Azerbaijan’s Foreign Economic Relations in 2018 (January-September)

Contents

1. Amendments to Legislation on Foreign Economic Relations

2.  Structure and Dynamics of Foreign Trade

     2.1. Analysis of the structure and dynamics of imports

    2.2. Analysis of the structure and dynamics of exports

   2.3 External trade balance

3. Balance of Payments: Major Trends

      3.1. Analysis of the current account balance  

     3.2. Analysis of the financial account

    3.3. Overall balance of payments

4. Major Trends Observed in Foreign Economic Relations 

1.Amendments to Legislation on Foreign Economic Relations

During the first nine months of 2018, Azerbaijan adopted three strong documents that all foreign economic activity participants can desire:

1) Rules of Foreign Currency Transactions of Residents and Non-Residents in the Republic of Azerbaijan were amended by the Central Bank’s decision No 4/1, dated 26 February 2018.[1] Under the amendments, upon advance payment for goods and services imported into Azerbaijan, imports shall be proven by a customs declaration and a proof of services having been rendered, respectively, in 270 days from the day of payment, compared to the previous term of 180 days.

2) The Cabinet of Ministers has expanded the list of products to which export promotion is applied under Decision 276, dated 25 June 2018. [2]  Eggs, peeled peanuts, olive oil, fruit wines, including pomegranate wine, except for grape wines, were added to the existing list of goods and products. Notably, payment rules of exporting promotion to Persons exporting non-oil products (Persons) by means of the state budget are regulated by the Cabinet’s Decision No. 401 adopted on 6 October. The exporting promotion base amount is three percent of exporting product’s customs value. The exporting product’s customs value is recorded in customs declaration. The new Decision, however, says the state returns part of their costs, 3 to 6 percent of the customs value of the goods to Persons. This figure for eggs and olive oil (its fractions) is 1.5 percent, for fruit wines, including pomegranate wine, 2 percent, for peeled peanuts 1 percent.

3) The “Action Plan to Improve the Imports and Exports Control System” has been approved by the presidential Decree dated June 28, 2018.[3] Under the Plan, the following activities have been identified according to relevant timetables:

• Apply a system for an import declaration submitted in electronic form in advance – until 1 December 2018;
• Improve the document exchange between state agencies using a single window system in the simplification of customs procedures and customs clearance – until 1 September 2018;
• Jointly control over the means of identification of goods and vehicles crossing the customs border – until 1 August 2018;
• Submit in electronic form a customs declaration, re-export notice or short-term export declaration for goods and transport means crossing the customs border (except for the goods not intended for use in commercial or production purposes by individuals) – until 1 January 2019;
• Launch an interactive electronic calculator service for entrepreneurs to calculate customs charges for imported goods through the website of the State Customs Committee – until January 1, 2019;
• Send SMS on the status of goods to foreign trade participants at all stages of customs clearance – until 1 January 2019;
• Launch an electronic (online) queue system for customs efficiency – until January 1, 2019;
• Apply control equipment in line with international standards for the purpose of accelerating the movement of goods and transport means across the border customs check-points – until January 1, 2019;
• Define simplified customs procedures of customs and tax authorities for foreign trade participants classified as a low risk group – until 1 December 2018;
• Improve mechanisms to determine the customs value during customs formalities of imported goods – until 1 December 2018;
• Simplify procedures for exports of agricultural products – until 1 October 2018.

Besides, the Action Plan also includes the improvement of external trade’s customs statistics in view of the international practice not later than October 1, 2018.

2.Structure and Dynamics of Foreign Trade[4]

During the first nine months of 2018 the foreign trade of Azerbaijan (exports plus imports) totaled $22,180,000,000, up $7,859,000,000, or 54.9 percent, from a year earlier.

Exports accounted for 64.4 percent of the value of Azerbaijan’s total foreign trade (as compared with 56.6 percent in the corresponding period of previous year), while imports accounted for percentile (as compared with 43.4 percent in the corresponding period of previous year) during the reporting period.

The foreign trade growth has been due chiefly to the volume of exports, which represented an increase of $6.131, or 78 percent of total trade growth, while imports captured $1.728 billion, or 22 percent, of total trade volume.

• Analysis of the structure and dynamics of imports

Imports totaled $7.905 billion during the review period, up $1.728 billion, or 28 percent, from the same period of 2017. 

