Without strong fiscal stimulus, the economy is projected to contract by 1.0% in 2016 because of continued low oil prices, followed by 1.0% growth in 2017 as an expected revival in oil prices facilitates economic recovery, according to Asian Development Bank’s forecast.

According to experts of the bank, higher social spending should limit the downturn in 2016. Despite a 10% salary increase for civil servants introduced in early 2016, real household spending is expected to slow as sharply higher inflation, at 12%, reduces real incomes.

“On the supply side, industry is forecast to contract in 2016 because of slowing oil production, but it could improve in 2017 and raise incomes if oil prices rebound. Public investment, including assistance from development partners for infrastructure, should stabilize construction in both years. Some growth in agriculture is also anticipated each year with continued government support for farmers, including the anticipated completion of reservoir and irrigation networks. On the demand side, private consumption and investment, both public and private, will be the main sources of growth. Net exports should narrow in 2016 and recover in 2017 along with oil prices, but the growth outlook remains vulnerable to any further energy price shock. A projected inflation spike to 12.0% in 2016 reflects the impact of currency depreciation on imports, which supply nearly half of consumption. A projected decline in global food prices, slower income growth, and the waning effects of the currency realignment are projected to slow inflation to 5.2% in 2017. However, inflation will likely be higher if the manat depreciates further. Weak oil prices pose a severe challenge to fiscal policy, as revenues depend heavily on oil taxes and transfers from the state oil fund. Revenue as a percentage of GDP is projected to decline to 30.2% in 2016. However, the budget aims to support the economy with higher social spending on pensions, targeted social assistance, and stipends, raising expenditure to 33.3% of GDP and the deficit to 3.1%. Following amendment of the legal ceiling on external debt, total government and government-guaranteed debt is projected to climb to 40.9% of GDP in 2016 with investment in the Southern Gas Corridor, other power-related infrastructure, and transport. The uncertain outlook for oil prices also affects the current account, which is projected to run a small deficit equal to 0.6% of GDP in 2016 as exports decline by 12.2%, outpacing the decline in imports. The current account is forecast to return in 2017 to a surplus of 1.5%, with some recovery of oil prices and exports rising by 7.0% while imports decline again, by 1.5%. The trade surplus is likely to remain small over the medium term until oil prices recover significantly”, the bank said.

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