Azerbaijan to continue reduce nonproductive public investment

Baku, Azerbaijan, May 5

By Leman Zeynalova – Trend:

Azerbaijan will continue to reduce nonproductive public investment in 2018, the International Monetary Fund (IMF) said in its Regional Economic Outlook: Caucasus and Central Asia (CCA).

“Economic activity in Azerbaijan is projected to improve only gradually, curtailed by lower oil production this year, in line with the recent OPEC+ agreement, the impact of ongoing financial vulnerabilities, and the foreseen impact of fiscal consolidation,” said the report.

“The non-oil fiscal deficit for oil exporters is projected to increase to 20.6 percent (of non-oil GDP) in 2017. This is explained primarily by a onetime support package to the banking system in Kazakhstan, and an extraordinary transfer from the State Oil Fund (SOFAZ) to the Central Bank of Azerbaijan for the repayment of debt obligations,” said the IMF. “In 2018, the deficit is projected to decline to 13.5 percent as Azerbaijan continues to reduce nonproductive public investment, and Kazakhstan’s fiscal stimulus expires.”

In Azerbaijan, capital injections and government purchases of bad loans continue, but additional bank closures might be necessary as new capitalization plans are developed, according to the IMF analysts.

With the slightly more benign external conditions anticipated to continue, growth in the CCA is projected to pick up to 3.1 percent in 2017 and further accelerate to 4.1 percent in 2018, said the report.

Inflation in oil exporters is expected to decline to 8.3 percent in 2017 and 7.6 percent in 2018, according to the IMF.

“These projections reflect easing inflation pressure in Kazakhstan associated with the recent appreciation of the tenge and lower government spending,” said the report. “Moderating inflation prospects in Azerbaijan due to the projected fiscal consolidation are also a factor, as well as tighter monetary policy as the country moves toward a fully flexible exchange rate regime—the Central Bank of Azerbaijan announced a move to a free floating exchange rate regime in early January 2017.”

At 11.5 percent last year, inflation among oil exporters reached double digits for the first time in eight years, said the IMF analysts, adding that this reflects the effects of past depreciations in Kazakhstan and Azerbaijan due to the large negative terms-of-trade shock.

In Azerbaijan, inflation was also affected by increases in the administrated prices for gas and electricity and the introduction of duties on some imported products, said the report.

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