Economic Development in Azerbaijan

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Economic Development in Azerbaijan

• FIKRET PASHAYEV, PhD
• CIS Eastern Europe Business Forum
• Tucson, Arizona
• 11/5/2004

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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

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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

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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
  

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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

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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

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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

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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

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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.

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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.

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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)

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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)

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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
  

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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)

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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

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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

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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

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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
  

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Key Business Development Areas

• Oil and Gas
• Renewable energy
• Construction and Building material
• Information and Communication Technologies
• Food processing and Agribusiness
• Tourism

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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

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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

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BTC SCP

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

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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

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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

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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)

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Construction

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

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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

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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

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Important tasks

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

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Challenges

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

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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)

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Useful links

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

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