Public sector imports saw sharp growth. Whereas public sector imports totaled $823 million in the first nine months of 2017, they have increased $789 million, or 96 percent, to $1.612 billion during the first nine months of 2018. Public sector imports represented 20.4 percent of the value of all Azerbaijani imports (as compared with 13.3 percent in 2017). 45 percent and 55 percent of total imports growth, respectively, came from public and private sectors.

No major change in the geographical structure of imports can be seen during the reporting period. The European Union accounted for 21.1 percent of Azerbaijan’s total imports (as compared to 21.1 percent in 2017), while the Commonwealth of Independent States (CIS) 25 percent (as compared to 26.2 percent in 2017).

Machinery, mechanisms and electrical equipment have occupied a dominant position in the import commodity structure, accounting for 23.2 percent of total imports (as compared to 21.6 percent in 2017) during the reporting period.

The major change in the imports commodity structure was driven by a decline in the share of consumer goods, as well as an increase in the share of commodities for production and investment purposes. During the first nine months of 2018, commodities for the consumption of food and clothing by households accounted for 19.6 percent of total Azerbaijani imports, while this figure was 23.5 percent in 2017. The share of chemical products, metals and metal products, machinery, mechanisms and electrical equipment, and transport means rose from 52.5 percent to 57 percent.

Statistical analysis has found that there is high concentration of imports in geographical terms, with ten countries standing at 67.3 percent of Azerbaijan’s total imports  over the reporting period.

Russia, Turkey and China have the biggest shares, representing 40.3 percent, followed by seven more countries having the biggest shares, accounting for 20 percent of Azerbaijani imports. These countries are Germany, the United States, Ukraine, Japan, Italy, Iran, and Switzerland.

2.2. Analysis of the structure and dynamics of exports

Exports totaled $14.275 billion during the review period, up $6.131 billion, or 75.3 percent, from the same period of 2017.

The European Union and the Commonwealth of Independent States (CIS) accounted for, respectively, 53.2 percent and 5.1 percent of Azerbaijan’s total exports. Exports to the CIS grew by $87.5 million, or 13.7 percent, while to the European Union by $3.874 billion, or 103.9 percent as compared to the previous year. The oil and gas sector accounted for $5.994 billion, or 97.8 percent of total exports growth, while non-oil sector accounted for $138 million, or 2.2 percent of the exports growth.

Oil and gas sector accounted for 91.5 percent (86.9 percent in 2017) of total exports from Azerbaijan, while the share of non-oil sector was 8.5 percent (13.1 percent in 2017). Oil and gas exports grew by $5.994 billion (84.7 percent), non-oil exports by $138 million (12.9 percent) in volume terms.

Like imports, there is high concentration of exports in geographical terms. Out of Azerbaijan’s 176 partner economies, ten economies stood at 71.6 percent, while three top economies (Italy, Turkey and Israel) accounted for 42 percent of total Azerbaijani exports over the reporting period.

Russia and Turkey accounted for 56.1 percent, or $678 million, of non-oil exports.

The top five partner economies accounted for 69.1 percent of total non-oil exports from Azerbaijan. All the four countries except for the Netherlands are Azerbaijan’s neighbors.

As regard to non-oil exports commodity structure, commodities by eight groups accounted for 78 percent of total exports.

Analysis of customs statistics has found that agricultural and food industry products accounted for $445.2 million, or 36.9 percent of total non-oil exports, including $65 million falling to the share of prepared foods, $188.1 million of vegetables, and $154.4 million of fruits and berries. Bu metals and metal products at lower prices, plastics and plastic substances, precious stones and metals from another group of products occupied a dominant position in the non-oil export commodity structure during the reporting period.

2.3. External trade balance

Thanks to advantageous global oil price conditions during the first nine months of 2018, the country’s balance-of-trade surplus rose 3.2-fold from $1.966 billion in the first nine months of 2017 to $6.370 billion.

The country’s oil balance-of-trade surplus accounted for $12.9 billion during the first nine months of 2018, representing an increase of $4.1 billion, or 47 percent, as compared to the previous year.

Azerbaijan, however, has seen a non-oil trade deficit over the reporting period, totaling $5.577 billion and representing an increase of $1.193 billion (27.2 percent) compared to the same period of 2017. The sharp increase in non-oil trade deficit mainly explains the fact that non-oil exports only grew by 13 percent ($138 million), while non-oil imports grew by 24 percent ($1.3 billion).

