But what about the oil?
Július Danko, Vojtěch Janků, Martin Kutlak, Ngoc Nam Nguyen
BTC oil pipeline and GDP
GDP decomposition
● Oil sector accounts for more than half of GDP, however other sectors are indirectly financed from
the oil revenues because of huge government expenditures
BOP - current account
● CAB mainly consisted of BOT (trade surplus caused by surge in gas and oil
sector exports)
● CAB peak in 2008 at 40% of GDP, since then it has fallen down to roughly
20% in 2014
BOT - focus on exports of oil and gas
● heavy dependency on oil and gas sector in exports
● similar trend as in CAB (due to surge in gas and oil exports)
● oil and gas exports: on average 94,7% of total exports (from 2006 to 2012,
according to IMF)
BOT - imports
● rapid increase of oil production between 2006 and 2008 removed the reliance
on foreign oil and gas imports
● after that imports mainly consisted of non-oil sectors
Remittances and external debt
● dependency on received remittances decreased (from 4.70 to 2.45%)
● external debts between years 2005 and 2014 remained stable between 10
and 15% of GDP
Monetary policy
● Focus: stable exchange rate
● Underdeveloped domestic debt market → limited monetary tools
● Azeri manat denomination in 2006 → new currency
● Currency appreciation since 2006 → expansionary monetary policy to cover
currency demand → M2 expanded 546% between 2006 and 2012 and continued to
grow
Nominal exchange rate
● Basically fixed against
USD (oil markets priced in
dollars)
● Maintaining a managed
exchange rate gives some
benefits of “importing” a
relatively stable monetary
policy
● This limits policy options
and has contributed to
inflation and output
volatility.
Source: IMF: Republic of Azerbaijan: Selected Issues (2013)
Real exchange rate
Source: IMF: Republic of Azerbaijan: Selected Issues (2013)
Large influx of foreign currencies from oil exports
Insufficient instruments for effective sterilization and
the weak monetary policy transmission channel
Volatility and an appreciation of the real effective
exchange rate, which hurts competitiveness and
prospects for export diversification.
+
Inflation
● volatile inflation in 2000-2014 (nearly 21% in 2008)
● determinants of inflation in Azerbaijan:
○ Monetary policy - converting the oil revenues of the state budget which in turn leads to high
money growth and therefore high inflation
○ Fiscal policy - huge government spending (infrastructure and social projects) financed
directly by oil revenues (SOFAZ)
○ Exchange rate - real appreciation caused deflationary pressures (not exactly observed)
○ Oil price - indirect transmission through imported goods (import cost-push shock)
Inflation, consumer prices (annual %) - Azerbaijan
Source: https://data.worldbank.org/
Fiscal policy
Government spending pass-through
Source: Hasanov (2009) - Analyzing price level in a booming economy - the case of Azerbaijan
QPM: Monetary policy rule
● Poorly developed financial markets and dependence of the commercial banks
on the foreign borrowing, as well as absence of inflation targeting suggest
different formulation of the equation.
● The usual interpretation of the monetary policy shock is not valid in case of
Azerbaijan
QPM: Uncovered interest rate parity
● UIP equations might be misspecified because it determines the nominal
exchange rate, which is in case of Azerbaijan fixed during most of the
examined period
QPM: IS curve
● Due to high dependence of Azerbaijan’s economy on oil revenues, impact of
oil price changes on Azeri GDP is fairly important (Zulfigarova and
Neuenkirch, 2020)
● As Chafik (2019) suggests, including the oil price in IS curve might be more
appropriate description of the the output in oil exporting countries
QPM: Phillips curve
● We did not find anything particularly problematic about the QPM equation for
the Phillips curve
QPM: Real exchange rate
● Movements in the RER trend are considered to reflect country's productivity
and therefore have no impact on output gap or inflation
● Not the case of Azerbaijan
○ volatile inflation
○ unstable output
● This leads to big gap
QPM model - summary
● Apart from the mentioned misspecifications (monetary policy rule, IS curve,
real exchange rate and the UIP equation) the fiscal policy block and the
exports should be explicitly modelled, because they are the main drivers of
the economic dynamics in Azerbaijan.
Literature
● Zulfigarov F, Neuenkirch M. The impact of oil price changes on selected macroeconomic indicators in
Azerbaijan. Economic Systems. 2020;44(4):100814. doi:10.1016/j.ecosys.2020.100814
● CHAFIK, Omar, 2019. "Monetary policy in oil exporting countries with fixed exchange rate and open capital
account: expectations matter," MPRA Paper 92558, University Library of Munich, Germany.
● Hasanov Fakhri, 2011. "Analyzing price level in a booming economy: the case of Azerbaijan," EERC
Working Paper Series 11/02e, EERC Research Network, Russia and CIS.
● Vugar Rahimov & Shaig Adigozalov & Fuad Mammadov, 2016. "Determinants of Inflation in Azerbaijan,"
Working Papers 1607, Central Bank of Azerbaijan Republic.
● IMF Republic of Azerbaijan: Selected Issues. IMF Country Report No. 12/6, January 2012