Azerbaijan nears current account surplus: Insights from economic forecasts [COMMENTARY]

By Azernews

By Ulviyya Shahin

Recent updates suggest that if current trends persist, Azerbaijan is on track to achieve a surplus in its current account by the end of 2024.

The Central Bank (CBA) reports that the trade balance, a significant component of the balance of payments, showed a surplus of $2.3 billion in the first quarter of the year.

The International Monetary Fund (IMF) anticipates that Azerbaijan's current account surplus will reach 8.5% of GDP in 2024. Meanwhile, the World Bank predicts a medium-term surplus of 7.5% of GDP.

In 2023, Azerbaijan's current account surplus was $8,329.4 million, equivalent to 11.5% of GDP. This marked a decrease of 64.5% compared to 2022, mainly due to the depreciation of oil and gas.

The average price of oil per barrel was $85.9 in 2023, down from $103.7 in 2022, as per the balance of payments.

In the oil and gas sector, the surplus amounted to $17,091.5 million, indicating a 40.4% decrease, while in the non-oil and gas sector, it reached $8,762.1 million, reflecting a 68.9% increase.

Besides, the presented report and indicators raise certain questions about how the surplus in the trade balance affects the Central Bank's decision-making process, particularly concerning interest rate policies as outlined in the press release.What are the key trends and economic indicators that have led to the forecast of a surplus in the current account balance for the entirety of 2024? and so on.

Speaking to Azernews, economist Natig Jafarly also proved the answer to the question, saying that despite certain decreases in recent years, both the overall balance of payments and the trade balance remain at sufficiently high levels.

"Primarily, a positive surplus persists in the trade balance. Put simply, we are selling more than we are buying. Therefore, this creates conditions, opportunities, and incentives for the Central Bank to act more comfortably, aiming to stimulate economic activity by lowering interest rates. As the Central Bank has two main functions, the exchange rate must also serve them. One function is to regulate financial stability and inflation, meaning creating mechanisms to influence inflation, while the other is to implement monetary policies that can affect economic activity. The more positive the trade balance is, meaning the more we sell compared to what we buy, the more opportunities the Central Bank has to act comfortably and lower interest rates more easily. One might wonder if this directly affects inflation. I don't think so, because there are other factors affecting inflation in our case. However, it can have a positive impact on loan interest rates after a while. We have seen examples of this."

According to the economist, the forecasts of the CBA sometimes differ from those of the government, and this is actually how it should be.

"Because the CB is a separate entity from the government and, as a government institution, it also has its own forecasting models. The government also establishes forecasting models, which is good. It wasn't like this before; the new leadership of the Central Bank has adopted this methodology, and it's correct. Because at least now, there are opportunities to compare various forecasts and expenditures by the public and experts. Previously, the Central Bank and government forecasts would align perfectly, without any opportunities for comparison. Now, however, the new leadership of the Central Bank looks at issues in the right direction, provides its own forecasts based on its methodology regarding macroeconomic indicators, and conducts its own calculations. This is positive because we can at least see the differences between the government and the Central Bank. The forecasts of the Central Bank are even more positive than those of the government. Even regarding the increase in economic activity and inflation indicators, the Central Bank is more optimistic. Because unlike the government, it doesn't bear any responsibility for economic conditions as a regulator. That responsibility lies with the government. The Central Bank tries to take a more positive approach as a regulator. The government, however, takes a more pessimistic view of these matters. Put simply, the government announces lower results in advance so that if there are better results, it's considered a greater success for them. This figure indicates that they are considered more successful, and from the perspective of macroeconomic indicators, we see the Central Bank taking a more optimistic approach while the government takes a somewhat pessimistic approach."

N. Jafarly thinks that the higher the profit, the greater the positive impact.

"However, our currency market has specific regulations. Currency is regulated according to our monetary regulations, and the exchange rate is determined through regulatory decisions jointly made by the Central Bank and the government, based on a model indexed to the dollar. Just as the dollar changes against other currencies, the manat also changes against other currencies in the same way. We primarily consider the dollar index. In other words, the manat is indexed to the dollar. Because it's regulated by regulation, even if there is no profit or a deficit, the exchange rate will not change without regulatory decisions, and at least for this year, it's difficult to forecast changes in the exchange rate. I don't think the exchange rate will change. But that doesn't mean it will never change. We witnessed a 10-year fixed exchange rate regime from 2005 to 2015. The country then experienced a three-tiered devaluation. Now, we have been in a fixed exchange rate regime for almost nine years. But that is not to say that it will always be like this. So, even if it doesn't happen this year, it could be expected to change in the coming years. Therefore, it's important to make decisions regarding the exchange rate."

Jafarly noted that the sole factor that could have an impact is oil and gas prices: "In our case, the price of oil is still at a high level—around $90, and its annual average has fluctuated between $85 and $90 since the beginning of the year. This is a good indicator. If, due to certain geopolitical tensions or economic reasons, the price of oil decreases, it will naturally have a significant negative impact on Azerbaijan's indicators, including the trade balance, current account balance, and commodity balance. Unfortunately, our economy is heavily dependent on oil," Natig Jafarly concluded.