Determinants of the Agricultural Exports in Azerbaijan

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Niftiyev, Ibrahim

Working Paper Determinants of the Agricultural Exports in Azerbaijan

Suggested Citation: Niftiyev, Ibrahim (2020) : Determinants of the Agricultural Exports in Azerbaijan, SSRN, Rochester, NY, http://dx.doi.org/10.2139/ssrn.3686701

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Determinants of The Agricultural Exports in Azerbaijan

Working Paper No. 2

Ibrahim Niftiyev1

1 PhD Candidate, Univesity of Szeged, Doctoral School in Economics [email protected]

This working paper has not gone through the final formal review and should be cited as a working paper. The main purpose of this working paper is to get ready the materials, concepts, and discussions for the final academic journal publication which is ongoing.

There is no funding or official support from any organization or person. All errors and expressions are those of the author.

Ibrahim Niftiyev ORCID number: 0000-0003-3437-9824 Research Gate/ Google Scholar profile: Ibrahim Niftiyev

Baku – 2020 (September) Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

Table of Contents

Abstract ...... 3 1. Introduction ...... 3 2. Literature review ...... 5 3. Data and Methods ...... 8 4. Results ...... 9 4.1. Main Agricultural Exports ...... 10 4.2. Empirical Findings ...... 11 5. Discussion and Limitations ...... 14 6. Conclusion ...... 16 References ...... 17

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

Abstract

Oil booming and accumulated mineral revenue contributed to the economic growth in Azerbaijan since independence but also pressurized the national currency leading to the appreciation of the nominal effective exchange rate (NEER) and real effective exchange rate (REER). An increase in export prices makes them expensive, decreasing the competitiveness of the country. Azerbaijan’s recent decreased economic performance during 2014–2015 reflected a common reality among the resource exporting countries: relying on the primary sectors might jeopardize the national economy due to the extreme price volatility. The paper investigates the extension of the relationship between NEER, REER, and other export-related macroeconomic variables and agricultural exports to identify Azerbaijan’s non-oil sub-sectoral dynamics between 2001–2018 via the OLS estimations. The main findings indicate that NEER negatively impacted potato, fresh fruit, and fresh vegetable exports. Moreover, potato and fresh fruit exports demonstrated more stable export dynamics during the economic crisis periods.

Key words: Azerbaijan economy, nominal effective exchange rate, real effective exchange rate, agriculture, crop exports

1. Introduction

The Azerbaijan economy demonstrated a very dynamic economic growth and transformation among the other post-soviet countries. The deep economic recession of the early 1990s resulting from the collapse of the Soviet Union was followed by the rapid catch-up period since the year 2000. Abundant oil reserves helped Azerbaijan to overcome the political instability, to rebuild the devastated society by the war with Armenia and to reestablish the collapsed economic connections. Various economic and social projects decreased poverty and boosted economic growth. Despite the considerable hardships to integrate into the global markets and to converge with the developed economies, Azerbaijan scored the highest GDP growth rate (annual percentage) in the post-soviet space – 34.5% in 2006 (World Bank, 2020a). In 2008, when colossal mineral revenue streamed into the country, GDP per capita in current USD reached 5,574.6$, which was 6.3 times higher than the indicator of 2003 (World Bank, 2020b).

Despite formidable recovering period and oil revenue booming period, commodity price slumps of 2014 and 2015 created a shock effect on the economy, decreasing GDP per capita (current USD) from $7,891.3 in 2014 to $3,880.7 in 2016. Similarly, the GDP growth rate bottomed around -3.06% but recovered in 2018 to the positive value (1.41%). GDP per capita in PPP (current USD) did not show a rapid shrinkage – it faded slightly from 17,973.1 (2015) to 17,417.1 (2016) (World Bank, 2020c) but gross domestic savings (GDS) lowered to 22.8% of GDP (GDS was 40.18% in 2014), the unemployment rate started to lightly rise from 4.91% in 2014 to 5.4% in 2019 (The Global Economy, 2020a; 2020b).

Oil dependency creates enormous challenges for commodity exporter countries like Azerbaijan in the form of the mentioned developments. There might be several reasons for the current

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan economic structure in Azerbaijan but appreciated national currency resulting from oil booming is a common explanation to have underdeveloped non-oil sectors. Subsequently, the established body of literature illustrates the vital link between the nominal effective exchange rate (NEER) and the real effective exchange rate (REER) on the tradable sectors.

Exchange rates change due to the monetary policy and international capital movements. Subsequently, monetary shocks affect agricultural competitiveness in trade relations (Orden, 2002). Agricultural prices respond to the changes and shocks in the monetary variables (Orden and Fackler, 1989). International research has been focusing on the relationship or cointegration among the trade flows, exchange rate, and relative prices to establish the conceptual background of this topic (Rey, 2006; Erdal et al., 2012). Thus, this paper seeks to answer the following research question applying the Ordinary Least Squares (OLS) estimation method: what is the impact of the exchange rate and related macroeconomic indicators on the agricultural crop exports like potato, tea, fresh fruits and fresh vegetables in Azerbaijan between 2000 and 2018? The connection between the exchange rate and non-oil sectors in Azerbaijan is a crucial one and needs to be analyzed continuously as the available data and methodologies allow us to conceptualize it in a better way. Furhermore, State Statistical committee of Azerbaijan classified potato, tea, fresh fruit, and fresh vegetable exports as main export categories which has considerably higher share in total agricultural exports.

