Azerbaijan’s economic immunity against sharp decrease of oil price - ANALYSIS
- 11 March 2020
Despite the passage of several years after the last economic crisis witnessed by us, the world economy still remains sensitive to any temporary situations not bearing an economic meaning. The matter is how the spread of coronavirus (COVID-19) will impact the world energy markets. This also refers to the potential of just one virus to throw the global economy out of the stable situation in the shortest time, the impossibility of obtaining an agreement between major players of the world oil market and the causation of sharp decrease of the world oil prices.
In order to evaluate the situation, it is necessary to pay attention to the chronology of the events. Thus, on March 6, the negotiations conducted among the "OPEC+" (the oil output reduction initiative covering the member and non-member countries of the Organization of Petroleum Exporting Countries (OPEC)) countries during the official meeting held in Vienna were unsuccessful. Russia and a number of non-OPEC countries didn’t accept the proposal to further reduce (by 1.5 mln. barrels) the daily oil output in response to the situation connected with coronavirus. They stated that the current agreement can be extended only till the end of the II quarter of the current year. Consequently, beginning from April 1, none of the members of the previous alliance will be obliged to reduce oil production, and according to the news spread in media, Saudi Arabia has disclosed its intention to increase the oil production and to lower the oil price.
It is also worth reminding that at the VI meeting of the ministers of OPEC’s member and non-member states held in Vienna on December 6, 2019, the decision was adopted regarding the further reduction of daily oil production by 500 thousand barrels in the I quarter of 2020. And thereby, the obligation under "OPEC+" for reduction of daily oil output has been brought to 1.7 mln. barrels. The distribution of the additional volumes regarding the reduction of output has been conducted between "OPEC+" countries in a proportionate manner.
As a result of these measures, on March 9, the oil sharply depreciated on the world markets, and this caused a sharp increase of US$ rate in many countries. This situation has also left the citizens asking questions amid Azerbaijan’s acting as an oil producer (a participant of the "OPEC+" initiative). It is worth mentioning that the existing anxiety and the attempts of the creation of agitation (the citizens’ desire to buy US$ in a massive way and the intention of the persons wishing to abuse this desire) are groundless. These are not senseless words or speculations. For instance, even on the backdrop of the global financial crisis starting in 2014, we witnessed the sustainable development of the Azerbaijani economy and the further improvement of sustainability in recent years.
Currently, the country’s economy is completely ready for economic perturbations. For instance, currently, Azerbaijan’s strategic currency reserves make up US$ 52 bln. (it exceeds the GDP volume by 8%). Besides the ratio of the country’s foreign public debt to the GDP is at the level of 17% (being one of the lowest indicators in the world). During the recent 16 years, Azerbaijan could grow its economy by 3.4 times. The poverty rate has been lowered from 50% to 4.8%. And currently, the sustainability of economic development in the country is being ensured. Similarly to the previous years, in 2020, the positive development dynamics still continue. For instance, during January-February of 2020, the non-oil GDP increased by 6.7%, and the GDP – by 2.8%, and the inflation rate made up 2.8%.
The measures aimed at the development and sustainability of the economy are not expressed only in figures. In order to ensure consolidation of the economy, the flexible public regulation taking into account development peculiarities and prospects of the national economy (improvement of efficiency of tax and customs duties, etc.) is being applied. Besides, the arrangement of strict control over the consumption market is being ensured. The strict measures are being taken against the persons trying to abuse the situation, committing an artificial price spike and attempting to create a shortage of goods by groundlessly removing them from the market.
In the conditions of growth of negative impacts of the worldwide spread of coronavirus infection on the global economy, the emergence of a discrepancy between major oil exporters about the volume of oil production has caused the sharp decrease in oil prices on the world market. On this backdrop, the Azerbaijani government has the plans of the preventative measures for neutralization of the negative impacts on the country’s economy of the negative economic trends that could appear, by keeping in the center of attention the processes going on in the world economy. For instance, the scenarios of projection of impacts on the payment balance of the sharp decrease of the oil price have been elaborated. According to these scenarios, in necessary cases, the relevant stabilizing measures package will be implemented.
Currently, the country’s economy has quite high financial immunity and security “pillow” against the events taking place on the oil market and in the global economy. According to the outcomes of 2019, our strategic currency reserves exceed 100% of the GDP, the currency reserves exceed the foreign public debt by 6 times. We have all the capacities necessary for taking measures in order to preserve stability on the currency market and the exchange rate of AZN. The measures envisaged in all other areas of both monetary and economic policy will ensure keeping the inflation at the targeted level. At the same time, the additional measures will be taken for further strengthening of the financial resilience of the state budget, the strict control over-optimization and efficient use of expenditures will be continued.
The chairman of the Central Bank of Azerbaijan (CBA) Elman Rustamov commenting on the impact of a sharp decrease of oil price on the country’s economy also said the government and the CBA have a "B" plan, and this plan has been prepared beforehand just for such price of oil (US$ 30-35). “Currently, the government is functioning based on this plan. We are committed to solving the problem in the shortest time. I call people for calm. It is seen from the measures taken by the government and by us that the demand is satisfied fully and with good self-control. We appeal to people to help us by their behavior so that we could achieve the solution of the problem sooner", Elman Rustamov stressed.
He said quite strict measures will also be taken against the persons committing an artificial price hike and the currency fraudsters in Azerbaijan.
The CBA chairman excluded the option of increasing inflation through US dollars: "Because the key anchor of inflation is the rate. We are taking measures to ensure that it does not change, which means that we do not expect this factor to affect inflation. But we also know objective factors. With the spread of coronavirus, there may be certain problems with providing currency, some fraudsters may take advantage of this. The government will monitor this. In addition, measures will be taken to improve the provision of currency. At the same time, very strict measures will be taken against those who abuse this situation, artificially raise prices, as well as against currency swindlers," said CBA Chairman.
Note that the negative trends taking place in the global economy due to the spread of coronavirus bear a short-term character and will be solved in the shortest time. Of course, Azerbaijan is a reliable oil supplier, an integral part of the world economy and can’t but feel the impact of the existing negative situation. But now we can say that the country’s economy is ready for such impacts. Even on the backdrop of the negative economic trends taking place in the world, the Azerbaijani economy demonstrates resilience, the country’s economy develops, and the country’s financial capacities are expanded.
It is also worth stressing that the expenditures of the adopted state budget for 2020 including all social projects and obligations are executed in full volume and timely and in accordance with the envisaged time schedule, no cancellation of any social project has been planned. The government has relevant impact tools for the elimination of negative impacts of the recent developments taking place in the global economy on the country’s economic growth and employment rate, and these tools will be rapidly used as far as necessary. Besides, the consumption market is strictly controlled, and the strict measures will be taken against the artificial price spike and the groundless shortage of goods that could be created by abusing the existing situation.
It would be expedient to finalize all the above-mentioned with the words of E. Rustamov: "We have capacities to confront the problem properly".