Azerbaijan needs to use benefits from energy windfalls amid the geopolitical situation in the Middle East to build buffers, Jihad Azour, Director of the Middle East and Central Asia Department at the International Monetary Fund (IMF) said in an exclusive interview with Trend News Agency.
“The difference between Azerbaijan and other countries in Central Asia and the Caucasus is that Azerbaijan is an oil-exporting, oil and gas-producing country. Therefore, the increase in prices of oil and gas are a positive development for Azerbaijan, which may not be the case for other countries in the region. Therefore, this is one positive development that benefits, in the short term, the economy of Azerbaijan. Of course, what is important when you have this kind of unexpected windfalls is to remain vigilant, not to consider this as a permanent increase in revenues, and therefore treat this as a way for Azerbaijan to build buffers,” he said.
Azour recalled that Azerbaijan is a country that is adjacent to where the conflict is taking place, and therefore, needs to be attentive.
“Again, it's very important also here to remain very much attentive to the risks and take precautionary measures for that in order to limit the risk premium that could arise because of the proximity to the zone of conflict. I think this is something that always helps countries which have this kind of benefits in adversity. It is important to view it as a way to build resilience. Again, building resilience requires vigilance on the one hand and the wise use of resources on the other,” he added.
Azour pointed out that amid the high level of uncertainty in the world, it is very important to use this moment to build buffers: “Buffers are very important, because they provide you with the capacity to respond to a crisis.”
“The second important element is that Azerbaijan is also embarking on large investment projects in terms of reconstruction, strengthening institutions, assessing the quality of expenditure management, investment management. Those are important factors, given the size of those spendings and the expectations of the population. Therefore, strengthening the capacity of finance to manage investment, manage complex public spending is important,” he noted.
Third, Azour believes that at the central bank level, it is important to improve monetary policy mechanisms and transmission, especially in a context where inflation may pose risks.
“This requires institutions with right policies, including strengthening the central bank’s institutional framework, increasing its capability, improving communication of monetary policy decisions, and increasing the central bank’s capacity to control the financial system. Last but not least, in order to embrace the opportunities that regional integration could create, you need to do structural reforms. The IMF is an advisor, is a partner to Azerbaijan in order to help accelerate those structural reforms,” he added.
He pointed out that there is a need for a clear communication of the monetary policy decisions, strengthening the quality of statistics.
“As for the supervision of the financial sector, make sure that the central bank and various agencies are well equipped in order to keep the financial sector stable. Those are pretty much the reforms that countries need. Of course, in a world where we have high level of volatility, it's really important to be conservative when it comes to the medium-term planning or the medium-term projections on economic issues. First of all, the level of uncertainty is extremely high. We are now two months since the outbreak of the war, and this war had a major economic impact on the region, mainly on the Gulf region and beyond. Internationally, with increasing oil and gas prices, as well as derivatives of oil and gas, chemical products constitute a new challenge for price stability.
This, of course, increases the level of pressure that we see currently. With the high level of uncertainty, it's very important for countries to remain vigilant. Those who are outside the zone of conflict need to use this as a windfall, not as a structural source of revenue. And this is why it's very important to manage wisely, build buffers and to be very vigilant. There's a great opportunity here to increase the level of connectivity, and this is something that we have worked on between Central Asia and the Caucasus, Middle East, especially with the Gulf. There are opportunities for investments, trade, and for strengthening connectivity in order to bypass risks,” he added.
Azour also touched upon the growing importance of the Middle Corridor amid the growing geopolitical uncertainties.
“Geopolitical risks with the recent developments are calling for more agility in finding other channels for trade in the world. Therefore, this is an opportunity to offer to the world a channel that would not replace the others, but a complementary channel to increase the fluidity of movement of goods between different geographies. Also, the improvement of the geopolitical front makes this opportunity more realistic. Of course, this would require to build an alternative that is not only based on infrastructure, but also to strengthen key elements in terms of coordination between institutions, between customs authorities, simplifying customs procedures, allowing the private sector to operate with a global approach, improve the flexibility in managing transshipment and all kinds of logistics facilities that reduce the cost and the duration and increase the predictability of trade. Therefore, those are important reforms to give this opportunity the full impact,” he added.
The second priority, according to Azour, is to deepen the financial market through greater coordination and by standardizing financial sector operations: “This would help build a more developed market, increase its size, and allow smoother capital flows. Those are important elements that make opportunities like the Middle Corridor more competitive, turning it into an alternative trade route for goods, people, and services.”
Further, he spoke about the regional situation in the South Caucasus and Central Asia, noting the importance of not being complacent.
“Countries in the region have been enjoying recently a good level of growth and performance. The first advice is not to be complacent, because we are living in a shock-prone world. Therefore, it's very important to preserve the buffers as strong as possible. Also, we live in a world where we see higher volatility in oil and gas prices, and therefore always plan accordingly to avoid the super prices. Developing medium-term fiscal frameworks, strengthening fiscal institutions, providing predictability to investors, to the market, to the citizen is being important on the fiscal side. Especially for a country that is increasing capital spending, building a transparent framework of investment management and so on, is an important element in strengthening confidence and reducing risks, especially when you resort to public-private partnerships.
Therefore, institutional reforms matter, and medium-term planning is also very important. On the fiscal side, diversifying revenues outside energy is also very important. On the expenditure side, the focus should shift more toward strengthening automatic stabilizers—fiscal measures that ease economic pressure—and improving the targeting of transfers and spending to better address the needs of vulnerable groups. This is what on the fiscal side is needed. In addition to that, given the high level of uncertainty, at the monetary side, it is important to have clarity of objectives that should revolve on inflation management, reducing the risk of inflation, especially in a world where prices could be driven up because of the oil shock,” Azour explained.
Azour went on to add that technical assistance is one of IMF’s main vectors of support to countries in the region, which may not need financing, but are in the midst of reform and reform management.
“To this end, the IMF has established the center in the region to be closer to countries, has also scaled up the technical assistance in order to cater for the region’s transformation.
Over the last three years, this region has been enjoying a fairly good level of growth, good economic performance, was mildly affected by the shocks that occurred around it. There is an opportunity now, with the improvement of the geopolitical and geoeconomic situation in the region, to play a bigger role as a connector through the Middle Corridor and also to be more integrated.
For that, the governments need to do reforms, both at the level of central bank and fiscal level, as well as on the statistics. This is where the IMF is very much engaged. The Fund is also focused on another important dimension of being the center that brings all the authorities of the region together. We have annually a certain number of regional dialogues that happen at our center and are coordinated by the Fund in order to bring more alignment between authorities and to strengthen the level of cooperation between countries in the region,” he concluded.