As this section outlined, oil booming in a small country like Azerbaijan brought substantial wealth to the country, at the same time, appreciating the national currency. Then, economic crises and policy changes (in 2015, the government devalued the national currency twice) rendered economic incentives for the export-oriented production process. The constructed model estimated the extension of the relationship between the export levels of potato, tea, fresh fruit, and fresh vegetable exports, which incorporated the indicators like REER, NEER, inflation, investments, employment, value-added in agriculture, Crop Production Index and economic crisis periods as explanatory variables. The findings indicated that NEER had a statistically significant and negative association with potato, fresh fruits, and fresh vegetables. NEER and tea exports were also negatively associated but insignificantly. This study also found a positive and significant association between REER and potato, fresh fruit, and fresh vegetable exports, which contradicts to some studies and general theoretical expectations related to the connection between exchange rate appreciation and non-booming sectors’ exports. Furthermore, other findings indicate a positive and significant association between potato exports and directed investments in agriculture, a positive and significant association between value-added in agriculture as a share of GDP and potato, fresh fruit, and fresh vegetable exports. Also, Crop Production Index impacted positively and in a statistical significant way only fresh fruit exports. Economic crisis periods impacted tea and fresh vegetable exports in a statistically significant and negative way.

Usually, economists and researchers investigate highly aggregate categories like oil and non- oil exports in the Azerbaijan economy, not paying the desired attention to the individual sectors. Highly aggregated categories like oil and non-oil tradable sectors might fail to precisely estimate the impact of the exchange rate and related variables on the economy. Too much

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan generalization via the simple theoretical frameworks can provide a biased view. This paper contributes to the body of literature related to the exchange rate and specific export sectors of Azerbaijan.

The next section briefly outlines the critical body of literature related to the role of the exchange rate dynamics in the economy of Azerbaijan and the other macroeconomic aspects of the economy. The third section describes the data and methods of the research. The fourth section presents the visual inspection of the collected data, descriptive statistics, and the Ordinary Least Squares (OLS) regression results. While the fifth section provides the discussion and limitations of the research, the sixth section concludes.

2. Literature review

Despite the abundant oil and gas resources reshaped the Azerbaijan economy since independence, and SOFAZ protected the national economy from the negative consequences of the global financial crisis (2007–2008), the years of 2014–2015 shocked the national economy and shook the strong confidence in it. However, accumulated huge oil revenue led to an appreciation of the national currency. Since the extractive industry boomed in Azerbaijan, non- resource sectors decreased their share in the economy. Usually, these trends, together with the undiversified economy, connects to the resource curse hypothesis and Dutch disease (Corden and Neary 1982; Corden, 1984; Robinson et al., 2006; Ross, 1999; Frankel, 2010). Following the years of high oil prices (being above $100 per barrel), the period of 2014–2015 considerably decreased the revenue of oil exporter countries, challenged macroeconomic stability, put trade and fiscal balance into the risk (Baffes et al., 2015). Also, “creditworthiness has decreased, and investor risks have increased since the negative oil shocks” (Mammadov, 2016: 9). Baffes et al. (2015) also evaluated this recent commodity price slump as an opportunity to diversify the national economies among the oil-exporter countries and reconsider the fuel subsidies and energy taxes. Thus, as Ahmadov (2016) stressed, Azerbaijan must develop non-oil sectors in a timely manner via the institutional reforms to neutralize any additional commodity shock in the foreseeable future.

The period of 2014–2015 was also memorable because the national currency experience devaluation in 2015 twice: the new fixed exchange rate of USD to AZN became 1.05 AZN on 21 February 2015 (Statement of the Central Bank, 2015a) and The Central Bank of Azerbaijan announced “a floating exchange rate” and a second devaluation on 31 December 2015 as 1 USD=1.5610 AZN (Statement of the Central Bank, 2015b). Figure 1 and Figure 2 illustrate how Azerbaijani Manat (AZN) was overvalued against the other currencies during high oil prices, but starting from 2015, the outcomes of the devaluations and decreased oil prices are apparent. The devaluation decision triggered panic in Azerbaijan, also igniting unofficial dollarization (Mammadov, 2016).

International research had been focusing on the relationship among the variables like oil prices, NEER, REER, and non-resource exports due to the well-known fact that exchange rate appreciation makes the exports more expensive for the other nations. With a high probability,

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan increased oil exports appreciate the national currencies in the commodity-exporter countries. (Dauvin, 2014). Agricultural exports are part of non-resource exports among mineral exporter countries, and exchange rate and industrial prices in connection with the interest rate had an impact on the variability of the agricultural prices (Awokuse, 2005). The revenue inflow into the mineral-rich country appreciates the national currency, and any increases in oil prices increase the production and transportation cost of non-resource sectors, which in both cases create shrinkage of competitiveness. Relevantly, Kapusuzoglu and Ulusoy (2015) concluded that policymakers or decision-makers should take into account the oil price changes because they found uni-directional causal connections in the short-term from oil prices into agricultural product prices. The findings did not support the same with the long-term relationship.