3.Balance of Payments: Major Trends[5]

3.1 Analysis of the current account balance 

 Cash inflows and outflows within the current account balance totaled, respectively, $ 21.407 billion and $16.319 billion during January-September 2018.

When compared with the previous review period, current account inflows grew by $5.416 billion, or 33.9 percent, during the first nine months of 2018, while outflows grew by $1.391 billion, or 9.3 percent. As a result of the dominance wielded by cash inflows over outflows, the surplus of current account surplus increased by about 5 times from $1.063 billion to $5.088 billion. It is precisely this factor which, of all others, has played a crucial role in securing stability of the national currency in the previous period.

The current account is divided into four components: foreign trade, services, primary income and secondary income. As foreign trade is dealt with in detail above, we will focus on three other components below.

Oil-and-gas and non-oil sectors, respectively, accounted for 68 percent, or $14.6 billion and 32 percent, or $6.8 billion of total inflows into the country. Commodities, service exports, and primary and secondary incomes reached 71.1 percent, 18.8 percent and 10.1 percent of total receipts from current operations, accordingly. Besides, 48.2 and 32.2 percent of payments to non-residents came from commodity and service imports, and 19.6 percent from transfers to non-residents for primary and secondary incomes.

Service exports and imports totaled $4.038 billion and $5.347 billion, with a service balance deficit valued at $1.309 billion.

Tourism, transport, and other services, respectively, accounted for 62.5 percent ($2.5 billion), 22 percent ($889 million) and 15.5 percent (647 million) of service exports. Tourism imports rose 6.7 percent from the previous period to $ 158.8 million. Tourism exports rose 6.7 percent from the previous period to $ 158.8 million.

Tourism, construction, transport, and other services, respectively, accounted for 39.6 percent, 20 percent, 20.2 percent, and 20 percent of service imports. Tourism imports dropped 5 percent from the previous period to $ 120 million during the first nine months of 2018, while transport imports rose 48.6 percent ti $353 million, but construction imports decreased twofold.

Service imports dropped 12.7 percent from the previous year to $781.6 million during the reporting period.

According to the methodology of the balance of payments guide, primary income includes earnings, investments, securities portfolio, dividends and retained (reinvested) earnings, loans, royalty and licensing services, franchising, income on deposits, interest and fee income, revenues, and payments to non-residents from the country. During the reporting period, secondary income provided to Azerbaijan totaled $1.269 billion (up $417 million, or 49 percent from the previous year), while payments to nonresidents stood at $2.758 billion (up $644.4 million, or 30.5 percent from the previous year), with a deficit of $1.489 billion (up $227.1 million, or 15.2 percent from the previous year). There are no official data on the structure of inflows into Azerbaijan within primary income. Moreover, it is only reported that oil sector accounted for $391.4 million, while non-oil sector for 877.9 million of total inflows. It’s probable that these are revenues generated from the placement of foreign assets by the State Oil Fund of Azerbaijan (SOFAZ), and those generated from SOCAR investments. Non-oil receipts could include interest on foreign assets held by banks, and compensation of employees and other incentives provided by physical persons.

It is clear from the report of the Central Bank that the bulk of the primary income – about $1.8 billion ($1.2 billion in 2014) was the repatriation of foreign investors’ income in foreign oil and gas companies. In addition, within the balance on primary income, $358 million $278 million in 2017) in securities and $289.7 million ($332 million in 2017) in foreign loans were provided to non-residents.

According to the methodology the balance of payments guide is based on, secondary income includes grants, contributions (membership fees) payable to international organizations, transactions with individuals (bank account and card transfers, in cash), fines, penalties and fees provided to the country and nonresidents.

During the first nine months of 2018, Azerbaijan received $870.7 million in secondary income ($ 800.6 million in 2017), $320.1 million were paid to non-residents. ($296 million) and the surplus of revenues amounted to $550.6 million ($504.6 million).

During the reporting period, money transfers provided to Azerbaijan by individuals from abroad totaled $801 million, while humanitarian aid and other undisclosed payments amounted to $70 million. The Central Bank’s report does not provide any information on the structure of money transfers abroad. It’s probable that the majority are contributions (membership fees) payable to international organizations. Thus, the state budget every year allocates between about $150 and $160 million.

3.2. Analysis of the financial account

During the first nine month of 2018, the balance in foreign assets totaled $3.345 billion, while those in claims on or liabilities to nonresidents and financial account, accordingly, touched $881.2 billion and $2.464 billion.

