Foreign Trade of Azerbaijan: A Shadowed Deficit

A couple of days ago I read online that Azerbaijan’s imports during July 2018 was the highest of the year so far[1]. We all know that Azerbaijan primarily imports things like vehicles, telephones, laptops etc. but still couple of questions came to my mind. Particularly, how does our trade balance look once we take oil/gas exports out of the equation?

To begin with, during the period of January – July 2018, Azerbaijan’s exports and imports were 10,748 million USD and 5,776 million USD respectively, leading to a magnificent trade surplus of 4,972 million USD. Yet, it is obvious that this trade surplus is accumulated largely because of oil and gas sector. Once we take them out, we are left with only 1,322 million USD worth of exports. Even of that amount, around 25% belongs to oil products, but I will not deduct them since they are not crude oil. With crude oil and natural gas excluded, Azerbaijan’s trade surplus of almost 5 billion becomes a trade deficit of 4.45 billion USD, which is around 17% of GDP for the relevant period. This number alone is enough to show how much Azerbaijan’s economy is dependent on commodities as well as imports from abroad.

To further analyze the issue, let us look at the export/import categories individually. There are a number of products which according to a dozen of sources, is developed or quickly developing in Azerbaijan, such as Cotton, Tobacco, Hazelnuts, Wine, Tea and other Fruits/Vegetables. Naturally one might assume that our exports of the above-mentioned goods should be substantial enough to contribute positively to our trade balance. In other words, if we are really developed/specialized on those products, then surely, we would export them more than we import. Let us see if that is the case.

I have constructed a table for Azerbaijan’s top net exports. I used net exports (exports – imports) as the benchmark because if the sector is unable to meet the local demand (in other words, if sector is importing a significant amount from abroad) then it would be preposterous to call it developed. Initially I was going to create a table for top 20 net exports, but that turned out to be impossible because according to the data of Customs Committee, out of 97 categories presented, Azerbaijan has a positive balance (positive net exports) in only 12 of them, which, in my opinion, is yet another indicator of how poor our non-oil/gas sector is developed. Thus, below you can see the top 11 products (excluding fossil fuels) of Azerbaijan with positive trade balance:

Table 1: Top Net Exports of Azerbaijan, million USD

Code[2] Product Export Import Net Export
7 Vegetables 185.1143 31.70036 153.414
52 Cotton 59.8902 3.01908 56.8711
8 Fruits and Nuts 116.20148 64.27857 51.9228
76 Aluminum and its products 77.76474 46.72756 31.0372
74 Copper and its products 25.94762 8.57605 17.3716
41 Unprocessed leather/skin 8.0155 0.67663 7.33887
26 Ores, slag and ash 7.98087 0.86269 7.11818
78 Lead and its products 6.54768 0.20325 6.34443
29 Organic Chemical Compounds 32.68174 29.64573 3.03601
13 Cedar, Resin and plant extracts 0.81485 0.26824 0.54671
5 Other animal products 0.60645 0.30416 0.30229
Total: 521.56553 186.26242 335.303

As you can see, the total net export from all of the categories combined is 335.3 million USD. In  order to better understand how meager that indicator is, I have grouped some other categories with a negative balance for comparison. Each of the 5 groups below have a combined net import greater than the total of all 11 categories above:

Tables 2 – 6: Major Net Imports of Azerbaijan, million USD

Code Product – Group A (million USD) Exports Imports Net Imports
73 Ferrous metal products 34.94694 430.92283 -395.976

 

Code Product – Group B Exports Imports Net Imports
85 Electronics 12.19535 366.2989 -354.104

 

Code Product – Group C Exports Imports Net Imports
87 Vehicles and their parts 2.63164 309.70239 -307.071
32 Paints, ink, varnishes… 1.3458 33.35493 -32.0091
Total: 3.97744 343.05732 -339.0799

 

Code Product – Group D Exports Imports Net Imports
10 Cereals 1.94502 143.12747 -141.182
90 Optical and medical apparatus 5.20514 109.07933 -103.874
48 Paper and board products 1.02088 76.79056 -75.7697
4 Milk products, eggs, honey…. 6.40325 73.29643 -69.6787
Total: 13.4138 403.9188 -390.505