Figure 1. Official Average Exchange Rates Figure 2. Nominal and Real Effective of AZN Against The Currencies of The Main Exchange Rate (REER) and Oil Prices (US$ Trading Partners, in Currency Units, 2000– Per Barrel) in Azerbaijan, 2000–2020. 2020.

2.20 0.04 140

0.04 120 1.70 0.03 100 0.03 1.20 80 0.02 60 0.70 0.02 40 0.01 0.20 20 0.01 0 -0.30 0.00

Against USD Against EUR

Against TL Against GEL Oil prices Nominal EER

Against RUR Real EER

Source: Central Bank of Azerbaijan Source: Central Bank of Azerbaijan Republic. Republic, Indexmundi, and author’s Note: The exchange rate of AZN against calculations. EUR is described on the right axis. Note: 1) For NEER and REER, 2000 December =100%; 2) Oil prices are based on the average monthly prices of BRENT trademark; 3) Data for 2020 is the average of available months.

So, if the national currency appreciation decreases the chances to diversify the economy, the opposite – currency depreciation should incentivize and increase the exports of non-booming sectors, be it because of the government's new monetary policy or other reasons. For instance, Oye et al. (2018) found a statistically significant relationship between exchange rate devaluation and gross domestic earnings in the Nigerian case between 1986 and 2016. In the case of Ghana, during 1960–1987, individual and traditional export sectors like coffee, cocoa, and shea nuts declined in parallel with REER appreciations, together with the volume

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan shrinkages in the total exports (Boansi, 2014). The other example might be given from Russia, a country that extensively exports natural gas and oil, accumulating mineral revenue. The study from Maitah et al. (2016) concluded that appreciated Russian ruble put agrarian exports in the comparative disadvantage despite the agro-producers performed well in the internal markets. Similarly, in the studies related to Cameroon (Amin, 1996), Uganda (Moya and Watundu, 2009), Venezuela (World Bank, 1993), Nigeria (Imoughele and Ismaila, 2015) evaluated REER as an important determinant of the agricultural competitiveness.

In Azerbaijan’s case, oil prices do not only determine the input prices or cost functions of the agricultural producers (also the other market players’), but also high oil revenue appreciates the national currency via the domestic prices, thus decreasing the competitiveness of the country (Hasanov et al., 2017). Hasanov (2010) reported a statistically significant relationship between the real oil prices and REER. Hasanov et al. (2017) also found a long-term relationship between oil prices and exchange rate appreciation among the Common Independent States (CIS), including Azerbaijan. Mukhtarov et al. (2019) reported a positive effect of oil price increases on GDP growth, Consumer Price Index (CPI), and exports1, while the impact on the exchange rate was negative. There are additional factors that influence REER appreciation in Azerbaijan. For example, Hayat et al. (2013) clarified an interesting aspect related to the exchange rate appreciation in Azerbaijan: the authors concluded that the overestimation of the oil reserves increased the expectations of future income and led to the real exchange rate appreciation. After the reserves were revised, it decreased the future income expectations and led to the exchange rate depreciation.

The other dimension of the occurrence of REER appreciation in Azerbaijan relates to the fiscal policy. In mineral-rich countries, the inflow of the unusually high amount of mineral revenue thanks to the high oil prices create fiscal expansion (Hasanov, 2010). In fact, according to Farajova (2011), a 1% increase in exchange rate decreases budget deficit by 22.2%, which is a common characteristic for a strong national currency. Hasanov (2010) suggested fiscal policy adjustments rather than monetary policy activities to prevent REER appreciation because, according to the author, the overspending of the oil revenue appreciates the national currency. Similarly, the study from Rahimov et al. (2016) excluded any possibility of domestic monetary policies to influence inflation, reporting only the exposure of inflation by external factors like foreign inflation, shocks, and exchange rate. Hasanov and Huseynov (2009) claimed that lagged variables of REER, terms of trade, trade openness, and net foreign assets position are among the essential determinants of REER.

Lastly, REER studies related to the Azerbaijan economy covers the impact of REER on non- oil exports. Hasanov and Samadova (2010) documented a short-and long-run statistically significant impact of REER and real non-oil GDP on non-oil exports. The authors reported that REER appreciation negatively influences non-oil exports, but non-oil GDP positively affects it. Analogously, Jamilov (2013) concluded that in the long-run, the real devaluation of AZN improves trade balance in a statistically significant way.

