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World > Middle East > Azerbaijan > Economy (Notes)

Azerbaijan - Economy (Notes)


ECONOMY
Azerbaijan is an economy in transition in which the state continues to play a dominant role. It has important oil reserves and a significant agronomic potential based on a wide variety of climatic zones. During the late 1990s, in cooperation with the International Monetary Fund (IMF), Azerbaijan pursued a successful economic stabilization program, with annual growth exceeding 10% since 2000. Real GDP grew by 36.2% year-on-year in the first half of 2006 (predominantly driven by the hydrocarbon sector) while non-oil GDP grew by 8.5%. Output expansion has been largely driven by oil-sector foreign direct investment (FDI) and related spillover effects in the construction and transportation sectors, although there have also been substantial gains in agriculture. Inflation, which peaked at 13.7% year on year in April 2005 before easing to 11.9% year on year in September 2005, is a major risk and could accelerate in the context of further increases in fiscal spending, high oil prices, and an inflexible exchange rate. Importantly, the higher inflation also reflects customs restrictions that are in place due to supply constraints that limit import competition and monopolies that continue to control many sectors of the economy. The national currency, the manat, is stable against the dollar, but was allowed to strengthen in 2005 by 5%. The IMF has warned that significantly more appreciation (roughly 10%) will be necessary to prevent inflation from increasing.

The 2006 budget increased spending (in dollar terms) by 84% with the bulk going to the military, wages, infrastructure projects, and social assistance. Part of the increase in expenditures was financed by revenues from the oil fund. The IMF has expressed concern about the impact in inflation and macroeconomic stability as well as governance if the capital budget is not well managed. The State Oil Fund (SOFAZ) was established as an extra-budgetary fund to ensure macroeconomic stability, transparency in the management of oil revenue, and the safeguarding of resources for future generations. All oil revenue profits from the development of new oil fields now flow into SOFAZ, and are held offshore. SOFAZ assets amounted to $1.5 billion as of February 2007. Nevertheless, SOFAZ's sterilization effect is limited since it does not cover SOCAR, the State Oil Company.

Progress on economic reform has generally lagged. The government has undertaken regulatory reforms in some areas, including substantial opening of trade policy, but inefficient public administration, in which commercial and regulatory interests are co-mingled, limits the impact of these reforms. The government has largely completed privatization of agricultural lands and small and medium-sized enterprises. Azerbaijan is still plagued by an arbitrary tax and customs administration, a weak court system, monopolistic regulation of the market, and corruption.

For more than a century the backbone of the Azerbaijani economy has been petroleum. Now that Western oil companies are able to tap deepwater oilfields untouched by the Soviets because of poor technology, Azerbaijan is considered one of the most important spots in the world for oil exploration and development. Proven oil reserves in the Caspian Basin, which Azerbaijan shares with Russia, Kazakhstan, Turkmenistan, and Iran are comparable in size to the North Sea, although exploration is still in the early stages.

Azerbaijan has concluded 21 production-sharing agreements with various oil companies. Azerbaijan celebrated first oil for the Baku-Tbilisi-Ceyhan (BTC) pipeline in May 2005, and the official completion ceremony was held in Turkey in July 2006. The BTC pipeline is now operational and has a maximum capacity of one million barrels per day. A parallel Baku-Tbilisi-Erzurum gas export pipeline opened in September 2006, but, due to technical issues in the offshore Shah Deniz gas field, has operated only intermittently. Eastern Caspian producers in Kazakhstan also have expressed interest in accessing this pipeline to transport a portion of their production

Environmental Issues
Azerbaijan faces serious environmental challenges. Soil throughout the region was contaminated by DDT and toxic defoliants used in cotton production during the Soviet era. Caspian petroleum and petrochemicals industries also have contributed to present air and water pollution problems. Several environmental organizations exist in Azerbaijan, yet few funds have been allocated to begin the necessary cleanup and prevention programs. Over-fishing by poachers is threatening the survival of Caspian sturgeon stocks, the source of most of the world's supply of caviar. The Convention on International Trade in Endangered Species (CITES) has listed as threatened all sturgeon species, including all commercial Caspian varieties. CITES imposed a ban on most Caspian caviar in January 2006, but lifted it in January 2007.


Facts at a Glance: Geography - People - Government - Economy - Communications - Transportation - Military - Current Time - Ranking Positions
Notes and Commentary: Economy - Government and Political Conditions - Historical Highlights - Foreign Relations - Relations with U.S.



Facts at a Glance
Geography
People
Government
Economy
Communications
Transportation
Military
Current Time
Ranking Positions


Notes and Commentary
Economy
Government and Political Conditions
Historical Highlights
Foreign Relations
Relations with U.S.





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