The Dutch Disease in Azerbaijan Economy Essay

It is not a secret that oil prices are instable. The price of oil in international market can be manipulated by the economic, political factors which is the reason why predicting prices for a long term is very complicated, sometimes impossible task. Experts started to warn Azerbaijan government that building the country budget mainly based on unpredictable oil export returns is unreliable since the boom of oil industry in the country. Moreover, oil and gas reserves are not infinite, they have limits. They will deplete within two, three decades in best projections. Thus any disruption in oil-gas export operations may impair accomplishment in market economy transition. Therefore, the country must accomplish division of budgetary formation by relying on different sources in economy.
Since 2006 Azerbaijan experience the huge flow of foreign currency particularly starting from 2005-2006 when huge oil pipeline Baku-Tbilisi-Ceyhan start to operate. It is crucial factor to manage this process adroitly in order to avoid undesirable outcomes of Dutch disease.
The term of Dutch disease was fabricated in 1977 by "The Economist" to describe the decline of the manufacturing sector in the Netherlands after the discovery of a large natural gas field in 1959 (The Dutch disease, 1977). Generally, the term means, strengthening one particular field of economy by neglecting the others. In our research scope the term refers to intensive exploitation of natural resources and gradual decline in manufacturing sector. Such approach to the economic management brings about serious problems in many countries where relying on primarily natural reserve returns in economic operations. These countries (Nigeria, Mexico) confronted serious problem in accomplishing sustainable growth of economy, as a rule.
Disproportionate economic management end up with macroeconomic instability. It has been given effect of Dutch disease during the interview that is given in the end of this research, prove the threat still remains in Azerbaijan economy. It will be given three main impact of Dutch disease which is originated from economic management failure and threaten the macroeconomic stability (C. B. Rosenberg and T. O. Saavalainen, 1998)
Firstly, appearance of the Dutch disease may bring about violation of foreign trade balance. The gap between export and import actions will grow in favour of import transactions. It is clear that oil boom in Azerbaijan triggers huge foreign currency inflow to the country. Excess of foreign currency increases demand to domestic currency. Thus domestic currency appreciates against the foreign currencies. Central Bank of Azerbaijan would tolerate to the appreciation in order to control inflation rate. Otherwise huge entry of foreign currency will bring about high rate of inflation, which the economy of Azerbaijan encountered once in the beginning of transition process. It is obvious that if the domestic currency rate appreciates, then import operations get more attractive for country rather than export operations. High domestic currency rate will decrease the competitiveness of domestic product in local and foreign market which is not pretty high yet, in Azerbaijans case. On the other hand, expectations from oil-gas revenues in upcoming period would