1 Overall aggregate exports. 7

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

Few studies investigated the relationship between agriculture and the exchange rate in Azerbaijan. Usually, related studies indicate a weak position of agriculture in the economy of Azerbaijan, which also triggers an inequality among rural and urban areas (Gulaliyev et al., 2019). Huseynov et al. (2019) analyzed the connection between REER and agriculture in the short- and long-run. The authors stated the negative statistically significant association between the non-oil exchange rate and the share of agriculture in GDP by using the VECM model (Vector Error Correction Model) covering the period of 2008Q3–2018Q2. On the whole, it is expected that during and after the oil booming period, appreciated national currency would decrease the incentives to bolster the agricultural output and exports. Likewise, Huseynov et al. (2019) found a negative association between non-oil REER and the share of agriculture in GDP.

Based on the given literature review regarding inflation and exchange rate studies in Azerbaijan, researchers and practitioners advised policy steps to fight back the adverse effects of the expected REER appreciation. However, the sole expectation of observing increased agricultural exports or production might not come true because it has to be supported by trade liberalization and market reforms (World Bank, 1993). Moreover, oil price volatility and the lack of diversified export basket keeps this theme topical. Therefore, this paper evaluates the impact of the exchange rate variables and other assumed determinants on the main agricultural exports in Azerbaijan between 2000 and 2018. The literature review identified critical periods like 2008–2009 and 2014–2015 as focal points of the NEER and REER’s impact on the economy. Although the global financial crisis did not severely damage the national economy of Azerbaijan, the opposite occurred during the sharp commodity price downturns in the international commodity markets. Including the devaluation of the national currency and specific policy changes echoes with the shifts in the trade patterns in theory. Accordingly, the first sub-section of the results will examine the visual patterns and descriptive statistics accompanied by individual interpretations. Then, the second sub-section will be regression estimations. Both sub-sections consider the following research question: what is the impact of the exchange rate and related macroeconomic indicators on the agricultural exports like potato, tea, fresh fruits, and vegetables in Azerbaijan between 2000 and 2018?

3. Data and Methods

This research employs the OLS regression method to estimate the impact of the variables like NEER, REER, inflation, investments, employment, value-added in agriculture, Crop Production Index, and a dummy variable that is economic crisis periods. Chasing the impact of the exchange rate and related variables is a complex mission. More comprehensive, in-depth, and cause and effect building studies are required to establish a sound connection. However, graphical interpretations and OLS estimations will provide the necessary ground to continue to reach more robust results with the help of follow-up studies.

The data sources are State Statistical Committee of the Republic of Azerbaijan (shortly SSCRA; the volume and the value of the exports of the individual agricultural sectors, investments, and employment data), Central Bank of the Republic of Azerbaijan (nominal and real effective

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan exchange rate data, the exchange rate of Azerbaijani Manat against the currencies of the main trading partners), The Global Economy (TGE; inflation, and Crop Production Index data) and World Bank (oil prices). The period for visual interpretations and descriptive statistics covers 1991–2018, but OLS estimations employed the period of 2000–2018. There were not any missing values both for the dependent variables and explanatory variables, excluding Crop Production Index. The missing values regarded Crop Production Index for 2017, and 2018 were replaced by the mean values (mean of the period of 2006–2016 for 2017 and 2007–2017 for 2018).

Based on the literature review, available data, and expected theoretical relationships, the econometrical model is specified as follows:

Volume of exports/ nominal exports/ real exports= ß0 + ß1*REER + ß2*NEER + ß3*Inflation +

+ ß4*Investments + ß5*Employment + ß6*Value-added in agriculture + ß7*Crop Production

Index + ß8*Economic crises (1)

Dependent variables are the volume, nominal and real value of the agricultural exports of potato, tea, fresh fruits, and fresh vegetables in the model (1). Real exports were calculated at the constant prices of the year 2000. Table 1 presents the measurement and the source of the explanatory variables of the constructed model. Furthermore, the Augmented Dickey-Fuller and Philips-Perron unit root test results reported highly non-stationary nature of the collected data (the results are not provided here but can be presented upon a request). Therefore, all variables are in their first difference form, excluding employment and value-added.

Table 1. Explanatory Variables of The Employed Model for The OLS Regression. Missing Variable Measurement Source value Nominal Effective Exchange in %, 2000=100% CBAR 0 Rate (NEER) Real Effective Exchange in %, 2000=100% CBAR 0 Rate (REER) Inflation As an annual percentage change in Consumer Price TGE 0 Index (CPI) Investments Investments directed to agriculture, forestry, and fishery SSCRA 0 as % of total investments. Employment Thousand persons employed in agriculture TGE 0 Value added Created value added in agriculture sector as % of GDP TGE 0 Crop Production Index 2004–2006=100, agricultural production of each year TGE 2 relative to the base period Economic crises A dummy variable to cover the period of 2007–2008 and --- 0 2014–2015. ß0 Intercept ------Source: author’s construction.

4. Results

This section first provides graphical interpretations and descriptive statistics on the volume and nominal value of the agricultural export categories to understand the overall trends and

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan dynamics between 1994 and 2018. The effects of the global financial crisis of 2007–2008 and the commodity crisis of 2014–2015 have been emphasized to shed light on specific points on the time series. Then, the last sub-section presents the OLS estimations based on the constructed model of the linear relationship between 2000–2018.

