The sharp fall in the global prices of hydrocarbons in 2016 resulted in a massive devaluation of manat, the local currency of Azerbaijan, whose economic growth is largely sustained by the exploration of large reserves of crude oil and natural gas. The devaluation negatively impacted consumers and threatened banking sector stability, triggering expenditure-led recessionary pressures in the economy. Gross domestic product (GDP) declined by 3.1% and inflation rate soared to 12.4% in 2016.
The developments forced the government to adopt countercyclical measures of both fiscal and financial policy nature, in support of which, the Asian Development Bank (ADB) approved a $500 million loan for the Countercyclical Support Program in December 2016. The loan amount, corresponding to the ceiling of the developing member country loans that may be accessed from ADB’s Countercyclical Support Facility (CSF), represented about a third of the $1.4 billion government estimate of its countercyclical financing requirement.
The government’s countercyclical measures were hinged on a three-pronged strategy of promoting social assistance, economic diversification toward strengthening the non-oil sector, and employment generation. The program financed by ADB’s CSF accorded with the objectives of the CSF policy to provide budget support to developing member countries undertaking fiscal stimulus during an economic crisis through a countercyclical development expenditure program to make up for “lost aggregate demand.” It was expected to result in sustained broad-based inclusive growth as impact, and the introduction of expenditures for fiscal stimulus as outcome.
Four outputs were lined up to achieve the program’s intended impact and outcome: (i) social safety net to citizens provided, (ii) social housing facilitated, (iii) additional jobs generated, and (iv) specific structural reforms identified and initiated.
Numerous measures ─ such as a 10% increase in the wages of public employees in select sectors; fixing the minimum pension at 110 manats (about $60) per month; and an increase of 10% in social benefits, health benefits, and food allowances ─ were implemented. The State Agency for Housing Construction and construction of the first multistory residential building, under a limited liability company, commenced in December 2016 and due for completion in 2019. Construction work under several other housing projects also started in 2017, and helped create jobs and expand economic activities.
An agency to support rural family businesses in production and branding and promoting their products was formed. A self-employment program was also piloted, alongside the creation of numerous contractual jobs in state-owned enterprises. Tax and customs incentives were implemented, and one-stop windows were expanded to support private sector activities. Investment certificates were issued to investors in selected regions, entitling them to a 50% reduction in income taxes, value-added tax-free importation of technological equipment, and exemption from property or land taxes.
The program’s countercyclical measures played a crucial role in protecting the vulnerable from the shocks of an economic recession and assisted the government in greatly reducing the debilitating effects of the crisis. The recession ended in 2017 as higher oil prices and gains in services and agriculture offset a decline in industry and returned the current account balance to surplus. The countercyclical efforts and the oil price recovery helped stabilize the macroeconomy and brought a return to growth in 2018. Economic growth was forecast to rise from 0.1% in 2017 and 1.4% in 2018 to 2% in 2019. This growth is to be driven by non-oil sector expansion, revival of oil prices, a return to growth in key regional trading partners, and the start of production in Shah Deniz II, a new gas field and one of the largest in the world.
Due to the government’s countercyclical measures and the economic growth they propelled, poverty declined to 5.4% in 2017. While inflation accelerated in December 2016, it tapered by the end of 2017 and stabilized below 3.5% from early-2018 onwards. Overall, ADB’s assistance was thus effective in reducing the fiscal and monetary risks in the short term. While it is too early to assess the full impact of the program, it is evident that the program helped build the foundation for the pursuit of structural reforms that can deliver inclusive and sustained growth to the country. The program was executed by the Ministry of Finance.
