Overview of Azerbaijan Economy and Banking Sector

Overview of Azerbaijan Economy and Banking Sector


Even though its DBI ratings are better than in many CIS countries, Azerbaijan is lagging behind its neighbours in terms of business environment. This factor has negatively impacted inflows of Foreign Direct Investment which play a lesser role in GDP than in other Caucasian and Post-Soviet countries. However FDI stocks are higher than in other Caucasian countries as the economy of Azerbaijan is 4.5 times bigger than that of Georgia and 6.5 times bigger than that of Armenia.

Despite its modest ratings and limited inflows of FDI, Azerbaijan has been a star economic performer in the last 10 years. Its GDP growth has been among the highest in the world reaching 10% on average from 2005 till 2014. The very strong growth of Azerbaijan has led to much higher Gross National Income than in other countries of the Caucasus. Meanwhile, economic growth has not been associated with very strong increase in income inequality as in neighbour Georgia or Russia. Therefore, the combination of very strong growth and moderate income inequality has led to a reduction of poverty unparalleled in the Caucasus. Against this background, while it is lagging in the Doing Business Index, Azerbaijan is leading in the Human Development Index.

Azerbaijan’ growth has mainly reflected the upsurge of its oil and gas output linked to large investments in prospection launched in the 1990s. However, since 2010, combined output is declining. Peak volumes of oil and gas have fortunately coincided with peak global prices which have been halved in the recent past even though they still remain above long term average prices. While it has played a critical role in recent growth, the oil and gas sector cannot be the exclusive basis for economic development as proven reserves of Azerbaijan are limited both in absolute volumes and even more relative to the population. Per capita oil and gas reserves of Azerbaijan are 72% of those of Russia, 32% of those of Iran, 7% of those of Turkmenistan and 2% of those of Qatar.

Azerbaijan authorities are fully aware of the limits of the oil-and-gas rent and have managed the economy accordingly by accumulating unparalleled external surpluses during the oil boom thanks to conservative macroeconomic policies. Between 2005 and 2014, the current account surplus reached on average 20.9% of GDP. Budgetary policies have been more restrictive than in other oil-and-gas exporting countries of the region with budget surpluses parked in an Oil Fund whose foreign assets were estimated by IMF at 34 billion USD (50% of GDP) in 2012. Sure, the monetary policy has been somewhat expansionist with the monetary base multiplied 5.8 times between end-2006 and end-2014. But the strong increase in the monetary base has just reflected the necessity to accommodate massive inflows linked to windfall oil and gas sales through acquisition of foreign currency by CBRA and equivalent issuance of local currency. In any case, because of the still small size of the financial sector (loan to GDP was only 25.5% in 2013 according to the World Bank, against 39.8% in Georgia and 45.2% in Armenia), massively increased Central Bank monetary base aggregates have not led to a lending spree that would have fuelled other monetary aggregates (M3). Against this background, the evolution of the financial sector does not create systemic risk despite the negative impact of a recent devaluation on the creditworthiness of unhedged borrowers in foreign currency. Prior to the recent fall of oil prices, cautious macro-economic management had allowed Azerbaijan to build up solid protection with very limited external debt and a combination of Oil fund foreign assets and foreign exchange reserves of CBRA amounting for up to 67% of GDP.

The oil crisis: an opportunity for economic diversification

Despite the robustness of external position of Azerbaijan, CBRA has devaluated the Manat in 2015. Thus, despite the fall of oil prices, IMF anticipates a current account surplus of up to 3% of GDP in 2015 thanks mainly to reduced imports. The impact of the devaluation on exports will remain limited on the short run as 96% of exports were linked to the oil and gas sectors prior to the fall of oil prices, a much higher level than in neighbour Iran, Kazakhstan or Russia.

The low share of manufacturing and agricultural exports reflects the economic distortions in favour of producers of non-internationally tradeable goods (local trade and services, construction and real estate) that were generated by the oil boom that are a common feature to all natural resource rent driven economies (Dutch disease). Strong increases in monetary aggregates linked to natural resource rent inflows generate differential inflation. Producers of internationally tradeable goods cannot increase their prices more than their foreign competitors. Producers of services benefit from improved internal terms of trade at the expense of the formers. In the last 10 years, prices for food products have increased most. This does not contradict the general Dutch disease pattern of local prices as this strong increase in food prices has just reflected a global trend.

Our Partners


The technical assistance funds of the project are provided by the EU Neighborhood Investment Facility.


This project is financed by the European Bank of Reconstruction and Development (EBRD).


The technical assistance services within the project are provided by Frankfurt School of Finance and Management.