4.1. Main Agricultural Exports

Figure 3 depicts four main agricultural exports in Azerbaijan; namely, potato, fresh fruits, tea, and fresh vegetables, had an overall positive trend since the early 2000s. Emphasized with the blue pillars, the global financial crisis (2007–2008) and sharp commodity price downturns (2014–2015) slowed down potato and tea exports, but fresh fruit and fresh vegetable exports continued to rise.

Figure 3. Volume of Potato (Right Axis), Tea (Right Axis), Fresh Fruit and Fresh Vegetable Exports, in Thousand Tons 1994–2018. 350,000 100,000 90,000 300,000 80,000 250,000 70,000 60,000 200,000 50,000 150,000 40,000

100,000 30,000 20,000 50,000 10,000 0 0 2011 2011 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2017 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2017 Potatos Fresh fruits Tea Fresh vegetables Source: SSCRA

Table 2. reports summary statistics of the export value of the four categories. Descriptive statistics identify a considerable improvement in potato, fresh fruit, and fresh vegetable exports measured by the range of the data. According to the coefficient of variation, tea exports varied less among agricultural exports, but the same can not be said about other categories.

Table 2. Descriptive Statistics of The Volume of The Exported Main Agricultural Categories, in Thousand Tons, 1991–2018. Potatos Fresh fruits Tea Fresh vegetables Min 42.80 2,271.50 917.80 525.70 Max 91,719.80 319,204.10 8,126.30 233,316.50 Range 91,677.00 316,932.60 7,208.50 232,790.80 Mean 35,207.86 133,595.31 3,881.34 54,107.26 St.Dev 31,808.39 96,181.27 2,537.32 62,912.37 Var 1,011,773,370.06 9,250,836,729.48 6,437,977.39 3,957,966,463.09 Coefficient of Variation 0.90 0.72 0.65 1.16 Source: Author’s own calculations based on the SSCRA data.

During the 2008–2009 period, the value of potato, fresh fruit, and fresh vegetable exports decreased, but tea exports reached 26,947.30 thousand USD in 2009, which is higher than the

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan indicator of the year of 2008 – 18,640.40 thousand USD. The commodity crisis period impacted potato and tea exports in a negative way, but fresh fruit and fresh vegetable exports kept rising.

Figure 4. Value of Potato (Right Axis), Tea (Right Axis), Fresh Fruit and Vegetable Exports, in Thousand current USD, 1994–2018. 350,000 45,000

40,000 300,000 35,000 250,000 30,000

200,000 25,000

150,000 20,000 15,000 100,000 10,000 50,000 5,000

0 0 2011 2011 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2017 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 1995 1997 1999 2001 2003 2005 2007 2009 2013 2015 2017 Potatos Fresh fruits Tea Fresh vegetables Source: SSCRA

Similar to the volume data, Table 3 reports the descriptive statistics of the value of the selected agricultural exports. Following the same description method, export value shows a very high range pointing to the significant difference between the minimum and maximum values, and the coefficient of variation explains the volatility among them. Potato, fresh fruit, and tea exports shared close values in terms of the coefficient of variation, while fresh vegetables had higher value (see Fig.2).

Table 3. Descriptive Statistics of The Value of The Exported Main Agricultural Categories, in Thousand Current USD, 1991–2018. Potatos Fresh fruits Tea Fresh vegetables Min 7.20 981.50 744.10 101.70 Max 31,968.50 325,571.80 44,343.00 202,794.40 Range 31,961.30 324,590.30 43,598.90 202,692.70 Mean 12,493.63 110,220.35 14,688.57 37,952.36 St.Dev 11,936.61 99,041.32 13,025.23 54,724.95 Var 142,482,669.06 9,809,183,633.69 169,656,558.58 2,994,820,537.68 Coefficient of variation 0.96 0.90 0.89 1.44 Source: Author’s calculations based on the SSCRA data.

4.2. Empirical Findings

Table 4 reports the OLS regression results regarded the potato and tea exports in Azerbaijan. Volume, nominal and real potato exports have a positive association with REER, investments directed to agriculture and value-added in agriculture as a share of GDP. The analysis shows an inverse relationship between potato exports and NEER, which overlaps with the main theoretical expectation of this study. Also, insignificant relationships were found between potato and inflation, employment, Crop Production Index, and economic crisis periods. On the other hand, tea exports demonstrated an only significant association with the economic crisis periods that were specified as 2009–2008 and 2014–2015.