The financial account in the first nine months of 2018 saw a $2.464 billion deficit, as compared to the year before, which saw a surplus coming in at $289 million. The main driver of this huge deficit is the sharp decrease in non-resident inflows in the financial account. Financial liabilities, meanwhile, narrowed by fivefold in the period from $4.734 billion from the year earlier to $ 881.2 million.

The decline in financial inflows into the country has been reflected in the following areas:

1) Direct oil and gas investments have plunged. Net direct investments in the oil and gas sector totaled $279 million for the first nine months of 2018 compared with $1.685 billion for the same period in 2017. The “Net direct investment” implies the difference between the volumes of foreign direct investments (FDI) and repatriated investments in oil and gas sector during the reporting period. For example, the volume of direct investments to the oil and gas sector in Azerbaijan totaled $2.382 billion in January-September 2018, while the repatriation of capital by foreign oil and gas firms came in at $2.104 billion in the period. These figures for fiscal 2017, respectively, amounted to $3.772 billion and $ 2.087 billion.

2)  The amount of non-oil sector net financial liabilities (NSNFL) has decreased. Direct net non-resident investment to the non-oil sector fell more than twofold to $255 million in the period, while net financial assets for Azerbaijani residents’ non-oil sector abroad (overseas investment) grew almost twice, reaching $834 million. The level of direct overseas investment by local non-oil businesses for January-September 2018 was over 3.2 times than that of foreign direct investment for Azerbaijan’s non-oil sector.

3) There has been no portfolio investments in Azerbaijan through the purchase of various debt securities and bonds. If the net amount of portfolio investments to Azerbaijan in January-September 2017 was AZN 2.764 billion, the net financial liability for portfolio investments during the same period of 2017 amounted to (-) $348.5 million. The negativity of this indicator implies that the amount of debt repayments for portfolio investments exceeds that of portfolio investments for the country, with the capital outflow exceeding $348.5 million. At the same time, the balance of net assets for portfolio investment (overseas investments by Azerbaijani residents) stood at $623 million in the period, while there was no capital outflow in the same quarter in 2017.

4) The net amount of the loan commitments has dropped dramatically. Net foreign loan commitments of Azerbaijan for January-September 2017 amounted to $352 million, while this figure was (-) $ 445.5 million in the same quarter of 2018. The negativity of this indicator means that the amount of loans repaid by Azerbaijan over the reporting period exceeded country inflows through obtaining loans, with the capital outflow amounting to $445.5 million.

5) The volume of trade loans and advances for the first nine months of 2018 rose $803 million, or 52 percent, to $2.357 billion compared with the same period of 2017. One relevant factor is that liabilities for trade loans and advances increased more than twofold to $766.5 million during the reporting period.

3.3. Overall balance of payments

A sharp increase in oil revenues has led to the rapid growth of surplus in the overall balance of payments during the reporting period. The trade surplus in January-September 2018 rose $1.462 billion, or 66 percent, compared to the previous period, to $3.665 billion.

The volume of foreign currency reflected in the “balancing item” of the Central Bank of Azerbaijan and the international methodology called “net errors and omissions” in the balance of payments data, increased about 30 percent to $1.037 billion. When this indicator is positive, it indicates that there is a capital inflow from unknown sources, other than those officially recorded, through the balance of payments. When this figure is negative, it indicates the extent to which the capital inflows are not officially registered by the balance of payments, but confirmed by various sources. In practice, the “cash cushion” is a major source of noncollectable currency circulation in which cash foreign currency and non-legal cash inflows are not declared by physical persons.

4.Major Trends Observed in Foreign Economic Relations

Below are major trends observed in foreign economic relations:

• A sharp increase in imports (28 percent) was recorded, the biggest increase since 2010.
• Public sector imports dramatically rose to about 96 percent compared with the previous period of 2017.
• The share of consumer goods (food, clothing, etc.) in aggregate imports decreased from 23.5 percent to 19.6 percent.
• The share of investment and capital commodities in imports (chemical industry products, metal and metal products, machinery, mechanisms and electrical equipment, etc.) increased from 76.5 percent to 80.4 percent.
• There is high geographical concentration in imports – 67.3 percent of Azerbaijan’s total imports were provided by 10 countries in the period.
• Despite the sharp increase in exports (75.3 percent), 97.8 percent of this growth came from the oil and gas sector, and only 2.2 percent from non-oil products.
• Non-oil exports grew by 13 percent, yet the share of this sector in total exports dropped from 13.1 percent to 8.5 percent.
• Whereas the country’s foreign trade relations were conducted with 176 countries in the period, only 5 countries accounted for 69.1 percent of non-oil exports.
• Export markets are mainly developing countries, and this fact shows that Azerbaijan’s non-oil products can not have access to developed markets.
• Non-oil exports are also very limited in terms of commodity types, and 78 percent of overall exports is provided by 8 goods groups. Another noteworthy point is that non-oil exports are provided by commodities with low and medium technological complexity.
• Total foreign trade balance grew 3.2-fold to $6.4 billion.
• Whereas oil trade surplus rose from $8.8 billion to $12.9 billion, the non-oil trade deficit widened from $4.4 billion to $5.6 billion.

