Our Analytics 17 june — 11:56

Central Bank announces Azerbaijan's balance of payments deficit (Our analysis)

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BY ELNUR MAMMADOV, ECONOMY SECTION

Azerbaijani Central Bank's report that the total deficit of the balance of payments of the country in the first quarter of this year amounted to 1 billion 343.5 million US dollars, alarmed many experts. The fact is that the country's balance of payments has long been established in the positive zone. For example, over the same period last year, the surplus of the balance of payments amounted to 2 billion 19.3 million dollars. Roughly speaking, almost $1.5 billion less was received in the country over the quarter than was exported from it. And if the current account surplus is still preserved, although it has decreased significantly, many articles have gone from the plus zone to the negative zone. Many explain the current situation with declining exports and rising imports.

The balance of payments is one of the main financial documents of the country, which can be used to judge the state of its economy as a whole. It shows cash flow in the form of payments from our country to others and vice versa. That is, this document characterises the ratio of the amounts of payments made by Azerbaijan abroad during the first quarter and received in the country during the same period. Unlike foreign trade turnover, the balance of payments takes into account not only the volume and amount of exports and imports of goods, but also many other economic factors. Therefore, it is usually more noticeable.

The experts' greatest concern is precisely the current account of the balance of payments, which totaled $643.6 million or 6% of Azerbaijan's GDP ($10 billion 777 million) in the first quarter of this year. It seems a solid reserve, measured in the hundreds of millions of dollars, does not give rise to excitement. But it's enough to recall that a year ago the current account surplus of the country's balance of payments amounted to $1 billion 602.7 million. That is, compared with the same period last year, the surplus decreased significantly - 2.5 times, and this cannot be called a normal phenomenon.

But, we shall immediately note that all this was expected. Moreover, in confidential conversations, senior officials of the country admitted that they were ready for the worst indicators. But indeed, against the backdrop of a significant recession in the global economy, suffocating in the arms of unprecedented sanctions, trade and currency wars, which were exacerbated by the pandemic that had hit the world, it was impossible to expect better results. Even in the oil and gas sector, the current account fell by $0.6 billion, or 19.2%, to $2.4 billion. The average oil price for the quarter was $57.6 per barrel compared to $61.9 a year earlier. A decline of 28.4% ($0.4 billion) is also observed in the non-oil sector, which amounted to only $1.8 billion. However, for now the surplus in the oil and gas sector has allowed to cover the deficit in the non-oil sector.

According to the results of the first quarter, the volume of foreign trade turnover of Azerbaijan amounted to $7.1 billion, the country's surplus in foreign trade amounted to $1.9 billion (a decrease of 24.7%). At the same time, 13% of the foreign trade turnover was trade with the CIS countries, 87% - with non-CIS countries. But it was the CIS countries that acted as traditional buyers of goods from the non-oil sector, and in the end of last year it was forecast to bring foreign trade to almost $1 billion per quarter with Russia. But Baku and Moscow, as you know, do not trade energy resources with each other.

In fact, the lion's share of exports fell to the oil and gas sector. In the structure of exports, the total volume of which amounted to $4.5 billion (a decline of 6%), oil and gas exports amounted to $4.1 billion (a decline of 6.9%). At the same time, direct export of oil and oil products amounted to $3.3 billion, of which oil export amounted to $3.2 billion. For comparison, we note that in the structure of imports, which amounted to $2.6 billion (an increase of 14.6%), consumer goods accounted for $1.1 billion, of which $352 million was for food products. Imports of equipment and special goods for the quarter amounted to 184.4 million dollars or 7.1% of all imports, which indicates an almost complete stagnation in the real economy.

And for the umpteenth time one has to repeat: the greatest growth is observed in the import of cars. Even in the context of the global crisis, this type of import increased by 52%. If, say, the growth of imports of metal, paper and wood products can somehow be understood, then the automobile disease of Azerbaijanis is simply inexplicable. The whole world, in anticipation of restrictive measures, reduced the production and purchase of cars, and Azerbaijan doubled. Well, aren't the traffic police fining precisely these cars for quarantine violations today: if you bought it, then you need to drive it.

The most vulnerable item in the balance of payments of Azerbaijan is traditionally the balance of services, it is always executed with a deficit. If the total volume of Azerbaijan's services with foreign countries amounted to $2.2 billion, then the share of services provided by Azerbaijani residents to foreign subcontractors (non-residents) was only $0.7 billion. As a result, the deficit in the balance of services increased 1.7 times and amounted to $0.8 billion. Moreover, the bulk of this deficit fell to the oil and gas sector - $634.3 million.

In order not to bore the reader, we restrict ourselves to transport and tourist services, which in recent years have received special development in the country. 30% of the mutual services turnover is accounted for by transport. The total cost of transport services is 681 million dollars. At the same time, Azerbaijani residents provided transportation services to non-residents for $295 million, and $386 million is the volume of services provided to Azerbaijani residents. And mutual tourism services decreased by 18% and amounted to 549 million dollars. Over the quarter, exports of tourism services ($267.4 million) fell by 2.3, and a deficit of $14.3 million formed. The number of Azerbaijani citizens travelling abroad for the quarter decreased by 23%, and those entering the country by 15%.

Yes, 2020 was a bad year for the global economy. The external climate also affected the Azerbaijani economy. In particular, the indicators of the main balance of payments items decreased. Many expert alarmists again talked about the devaluation of the manat, saying that it will not withstand such pressure for a long time, the indicators of the second quarter promise to become even lower. But, as the Central Bank told Azeri Daily earlier, Azerbaijan is ready for the worst situation (pessimistic option), when the average annual oil price is $30 per barrel, and the balance of payments deficit will increase by another billion or two.

Foreign investors too are confident about the future of the Azerbaijani economy. Foreign direct investment in the country's economy in the first quarter amounted to $1.2 billion compared to $808.7 million a year ago. Investors are prudent people, if they increased their investment in the country by 48.4%, then they calculated all the options. True, 80% of these investments are in the oil and gas sector. But compared with the same period last year, foreign direct investment in this sector decreased by 4%, and in the non-oil sector - increased by 87.2%.

In a word, the economy of Azerbaijan, of course, is not going through the best of days. But even in its current form, it looks much better than the economies of other countries, including the most developed. But what awaits it even in the short term is difficult to say. True, the first wave of the coronavirus pandemic has already subsided, which promises the global economy recovery. But the claims of the great powers to each other are growing with renewed vigour. At the same time, the economy, including Azerbaijani, should develop, it cannot stagnate for a long time. And this is likely to happen soon.

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