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Economic Development in Azerbaijan

Economic Development in Azerbaijan. FIKRET PASHAYEV, PhD CIS & Eastern Europe Business Forum Tucson, Arizona 11/5/2004. Quick feedback on Azerbaijan. Azerbaijan declared its independence from Soviet Union on August 30,1991 Population is 8,2 million

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Economic Development in Azerbaijan

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  1. Economic Development in Azerbaijan FIKRET PASHAYEV, PhD CIS & Eastern Europe Business Forum Tucson, Arizona 11/5/2004

  2. Quick feedback on Azerbaijan • Azerbaijan declared its independence from Soviet Union on August 30,1991 • Population is 8,2 million • The capital City is Baku – population 2 million • Azerbaijan covers an area of 86 000 sq. km

  3. Macroeconomic situation • Low inflation (2-3%) for the decade of years • Budget deficit/GDP ratio is around 1% • GDP growth rates for the last 6 years averaged 10.4% (11.2% in 2003, 10% in 9 months of 2004) • In 2003 industrial output grew up 4.3%, agriculture grew up 5.6 %, construction – 61%, services – 8 %

  4. Budget • Budget proposal for 2004 – revenue growth 25%, expenditures – 27%. • Major new expenses – substantial increase of wages, development of SMEs (40 mln USD), regional programs, agriculture projects (20 mln USD), infrastructure projects. • Budget proposal envisages price of oil as 25 dollar/barrel [conservative approach]

  5. Economic reforms • Further strengthening of legislative basis • Liberalization of prices • Restructuring of banking system • Modernization of tax system • Privatization state-owned enterprises • Attraction of foreign investment

  6. State Programs • Decree of the President on measures for acceleration of the social and economic development in the Republic of Azerbaijan • State Program for Social and Economic Development of the Regions for 2004-2008. Creation of 600.000 jobs in 5 years. • State Program for Poverty Reduction Strategy and Economic Development – SPPRED was adopted in 2003. Target - manage oil revenues, creation of jobs, infrastructure development • Long-term strategy for use of oil revenues

  7. Investment Climate • Law on protection of Foreign Investment adopted in 1992 • Government established Investments Promotion Fund • Potential investment projects identified • Potential areas: chemical industry, machinery, textiles, food processing

  8. Volume of Investment • Azerbaijan has the highest ratio FDI per capita among transition economies • In 2003 from various sources $3.6 bln was invested in economy of Azerbaijan, • Foreign Investment totaled $2.9 bln. • There are 3,250 companies with foreign investment in Azerbaijan • In recent 10 years $20 bln have been invested in economy of Azerbaijan

  9. Good Governance • Very transparent budgetary system (USAID assistance) • Azerbaijan joined to Extractive Industries Transparency Initiative (EITI) • In 2003 Milli Majlis (Parliament) adopted the Law on Fight against Corruption.

  10. Good Governance - II • In 2003 Parliament of Azerbaijan ratified the “Criminal Law Convention on Corruption of 1999” of Council of Europe. • In the framework of Organization of Economic Cooperation and Development (OECD) Azerbaijan participates in Europe-Caucasus Anticorruption Initiatives Program. • In 2003 Azerbaijan has prepared National Plan on Fight against Corruption [in the framework of OECD Europe-Caucasus Anticorruption Initiatives Program].

  11. Good Governance III • 0) Report “Anticorruption in Transition 2” published by World Bank in 2004 says “Significant declines in the perception of corruption as an obstacle occurred in some of the countries where 1999 levels were high, including Azerbaijan, Croatia, Kazakhstan, the Kyrgyz Republic, Lithuania, and Russia.” (Executive Summary p. xii, p.14)

  12. Banking system • There are no separate regulations in regard of operation of foreign banks. The law named “Banks and banking activities in the Republic of Azerbaijan” adopted in 1996 regulates all banking operations • For 1 January 2003 - minimum level of charter capital established at $2.5 million for existing and $5 million for new establishing banks (93 banks have received licenses, among them 2 state banks and 15 banks with foreign capital participation)

  13. Major Banks • There are only 2 state-owned banks in Azerbaijan • United Universal Stock bank – 15% of market • International Bank of Azerbaijan – up to 70% of market • Both banks will be privatized in the years 2003-2004

