Dynamic private sector to ensure robust economic growth in Azerbaijan - Antonio Nucifora

By Trend

Dynamic private sector will ensure robust economic growth in Azerbaijan, Antonio Nucifora, Practice Manager for the Macroeconomics, Trade and Investment in Europe and Central Asia Region of the World Bank Group, said in an exclusive interview with Trend.

Nucifora pointed out that economic growth performance in Azerbaijan this year has been robust, standing at around 5.5 percent year-on-year by the end of the third quarter.

“The energy sector output has decreased, but the non-energy sector growth has remained strong with a growth of 10 percent year-on-year by end-September. Inflation accelerated in September and there is a little bit of concern regarding food inflation. The government is aware of this, of course. The Central Bank has been tightening the monetary policy, increasing what we call the policy rate, by a quarter of a percentage point bringing it to 8 percent in November. On the external side, the trade surplus is very healthy standing at about 33 percent of GDP from January through September, driven mainly of course, by the high global energy prices, but also by other exports in the non-oil and gas sectors and has been strong enough to overcome an increase in imports and still generate a strong trade surplus on the public side” he said.

He went on to add that the fiscal balance also is very healthy.

“Again, strong rise in both oil and non-oil revenues have more than outpaced an increase in government spending leaving a surplus of about 2 percent. On the financial sector, the banking sector is doing well. So, in that sense, the economy is doing well. Now, of course, we are in a special global situation in terms of the recovery from the pandemic, and geopolitical tensions, namely, the war in Ukraine,” noted Nucifora.

Also, as he said, there was a lot of demand which had been in a way slowed down during the pandemic, meaning the pent-up demand, which now has been released.

‘So, this increased demand and spending after the pandemic contributes to accelerating economic growth. And also, there has been an increase in public spending, which again contributes to economic growth, since the increase in consumption boosts the economy as a whole. In parallel to the post-COVID recovery, which has contributed to the growth, there is also the pickup in remittances from Russia. The current geopolitical situation has had a relatively muted, but positive impact on the economy in Azerbaijan, in particular, on the transport sector, also ensuring double-digit growth rates in hospitality and ICT.

So, there has been a boost coming from the inflow of both tourists and financial flows. A big number of Russian citizens have been moving to the Caucasus, or Central Asia. We see re-channeling of trade to the South Caucasus, Türkiye, Central Asia. All of these have contributed to boosting the demand and maintaining healthy economic growth in Azerbaijan,” he added.

Non-oil sector’s development

Nucifora pointed out that the “Azerbaijan 2030: National Priorities for Socio-economic Development" clearly sets a vision for a healthy, dynamic private sector as the center of the growth model of the future for Azerbaijan.

“We argue very much that there is a need for a fundamentally new growth model which is driven by dynamic, non-energy, non-oil and gas private sector. This is going to be critical to ensure that the growth will continue. There is a need to shift to the non-energy sector as an engine of growth. Azerbaijan has got a very pervasive presence of the state with state-owned enterprises in almost every sector of the economy, which is very unusual,” he said.

Nucifora believes that there is a need to shift to a more productive model.

“And to do this fundamentally, one needs to enable the private sector to operate on a level playing field, to have an environment and to have also the human capital skills which are needed to be able to grow and compete. Shifting to this new growth model with private sector at the center is going to be fundamental. Azerbaijan is well positioned with a strong energy sector contributing to the economic growth. Over the past 25 years, the growth performance of Azerbaijan has been impressive, the poverty has been reduced dramatically from 50 percent to 5 percent. But looking ahead, Azerbaijan has realized that the world is changing and is backing on green economy amid the commitments to fight the global climate change, the policy of transition towards renewables, and net zero emissions, ,” he added.

Nucifora noted that among energy producers, Azerbaijan is well positioned as a country transporting gas to Europe, since natural gas is a much cleaner mean of producing electricity.

