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The manat, also denoted by AZM, is the official currency of Azerbaijan. One manat is divided into 100 gopiks. Banknotes below 50 manats have disappeared from circulation.
Before the use of the manat, the ruble was the official currency of Azerbaijan. It was when Azerbaijan became independent from the Soviet Union that the manat came to be the new currency of their country.
Economic outlook
Prospects for 2006 and 2007
Forecasts of key economic variables are based on the following assumptions, namely that: NBA monetary policy will aim to keep inflation in check and continue a flexibly managed exchange rate policy; the Government, while raising spending, will seek to follow policies that are consistent with macroeconomic stability; and production and exports of hydrocarbons will increase significantly.
GDP is forecast to accelerate to 30.5% in 2006, driven by a substantial increase in oil and gas production and exports, high domestic investment, and an expansionary fiscal policy. With the completion of the BTC oil pipeline and a ramping up of oil production from the ACG oil fields as well as gas production coming on stream from the Shah Deniz gas field in 2006, hydrocarbon production and exports are likely to power forward. However, GDP growth is seen as slowing slightly in 2007 to 27.3% as increases in oil and gas production moderate and FDI falls. In 2006, total oil production is put at 28.6 million tons, up 42.4%, and projected to expand by a further 21.8% in 2007. Total gas production is expected to be 6.5 billion cubic meters in 2006, up 15%, and in 2007 jump to 11.0 billion cubic meters (up 108.3%).
Foreign investment is predicted to tail off after 2006 as the hydrocarbon sector moves to a less intensive phase of development. Some of this downswing will be offset by an increased inflow of concessional funds and grants over the next 4 years, estimated at around $3 billion. The Government envisages domestic investment as a key driver of growth in the coming years. The Ministry of Economic Development foresees domestic investment rising by 19.5% a year, particularly in services such as transport, communications, and construction. To achieve these investment projections, the Government will need to advance the pace of structural reforms in order to create an enabling environment that will attract domestic investment into non-oil activity. The Government forecasts the non-oil sector growing at an average rate of about 12% a year through 2009.
Parliament approved the state budget for 2006 in autumn 2005. State spending is projected to increase by up to 65% in 2006. A large portion of the increase is to be spent, as in 2005, on public sector wages and on pensions, in addition to defense and infrastructure. A major concern is whether the economy has the capacity to absorb this increase. The Government aims to finance part of the deficit through selling treasury bills, but a lack of demand and a weak secondary market for debt will limit its ability to raise funds in this way. Greatly increased fiscal spending would put considerable pressure on aggregate demand in an already tight economy and the NBA would face a difficult task in controlling inflation and maintaining exchange rate stability in 2006. Thus there needs to be close coordination between monetary and fiscal policies to forestall emerging pressures. The Government has stated that it is prepared to trim expenditure if inflation begins to accelerate.
With the substantial increase in oil and gas export revenues, and as import growth is expected to ease—reflecting lower oil and gas-related capital investment—the current account is projected to swing into surplus. However, the income balance will likely deteriorate as rising profits from the oil and gas sector are repatriated.
Medium-term outlook
Prospects are positive. Increased production and exports of oil and gas, of domestic investment, and of fiscal outlays will be the key drivers of growth. However, large increases in government expenditure will likely stoke inflationary pressures if supply-side factors are not tackled—production capacity needs to be enhanced and productivity improved. The Government’s key challenge is to create an enabling environment to attract investment into the non-oil sector. To do this, it should lift the pace of domestic reforms by, for example, improving fiscal management, accelerating the privatization of small- and medium enterprises, speeding up trade and price liberalization, and implementing reforms in banking and finance. Strengthening the business environment is also important. On the foreign policy front, concluding an agreement with Armenia to resolve the conflict over Nagorno-Karabakh would benefit both countries.
The major risk to the bright economic outlook centers on properly managing oil revenue to maintain macroeconomic stability and avoid excessive appreciation of the exchange rate. The latter would damage competitiveness in the non-oil sector and limit its development. A very sharp downturn in oil prices, though unlikely, would put pressure on the budget and the current account, putting constraints on the rapid economic transformation needed to reduce unemployment and poverty.
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