 

Code Product – Group E Exports Imports Net Imports
24 Tobacco 6.40325 73.2964 -66.8932
69 Ceramics products 0.12638 50.1898 -50.0634
17 Fertilizers 0.3606 49.58 -49.2194
31 Sugar and its products 15.1866 61.9471 -46.7605
64 Shoes 0.10782 41.6095 -41.5017
22 Beverages 8.06471 48.6464 -40.5817
2 Meat and meat addivities 0.4436 37.8274 -37.3838
Total: 36.1745 395.61 -359.44

What this tables tell us is that all of the “revenues” Azerbaijan gets as a country from export of its leading non-oil products such as Vegetables, Cotton, Fruits, Aluminum etc. is not even enough to cover our “expenses” from importing ferrous metal products (group A) or electronics (group B) and so on. The most critical groups for me here are D and E, for a simple reason: it is coherent (to a certain degree) that we import a lot of electronics/vehicles/ferrous metal products because mobile phones, computers, cars and others require a lot of specialization which we significantly lack. On the other hand, groups D and E are consisted of simple everyday products. Particularly group E is interesting since it has goods such as Tobacco, Sugar, Tea and Beverages which we often claim to be “specialized” in. During the January – July period, we have lost 66.9 million USD in foreign trade from importing Tobacco, a loss larger than the amount we gained from cotton exports. Just take a moment and think about it: there was a lot of boasting in our country recently about cotton production even to the degree of calling it the “white gold”. Indeed, it is true that Azerbaijan’s cotton production increased adequately in the course of the last two years, yet all of the cotton exports are still smaller than the amount of tobacco/tobacco products we import. The severity of situation looks even deeper when considering that tobacco is labeled as another “traditional” sector in Azerbaijan.

Thus, the image is clear, we have considerable problems in our foreign trade, but it is easy to overlook them because revenues from oil/gas sector conveniently compensate for our trade “loss”. Overall, I would subjectively divide Azerbaijan’s main imports into 2 categories:

  • Goods such as cars, laptops, mobile phones, locomotives, pharmaceutical products, wood etc., which either requires high levels of specialization or a number of scarce input products in the form of natural resources. Unfortunately, we cannot do much about the latter. For example, only 11% of Azerbaijan’s landscape is covered with forests, implying that we would not be a producer of paper or similar products any time soon. Specialization, on the other hand is something that can be achieved over time. However, most of us are already familiar with failure of companies such as NAZ (car production company of Nakhchivan), Kür (computer production company of Mingachevir) and others. The only way to create a successful company specialized in one of those fields above is thru the profit incentives, which, as de facto State-Owned Enterprises NAZ and Kür severely lacked.
  • Goods such as beverages, meat, tea, tobacco, milk, honey and other agricultural products. They are not particularly hard to produce, but dominance of oil sector in our economy has long undermined their performance. During the first 7 months, these goods accounted for almost 400 million USD worth of imports. Everybody is talking about export potential of our agricultural products while we fall far short of even meeting the local demand. Instead of constantly thinking about exporting cotton to other foreign markets (which brings us only 56.8 million USD), maybe it is time to think about meeting the local demand for other agricultural products first? Because looking from the economical point of view, 1$ less import has the same effect as 1$ more export.

At the end, it is no mystery that Azerbaijan’s foreign trade is in a dire situation. Not only we import technologically advanced goods but also simple agricultural products. For the short run, I believe that the government should abandon the export-oriented policy (according to some sources, farmers were even pressured to plant cotton[3]) and create free market incentives to meet the local demand. For the long run, our only hope is to create a suitable environment for privately owned manufacturing companies to specialize in their respective fields.

Footnotes:

[1]All of the following numbers used in this paper are retrieved from report of Customs Committee: http://customs.gov.az/modules/pdf/pdffolder/71/FILE_C9FAFF-4A0744-9A5FD7-65A94F-3F5341-BF6BCA.pdf

[2]Code of the products are given in order to easily navigate thru the report of the Customs Committee (attachment 5 on page 24) and find exact category name (the report is presented in Azerbaijani only)

[3]https://www.bbc.com/azeri/azerbaijan-43015901

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