ADB forecasts Azerbaijan’s GDP to jump by 1.2% in 2018

By Azernews

By Gunay Camal

The Asian Development Bank expects Azerbaijan’s GDP to increase by 1.2 percent in 2018 with the onset of production from the Shah Deniz gas field and some recovery anticipated among private firms.

In its report titled “Asian Development Outlook 2017: Transcending the middle-income challenge”, the Bank forecasts the oil and gas industry to contract by 0.5 percent in 2017 as oil production, which accounts for 65 percent of total industry, declines further.

“However, gas condensate from new Shah Deniz gas field will help industry expand by 1.0 percent in 2018,” the report reads.

Being one of the main components of the large-scale Southern Gas Corridor project, Shah Deniz 2 is expected to add a further 16 bcm per year of gas production to the approximately 9 bcm  per year produced by Shah Deniz Stage 1.

Reserves of the field are estimated at 1.2 trillion cubic meters of gas and 240 million tons of condensate. The gas is projected to be exported to Georgia, Turkey and European markets through expansion of the South Caucasus Pipeline and the construction of the Trans Anatolian Natural Gas Pipeline and the Trans Adriatic Pipeline.

“With real GDP declining in 2017 and growing little in 2018, revenue is forecast at 25.2 percent of GDP in 2017 and 25.6 percent in 2018. Expenditure is projected at 26.2 percent of GDP in 2017, reflecting higher current outlays and a further 41.1 percent cut in capital spending, and at 26.4 percent in 2018,” reads the report.

Azerbaijan’s gross reserves including assets in the sovereign wealth fund are projected at $30.1 billion in 2017 and $31.5 billion in 2018.

The Bank expects the government efforts to stimulate non-oil exports, in particular through its ‘Made in Azerbaijan’ promotion, to catalyze growth in agriculture at 3.0 percent in 2017 and 4.0 percent in 2018.

Azerbaijan outputs more than 250 kinds of home-made products in food, light, heavy and construction industries under the brand of ‘Made in Azerbaijan’. 

Overall, the country’s net exports are forecast to improve in 2017 and particularly in 2018 as gas production increases.

As for the inflation rate, the Bank forecasts the figure to moderate to 9.0 percent in 2017 with less currency depreciation, despite tariff increases for electricity and gas, then slow further to 8.0 percent in 2018 barring further adjustment to utility prices or resurgent depreciation.

“Inflation will remain a key challenge over the forecast period, and it will require coordinated efforts from monetary and fiscal authorities,” the bank’s experts say.

In addition, growing demand for foreign currency may further weaken the manat unless the central bank intervenes, according to the report.

“Dollarization in banking will remain high, limiting liquidity in the local currency. Manat depreciation will crimp borrowers’ repayment capacity, possibly pushing the share of nonperforming loans above 10 percent. The combined impact of continued currency depreciation, tightened monetary policy, and a stagnant private sector is expected to create serious risks for domestic banks,” the report reads.

The Bank recalls that in December 2016, the government adopted a roadmap program that prioritizes 12 sectors, emphasizes the provision of sustainable employment, and sets an ambitious goal of creating 450,000 jobs by 2025.

“To augment these measures, the authorities should pay more attention to job promotion for younger workers, as the youth unemployment rate has risen especially rapidly. They could consider additional measures to better link vocational education with the labor market, develop the job skills needed to raise productivity in the private sector, provide small and medium-sized enterprises with more affordable financing, and open centers to provide agricultural support services. The privatization of inactive state-owned enterprises, which should lead to a resumption of their activity, will also help to create jobs,” the report reads.

Currently, the  agriculture employs 36.3 percent of workers to produce only 6.2 percent of GDP, while industry employs only 6.9 percent of workers to produce 47.0 percent of GDP.

To date, the government has relied mainly on regional socioeconomic development programs to combat joblessness. These programs helped cut the unemployment rate from 7.2 percent in 2005 to 4.9 percent in 2014, though many of the jobs created were temporary. The unemployment rate subsequently rose to 5.6 percent at the end of 2016.