Azerbaijan is a low income country with Gross National Income (GNI) per capita of US$ 710. The country is rich in mineral resources (mainly oil and gas), has fertile agricultural land and a well educated labor force with a strong entrepreneurial tradition. The oil and gas sector contributes some one-third to GDP, while agriculture contributes some 18 percent and provides income and employment to 40 percent of households.

The impressive GDP growth of the past five years -- with average annual growth exceeding 8 percent -- was led mainly by developments in the oil and gas sector, while non-oil output remained well below its 1990 level. If oil and gas developments remain on track, GDP growth could reach double digits beyond 2005. However, oil production is expected to peak in 2011 and decline rapidly after 2013, unless any other major discoveries are made. Diversified development of the non-oil sector is key for generating jobs and promoting long term growth.

Notwithstanding the country's natural resources, Azerbaijan remains one of the seven lowest income countries in Europe and Central Asia and poverty continues to present a major challenge. In 2001, some 50 percent of the population lived in poverty and 17 percent in extreme poverty. There are significant regional variations in poverty rates with the incidence of income poverty being highest among households in provincial towns. Access to services is more limited in the rural areas, giving rise to significant rural-urban migration. Appropriate management of oil resources will be crucial in securing more equitable growth for current and future generations.

Events since transition

Azerbaijan became part of the Soviet Union in 1920 and gained its independence in 1991. Although precise data are not available, the country was clearly poorer than most Soviet republics at the start of transition. Since independence, Azerbaijan has faced many of the challenges that confronted other Commonwealth of Independent States (CIS) countries in transition -- economic distortion and contraction, a deterioration in social services and infrastructure, and an increase in poverty. In addition, the country has dealt with an armed conflict with neighboring Armenia over Nagorno Karabakh, that led to an influx of over one million refugees and internally displaced persons and disrupted key regional trade and transport links.

Economic recovery began from 1995 onwards when, with the gradually stabilizing political situation, the Government decided to embark on a reform program to stabilize the economy and accelerate structural reforms.

Recent economic performance

The impressive GDP growth of the past five years was the result of two sets of policy achievements. First, the Government launched a wide-ranging reform program that was supported by quick-disbursing World Bank credits, as well as by an IMF program. Second, in late 1994, Production Sharing Agreements (PSAs) were signed with foreign oil companies under which these companies would invest US$7.5 billion to develop oil deposits in the Caspian Sea. These include the Baku-Tbilisi-Ceyhan (BTC) pipeline and the Shah-Deniz pipeline which will transport gas to Turkey through Georgia.

In December 1999, the State Oil Fund of the Azerbaijan Republic (SOFAR) was created to manage the anticipated oil boom. The Fund carries both stabilization and savings functions, and its assets are programmed to increase to over US$700 million by the end of 2003. Other significant reforms included strengthening governance in the banking sector, enhancing transparency in the utility sectors, enacting a modern tax code, and ensuring more transparent budget execution and accounting, as well as strengthening internal and external audit capacity.

Recently the non-oil economy, including agriculture, has also begun to recover. Azerbaijan is amongst the leaders in the CIS in farm privatization and registration of arable land. During 1999-2002, non-oil GDP grew more than 8 percent a year, led by construction, which in turn benefited from oil development. The country's location at the cross-roads of Europe and Asia also offers potential for future growth in trade and transit facilities.

Focus of World Bank Assistance

The Azerbaijan Republic became a member of the World Bank in 1992 and of the International Development Association (IDA) in 1995. Since then, the World Bank Group has focused on facilitating Azerbaijan’s transition to a market economy.

The World Bank's new Country Assistance Strategy (CAS) for FY03-05 is designed to support the country-driven State Program on Poverty Reduction and Economic Development (SPPRED). The SPPRED identifies six strategic pillars namely, maintaining macroeconomic stability, creating an enabling environment for income-generation, improving infrastructure, providing better access to health and education, reforming social protection and creating better conditions for refugees and internally displaced people.

The FY03 -05 CAS will span a crucial period in preparing the country for the anticipated oil boom. The broad elements of the new Country Assistance Strategy envisage assistance in the following areas:

Managing the oil boom to help maintain macroeconomic stability, avoid “Dutch disease” (a high exchange rate damaging the competitiveness of its non-oil tradable sectors), and facilitate non-oil growth, employment and pro-poor expenditures.

Generating jobs and non-oil growth by improving the business environment and access to financial services, building infrastructure to support Small and Medium Enterprises (SMEs), and stimulating agriculture.

Improving access to services by reversing the decline in social services and social assistance, and infrastructure.

Realizing the country’s oil potential to the extent and within the time-frame laid out in the SPPRED.