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

Table 4. OLS Regression Results: The Impact of The Selected Variables like REER, NEER, Inflation and etc. on The Volume, Nominal and Real Exports of Potato and Tea, 2001–2018. Dependent variables Explanatory Volume of Nominal Real potato Volume of tea Nominal tea Real tea exp. variable potato exp. potato exp. exp. exp. exp. Intercept 207128.0 77479.59 2694.56 -3840.06 -43001.65 -8212.23 [1.58] [1.15] [1.58] [-0.23] [-0.70] [-0.23] REER 3122.72*** 832.50 406.16*** 148.80 681.78 318.21 [3.28] [1.71] [3.28] [1.23] [1.54] [1.23] NEER -3115.56*** -581.03 -405.23*** -103.18 -494.76 -220.66 [-3.41] [-1.25] [-3.41] [-0.89] [-1.17] [-0.89] Inflation -347.16 158.44 -45.15 -62.20 -356.40 -133.03 [-0.70] [0.62] [-0.70] [-0.98] [-1.54] [-0.98] Investments 56.38** 29.24** 7.33** -2.09 0.70 -4.46 [2.29] [2.32] [2.29] [-0.67] [0.06] [-0.67] Employment -6453.97 -2336.67 -839.45 68.33 1113.42 146.13 [-1.72] [-1.22] [-1.72] [0.14] [0.64] [0.14] VA in agr. 4695.70** 1522.77 610.76** 229.11 361.62 489.96 [2.72] [1.73] [2.72] [1.04] [0.45] [1.04] Crop pr.index 453.34 -104.28 58.96 -73.14 -207.60 -156.40 [1.26] [-0.57] [1.26] [-1.60] [-1.25] [0.14] Economic crisis 407.31 1691.50 52.97 -1787.44* -9571.53** -3822.57* periods [0.06] [0.49] [0.06] [-2.06] [-3.02] [-2.06] N obs 18 18 18 18 18 18 R sq. 0.62 0.58 0.62 0.51 0.64 0.51 Adjusted R sq. 0.29 0.20 0.29 0.07 0.33 0.07 F-statistic 1.85 1.52 1.85 1.16 2.03 1.16 Prob(F-statistic) 0.19 0.27 0.19 0.41 0.16 0.41 Note: 1) the numbers in the brackets are the corresponding t-statistics. The symbols *, **,*** indicate statistical significance at 10%, 5%, and 1% levels, respectively; 2) the estimations do not include degrees of freedom adjustment for standard errors and covariance; 3) numbers were rounded to the second decimal point to be compact.

CUSUM and CUSUM of squares stability test results of the OLS estimations regarded potato and tea exports are below (see Table 5). According to CUSUM test results, the coefficients are stable, and the constructed model tracks the potato and tea exports well. However, CUSUM of squares identified a small deviation from the lower bound of significance regarded the tea exports, but the deviation does not provide evidence of a considerable instability of the calculated coefficients.

Table 5. CUSUM and CUSUM of squares stability test results, potato and tea exports. Volume of potato Nominal potato exports Real potato exports exports

10.0 10.0 10.0

7.5 7.5 7.5

5.0 5.0 5.0

2.5 2.5 2.5

0.0 0.0 0.0 CUSUM -2.5 -2.5 -2.5 -5.0 -5.0 -5.0

-7.5 -7.5 -7.5

-10.0 -10.0 -10.0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 CUSUM 5% Significance CUSUM 5% Significance CUSUM 5% Significance

1.6 1.6 1.6

1.2 1.2 1.2

0.8 0.8 0.8

CUSUM of squares 0.4 0.4 0.4

0.0 0.0 0.0

-0.4 -0.4 -0.4 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 2018 CUSUM of Squares 5% Significance CUSUM of Squares 5% Significance CUSUM of Squares 5% Significance Volume of tea exports Nominal tea exports Real tea exports 12

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

10.0 10.0 10.0

7.5 7.5 7.5

5.0 5.0 5.0

2.5 2.5 2.5

0.0 0.0 0.0 CUSUM -2.5 -2.5 -2.5 -5.0 -5.0 -5.0

-7.5 -7.5 -7.5

1.6 1.6 1.6

1.2 1.2 1.2

0.8 0.8 0.8 CUSUM of squares 0.4 0.4 0.4 0.0 0.0 0.0

Meanwhile, Table 6 displays the OLS regression results for the fresh fruit and fresh vegetable exports. Compared to potato and tea exports, fresh fruit and fresh vegetable exports indicate a higher amount of significant associations with the chosen variables. While fresh fruit exports are positively associated with the intercept, REER, value-added in agriculture and Crop Production Index, the opposite association belongs the NEER and employment. Fresh vegetables almost mirror the same results of the fresh fruits with an addition of the negative association between the economic crisis periods and except for the significant association for the Crop Production Index.

