Our Analytics 5 january — 13:32

Azerbaijani PM and $5 bln deficit (Our analysis)



The Central Bank's holy of hollies is the balance of payments, which reflects the cash flows in the form of payments from country to country. In other words, this indicator shows the ratio of amounts of payments made by the country abroad and those arrived in the country in a certain period. All this dynamic of financial movements in Azerbaijan monitors the Central Bank (CBA), for which the balance of payments is the most important document. On the basis of this document, the government and the CBA itself take steps to remedy the situation in a particular sector of the economy to correct the total balance.

But now the balance of payments will be managed by the Financial Stability Council of Azerbaijan. On the eve of the New Year, the Central Bank made a sensational report that the Council plans for 2017 a set of measures aimed at financing and reduction of the balance of payments deficit. The CBA itself explains the reasons for such concerns about the balance of payments by the Council led by Prime Minister Artur Rasizadeh. Everything is explained simply: the financing of the strategic energy projects and large financial obligations related to payments on the foreign debt of the public sector, will affect the balance of movement of capital and finance in the balance of payments. Under the influence of these factors, management of a huge deficit in the balance of payments expected in the coming year will have an impact on macroeconomic stability.

The strategic energy projects, such as TANAP, TAP and others, are well-known to us. Payments on foreign debt, too, are already a tidy sum, which will continue to grow. But they have been known to the Central Bank and the government in the past. Why is there such a fuss now? There is nothing surprising here. Once again, the balance of payments is a reliable indicator of the government, which allows to make the right decisions. But in this case we are talking about a huge deficit in the balance of payments, which may also affect the macroeconomic stability. And here, of course, it will require a lot of effort to achieve financial stability, which cannot be done alone by the Central Bank led by Elman Rustamov.

So, we must clearly understand that this year, current account deficit will not be lower than the last year, which resulted, according to the CBA forecasts, in 5 billion manats deficit. Just in contrast to 2016, in 2017 the deficit will be caused not by the weakening of the economy, but by payments on large-scale projects. What measures will the Council, which, incidentally, includes Elman Rustamov himself, undertake in such a difficult situation?

As in any complex macroeconomic situation, it will have to implement a number of strategic and tactical measures. Tactical measures to be implemented in the next year, include, in particular, the neutralisation of the factors creating tension in the foreign exchange market as a result of regulation of the flow of capital and finance. All these, along with a significant neutralisation of the pressure on the exchange rate of manat, is aimed at minimising macroeconomic risks: chief among them are inflation, financial stability, etc. And the new rules related to the foreign exchange regime that are coming into force will provide additional support for a balanced balance of payments: limits on remittances of natural persons, the prescribed period of 180 days for delivery to the country of goods and services, for which the prepayment is made.

Strategic actions are aimed at fundamental balancing of the balance of payments through a re-balancing of the national economy. That is, the government intends to continue the policy of fiscal consolidation, strict monetary policy, effective channel management of the money supply, structural reforms aimed at promoting export-oriented production. At the same time there are provided appropriate measures to strengthen social protection of the population, which provide for an increase in social assistance and the expansion of its coverage, employment support.

The reader must have noticed that the main task for the government in the coming year is to neutralise the factors that create tensions in the currency market as a result of regulation of the capital account and finance. This account in the structure of the balance of payments of the country is the section, in which the Central Bank fixes the export and import of goods and services, net investment income and net transfer payments. Allocation in the current difficult economic situation of the additional billions of dollars of payments for the implementation of strategic projects will affect first of all this section of the balance of payments. Can the government achieve growth of exports of goods and services, investment income and reduction of transfer payments? That is something worth thinking about.

Rising oil prices make it possible to hope that the proceeds of its exports will cover all losses from the import of goods and services. Growth of investment income also, one thinks, may be possible to achieve thanks to large-scale reforms, which undoubtedly will cause a new influx of both foreign and domestic investment. In general, today there are many ways to determine the effectiveness and profitability of an investment project, which the government should take advantage of. But before moving on to net transfer payments, let us note that these are personal and transfer payments to residents of other countries without taking into account the personal and government transfer payments received from residents of other countries. Transfers from, say, Russia, fall, while the number of migrants, who are sending part of the money earned there to their families, is growing. Therefore it is necessary to restore order in the migration sphere.

Now pay attention to this nuance. In the account of movement of capital and finances are recorded transactions, which should be completed within this year, ie the period for which the balance is made. According to the theory, the effect of such operations does not affect the balance of payments in subsequent periods. But in Azerbaijan this situation persists, at least, since last year. One remembers, the CBA head Elman Rustamov has told earlier about the problems in the balance of capital movements. The cause of these problems he called the old external debt of the International Bank (IBA), which should be paid off. But now, along with the strategic energy projects, the government, as can be seen, once again is concerned about the payment of IBA's foreign debts.

Yes, the country's largest bank is too costly for our government. It should have been a good help in a crisis situation. But it was the chaos in the banking system of the country that laid the foundation of the financial crisis, from which the country still cannot get out. A new personnel reshuffle in the IBA, which began here after the dismissal of the newly appointed head of the International Bank, suggests that there are still problems in the country's largest bank.

On the one hand, the Financial Markets Supervision Chamber announced the privatisation of the International Bank already this year, but, on the other hand, the emergence of a new supervisory authority on the market to improve its efficiency gives no chance for this to happen. However, the government has already managed to write off a portion of viral IBA assets worth 10 billion manats, but about the same amount has yet to be passed on to a non-bank organisation 'Agrarkredit' where a new scandal is brewing today. And it's no wonder: the unhealthy assets of the organisation are higher than the country's budget, and what are its healthy assets, is not known to the public.

That's why, probably, the Financial Stability Council took up the financing and reduction of deficit of the balance of payments.

No accident that President Ilham Aliyev had instructed the Council to approve and enforce the monetary program for 2017, as well as the plan of measures to ensure macroeconomic and financial stability in 2017 and in the medium term. The Council has also been requested to speed up the implementation of measures to improve the health of OJSC 'International Bank of Azerbaijan.' What the last year couldn't do the Central Bank and then the Financial Markets Supervision Chamber, in the new year will have to do the Financial Stability Council.

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