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International Conference on Investment in Azerbaijan
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Baku, May 7-9
| Â Your Excellencies, Esteemed Mr. Akhundov, Mr. Aliyev, State Secretary Syz, Ladies and Gentlemen,
It is a great pleasure for me to visit Azerbaijan once again and to address the opening session of this important conference on investment in the country, which I expect will be a landmark in the transition and transformation of Azerbaijan’s economy.
Foreign investment in Azerbaijan, of course, goes back a long way to a different era when such investors as the Nobels and the Rothschilds helped realize the first oil boom in the second half of the 19th century. Now, foreign investment is helping in the realization of the second oil boom. As we have heard from Minister Farhad Aliyev, this conference is indicative of Azerbaijan’s desire to broaden its appeal as a destination for foreign investment in activities other than oil and gas. I hardly need to emphasize that this is a rather different challenge and success in meeting this challenge will depend on how far and how fast Azerbaijan traverses the path of economic reforms that it has embarked upon.
My Colleague, Peter Woicke, has pointed to some of the important reforms that are needed for attracting investors and what IFC is doing to assist Azerbaijan. I will speak briefly from the perspective of the rest of the World Bank Group and its involvement in the transition of Azerbaijan’s economy.
The World Bank has been actively involved from the start in helping the economies of Central and Eastern Europe and Central Asia make the transition from command to market economies. This we have sought to do not only through the provision of finance, but also -- and at least as importantly -- through making available knowledge and know-how based on the Bank’s worldwide experience, analysis and research.
Generally speaking, transition in Central Europe and the Baltic countries has gone farther and faster that in the CIS countries of the former Soviet Union. In Azerbaijan the challenge and the need was made the greater by the especially dramatic output collapse at the onset of the transition: between 1989 and 1995, Azerbaijan’s measured GDP dropped by 63 percent compared with an average of 42 percent in the CIS countries.
The World Bank along with the IMF initially provided support to the program of economic stabilization and structural reforms launched in 1995. That program and subsequent effective economic management had dramatic success in restoring macro economic stability. Inflation which had averaged an annual rate of 700 percent in 1991-96 dropped to an annual average of 0.1 percent during 1997-2002.
On the structural front, reforms on Azerbaijan’s transition path have had a more mixed record though there were some notable successes in the 1990s, especially in the privatization of agricultural land and of small-and-medium enterprises. Overall, these reforms, combined with the success in attracting foreign investment for Caspian energy development, have meant that Azerbaijan’s economy has been growing at a rate of some 9 percent a year over 1997-2002 led by the oil sector. But aggregate output remained well below its peak and non-oil manufacturing, in particular, continued to languish.
Also, major structural and social reform challenges remained, as the country entered the new Millennium. It is therefore most welcome that reforms and the growth of the non-oil economy have accelerated since the year 2000. We in the World Bank have been active in supporting the new reform initiatives, particularly through our second Structural Adjustment Credit approved in 2002. The ambitious reform agenda supported by that credit has not yet been quite completed, but excellent progress has been made. In particular, we are heartened by the way the Oil Fund has been managed to date, by the improved transparency and quality of public expenditure management, by the progress made in making hidden or implicit subsidies to utilities explicit and in reducing them, and by the commencement of the restructuring of the State Oil Company (SOCAR) that plays such a vital role in the economy of Azerbaijan.
Also welcome is the related improvement in overall governance as it affects the investment climate. As in other CIS countries this is an important issue in Azerbaijan. Some recent surveys indicate progress, particularly concerning corruption and the business environment. Various Comprehensive governance/investment climate surveys, including the World Bank/EBRD Business Environment and Enterprise Performance Survey (BEEPS), the World Bank Group’s Foreign Investment Advisory Service Survey (FIAS), PRS Group’s International Country Risk Guide and Heritage Foundation’s Economic Freedom Survey, have all reported significant improvements in Azerbaijan’s investment climate in the last three years, albeit from a low base. These trends are very encouraging, and they provide a promising platform for continuing reform efforts to improve the investment climate in Azerbaijan.
Success in that endeavor will have a vital bearing on how well Azerbaijan manages the promise and the challenge provided by the new oil boom that is to intensify with the coming on-stream of the oil and gas pipelines, commencing in 2005. The unfortunate experience of many countries with handling natural resource booms is a sobering reminder of how considerable that challenges is and how important it is for Azerbaijan to sustain the momentum of its reforms.
The World Bank Group, including the IFC, has prepared a new Country Assistance Strategy for Azerbaijan which aims to assist in that endeavor and which is to be discussed by our Executive Board on May 27. This strategy is in support of Azerbaijan’s State Program of Poverty Reduction and Economic Development (SPPRED). That wide-ranging program recognizes, inter alia, the salience of the development of the non-oil economy for employment generation and poverty reduction. It also recognizes that the development of the non-oil sector in turn is a function of many reforms of policies and institutions, as well as development of infrastructure, all of which bear on the attractiveness of Azerbaijan to both domestic and foreign investors.
In support of the government’s priorities the proposed new World Bank Group Assistance Strategy comprises four inter-related strategic goals.
Strategic Goal #1 is to help Manage the expected oil revenue boom. The reform program being supported by the ongoing Structural Adjustment Credit is laying the foundations for improved management of the oil windfalls. We expect to build on that credit both through additional lending as well as through policy analysis and advice in support of improved economic management.
Strategic Goal #2 is the creation of Jobs and of Non-Oil Sector Growth. Here we aim at stimulating the development of non-oil enterprises, including in agriculture. Environmental sustainability of growth will be assisted by attention to the environment as a cross-cutting theme in all of our activities.
Strategic Goal #3 is to improve Social Services and Infrastructure. Issues of infrastructure will be addressed both through policy advice and lending for specific projects, including for electricity. We also plan projects for improved social services and safety nets, esp. for education and pension reforms.
Strategic Goal #4 is to help actually realize Azerbaijan’s Oil Potential. As Peter Woicke has noted, IFC is considering providing finance for the BTC pipeline.
In addition to IFC’s financing for oil and non-oil sector development our financial support for Azerbaijan through the World Bank’s highly concessional IDA window could reach up to about $160 million for the period 2003-2005. In addition, in view of Azerbaijan’s much enhanced creditworthiness, we hope to be able to offer Azerbaijan up to $75 million from the Bank’s less concessional IBRD window, which would represent a new milestone in Azerbaijan’s path towards accessing international capital markets.
In concluding, I would like to emphasize that the World Bank remains strongly committed to assisting Azerbaijan in completing its transition and in the betterment of the standard of living of its people, especially those living in poverty. The success of this conference can make a significant contribution to that end. I wish you a very good and productive outcome.
Finally, Mr. Akhundov and Mr. Aliyev, on behalf of myself and my colleagues at the World Bank, let me ask you to convey our best wishes to President Aliyev for his impending 80th birthday! Thank you.
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