Transcript Azerbaijan: dealing with foreign exchange inflows

Azerbaijan: dealing with
foreign exchange inflows
Emin Huseynov
The National Bank of the Republic of Azerbaijan

Recent macroeconomic performance

Inflows

Outflows

Net inflows

Specific features of Azeri case

Demand management policies

Structural reforms
Outline

strong overall economic growth

modest non-oil growth

intensified demand pressures

real exchange appreciation
Recent macroeconomic
performance
160
135
120
%
98,3
80
57,6
31,6
34,5
Czech
Republic
Hungary
40
62,3
26,8
0
Azerbaijan
Kazakhstan
Ukraine
Russia
Poland
GDP growth during the 20002006, %
7500
6000
4500
2383
3000
1500
665
714
774
897
1610
1060
0
2000
2001
Kyrgyz Republic
2002
Armenia
2003
2004
Azerbaijan
2005
Kazakhstan
2006
Russia
GDP per capita in selected CIS
countries, USD
40
35
30
%
25
20
15
10
5
0
2000
Agriculture
2001
Mining
2002
Construction
2003
Trade
2004
2005
Transport, communication
Sector’s contribution to GDP
growth, %
2006
GDP growth
10000
12%
8000
10%
6000
8%
4000
6%
2000
4%
0
2000
2001
2002
2003
2004
2005
2006
2%
-2000
-4000
C onsumption
Investment
Net exports
Demand pressures
annual inflation
0%
5
100
90
4
80
70
3
60
50
2
40
30
1
20
10
0
0
2006
2005
2004
2003
2002
2001
2000
1999
Total deposits (in percent of GDP; left)
FOREX deposits (in percent of total deposits; right)
Confidence in banks improved,
dollarization declined

Export of goods and services, mostly oil related

FDI’s, mostly oil related

Remittances

Bank borrowing
Inflows
14
12
10
8
6
4
2
0
2000
2001
Oil exports
2002
2003
Non-oil exports
2004
FDI
Inflows, bln. USD
2005
Bank borrowing
2006
Remittances

Imports of goods and services

Capital repatriation

Profit repatriation
Outflows
0
-1 000
-2 000
-3 000
-4 000
-5 000
-6 000
-7 000
-8 000
-9 000
2000
2001
2002
Improts of goods and services
2003
2004
C apital repatriation
Outflows, mln. USD
2005
2006
Profit repatriation
4000
3500
3000
2500
2000
1500
1000
500
0
-500
2000
2001
2002
2003
2004
Net inflows, mln. USD
2005
2006

Significant oil revenues


Short horizon of production profile


various estimates indicate $140-$200 billion until
2024, which is about 10-fold of GDP in 2006
proven hydrocarbon resources would almost be
depleted at end-2024
Existing pipeline infrastructure to the
world market
 completion of BTC opens up prospects of continued
revenue base even after oil and gas dries up
Specific features of Azeri case
16000
14000
12000
10000
8000
6000
4000
Profit tax
Government's share
Oil revenues, mln. USD
2024
2023
2022
2021
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2007
0
2008
2000

Transparent and best practice governance
framework established but not fully operationalized

Effective coordination of macroeconomic policies of
demand management is lacking

Underdeveloped domestic financial markets and
low initial level of financial intermediation

Unfinished agenda of structural reforms, especially
in the non-financial corporate sector
Specific features of Azeri case
1600
1400
1200
1000
800
600
400
200
0
2000
2001
2002
Taxes from AIOC
2003
2004
Taxes from SOCAR
2005
2006
Transfers from SOFAZ
Oil revenues accruing to
Government Budget, mln.$
2007
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2000 2001 2002 2003 2004 2005 2006 2007
Non-oil overall balance to Non-oil GDP
Budget expenditure growth (right scale)
Expansionary fiscal policy framework
2000
1600
1200
800
400
0
2000
2001
2002
2003
Change in SOF assets
2004
2005
2006
2007
Change in NBA assets
Excess FX sterilization, mln. USD
2500
(mln.AZN)
2000
1500
1000
500
0
2000
2001
2002
NFA
2003
2004
Reserve money
Monetary impact
2005
2006
I. Handling monetary impact

Partial FX sterilization

Efforts to liberalize capital outflows

Limited appreciation

Partial sterilization by ANB notes
These measures have not been sufficient to
constrain demand so far
Demand management policies
300
250
200
150
100
50
0
2003
2004
2005
Monetary Sterilization
NBA’s paper, mln. AZN
2006
2007f
0.9900
120
0.9800
0.9700
100
0.9600
0.9500
80
0.9400
0.9300
60
0.9200
0.9100
40
0.9000
0.8900
20
0.8800
0.8700
0.8600
0
2 000
2 001
2 002
2 003
Ex. Rate USD/AZN
2 004
2 005
NEER
Limited X-rate flexibility
2 006
II. Constraining fiscal expansion

A rule-based cap on maximum oil revenues to be
used in one year: PIH, non-oil GDP growth, real
productivity growth, model-based estimates
consistent with low and stable inflation, etc.

Nominal growth of expenditure to be limited to
under 10% for the period of 2008-2024

Non-oil revenue growth to match that of current
expenditure

Ineffective public investments to be minimized
Demand management policies
III. Adopting inflation targeting in the mediumterm

Inflation target to be set for medium-term

Operational independence of the monetary
authority to be ensured

Flexible X-rate policy to be adopted

Macroeconomic coordination to be strengthened

Gradual switch from monetary targeting to interest
rate targeting
Demand management policies

Reduction of the role of state in the economy

Completion of reforms in the utilities sector

Introduction of corporate governance principles in
state enterprises

Deepening and expansion of financial sector

Improving tax administration
Structural reforms