FEDERATION OF EURO-ASIAN STOCK EXCHANGES
SEMI ANNUAL REPORT OCTOBER 2006
BAKU INTERBANK CURRENCY EXCHANGE
ECONOMIC AND POLITICAL DEVELOPMENTS
Economic and Political Environment
It is expected that Mr. Aliyev will continue to
consolidate his position over the forecast
period, by sidelining potential rivals and
placing loyalists in positions of power.
Azerbaijan's growing oil wealth will enable
Mr. Aliyev to increase expenditure on wages
and infrastructure–thereby allowing him to
claim that he is distributing the benefits of
the oil boom.
Azerbaijan will continue to balance its foreign
policy orientation, seeking to maintain stable
relations with the West at the same time as
developing military and economic ties with
Russia and keeping relations with Iran on an
even keel. Prospects for a resolution of the
conflict with Armenia over the disputed
region of Nagorny Karabakh have receded,
following the failure of presidential talks in
February 2006 to reach consensus over a
framework peace agreement. Further
progress is unlikely in the forecast period,
given the approach of a parliamentary
election in Armenia in 2007 and presidential
elections in both countries in 2008.
Economic policy will focus on the challenge
of maintaining macroeconomic stability
during a period of rapid economic growth.
Budgetary spending on welfare and
infrastructure projects will rise, with the aim
of alleviating poverty (particularly among
those displaced from Nagorny Karabakh).
In conjunction with a large increase in
foreign-currency inflows from oil exports, the
rise in government spending risks sparking
an acceleration in inflation. Official debt, both
domestic and external, will remain low, but
the issuance of domestic debt will increase
as a way of mopping up excess liquidity
linked to hard-currency inflows. Greater
reliance on hydrocarbons resources will
adversely affect the structure of Azerbaijan's
economy. Together with increasing concerns
about the business environment, the weak
banking sector and poor legal framework,
the growing dependence on hydrocarbons
will exacerbate the differences between the
oil and non-oil sectors.
Economic Performance
A surge in hydrocarbons output will support
Azerbaijan's economic expansion in 2006-07.
Production came on stream at the Azeri-
Chirag-Guneshli (ACG) oilfields in February
2005, and crude oil has now filled the Baku-
Tbilisi-Ceyhan (BTC) export pipeline, with the
first tanker leaving Ceyhan in early June.
Crude oil production will increase steadily
over the next few years, reaching just under
1m barrels/day by 2007. Gas from the Shah
Deniz field is expected to come on stream in
September-October 2006, which will provide
a further boost to economic growth.
The main factors fuelling consumer price
inflation will be the rapid growth in budget
expenditure and continued strong foreign
exchange inflows associated with the oil and
gas sector. Robust private consumption,
owing to sharply rising wages in the oil and
oil-related sectors, will also exert inflationary
pressure. In response, the authorities will
tighten monetary policy slightly and will allow
the manat to appreciate. However, because
of the dominance of foreign currency in the
money supply, and a continuing lack of
public confidence in the manat, the
strengthening of the local currency will
have only a limited impact on inflation.
We therefore expect annual average inflation
to remain at around 6.5% in 2006-07,
although the lack of monetary policy tools
available to the authorities could result in a
somewhat higher rate.
Hard-currency inflows from oil exports will
strengthen the manat in both nominal and
real effective terms over our forecast period
and beyond. The National Bank of Azerbaijan
(NBA, the central bank) will attempt to
sterilize foreign-currency inflows through
the sale of Treasury bills and the use of
Azerbaijan's overseas oil fund, the State Oil
Fund of the Republic of Azerbaijan (SOFAZ).
However, the amount of short-term paper
involved will be small. As Azerbaijan's rate
of inflation will remain high compared with
those of its trading partners, this will produce
a real effective appreciation of around
10-15% between end-2005 and end-2007.
Nevertheless, the manat will still be some
15% weaker in real effective terms than its
rate in 1997. This will mitigate the impact of
the real effective appreciation on the export
competitiveness of Azerbaijan's non-oil
sectors.*
* The Economist Intelligence Unit Ltd., July 2006
Key Information Contacts
National Bank www.nba.az
State Committee for Securities www.scs.gov.az
Ministry of Finance www.maliyye.gov.az
National Depository Center www.mdm.az
Ministry of Economic Development www.economy.gov.az
2003-MAIN ORIGINS OF GROSS DOMESTIC PRODUCT (%)
2003-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%)
Agriculture
Industry
Construction
Transport & communications
Other
12.1
49.9
10.6
14.3
13.1
PAGE 48
Public consumption
Private consumption
Gross fixed investment
Net exports of goods & services
70
60
50
40
30
20
10
0
-10
-20
-30
63.2
50.8
11.7
-24.0