Azerbaijan's macroeconomic stability Progress and challenges

The year 2024 proved to be a successful one for strengthening Azerbaijan's macroeconomic and financial stability. Relatively low inflation and the resilience of monetary factors enabled the Central Bank of Azerbaijan (CBA) to confidently ease its monetary policy throughout the year. The continuation of positive macroeconomic trends is evident, with the CBA maintaining its discount rate at 7.25% on January 22, 2025. The prospects for Azerbaijan’s sustainable development in the coming year were recently discussed at the regular meeting of the working group on macroeconomic stability, established by the Cabinet of Ministers.

The past year was marked by a decline in global inflation expectations in many countries, and against this backdrop, the priority shifted toward efforts to improve GDP dynamics, reduce the tax burden, and expand business incentives. Similar trends were observed in Azerbaijan last year, where the relatively low price growth in food and non-food segments became one of the key factors supporting the achievement of the targeted inflation level. Based on this factor, the country's financial regulator lowered the discount rate several times since the end of 2023, reducing it from 9% to 7.25% by June of last year. In the following months, the Central Bank did not adjust these figures, and they remained unchanged both at the end of the past year and in January 2025.

"The decision to keep the discount rate unchanged was made considering that the actual and projected inflation are within the target range (4±2%), as well as an analysis of the global economic situation, macroeconomic trends, and the transmission of monetary policy effects on the economy," stated the Central Bank of Azerbaijan (CBA) in its publication on January 22.

One of the key conditions for maintaining stability in the monetary market is the balance of essential macroeconomic factors, particularly the stability of the monetary base. Unlike many of its trading partners, Azerbaijan has managed to keep the manat-to-dollar exchange rate unchanged for the eighth consecutive year. This achievement significantly strengthens the resilience of the domestic financial sector against both external and internal pressures. However, beyond inflationary and monetary processes, other factors also play a crucial role in ensuring macroeconomic stability in the country. These include the balance of payments, foreign currency reserves, and, importantly, the dynamics of foreign trade indicators.

The assessment of these factors, as well as the analysis of the various parameters influencing the country's economic indicators, has been entrusted to a special working group on macroeconomic stability, established by the Cabinet of Ministers. During the recent meeting of the working group, chaired by the Central Bank, the results of monitoring and evaluating 15 initiatives implemented in 2024 were presented. These initiatives, approved across three key areas under the goal of "Resilience to Internal and External Shocks," were discussed in detail. The participants also explored measures to improve the effectiveness of these actions, and following in-depth discussions with working group members and CBA officials, the next steps were outlined.

The medium-term goal of the working group is to analyze and plan actions to ensure the full, timely, and effective implementation of the initiatives outlined in the "Azerbaijan’s Socio-Economic Development Strategy for 2022-2026," while ensuring the proper coordination of the activities of government bodies involved in these processes. During the meeting, Aliyar Mammadyarov, First Deputy Chairman of the Central Bank and Chairman of the Working Group, provided an update on the initiatives carried out under the five-year Strategy. Additionally, the Center for Economic Reforms and Communications (CERC) shared information on the progress made over the past year and highlighted the challenges that remain.

According to the long-term document "Azerbaijan 2030: National Priorities for Socio-Economic Development," developed in early 2021, and the medium-term strategy for 2022-2026 based on it, economic growth in Azerbaijan is expected to be healthy, balanced, and resilient to external risks. To achieve these objectives, large-scale diversification of the national economy has been underway in recent years. This includes the development of promising sectors such as "green" energy, the digitalization of both public and private sectors, the introduction of Industry 4.0 components, and the implementation of a new, transparent privatization strategy, which involves the clustering of state-owned enterprises to enhance their economic efficiency. 

Additionally, tax and customs reforms aimed at combating the "shadow" economy and encouraging transparent entrepreneurial activity have been introduced to strengthen the revenue side of the state budget. Over the past three years, Azerbaijan has achieved significant progress in these areas, as highlighted in reports from numerous reputable international organizations, including the latest report from the World Economic Forum (WEF).

Another key objective is to maximize the export potential of the non-oil sector, for which the strategy calls for the identification of new "driving forces." In this context, thanks to efforts in recent years to develop the non-oil sector, including the formation of various industrial and agricultural clusters and the establishment of special economic zones (SEZs), the growth rates of non-oil industries in Azerbaijan have significantly outpaced the overall GDP growth. Specifically, in the past year, the non-oil sector saw a growth rate of 6%, with the non-oil industry segment posting a positive growth rate of 7%.

However, for several years now, Azerbaijan has experienced a decline in export figures, primarily in the oil and gas sector. This has been driven by high volatility, a decrease in global prices for hydrocarbon resources, and a decline in oil production from the country’s key offshore fields. Specifically, the drop in raw material exports to international markets, combined with reduced revenue due to unfavourable external conditions, has contributed to a decline in Azerbaijan's foreign trade turnover. According to data from the State Customs Committee of Azerbaijan, in 2024, turnover decreased by 6.98%, or $3.571 billion, compared to the previous year. As a result, although the trade balance remained positive, it shrank by more than $11.117 billion, or 66.92%, to $5.496 billion. This negative trend is particularly concerning, as trade balance figures are directly linked to the country’s payment balance indicators, thereby creating risks for macroeconomic stability.

Unfortunately, non-oil export figures have also not shown significant dynamics over the past two years. Specifically, according to recently published data from the Center for Economic Reforms and Communications (CERC), the total volume of Azerbaijan's non-oil exports in 2024 amounted to $3.4 billion, with a year-on-year growth of a mere 0.3%. Relatively good export dynamics were observed only in the agricultural and food sectors, with external supplies in these areas growing by 11.3% to reach $1.03 billion. In the industrial sector, meaningful export dynamics were recorded only in the precious metals segment, with sales to foreign markets valued at $215.3 million, reflecting a growth of 29.2%. Furthermore, in 2024, the export of chemical industry products increased by 18.3%, totalling $293.7 million. For other sectors, similar high dynamics were not observed.

This year, it is expected that, through the efforts of the working group on macroeconomic stability under the Cabinet of Ministers, along with other relevant government agencies, effective solutions will be identified to improve foreign trade performance, boost exports, and achieve a positive trade balance.