Country brief 2006 Updated September 2006
Azerbaijan is a lower middle-income country with a gross national income per capita of $1,240 in 2005. Azerbaijan is rich in mineral resources, mainly oil and gas. The country also has fertile agricultural land and a well-educated labor force with a strong entrepreneurial tradition. The oil and gas sector contributes approximately one-third of GDP, while agriculture contributes about 9 percent but provides livelihoods to just under half of all households.
The impressive GDP growth of the past five years - with an average annual growth rate of 12 percent - was led mainly by oil and gas production. Growth in non-oil output has picked up since 1999 with an average annual growth rate of more than 15 percent. If oil and gas developments remain on track, double-digit GDP growth can continue beyond 2006. However, oil production is expected to peak in 2011 and decline thereafter in the absence of major new discoveries. Diversified development of the non-oil sector is critical for generating jobs and promoting long-term growth.
Despite the country's natural resources, poverty continues to pose a major challenge for Azerbaijan. Notwithstanding the country’s substantial poverty reduction over the last two years, in 2005, some 29 percent of the population lived in poverty and 8 percent in extreme poverty. There are significant regional variations in poverty rates, with the incidence of income poverty highest in provincial towns. Access to services is limited in rural areas, giving rise to significant rural-urban migration.
Azerbaijan became a member of the World Bank in 1992 and of the International Development Association (IDA) in 1995.
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Economy
Developments since independence
Azerbaijan became part of the Soviet Union in 1920 and gained its independence in 1991. Although reliable statistical data is not available, the country was clearly poorer than most Soviet republics at the time of its independence.
Since independence, Azerbaijan has faced many of the challenges that confronted other Commonwealth of Independent States (CIS) countries in transition: economic distortion and contraction, a deterioration in social services and infrastructure, and a rise in poverty.
In addition, an armed conflict with neighboring Armenia over Nagorno-Karabakh from 1988 to 1994 led to an influx of over one million refugees and internally displaced people, and disrupted key regional trade and transport links.
Economic recovery began in 1995 when, with the gradual stabilization of the political situation, the Government decided to embark on a program to stabilize the economy and accelerate structural reforms.
Recent economic developments
The impressive recent GDP growth witnessed in Azerbaijan has been the result of two sets of policy achievements.
First, in late 1994, Production Sharing Agreements were signed with foreign oil companies under which these companies agreed to invest $7.5 billion to develop oil deposits in the Caspian Sea, the Baku-Tbilisi-Ceyhan pipeline and the Shah-Deniz pipeline, to transport oil and gas to Turkey through Georgia.
In December 1999, the State Oil Fund of the Azerbaijan Republic was created to manage the anticipated oil boom. The Fund performs both stabilization and savings functions and its assets are projected to increase to over $ 3.6 billion by the end of 2006.
Second, the Government launched a wide-ranging reform program supported by quick-disbursing World Bank credits, as well as by an IMF program. Reforms included strengthening governance in the banking sector, enhancing transparency in the utility sectors, enacting a modern tax code, and ensuring more transparent budget execution and accounting, as well as strengthening internal and external audit capacity.
Recently, the non-oil economy, including agriculture, has also begun to recover. Azerbaijan is among the leaders in the CIS in farm privatization and registration of arable land. From 1999 to 2005, non-oil GDP grew by more than 8 percent a year, led by construction and services. The country's location at the cross-roads of Europe and Asia also offers potential for future growth in trade and transit facilities.
Challenges ahead
Azerbaijan stands on the verge of a major oil boom and an important economic transition. With the oil boom expected to last for a decade and half, the country is facing the major challenge of effective management of oil revenues that would ensure growth in the non-oil economy and a sustainable reduction in poverty. Key policy challenges include:
Effectively managing the country's finite oil and gas reserves. In the coming years, Azerbaijan must maintain fiscal discipline to avoid inflation and Dutch disease. The government will need to ensure that public spending is well-targeted for the benefit of all citizens. Investing in the non-oil economy will be critical for the success of the country’s development strategy, along with broadening participation in economic growth by rebuilding crucial infrastructure and removing barriers to doing business.