“It generates roughly half the carbon emissions from coal and produces less particulate matter. Therefore, natural gas is likely to play a role of a transition fuel, helping bridge the transition to a zero-carbon economy. In this sense, with the memorandum of understanding signed between Azerbaijan and EU to double the gas supplies, the country will ramp up natural gas production. It will boost the country’s economic growth in the medium term. But what also remains important, however, is looking at the longer-term perspective. The demand for natural gas will last longer than other fossil fuel-based sources of energy, but since ultimately, we're moving towards renewable energy, the demand for natural gas will also subside. Therefore, looking ahead, the critical point remains the need to move to a new growth model which is driven by a dynamic non-energy private sector,” he added.

Growing role of Middle Corridor

Nucifora noted that Azerbaijan is placed in a very strategic position.

“Most of the trade between China and Europe was happening through the Northern Corridor, which eventually goes through Russia. And now with the war in Ukraine and the sanctions on Russia, significant part of this trade shifts towards the Middle Corridor, which essentially passes through Central Asia and the Caucasus, again, linking China to Europe. The geographical location on the East-West trade route, connecting Europe and China, opens up a lot of opportunities for Azerbaijan. The first one is of course, related to transit shipments. The transport and logistics, the demand for services in this sphere can contribute to economic growth in Azerbaijan. The strategic location on the Middle Corridor also enables Azerbaijan to become more attractive to global value chains, and be able to be better integrated in global value chains,” he said.

Nucifora went on to add that in a globalized world, there are some leading firms that invest in countries, which they use as a hub for production to access global markets.

“Different pieces of products are produced in multiple countries and then assembled together. Now some of these big foreign investors may be encouraged to come to Azerbaijan, taking advantage of this country’s connection to the global markets, China and Europe,” he explained.

Nucifora believes that the geographical advantage will help Azerbaijan attract investment and get more integrated into the global market.

“Indeed, the Middle Corridor is not functioning very well at present. That's why most of the traffic in the past was passing through the Northern Corridor. The reason is that the Middle Corridor still lacks some pieces of infrastructure and some of its parts are not developed. So, in order to reduce the costs of using the Middle Corridor for trade, Azerbaijan will need to coordinate with major partner countries such as Georgia and Kazakhstan, to invest in the infrastructure needed to make the corridor more operational. Secondly, Azerbaijan also needs to look very carefully at reducing the barriers for trade in terms of the procedures at the borders, especially for transit shipment. This in fact is is part of the bigger issue related to the importance of a new growth model based on a dynamic private sector. Because in order to achieve that, there is going to be a need for Azerbaijan to act in at least three directions. First, it is about creating by all means an environment for private sector to flourish, ensuring a level playing field, where markets are contestable. The second one is an environment where you can attract investments. Of course, Azerbaijan has a strong track record, when it comes to attracting investors in the energy sector,” he said. The third is about integration into the global markets, according to Nucifora.

“There is no country in the world that has achieved high income status without being integrated into global markets. When you are a small country, you have a small domestic market with a relatively limited population size. Having access to global markets to be able to sell to a much bigger scale remains fundamental. Therefore, to develop globally, smaller countries need to have integration into global markets, which becomes an engine, a pathway to growth,” he added.

Reintegration of liberated territories in Azerbaijan’s economy

Projects in liberated territories can be a model for economic growth in the rest of Azerbaijan, Nucifora noted.

“Liberated territories will require investments in the short term in demining, creating infrastructure and forming human capital needed to create an environment where economic growth can take place. The challenges, meaning the new growth model, the need to transition towards renewables and a green economy apply everywhere, including the liberated territories,” he said.

Nucifora said what is different there, is that it is a restart in a way and there is a chance to use it as a pilot in terms of creating an economic basis, which is already able to anticipate climate change, is focused on a green economy, energy efficient buildings and all the infrastructure which follows these.

“So, in that sense, it can become a pilot, which may drive the transition towards a more energy efficient, greener economy across the country. It can lead the way in becoming a model for the rest of Azerbaijan,” he explained.