Impact on the Ground

The World Bank’s wide-ranging program of assistance to Azerbaijan has had significant impact. Specific achievements include:

Oil Fund managment improved. Management of the Oil Fund has improved with Bank assistance through the Second Structural Adjustment Credit to the country (SAC II). The Oil Fund’s budget is now prepared in consultation with the Ministry of Finance and endorsed by the Supervisory Board of the Fund, before approval by the President. Moreover, Oil Fund expenditures are approved by the Parliament, and prudent asset management guidelines ensure that assets are managed in a professional way.

Farms privatized and land redistributed. With Bank assistance, almost all (99 percent) former state and collective farms have been privatized and their land distributed. As a result, small-scale individual farmers working on privatized plots now contribute some 96 percent to agricultural production. In addition, some 88,000 farmers now use advisory and information services.

Critical infrastructure rehabilitated. Some 146,000 hectares of land have benefited from works under the Irrigation Project that have stopped the deterioration in the supply of irrigation water. The water supply system of Baku has been improved and the gas distribution system rehabilitated.

Living conditions of internally displaced persons and refugees improved. Infrastructure has been rebuilt, and internally displaced persons and refugees have been encouraged to resettle, with help provided under a reconstruction project. The Bank's portion of this joint program has directly benefited some 20,000 persons. Some 35,000 people now have access to a water supply and local roads through civil works financed under the Bank’s Social Fund.

Education upgraded. Some 20 pilot schools and several other educational institutions in 5 regions have been rehabilitated and appropriately equipped with Bank assistance. The national curriculum is being revised in the primary grades, and more than 2,000 teachers have received some form of in-service training.

Environmental management system strengthened. To save endangered sturgeon, a new hatchery with an annual capacity of 15 million fingerlings has been constructed under the Urgent Environmental Investment Project. The hatchery became operational in August 2003.

For details of World Bank projects in Azerbaijan, please click here.

Challenges Ahead

• Managing the country's finite oil and gas reserves effectively. Although Azerbaijan has so far resisted temptation to spend oil money rapidly and wastefully, the managment of the substantial, but short lived, windfall in revenue that is expected to accrue from the development of the country's oil and gas resources in a manner that avoids macroeconomic distortion and encourages diversification and growth of the non-oil sector, poses a complex set of challenges.

• Reversing declining living standards and addressing pervasive poverty. Improvements in social and infrastructure services, employment generation, and diverse and balanced development of the non-oil economy is crucial.

• Strengthening governance. Although Azerbaijan has made some important gains in political, regulatory and legal reform, and there are indications of an improvement in the business environment, a significant agenda remains. This will include improving public sector efficiency and transparency, building capacities at the citizen and community level to utilize information and hold the government accountable, strengthening the relatively weak legislative and judicial branches of government, and ensuring orderly electoral processes at the national, parliamentary and local levels.

World Bank Partners in Azerbaijan

SECTOR	LEAD NATIONAL AGENCY	PARTNERS
Agriculture	Ministries of Agriculture, Economic Development, Cabinet of Ministers, State Irrigation Committee ..	EU ; IDB ; IFAD ; International and Local NGOs
Infrastructure	Cabinet of Ministers, Ministries of Fuel & Energy, Transportation ..	IDB ; ADB ; UN ; KFW ; Bilateral Agencies
Internally Displaced Persons and Refugees	Cabinet of Ministers, Agency for Reconstruction and Rehabilitation, IDPs Social Development Fund ..	UNDP; UNHCR ; International and Local NGOs
Macroeconomic and Public sector	Ministries of Economic Development and of , Finance, National (Central) Bank, Cabinet of Ministers, President’s Office ..	IMF; EU ; Bilateral Agencies
Poverty Reduction	Ministry of Economic Development (MED), PRSP Secretariat at MED ..	IMF; UNDP; ADB;EU; GTZ; USAID; Bilateral Agencies
Private Sector	Ministry of Economic Development ..	EBRD
Social Protection, Health and Education	Ministries of Labor & Social Protection, Health, Education ..	ADB; UNICEF; Bilateral Agencies

World Bank Lending to Azerbaijan

Total IBRD / IDA Commitments from FY95 to FY03: US$ 597 million for 23 projects.

Seventeen projects are currently under implementation.

The following projects were approved in FY 2003:

Greater Baku Water Supply Project – Supplemental Credit – USD 13 million
Education Sector Development Project – USD 18 million
Irrigation Distribution System and Management Improvement Project – USD 35 million.

(by fiscal year *, in nearest US$ millions)

	upto 1996	1997	1998	1999	2000	2001	2002	2003	Total
Commitments	165	35	90	80	42	50	69	66	597
Disbursements	63	10	58	63	24	28	55	69	370

Total Commitments by Sector since 1992

(in nearest US$ millions)

* Fiscal year from July 1-June 30