Table 6. OLS Regression Results: The Impact of The Selected Variables like REER, NEER, Inflation and etc. on The Volume, Nominal and Real Exports of Fresh Fruits and Fresh Vegetables, 2001–2018. Dependent variables Explanatory Volume of Volume of Nominal fresh Real fresh variable Nominal fresh Real fresh the fresh the fresh fruit vegetable vegetable fruits exp. fruits exp. vegetable exp. exp. exp. exp. Intercept 921274.9* 1067400.0** 411235.6* 921153.4*** 673649.7*** 172585.1*** [2.15] [3.01] [2.15] [4.32] [4.56] [4.32] REER 9688.52** 7274.27** 4324.73** 6010.11*** 2948.48** 1126.04*** [3.11] [2.83] [3.12] [3.89] [2.58] [3.89] NEER -9278.85*** -6111.80** -4342.73*** -5485.42*** -2716.54** -1027.74*** [-3.27] [-2.48] [-3.27] [-3.71] [-2.65] [-3.71] Inflation -2525.84 -1614.59 -1127.48 -242.00 385.73 -45.34 [-1.55] [-1.20] [-1.55] [-0.30] [0.69] [-0.30] Investments 3.89 -99.88 1.74 -28.86 17.03 -5.41 [0.05] [-1.50] [0.05] [-0.72] [0.62] [-0.72] Employment -27025.54* -29606.16** -12063.57* -25751.04*** -18403.15*** -4824.65*** [-2.21] [-2.93] [-2.21] [-4.24] [-4.37] [-4.24] 13668.41** 9286.17* 6101.26** 9736.97*** 5338.46** 1824.30*** VA in agr. [2.42] [1.99] [2.42] [3.48] [2.75] [3.48] Crop pr.index 3229.92** 3939.13*** 1441.76** 22.28 -7.22 4.17 [2.76] [4.07] [2.76] [0.04] [-0.02] [0.04] Economic crisis 4726.87 -18191.27 2109.52 -23177.84* -19078.12** -4342.55* periods [0.21] [-0.99] [0.21] [-2.10] [-2.49] [-2.10] N obs 18 18 18 18 18 18 R sq. 0.47 0.53 0.47 0.66 0.69 0.66 Adjusted R sq. 0.01 0.11 0.01 0.35 0.42 0.35 F-statistic 1.01 1.26 1.01 2.16 2.56 2.16 Prob(F-statistic) 0.49 0.37 0.49 0.14 0.09 0.14 Note: 1) the numbers in the brackets are the corresponding t-statistics. The symbols *, **,*** indicate statistical significance at 10%, 5%, and 1% levels, respectively; 2) the estimations do not include degrees of freedom adjustment for standard errors and covariance; 3) numbers were rounded to the second decimal point to be compact.

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

CUSUM and CUSUM of squares represent high-level stability for the fresh fruit exports, but the coefficients of the fresh vegetable exports demonstrate an instability starting from 2011 (see Table 7).

Table 7. CUSUM and CUSUM of squares stability test results, fresh fruits and fresh vegetable exports. Volume of fresh fruit Nominal fresh fruit Real fresh fruit exports exports exports

10.0 10.0 10.0

7.5 7.5 7.5

5.0 5.0 5.0

2.5 2.5 2.5

0.0 0.0 0.0 CUSUM -2.5 -2.5 -2.5 -5.0 -5.0 -5.0

-7.5 -7.5 -7.5

1.2 1.2 1.2

0.8 0.8 0.8 CUSUM of squares 0.4 0.4 0.4 0.0 0.0 0.0

vegetable exports exports exports

10.0 10.0 10.0

7.5 7.5 7.5

5.0 5.0 5.0

2.5 2.5 2.5

0.0 0.0 0.0 CUSUM -2.5 -2.5 -2.5 -5.0 -5.0 -5.0

-7.5 -7.5 -7.5

1.6 1.6 1.6

1.2 1.2 1.2

0.8 0.8 0.8 CUSUM of squares 0.4 0.4 0.4 0.0 0.0 0.0

5. Discussion and Limitations

This study estimates that NEER and potato exports (volume and real exports) are negatively associated in a statistically significant way. The paper also estimates negative associations between NEER and fresh fruit and vegetable exports. NEER and tea exports were also negatively associated but not in a statistically significant form. There was no evidence of the statistically significant and negative effect of REER on potato, tea, fresh fruit, and fresh vegetable exports. Surprisingly, REER and exports of potato, fresh fruits, and vegetables were positively and significantly associated. These estimations contradict to the more aggregated results from Hasanov and Samadova (2010) and Huseynov et al. (2019). Even from the graphical interpretations, we can observe that REER appreciation goes hand in hand with the export categories that were studied in this paper. An interesting finding regarded the impact of REER and NEER on the chosen export categories relays on the difference in the associations. An interpretation should be cautious because one might indicate from the statistically significant and positive relationship between potato, fresh fruits, and fresh vegetables and

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan

REER that REER appreciation boosted the exports of these categories. However, additional reasons should be indicated by the follow-up studies to point to the underlying reasons for these dynamics.

Besides the impact of REER and NEER on agricultural exports, the constructed models also incorporated additional variables. Their interpretations also help to understand the export dynamics along the exchange rate dimension. For instance, insignificant but negative associations between inflation (measured by the percentage change in CPI index) and export categories provide an insight into the connection of the export dynamics and domestic price levels. Increased price levels might decrease the incentives to purchase imported goods, directing the consumers towards the locally produced agricultural output. In that case, additional investments might be directed to increase the output and employment, but directed investments to agriculture had a statistically significant impact only on potato exports. However, even employment decreased overall in agriculture over time, exports had positive trends in fresh fruit and vegetable exports, pointing to the statistically significant and negative association between them.

