Economic Development in Azerbaijan

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Economic Development in Azerbaijan

• FIKRET PASHAYEV, PhD
• CIS Eastern Europe Business Forum
• Tucson, Arizona
• 11/1/2003

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Economic Development in Azerbaijan

• Achievements
• Challenges
• Prospective

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Quick feedback on Azerbaijan

• Azerbaijan, the Land of Fire
• Declared its independence from Russia for the
  first time in May 1918
• But became the Azerbaijan Soviet Republic in
  April 1920(after the invasion of Soviet army)
• 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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Azerbaijani-US Relations

• Strong bilateral relations and removal of Section
  907 restriction
• Azerbaijan is key US ally in fight against
  terrorism, recently 151 Azerbaijani troops have
  been send to Iraq for peace-keeping operations
• In 2002 number of US companies in Azerbaijan grew
  by 30 (100) US is largest foreign investor in
  Azerbaijan
• - US investment amounted 1,990 billion for
  1993-2002

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Economy of Azerbaijan

• For last 5 years GDP growth averaged nearly 10
  annually (10.6 in 2002)
• Inflation is very low - 2-3 a year
• The share of private sector in GDP reached 73
  in 2002
• National Poverty Reduction and Economic
  Development Program was adopted in February 2003

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Investment climate

• Sound legislative framework
• Law on protection of Foreign Investment adopted
  in 1992
• Property Law, Law on Land Reform, Law on
  Privatization of State Property, Law on
  Joint-Stock Companies, Law on Entrepreneurial
  Activity, Tax Code, Customs Code, etc

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Investment Climate (c)

• According to the Decrees of President in 2002 the
  licensing system substantially liberalized
  number of licenses decreased from 240 to 30
• Simplified tax system was introduced (top income
  tax rate 35, top corporate tax rate 25)

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Volume of FDI

• Recent Years Azerbaijan received more than 10
  billion dollars of foreign investment, in 2002
  foreign investment amounted 34 of GDP
• Azerbaijan has highest ratio of FDI (Foreign
  Direct Investment) per capita among all Eastern
  European Countries

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Financial system

• In 1994 budget deficit concluded 10.3 of GDP, in
  2002 that indicator totaled 0.4
• Since mid 1997 transition to Treasury system,
  better management and control of state budget
• During last 7 years ratio of banking assets to
  GDP increased 10.2 times, investment through
  banking loans in economy grew 2.3 times

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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
• The preparatory works on establishing rules for
  insurance of deposits are in progress
• 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 (100 ownership)
  15 of market
• International Bank of Azerbaijan (50.2 state
  ownership) up to 70 of market
• Both banks will be privatized in the years
  2003-2004

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Privatization

• First stage of privatization was implemented in
  1995-1998 (state program)
• Second stage of privatization was launched in
  2000 (State Program and Law)
• According to second privatization program large
  enterprises in various industries will be
  privatized (chemical industry, machine building,
  etc)
• During last 7 years about 24.000 SMEs. 1500
  enterprises became joint stock companies

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Land ownership

• Land Code provides 3 forms of land ownership
• Public
• Private
• Municipal

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Trade Policy

• weighted average tariff rate 6.7
• Azerbaijan has not joined to any customs union
  yet
• Subsidies According the state budget of 2003
  the amount 347.000 US dollars is considered for
  the Ministry of Agriculture
• Accession to WTO - priority

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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
• Construction and Building material
• Information and Communication Technologies
• Food processing and Agribusiness
• Potential
• Tourism
• Health (development of oil industry pushes
  forward health industry. Today Germany, Turkey,
  Japan do well in investing to this sector in
  Azerbaijan )

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The economy of Azerbaijan is based on the
production of oil and natural gas

• With its huge Caspian Sea reserves Azerbaijan has
  great potential for economic development.
• Due to natural resources, its geopolitical
  location, and large intellectual potential it is
  one of the attractive countries for investors.

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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 Barons

• Alfred Nobel made his fortunes here, and many oil
  barons built great palaces in Baku.
• By beginning of the 20th century Baku oil field
  was the largest in the world

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NEFT DASHLARI

• First off-shore oil exploration in the world
• Neft Dashlari is the giant floating city of the
  off-shore field of Neft Dashlari (Oil rocks),
  which production was launched in 1948 45km
  North-East of Baku
• This archipelago of wells is linked through a
  labyrinth of bridges.

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Oil and Gas

• Oil in Azerbaijan has been produced for 150 years
  
• by 1911, half of the world oil was produced in
  Azerbaijan
• In 1994 - 2002 than 22 contracts were signed with
  35 large multinational oil companies from 15
  countries
• According to this contracts in the years to come
  60 billion dollars of foreign investment will be
  invested in oil and gas sector

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Oil and Gas

• Baku-Tbilisi-Ceyhan (BTC)Main Export
  Pipeline-completed 15 by July 2003 -is aimed at
  bringing rich oil resources of Caspian Sea to the
  world markets through Mediterranean port of
  Ceyhan (July 2005 - first delivery for BTC)

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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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Construction

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

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ICT

• National Information Communication Technologies
  Strategy (2003-2012) is adopted by Decree of the
  President of Republic of Azerbaijan
• Enhancing Local development opportunities
• Attraction of foreign investment
• www.nicts.az

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Food processing and Agribusiness

• Azerbaijan has 9 climatic zones from existing 12
• cultivation of vegetables, fruit, cotton, crops,
  tobacco, subtropical cultures, silkworm and sheep
  breeding)
• TDA definitional mission in July 2003

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Tourism

• State Program on Development of Tourism for
  2002-2005 was adopted in 2002
• there are about 90 national tourist companies,
• industry is developing fast
• TDA definitional mission in August 2003

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Health

• Development of oil industry pushes forward health
  industry (Alaska)
• Today Germany, Turkey, Japan do well in investing
  to this sector in Azerbaijan
• Development of Pediatric ED and Trauma Center
• Affiliation with Western Medical Schools
• Telemedicine

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Challenges

• Political stability
• Macroeconomic stability
• Sustainable economic growth
• Development of oil and gas industry
• Diversification of economy
• Further improvement of legal framework

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Political stability

• New President was elected recently
• Geopolitical situation
• Conflict with Armenia in and around
  Nagorno-Karabakh region of Azerbaijan

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Macroeconomic stability

• Sound financial policy
• Cooperation with IFIs (IMF)
• Solid banking system
• Better managing with externalities (oil prices,
  etc)

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Diversification of economy

• Priorities in non-oil sector
• SOFAZ, IFI
• FDI in non-oil sector
• Privatization
• Development of SME
• State programs
• Solid banking system
• Dutch disease

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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

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