  14. Tax system • Adoption of Tax Code • Tax Code used recommendations of IFIs, IMF in particular • Tax Code – decrease of number of taxes, reduction the tax rates, creation of favorable investment environment • Income tax (14-35%, 12-70%before), Profit tax (24%, 30-55%before), VAT (18%,20% before)

  15. Privatization • During First Program in 1995-1998 around 35,000 small enterprises have been privatized • Second privatization program targeted to medium-size and large enterprises (started in 2000) • Sectors for privatization - transportation, communications, machinery, chemical, etc • Private sector share in GDP totals 73%

  16. Land ownership • Land Code provides 3 forms of land ownership: public, private, municipal • 99.7% of the land [designed for privatization] was privatized • 3.3 million people (871.8 families) entitled to get land share

  17. Trade • Azerbaijan is trading with 112 countries • Goods turnover increases 30-40% annually • 40.4% of foreign goods turnover - EU, 28.2% - CIS countries • Accession to the WTO

  18. Customs regulations • Valuation • transparency • International standards • Licenses applied to alcohol and tobacco • Tariff Council has been established (31 January 2002) – state control over forming of tariffs and duties

  19. Key Business Development Areas • Oil and Gas • Renewable energy • Construction and Building material • Information and Communication Technologies • Food processing and Agribusiness • Tourism

  20. History of oil industry • The existence of petroleum was known since 8th century • By the 15th century oil for lamps was obtained from surface wells • Commercial exploitation began in 1872

  21. Oil and Gas • Reserves estimated energy reserves 6.7 billions barrels of oil and 10.7 trillion cubic feet of gas • Since 1994 Azerbaijan signed 23 oil contracts with 35 companies from 15 countries • Total value – more than $60 bln

  22. BTC & SCP • Baku-Tbilisi-Ceyhan Main Export Pipeline – 85% finished. Length - 1760 km. Capacity 1 mln barrels of crude oil per day. • South CaucasusPipeline – for exportation of natural gas (Baku-Tbilisi-Erzerum). Length - 442 km. Gas comes from Shahdeniz field.

  23. SOFAZ • State Oil Fund of Azerbaijan (SOFAZ) was established in 2001 to save resources for the future generations • Main purpose is to diversify economy • Reserves $810 million, will increase $1 bln annually starting 2006 • Azerbaijan joined EITI initiative by UK Government

  24. Renewable energy • Visits to ORNL and NREL • Executive Order by the President of Azerbaijan on adoption of “State program on development of alternative and renewable energy sources” – 10/22/2004 • TDA Projects – Projects for Nakhichevan region of Azerbaijan • USAID sponsored programs

  25. Agriculture • USAID implements several programs to develop private sector in agriculture • Production of cotton, tobacco and grapes reduced (comparing 1995 to 2003) • Production of grain increased 2.1 times, vegetable – 2.4 times, fruit - 1.2 times, sugar beet – 13 times, potato – 4.7 times (1995-2003)

  26. Construction • Construction and Building materials • Cement industry • Steel plant • Apartment and office buildings • Infrastructure

  27. ICT • National ICT Strategy was approved in 2003 (for 2003-2012). The Government decided to replace it with the State Program of Development of ICT technologies. It will include more tasks and projects. • Regulatory framework and liberalization of sector • BAKUTEL 2004 – Annual Exhibition • Global ICT conference on "Digital Divide and Knowledge Economy: Problems and Solutions" Baku, Azerbaijan – 25 -28 November 2004

  28. Tourism • TDA – Master plan for development of tourism for 50 years • Ministry of Youth, Sports and Tourism has licensed 127 tourist service operators (122 companies and 5 operators) • Annual income is $40 mln, 97 % private tourist companies • Tourists mainly come from CIS, Turkey, EU

  29. Important tasks • Adoption of banking law • Privatization of International Bank of Azerbaijan (IBA) and BUSBank • Adoption of competition law • Accounting law • Accession to WTO

  30. Challenges • Macroeconomic stability • Strengthening of regulatory functions of government institutions • Development of non-oil sector • Liberalization of prices • Privatization

  31. Economic growth • Import substitution policy (IFIs, investment, legal framework) • Export oriented production (IFIs, FDI, incentives, infrastructure) • FTA and Custom Unions • Membership in World Trade Organization (WTO)

  32. Useful links • www.azembassy.com • www.economy.gov.az • www.sahibkar.biz • www.bisnis.doc.gov • www.usacc.org

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