PrintAs a Caspian littoral state, Azerbaijan is capitalizing upon the Sea's sizeable, but still mostly untapped, hydrocarbon resources.
Azerbaijan's real gross domestic product (GDP) grew by an impressive 26 percent to $13 billion in 2005 as foreign investors pushed ahead with major projects in Azerbaijan (see Azerbaijan Production Sharing Agreements for more information). Foreign direct investment in the country contracted from $2.3 billion in 2004 to just under $500 million in 2005 largely due to the completion of construction on the BTC pipeline in Azerbaijan. In the next couple years favorable real GDP growth is expected, but maintaining low inflation rates as energy and transit revenues flow into the country represents a major challenge.
In the meantime, Azerbaijan is struggling to overcome the economic collapse that followed independence from the former Soviet Union, as the country's GDP contracted by almost 60 percent from 1990 to 1995. By 2000 and 2001 wages were increasing around 20 percent each year, and by the end of 2005 the average monthly wage was around $125. Still, according to the International Monetary Fund (IMF), almost 45 percent of the population lives below the poverty line. Azerbaijan has drawn over $120 million (as of April 2006) from an IMF-run Poverty Reduction and Growth Facility program in Azerbaijan that has helped re-structure the country's economy and alleviate economic hardships.
Azerbaijan's hope for future economic growth rests in large part with successful development of its oil and natural gas resources in the Caspian Sea region and through effective management of the resulting revenue stream. After the first commercial oil flows through BTC during Summer 2006, oil revenues will contribute to a doubling of Azerbaijan’s GDP by 2008. Azerbaijan will have drastically higher oil revenues than ever before, and although the country has effectively managed a $1 billion oil fund, bankers and investors question whether Azerbaijan can manage an oil fund that could eventually be worth $100-200 billion (depending on the oil price). Although the entire fuel sector represented 27 percent of Azerbaijan’s GDP in 2000, it grew to approximately 41 percent of GDP in 2005 (See Table 1).
To manage the revenues, former president President Heydar Aliyev created a State Oil Fund in 1999, which is designed to use money obtained from oil-related foreign investment for education, poverty reduction, and efforts aimed at raising rural living standards.
As of the end of 2005, the State Oil Fund reported assets of $1.3 billion, but the fund’s assets are expected to almost double during 2006.
Economists at the IMF warn Azerbaijan that institutional reform and economic liberalization are necessary for the country to sustain its upcoming oil wealth. Some of the slow-paced reform has been due to the transfer of power to Ilham Aliyev, who was elected president in October 2003. He succeeded his father, Heydar Aliyev, the longstanding president during the 1970s and much of the 1990s. However, the shift in power from father to son was reportedly tainted and accompanied by violence. Ilham Aliyev has a background in his country's energy sector, was educated in Russia and the United States, and has maintained a good working relationship with foreign investors and the U.S. Regardless of the policy direction that Azerbaijan takes, the establishment of the oil fund and Azerbaijan’s leadership in the Extractive Industries Transparency Initiative (EITI), which urges data transparency and hopes to reduce corruption, show positive signs that Azerbaijan is aware of the challenges it faces.
The Organization for Security and Cooperation in Europe (OSCE) noted some improvements in the election process during the November 2005 elections, but observed “deteriorating” condit
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