Created value-added in agriculture and Crop Production Index shows how the output in the national economy and exports are linked to each other. Only tea exports did not show any significant association with value-added in agriculture as a share of GDP. In this case, the characteristic features of the individual sectors should be mentioned. Tea production is time- consuming and had a barrage of challenges since the collapse of the Soviet Union. Its areal is limited, and export-orientation is quite negligible. Comparatively, the situation is better in potato, fresh fruit, and vegetable exports, and, naturally, their exports increase as the share of value-added rises.

The Crop Production Index, which measures the produced agricultural output, excluding fodder crops, had a statistically significant impact only on fresh fruit exports. It might be signaling an increased domestic consumption that absorbed increased supply of the other crop categories. Moreover, the decreased aggregate demand among the main trading partners during economic crisis periods is the usual expectation. So, sometimes the volume and value of exports decrease because of the crisis periods. Statistically significant and negative associations were found only in the case of tea and fresh vegetable exports. However, positive associations were found on potato and fresh fruit exports that indicate more sustainable export patterns and should be prioritized for the policy considerations because those categories can maintain its stability even during the crisis periods.

Azerbaijan is a small exporter when it comes to agricultural crops. The characteristics of the individual sectors play a huge role in the export dynamics of the country. Even if this paper tried to understand mainly the impact of REER and NEER, the results indicate that sole calculations and interpretations regarded those indicators are not enough and even sometimes does not make much sense (because of certain positive associations between REER and export categories). The agricultural production and exports are quite colorful in Azerbaijan, and the country has a historical experience in it. Nevertheless, new stages of production and

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan consumption require flexible approaches. For instance, current opportunities to increase agricultural or agri-food exports might belong to the development of the organic agriculture that Azerbaijan is capable of (Aksoy et al., 2018). Institutional and regulation endowments also provide an optimistic view on this because, until 2014–2015, more comprehensive and holistic agricultural or agrarian policies were lacking in Azerbaijan. In the near future, softened trade and non-trade barriers among the main trading partners and solutions for the standardization issues might increase the access to the markets of agricultural products of Azerbaijan.

The theme is topical during the boom and bust periods of the mineral-rich countries, but this analysis is just a trial to scratch a surface. However, the theme must be kept at the forefront of our attention to track the changes in the essential dynamics related to the export possibilities in Azerbaijan and to guide the decisionmakers. Meanwhile, several natural and research-exclusive limitations should be listed. Firstly, the available data regarded REER and NEER provided by CBAR is limited only for 2000 and 2020, while the exports of the leading crops are available for 1994 and 2018 (SSCRA data). It decreases the chance to build a model that could employ more observations. Naturally, the small sample size downgrades the estimations. Secondly, the information based on the individual years regarded the agricultural crop exports do not help to understand the rapid ups and downs. There are several outliers in the data set that bias the real patterns between individual sectors and exchange rates. Even though the first difference form of the data was utilized, still structural breaks create several challenges for the proper estimations. Thirdly, OLS regression can not fully capture the significant association of the export categories in connection with REER and NEER. More comprehensive macro- econometric models or forecasting should be utilized via the follow-up studies. Usually, REER or NEER studies (or Dutch-disease-related studies) employ VECM (Vector Error Correction Model), ARDL (Auto-Regressive Distributed Lags) and GCE (General Computable Equilibrium) models to calculate more accurate results. Next, the political economy and trade policy aspects of the topic should be highly considered both in Azerbaijan and among the main trading partners to outline the broader picture.

6. Conclusion

Overall, this study estimated a statistically significant and negative association between Nominal Effective Exchange Rate (NEER) and potato, fresh fruit, and fresh vegetable exports in Azerbaijan between 2000–2018 via Ordinary Least Squares (OLS) method. NEER and tea exports were also associated negatively but insignificantly. Surprisingly, Real Effective Exchange Rate (REER) did not exhibit any statistically significant and negative association with the exports of the main agricultural commodities in Azerbaijan despite it was an expected outcome according to the literature review. The other main finding includes the negative and significant impact of the crisis periods like 2007–2008 and 2014–2015 on tea and fresh vegetable exports. Investments directed to agriculture positively impacted only potato exports. Meanwhile, tea exports were only agricultural categories that did not show any significant association with the value-added in agriculture. The path between the produced agricultural output (measured by the Crop Production Index) and exports was found only in fresh fruit

Ibrahim Niftiyev Determinants of The Agricultural Exports in Azerbaijan exports. Lastly, economic crisis periods impacted tea and fresh vegetable exports in a statistically significant and negative way.

It must be kept in mind that sole OLS estimations can not provide the details related to the complex topic like the connection of REER or NEER and exports. More detailed modeling needs to be organized to track the causal connections among the agricultural and trade indicators. Further research should employ additional variables and comprehensive techniques to increase a chance to have more sophisticated results before any generalized conclusions can be drawn.

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