In the past year, all street currency exchange points were closed and restrictions were introduced on the sale of foreign currency by banks. The dollar jumped from AZN 1.5610 on January 5, 2016 to AZN 1.7622 as of December 23. By March, the Central Bank AZN spent 990 million on stabilizing the exchange rate, and then gave up large-scale interventions. From sharp sliding down AZN was kept by the State Oil Fund actively involved in currency auctions; for the first nine months SOFAZ threw $ 4 billion into the market. The main reasons for the dollar shortage in the market remained the same - the outflow of capital from the country, the import costs, and the increase in the country's external debt. All this took place against the backdrop of a growing deficit in the balance of payments of Azerbaijan, primarily on the capital account.
Aware of the growing complexity in the regulation of the financial market, the government in January created a new institute for Azerbaijan - Financial Markets Supervision House (FMSH), the country's first legal entity of public law. The same status after a while was received by the Central Bank. Trend of the year was the fact that the new legal status was also obtained by many other public institutions.
In September, the discount rate of the Central Bank increased from 9.5% to 15%. CBA continued its policy of reducing money supply in the economy, although it has already been compressed to the limit. The banks configured on a rising dollar converted AZN into dollars at once. Much has happened in the financial sector for the first time. In order to maintain liquidity of the International Bank of Azerbaijan (IBA) the State Oil Fund twice placed its deposits in this bank at 4% per annum. This was an extraordinary event, as it has always been considered extremely risky to place the SOFAZ funds in the domestic market. FMSH registered the first issue of dollar bonds by SOCAR. As part of the monitoring of exchange rate and monetary market new tools began to appear: deposit auctions of CBA, with dual currency (foreign currency and AZN). By December, banks no longer sold currency. At the same time significantly tightened in the past year was the procedure of foreign currency transfer abroad. It has not been possible to calm the foreign exchange market yet, but the head of CBA said on behalf of the Financial Stability Board established in 2016, that the economy is finally transferred to the floating exchange rate of AZN.
This year has been outlined by the struggle against monopolies. The monopoly at the State Customs Committee has been really broken. The President initiated the adoption of amendments to the Criminal Code providing for criminal penalties for collusion of monopolists against the competitors. However, the Code of Competition, which regulates these relations, still has not been adopted.
The social situation of the population has deteriorated sharply. The average salary in the country has amounted to 303 dollars - Azerbaijan is behind Georgia and Armenia on this indicator. Incomes of the population grew, but they were "eaten" by the rising inflation. The social expenditure budget for 2015 remained at the same level this year. At the same time tariffs on utility services began to increase, which had not been observed long before. In fact, electricity tariffs increased twice during the year. The differentiated tariffs for electricity and gas introduced in November have led to fierce debate among economists. Later, in December, at the request of the President the limit on electricity use was raised to 300 kilowatt-hours per month and the limit on the use of gas was raised up to 1,700 cubic meters per year. The rise in unemployment in two quarters of 2016 is estimated by CBA as 190,000 jobs.
On December 16 the Parliament with a noticeable delay adopted the state budget for 2017 with 112 votes "for" and three votes "against". The budget revenues are projected at 15 billion 955 million manat (26% of GDP). The budget expenditures are projected at 16 billion 600 million manat (27% of GDP). The budget revenues decreased compared to the year 2016 by 867 million manat (-5.2%), and the expenses decreased by 1 billion 895 million manat (- 10.2%). Budgets of development remain in the past. Last time budget expenditures grew in 2014 - by 1.7%. In 2015-17, they began to decline annually.
A sign that the government recognizes the crisis was the decision of the President to create a roadmap for overcoming the crisis. This is the first document, which more or less represents the further development of the country until 2025. In general, the implementation of the strategic roadmap requires 27 billion manat. Strategic roadmaps have been developed for all the 11 sectors of the economy included in this document. It is noteworthy that Aliyev laid the overall management and control of the implementation of the strategic roadmaps not on the Cabinet, but on the administration of the President of Azerbaijan.
In the coming year it is projected to start economic growth (by 1%, to 61.4 billion manat). Nevertheless, Azerbaijan is entering the coming year with many challenges, which did not find their solution in 2016.
Turan Analytical Service