On 15 September, the Asian Development Bank (ADB) updated its economic forecast for its member states. In ADB’s flagship annual publication, Asian Development Outlook (ADO) 2020 Update, the bank forecasted a 4.3% contract in 2020 followed by a 1.2% growth in 2021 for Azerbaijan.
The Azerbaijani economy reversed 2.4% growth in the first half of 2019 to contract by 2.7% in the same period of this year, reflecting low oil prices amid the Covid-19 pandemic and lockdowns that lasted from March to May and were introduced again in July. The petroleum industry shrank by 2.5%, and the rest of the economy by 2.9%, though fiscal stimulus equal to 4.3% of GDP for health care, social protection and support to business limited the contraction. A 3.1% decline in industry reflected weak mining activities as Azerbaijan cut oil production by 4.5% under an agreement with the Organization of the Petroleum Exporting Countries and other major oil producers (OPEC+). However, gas output did rise by 14.9%. Construction shrank by 14.5% because of the pandemic and a 22.2% cut in public investment. Services fell by 3.0% as tourism-dependent services plunged by half and weak domestic demand curtailed retail trade by 1.9%. Growth in agriculture slowed from 13.0% in the first half of 2019 to 2.2% a year later as drought and the pandemic disrupted crop production.
On the demand side, private consumption reversed 2.4% expansion in the first quarter of 2019 to slip by 0.4% a year later. Overall consumption is expected to drop sharply as mobility restrictions and weakening income persist throughout 2020. With the pandemic and cuts to oil production expected to continue in the coming months, the report forecasts deeper contraction in 2020 than projected in ADO 2020 and more gradual recovery in 2021 as demand and oil prices revive.
Average inflation in the first half of 2020 rose from 2.5% a year earlier to 3.0%. Food prices climbed by 5.5% as consumers stockpiled and supply tightened, but prices for other goods increased by only 1.3% and for services by 1.0%. In June, the central bank reduced its policy rate by 25 basis points to 7.0%, citing low inflation, while still accepting income-yielding deposits from banks to soak up liquidity and thus contain inflation and avoid downward pressure on the Azerbaijan manat.
The current account surplus narrowed to 6.0% of GDP in the first quarter 2020 and is expected to have become negative in the first half. While slack demand cut imports by 35.0% in the first half of 2020, lower oil prices and production slashed export earnings by 23.0% and the halving of tourism widened the deficit in services. Slowdown in the Russian Federation and Turkey cut remittances, weakening income and transfers.