Reversing declining living standards and tackling pervasive poverty. With 29 per cent of the population still living in poverty, Azerbaijan needs to improve social services and infrastructure, generate employment, and develop the non-oil economy.
Strengthening governance. Although Azerbaijan has made some important gains in political, regulatory, and legal reform, and there are signs of an improvement in the business environment, a significant agenda for reform remains. This agenda includes improving public-sector efficiency and transparency, enhancing the ability of citizens and communities to utilize information and hold the government accountable, strengthening the relatively weak legislative and judicial branches of government, and ensuring orderly electoral processes at all levels.
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Program to date
- Landmark Projects
- More projects
The World Bank Group has focused on facilitating Azerbaijan’s transition to a market economy since the country became a member in 1992. Results from World Bank assistance in Azerbaijan have been far-reaching. The World Bank has helped improve the management of Azerbaijan's oil fund. The institution has also played a key role in the privatization and distribution of 99 percent of the country’s farmland. As part of this effort, small-scale farmers raised their productivity thanks to greater access to advice and information. In the social sector, Bank assistance has been used to help refugees and internally displaced people and, in the area of education, schools have been rehabilitated and teachers trained.
Over the last four years, the Bank has helped the Government establish a meaningful poverty reduction strategy and has supported implementation of important pro-poor reforms in a number of sectors of the economy. Azerbaijan now needs to persevere with key reforms and build on the opportunities provided by its oil revenue.
Azerbaijan has already begun the transition from International Development Association (IDA) to International Bank for Reconstruction and Development (IBRD) financing due to its rapidly growing economy and creditworthiness. Its first IBRD loan was approved in May 2005.
In fiscal year 2006, World Bank commitments to the country totaled $300.8 million. Overall commitments for active projects total $580 million.
Going forward
The World Bank's Country Assistance Strategy for fiscal years 2007-2010 envisages a lending program of up to US$250 million per year. Knowledge sharing, analytical and advisory activities, and development partnerships will reinforce these investments.
Following on the success of a farm privatization project, 95% of all arable farmland was privatized. The move helped shift crops, increase productivity and decrease rural poverty.
Read moreAzerbaijan is completing its first national poverty reduction program, and is now developing a new State Program for Poverty Reduction and Sustainable Development (SPPRSD) for 2006–2015. The new Strategy reflects the objectives of the SPPRSD and rests on four main pillars:
Improving the quality and transparency of public sector governance: Maintaining a stable macroeconomic framework that makes prudent use of oil revenues; improving public expenditure planning and management; strengthening financial management and procurement systems; establishing proper public sector and corporate governance, accounting, and auditing; creating an administrative and regulatory environment conducive to growth; and strengthening the judicial system.
Supporting sustainable and balanced growth of the non-oil economy: Expanding access to financial services; improving the business environment and, through IFC, providing direct investments and technical assistance to strengthen the private sector; developing essential infrastructure and services, with special attention to both the rural economy and Central Asia-South Caucasus-Black Sea regional transit routes; and, strengthening the financial viability and efficiency of the utility sectors.
Increasing the quality of and access to social services: Expanding coverage of good-quality health care services; developing a modern education system and globally competitive knowledge economy; effectively targeting social assistance; creating a more transparent, affordable, and sustainable pension system; and improving living conditions and economic opportunities for internally displaced people.
Improving environmental management and furthering the climate change agenda: Cleaning up legacy pollution, reducing carbon emissions, and promoting biodiversity; supporting more sustainable natural resource management in selected areas; and strengthening natural disaster management.
NB: Lending is per fiscal year, July 1-June 30
Active Portfolio by Sector as of June 2006
(US$ millions)
The Country Aggregate Report provides more lending data for Azerbaijan
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World Bank Office
Saida Bagirli
Phone in Baku: +(994-12) 92 28 07
E-mail: sbagirli@worldbank.org
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