IMF gives Azerbaijan bright economic prospects Forecasts, indicators, realities

In early February, several international financial and rating organisations published assessments of post-Soviet countries' economic development, including Azerbaijan. For example, the International Monetary Fund (IMF) summarised the results of consultations with the government of Azerbaijan following Article IV of the agreement "On the Establishment of the IMF" and presented forecasts of economic development in 2024 and subsequent years. Experts believe that the global economic outlook for this year will not improve due to weak demand in the EU and China, conflicts in Ukraine and the Middle East, and disruptions in supply chains. Nevertheless, Azerbaijan's gross domestic product (GDP) is expected to show positive momentum in 2024, according to the IMF and other international experts.

In a recent report, the Organisation for Economic Cooperation and Development (OECD) raised its forecast for world economic growth in 2024 to 2.9 per cent from 2.7 per cent in November. However, this still falls short of the very challenging 2023, when the OECD estimated global growth at 3.1 per cent. According to the organisation's estimates, a sustained improvement in the performance of global GDP is not expected until 2025, when economic growth will reach three per cent or more.

"Recent indicators point to a slight slowdown in global GDP growth in early 2024, while tightening financial conditions (rising central bank interest rates) continue to affect the credit market and residential real estate, and global trade activity remains subdued," the organisation said in its report. It also noted that Houthi attacks on ships in the Red Sea have led to a sharp increase in the cost of transporting goods and longer delivery times, contributing to price pressures, including in the energy market.

The OECD has raised its 2024 GDP growth forecast for the US from 1.5 per cent to 2.1 per cent, noting that a strong labour market and consumer spending will support the US economy. However, other centres of global development - the European Union and China - are not showing strong growth drivers this year. EU gross domestic product growth is expected at only 0.6 per cent this year and 1.3 per cent next year, with energy shortages and tight credit conditions limiting economic activity in the euro area in the short term.

Things don't look good for the Middle Kingdom either: The OECD forecasts a slowdown in the Chinese economy from 5.2 per cent in 2023 to 4.7 per cent in 2024 and 4.2 per cent in 2025, despite the stimulus measures taken by the Chinese authorities. The Chinese economy is still facing weak consumer demand, a decline in exports, a high debt burden and the problems of a deflated property bubble.

And what is the situation of Azerbaijan, whose GDP growth was not the best last year, against the background of the current global trends? Let's recall that in 2023 our country faced a decrease in the trade surplus, a slowdown in industrial dynamics, etc., due to the high volatility of world prices of hydrocarbon raw materials, as well as the decrease in oil production and exports (only partially compensated by the growth of gas production). As a result, the country's final economic growth in 2023 was 1.1 per cent, which is a multiple of the record year 2022, when domestic GDP growth was 4.6 per cent.

Judging by the data from January and early February, this year there is still a high level of volatility in hydrocarbon prices, but their average level remains within acceptable limits. Moreover, the good dynamics of non-oil production and exports achieved last year are likely to continue in 2024. The growth of the real sector of our country's economy will continue with the support of large-scale reconstruction works in the liberated territories, which will be an important stimulus for the development of the non-oil sector.

Approximately $5.7 billion has been allocated from the budget for the revival of the Karabakh and Eastern Zangezur economic regions in 2020-2023, and up to $6.1 billion is planned to be allocated here in 2024-2026 during the second phase of reconstruction. Based on these forecasts, the Central Bank of Azerbaijan (CBA) recently estimated the real GDP growth rate in 2024 at 3-3.5 per cent, taking into account the reduction of the negative impact of the imported inflation factor. The Azerbaijani government's estimates are slightly more modest: GDP is expected to grow by 2.4 per cent in 2024 and 2.9 per cent in 2025.

It is noteworthy that the positive dynamics of Azerbaijan's economic development in the current year is the forecast of the IMF, whose final report was published the day before. It should be recalled that the period of active cooperation between Azerbaijan and the IMF was 1995-2005 when the Fund lent our country $577.3 million to support the economic reform programme. Since 2006, the government of Azerbaijan has not taken out any new loans and has fully repaid its debts to the Fund. Since then, cooperation with the IMF has taken the form of consultations under Article IV of the Fund's charter and technical missions to study the main directions of the country's macroeconomic policy.

The last such mission, led by IMF country representative Anna Bordon, took place in November last year. "Against the backdrop of an easing post-pandemic surge and a continued structural decline in oil production, Azerbaijan's economy is projected to grow by 2.3 per cent over the medium term (2024-2028). Azerbaijan's oil GDP is expected to decline by an average of 0.5 per cent over the five years, but non-oil GDP is expected to grow by 3.6 per cent in 2024 and by an average of 3.5 per cent in 2025-2028. Overall, growth momentum is slowing after a strong recovery from the pandemic (2021-2022), while inflation has returned to the target range and price growth will slow to 4.7 per cent in 2024," the IMF report said.

According to the Fund's experts, the key challenge for Azerbaijan in the medium and long term is to reduce its dependence on the hydrocarbon sector and promote economic diversification based on the private sector. Achieving these goals will require expanding privatisation and improving the management of state-owned enterprises, developing green energy, increasing financial transparency, and improving the business environment, which will increase private investment and productivity.

According to IMF forecasts, Azerbaijan's nominal GDP will amount to $79 billion in 2024 (including non-oil GDP - $50 billion) and gradually increase to $93 billion in 2028 (including non-oil GDP - $68 billion). IFI experts confirm the stability of the country's macroeconomic situation and the risks for the future remain generally balanced. For example, financial stability indicators continue to show a strong banking sector, and the country's external position, supported by acceptable oil prices, will remain strong due to the trade surplus and the growth of foreign exchange reserves.

It is worth noting that other international financial organisations (IFIs) and rating agencies are expressing a similar opinion on the prospects for the economic development of Azerbaijan in the current year and the years to come. In particular, the leading London-based investment company Renaissance Capital recently estimated that Azerbaijan's GDP will grow by 2.4 per cent in 2024. At the same time, by the end of 2023, our country will have one of the best positions in the CIS in terms of the rate of reduction of inflation and public debt, the budget deficit will also remain at a very low level as a percentage of GDP, and the country will safely increase its gold and foreign currency reserves, Renaissance Capital experts believe.

In turn, experts of the international company Fitch Solutions recently estimated the GDP growth of Azerbaijan in 2024 at 2.6 per cent and noted that in the medium term, our country will benefit from the increase in demand for natural gas from the European Union. The European Bank for Reconstruction and Development (EBRD) is of the same opinion. According to its forecasts, the country's GDP will grow by 2.5 per cent in 2024, which will allow Azerbaijan to maintain its current level of investment and public spending.