Azerbaijan Economy Facts

by ebizdir · Published January 30, 2023 · Updated February 22, 2023

Economical overview

From being poor and down, Azerbaijan has developed rapidly in recent decades through the exploitation of the country’s oil and natural gas. However, the dependence on oil exports has made the economy vulnerable to fluctuations in oil prices. At the same time, the economic system is hampered by corruption and lack of transparency.

During the Soviet era, Azerbaijan’s economy developed unilaterally. The country produced most commodities – oil and agricultural products – for export to other Soviet republics. The first few years after independence were marked by major difficulties: political instability, disruptions to former Soviet-Soviet trade, old-fashioned equipment and lack of knowledge and capital. In addition, there were costs for the war against Armenia on Nagorno-Karabakh and refugee flows caused by the war. Production collapsed in both agriculture and industry, and the standard of living fell. GDP was halved in the first half of the 1990s. The transition from planning economics to market economics was slow.

Countryaah.com: Major imports by Azerbaijan, covering a full list of top products imported by the country and trade value for each product category.

The 1994 ceasefire in the War on Nagorno-Karabakh and increased political stability under President Heidar Aliyev created better conditions. A stabilization and reform program started in 1995 in cooperation with the International Monetary Fund (IMF) had favorable effects. From 1996, GDP began to rise again slowly and the previously soaring inflation fell.

In the first years after the turn of the millennium, the economy grew by up to 10 percent per year. A peak was reached in 2006 when growth was just over 34 percent, but then it dropped back to previous levels. After a couple of crisis years in 2014–2015 due to falling oil prices, Azerbaijan’s economy is showing growth again, albeit at modest levels. Forecasts for 2019 and 2020 have landed at just over 2 percent. Inflation has fallen again after the crisis years.

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Growth has been highly concentrated on the oil and gas industry and on industries that cooperate with the energy industry, such as the construction industry and the communications sector. Parts of the economy that are not oil related have developed at a lower rate.

The deficit in the state budget has been relatively low since the late 1990s, thanks to oil revenues. Foreign debt has also been kept down.

Other factors in the economy are seen as less positive. A major problem is the strong dependence on oil revenues that has made the economy sensitive to variations in world market prices. Energy accounts for about 90 percent of the country’s exports and three-quarters of government revenue. From summer 2014, oil prices fell sharply. To counteract the effects, the central bank wrote down the value of the manate against the dollar. The purpose was to strengthen the country’s competitiveness. When other countries also devalued their currencies, the central bank released the value of the mandate freely in 2015. The currency then dropped one-third of its value, with the result that prices rose, which triggered nationwide protests.

In early 2017, President Aliyev ordered the government to implement major privatizations to revitalize the slowed economy. After the 2018 presidential election, some key ministers were replaced. Also in 2019, people in Aliyev’s immediate circle were petitioned in connection with the president openly describing the government as brake pads in reform work.

The government has promised to expand other parts of the economy, but it is primarily the oil industry, such as the manufacture of plastics, that has continued to develop. The conflict with Armenia over the Nagorno-Karabakh enclave still creates barriers to traffic and transport to the west. There is a railroad between Baku and Moscow as well as between Baku, Georgia’s capital Tbilisi and Kars in northeastern Turkey. By contrast, the railway from Baku through Armenia to Nachichevan has been shut down since the war in the early 1990s. Baku with the Caspian Sea’s best natural harbor has ancient traditions as a port city, but has not been able to become a major international port because the Caspian Sea has no connection with other seas.

Another problem is the lack of structural and administrative reforms, including the tax system. The privatization of large state-owned companies has been slow, although the sale of small and medium-sized enterprises was almost completed at the turn of the millennium.

The lack of democracy and transparency in the government’s actions make it difficult to assess the effects of various measures. Corruption is an old problem that permeates the whole of society. In the wake of the economic transition, crime has risen, as has unemployment.

It is uncertain how long Azerbaijan’s oil resources will last. In 1999, the government formed an oil fund, supported by the IMF and the World Bank. The purpose of the fund is to protect the domestic currency by keeping revenues from oil exports in foreign currency outside the domestic economy. At the same time, the fund will serve as a future buffer and be used for investments in infrastructure and social areas.

The number of foreign tourists has increased for several years in a row, according to government statistics. In 2018, the country received more than 2.8 million visitors from other countries. Most foreign tourists come from Russia, Turkey and Georgia. The ones that are increasing the most are travelers from states of the Persian Gulf, not least Saudi Arabia.