Major trends in the performance of the Balance of Payments:

• The current account surplus grew 5 times to $5.088 billion.
• The growth rate of cash flows to the country (33.9 percent) significantly exceeded that of payments to non-residents (9.3 percent).
• Oil and gas and non-oil sectors accounted for, respectively, 68 percent and 32 percent of overall receipts from current operations.
• The share of service exports in country’s currency earnings is real low and 18.8 percent and 71 percent, respectively, of all currency flows to the country were provided thanks to service and commodity exports in the period.
• The share of factor incomes in the country’s foreign exchange earnings is sufficiently low, and wages, interest, investment income, dividends and profit from current operations accounted for 5.9 percent of all currency movements to the country in the reporting period.
• 85 percent of revenues (inflows) from service exports were provided by two services – tourism and transport in the period. Accordingly, tourism services alone provided 62.5 percent of all service exports, while tens of other services did 16-17 percent of aggregate services.
• Azerbaijan has very limited potential, particularly with regard to business and construction services exports. However, approximately 45 percent of Azerbaijan’s service exports came from business and construction services.
• Receipts on primary income rose by $417 million (49 percent) compared to the previous period of 2017, while payments to non-residents by 644.5 million (30.5 percent).
• International oil and gas companies exported about $1.8 billion in profit from Azerbaijan in the period, up $600 million from the previous period.
• During the reporting period, Azerbaijan received $ 358 million in primary earnings, plus interests on securities to non-residents and $289.7 million for the use by foreign loans.
• Remittances sent to Azerbaijani citizens from abroad increased 10 percent to $801 million.
• The financial report saw a $2.464 billion deficit during the study. However, in the same period of 2017, there was a $289 million surplus.
• Compared with the same period of 2017, net financial obligations of the country decreased 5.5 times to $881.2 million. This figure manifests a decrease in investment flows provided through various sources.
• Direct investment in the oil and gas sector decreased 6 times to $279 million.
• The volume of foreign oil and gas companies’ direct investment repatriation amounted to $2.104 billion.
• Net financial liabilities for the non-oil sector decreased more than 2.5 times to $255 million.
• Net financial assets for Azerbaijani residents’ non-oil sector abroad (overseas investment) also increased 2 times to $834 million.
• If the net amount of portfolio investments to Azerbaijan in January-September 2017 was AZN 2.764 billion, the net financial liability for portfolio investments during the same period of 2017 amounted to (-) $348.5 million.
• Net foreign loan commitments of Azerbaijan for January-September 2017 amounted to $352 million, while this figure was (-) $ 445.5 million in the same quarter of 2018.
• The volume of trade loans and advances for the first nine months of 2018 rose by $803 million, or 52 percent, compared with the same period of 2017.
• The balance of payments surplus rose 66 percent to $3.665 billion.
• The volume of foreign currency assets recorded as the international methodology called “net errors and omissions” in the balance of payments data and remaining unknown sources in the banking sector, increased about 30 percent to $1.038 billion.

References

[1] https://uploads.cbar.az/assets/5da03cfa7138a9d2cc4ad3daf.pdf

[2] http://www.e-qanun.az/framework/39289

[3] http://www.e-qanun.az/framework/39273

[4] All foreign trade data are being compiled from two official sources: the Department of Trade Statistics at the State Statistical Committee https://www.stat.gov.az/source/trade/ and statistical bulletins released by the State Customs Committee http://customs.gov.az/az/faydali/gomruk-statistikasi/xarici-ticaretin-veziyyeti-haqqinda/

[5] All data on the balance of payments are official and being compiled from Central Bank’s relevant reports.  https://www.cbar.az/page-43/external-sector-statistics