Date: 5 May 2011
Country briefing note <download pdf file>
Economic growth benefits from greater non-oil activities
In recent years, the country has enjoyed large and growing oil exports and was among the fastest growing economies in the subregion. However, as existing oilfields reach their productive capacity, oil output is slowing down.
The hydrocarbon sector accounts for some 55% of GDP and over 80% of export earnings and as such, GDP growth itself slowed down to 5.0% in 2010 from over 9% in the previous years.
Non-oil activities, driven largely by public investment in infrastructure but also trade and services, are playing a greater role in driving the economy.
The industrial sector expanded by 2.6% and retail sales grew by 8.8% in 2010. The agricultural sector, however, contracted, as grain production declined sharply due to poor weather conditions, particularly flooding.
Inflation is steadily rising, led by food prices
Higher food and commodity prices and increased government spending led to an acceleration of consumer price inflation from 1.5% in 2009 to 5.7% in 2010.
A stable exchange rate pegged to the dollar and moderate expansion in credit have helped to keep inflation from rising faster.
Public expenditure remains high, but monetary stance turns less accommodative
Azerbaijan received budgetary boosts from recovery in global demand and higher oil prices. The Government amended its budget target and increased its transfers from the State Oil Fund in order to finance infrastructure and social programmes.
While the central government budget recorded a large surplus, efforts could be made to reduce a significant non-oil fiscal deficit.
In 2009, the National Banks of Azerbaijan cut reserve requirements of commercial banks to increase liquidity and support economic activities. As inflationary pressures set in, however, policy rates were raised in late 2010 and again in March 2011.
At the same time, the financial authorities committed to maintaining the stability of the banking system and to ensuring sufficient liquidity in the financial system, to support economic growth in the short- and medium-term.
Strong growth in trade
Current account surplus increased from 23.6% of GDP in 2009 to around 26% in 2010. The economy ran a trade surplus of US$14.7 billion in 2010, higher than the surplus recorded in previous year.
Oil and refined petroleum products continue to account for the largest share of export earnings. Among the largest imports were food products and capital goods such as machinery, metals and transport equipment.
Future outlook and policy challenges
The pursuit of broad-based growth and development of the non-oil sectors were the principal economic policy challenges in 2010. The Government is expected to use its State Oil Fund to finance social spending and infrastructure projects, and to increase investment in the non-oil sectors, such as agriculture and manufacturing. Greater efforts are needed to diversify the economy and institute market-based reforms to boost competitiveness.
In 2011, the economy is expected to grow by 5.5% and the consumer price inflation rise to 7.0%.