YEAR IN REVIEW

Life at 20

Azerbaijan has quickly emerged as one of the leading and most dynamic states in the Caucasus region, and is celebrating its 20th anniversary as an independent republic in 2011. The country has successfully leveraged its historical role in the oil and gas industry to post an impressive GDP figure of $90.15 billion (PPP) in 2010, according to the World Bank. Possibilities for FDI are also presenting themselves across other non-prime sectors of the economy as the government continues its drive to diversify and reduce the effect of global oil price fluctuations on the real economy.

Azerbaijan’s strong economic growth between 2006 and 2008 was attributable to its growing oil exports, but some non-export sectors also displayed double-digit growth, spurred on by activity in the banking, construction, and real estate sectors. In 2009, economic growth remained above 9%, with the Azerbaijani economy remaining resilient in the face of the global economic crisis. In 2010, as oil prices moderated, economic growth slowed to 3.7%, although the knock-on effects of the crisis affected countries in the region far more severely.

Azerbaijan’s oil production has increased dramatically since 1997, when the country signed its first production sharing agreement (PSA) with the Azerbaijan International Operating Company. Today, oil exports via the Baku-Tbilisi-Ceyhan (BTC) Pipeline have become Azerbaijan’s main economic driver. Meanwhile, the government has implemented concrete measures to diversify the economy in order to prepare for the eventual depletion of oil reserves. Several state programs in various sectors including ICT, tourism, construction, and agriculture gave the economy a boost in 2010, with the construction sector alone posting a growth rate of 20.3%, largely driven by public investment. State investment, especially concentrated in the non-oil sector, rose to represent 13% of GDP, and accounted for nearly three-quarters of overall domestic investment. Going forward, growth of 8% is foreseen in the non-oil sector in 2011 and 2012, while overall GDP growth is projected at around 2.8% over 2011.

In line with its diversification plans, the Azerbaijani government has made it a priority to encourage foreign investment into the country. In that vein, many incentives were created, with the registration period for foreign companies reduced from 70 to 3 days. Furthermore, progress is being made to promote the use of e-government facilities, with a national e-signature database close to completion. In addition, public investment companies were created as well as promotion agencies, resulting in an increase in total FDI stock to $8.9 billion by end-2010.

Azerbaijan is rich in natural assets, and geographically it is well placed to see its agriculture sector develop rapidly over the coming years, with its broad range of climatic zones. To realize this potential, government support is continuing in the form of reductions in value-added tax on agricultural inputs such as machinery, the lending rate offered by the main agro-leasing company, and the completion of irrigation and infrastructure initiatives. Other sectors that are also receiving attention include alternative energy, which has also become a priority of the government, resulting in the foundation of the State Alternative Energy Agency aimed at promoting all types of renewable energy supply.

The country’s strategic location should also not be overlooked, with key links to Europe, Russia, the Middle East, and Central Asia making Azerbaijan an important transport hub for the region. Its population of 9 million and already well-established education sector mean the quality of human capital is also ticking all the right boxes for foreign investors. Azerbaijan has a young and steadily urbanizing population, with an average age of only 28 years and an urbanization rate of 52%. Expenditure on education reforms and incentives represented 1.9% of GDP in 2008, aimed at transferring know-how to the Azerbaijani people and creating sustainable jobs for locals through a more active collaboration between businesses and universities.

Politically stable and economically diverse, Azerbaijan is in a strong position to play off its strengths—including a debt level of only $4 billion and reserves of $30 billion—to carve a path towards a future without an overt reliance on the oil and gas sector.