What do international financial institutions predict for Azerbaijan's economy? Caliber.Az review

The forecasts for Azerbaijan provided by the International Monetary Fund (IMF), Asian Development Bank (ADB), and ING Group have recently been updated amidst a broader review of global economic prospects for 2024-2025. These international financial and rating organizations have undertaken comprehensive assessments, emphasizing both risks and key trends expected to shape the medium-term outlook.

The IMF's latest World Economic Outlook maintained its projection of global economic growth at 3.2% for 2024 while slightly revising upwards its expectations for 2025 to 3.3%, compared to earlier estimates in April. This adjustment reflects robust global trade dynamics, particularly strong exports from Asia, notably in the technology sector. The report also notes a convergence of economic growth among major advanced economies as output gaps gradually narrow.

Meanwhile, the ADB and ING Group have shown increased optimism regarding economic developments in Central Asia and the South Caucasus, including Azerbaijan. These assessments are reinforced by Azerbaijan's State Statistics Committee, which reported a notable domestic GDP growth rate exceeding 4% during the initial half of the year.

The economic landscape within advanced economies presents a mixed picture: the United States, after a strong performance in 2023, is experiencing signs of cooling, particularly in the labour market, prompting a slight downward adjustment in the IMF's GDP growth forecast for the country to 2.6% for the current year. In contrast, the European Union anticipates an acceleration in economic growth following a near-zero performance last year, with the IMF raising its estimate for the eurozone to 0.9% for 2024.

Regarding global risks to inflation, the IMF's experts have maintained their assessments, predicting a slowdown in global inflation from 6.7% last year to 5.9% this year, aligning with expectations of a "soft landing." However, in certain advanced economies, notably the United States, inflationary trends have decelerated, raising concerns about potential upward pressures on prices. The IMF has identified additional short-term risks affecting global economic development, including geopolitical tensions such as those in Ukraine and the Middle East, uncertainties surrounding the U.S. presidential election, a strengthening U.S. dollar, trade barriers, and trends towards deglobalization.

The ongoing appreciation of the U.S. dollar due to exchange rate differentials has the potential to disrupt capital flows and complicate efforts to implement accommodative monetary policies, potentially dampening economic dynamics. IMF chief economist Pierre-Olivier Gourinchas has also highlighted concerns about increasing trade tariffs and industrial protectionism, noting a global trend away from multilateral trade agreements towards unilateral measures that may not align with World Trade Organization rules. Despite these challenges, international financial organizations, including the IMF, generally assess the risks to the global economy in 2024 as balanced.

Against this backdrop, how does Azerbaijan's economic outlook appear in the near term, and to what extent is the country insulated from global uncertainties? Recent IMF projections indicate that Azerbaijan's GDP is expected to grow by 2.8% in 2024, marking a three-percentage-point increase from estimates made last October. This forecast surpasses the Azerbaijani government's own projection of 2.4% growth for the 2024 fiscal year, reflecting a positive outlook despite global economic pressures.

The IMF's positive outlook on Azerbaijan's economic prospects is not an isolated view; several leading international financial institutions (IFIs) share optimistic forecasts for the country. For instance, the Asian Development Bank (ADB) recently revised upward its growth projections for the South Caucasus and Central Asia, forecasting growth rates of 4.5% in 2024 and 5.1% in 2025. Highlighting Azerbaijan specifically, the ADB noted that the economy expanded by 4.3% in January-April 2024, driven by robust performances in the transport and construction sectors supported by government expenditures. This growth continued in the first half of the year, with domestic GDP reaching over $35.11 billion, primarily fueled by a 6.9% increase in the non-oil sector.

In early July, the ING Group, another reputable global entity, projected Azerbaijan's economic growth to reach 2.8% in 2024, with similar expectations maintained through 2026. This represents a 0.3 percentage point increase in their forecast for the current year compared to previous estimates.

According to UN forecasts, Azerbaijan's GDP growth is anticipated to be 2.6% in 2024 and rise to 2.8% in 2025. The World Bank specialists expect growth rates of 2.3% in 2024 and 2.4% in 2025-2026, while the European Bank for Reconstruction and Development (EBRD) has raised its forecast for Azerbaijan's GDP growth to 3.1% for the current year.

Overall, 2024 holds promising prospects for Azerbaijan's domestic economy, with global risks, including imported inflation, significantly lower compared to the previous two years. According to the Central Bank of Azerbaijan (CBA), inflation is expected to remain within target, with forecasts suggesting annual rates of 3.5% in 2024 and 4.2% in 2025. These estimates are in line with projections from the World Bank, which anticipates inflation at 3% in 2024, 3.5% in 2025, and 4% in 2026 for Azerbaijan.

Speculating on the future direction of the global energy market for the remainder of this year would be premature, especially given the recent wave of volatility in oil prices observed from May to July. However, according to estimates from international experts, average annual prices for Brent crude are expected to remain within the range of $80-90 per barrel. This forecast holds significant implications for Azerbaijan, where the oil and gas sector continues to play a pivotal role in driving economic development, particularly through export revenues.

Equally crucial in safeguarding the domestic economy against potential disruptions is the notable increase in gold and foreign exchange reserves. Azerbaijan's strategic foreign exchange reserves, as reported by the CBA, rose by $1.3 billion, marking a 1.8% growth to reach $69.7 billion. Furthermore, the surplus in the balance of payments plays a decisive role in maintaining stability in the country's foreign exchange market, with the current account surplus amounting to 10.1% of GDP in the first quarter of 2024. These factors collectively bolster Azerbaijan's resilience against unforeseen economic challenges.