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Azerbaijan’s Economic Development Options

In April, Azerbaijan will hold extraordinary presidential elections. The elections come at a crucial time for Azerbaijan as the country seeks to build on the advances of the past decade and a half, and continue its development in the years to come. The ruling New Azerbaijan Party (YAP) has nominated current president, Ilham Aliyev, as its candidate for the April elections.

The Republic of Azerbaijan entered a new era of development in 2003 since Ilham Aliyev’s first presidency. The last 15 years marked a paradigm shift in the economic, social, political, and cultural development of the country. For instance, in spite of a poverty rate of 49% in 2001, the country has rapidly transformed itself into an upper-middle-income country. Over recent years the economy of the country has more than tripled in size, and this rapid economic development can be attributed to the exploitation of hydrocarbon resources, achieved through production sharing agreements (PSAs) with foreign oil companies and foreign direct investment (FDI).

The country has made great advances in the field of social infrastructure modernization. The years from 2003 to 2017 witnessed the construction of 43 modern sports complexes and 642 hospitals, along with the building or renovation of 3,100 schools. As a result of the Nagorno-Karabakh war, the country has also had to respond to the ongoing consequences of conflict, including the needs of over a million refugees and internally displaced persons (IDPs).

In order to improve the social and living conditions of these people, Azerbaijan built 92 settlements and residential complexes, comprising 48,300 apartments, allowing 245,000 to move into modern apartments. Indicative of the country’s extensive infrastructure investment have been the construction of 12.3 thousand kilometers of modern roads and 443 bridges and road junctions, along with projects to supply natural gas to 93% of the population and drinking water to 67%.

Of course, some negative trends were observed in the country’s economy with high dependence on the volatile oil sector adversely affected by price declines. This downward trend had negative effects on Azerbaijan banking sector and forced Azerbaijan’s national currency to lose more than 80% of its value. However, the government managed to implement policies to overcome this challenge and improve living standards.

Looking to the future, key objectives will include further large-scale investment in infrastructure along with rapid diversification of the economy. In this context, the government’s ongoing priorities include providing macroeconomic stability within an improved, supportive business environment; encouraging entrepreneurship; creating a competitive economic environment; rapidly developing non-oil industrial sectors; as well as investing in human capital.

The rapid socio-economic development of the country has been the result of measures that the government has implemented to improve the business environment. The World Economic Forum’s Global Competitiveness Report 2017–2018, which measures national competitiveness, ranked Azerbaijan in 35th place in the world, and in first place among the CIS. The World Bank’s Doing Business Report (2018) recognized the advances the country has made to improve the business environment in the areas such as access to credit, protecting minority investors, enforcing contracts, and resolving insolvency, which resulted from the package of economic reforms introduced by President Aliyev. The country ranked 78th out of 188 countries in the UNDP’s Human Development Report (2016) placing it among the countries with high human development.

During these years the country also managed to implement strategically important energy projects, such as the Baku-Tbilisi-Erzurum (BTE) Gas Pipeline to transport gas produced from the Shah Deniz field to Georgia and Turkey. One of the global projects that Azerbaijan has transformed from concept to reality is the Southern Gas Corridor (SGC) project, which will transport gas extracted from the Shah-Deniz Stage 2 development from the Caspian Sea to Turkey and then on to Europe. The SGC includes two further important pipeline projects – Trans-Anatolian Pipeline (TANAP) and Trans-Adriatic Pipeline (TAP) – will deliver Azerbaijani gas to European markets. This project will contribute to the energy security of the EU as well as further strengthening Azerbaijan’s position as a strategic energy supplier.

In September 2017, the government and the State Oil Company of the Azerbaijan Republic (SOCAR), together with BP, Chevron, INPEX, Statoil, ExxonMobil, TP, ITOCHU, and ONGC Videsh signed an amended agreement on joint development and production sharing for the Azeri Chirag and deep water portion of the Gunashli gas fields (ACG) in the Azerbaijan sector of the Caspian Sea. As part of the revised contract, the international co-venture partners will pay a bonus of $3.6bn to the State Oil Fund of the Republic of Azerbaijan, and SOCAR will increase its equity share in the ACG PSA from 11.65 to 25%. During the next 32 years, there is the potential for more than $40 billion in capital to be invested in the ACG oil field.

Azerbaijan has the potential to become one of the major commercial and transportation hubs in the region. The country is actively engaged with implementing major transportation projects such as the Baku-Tbilisi-Kars (BTK) railway and Baku International Sea Trade Port. The opening of the BTK railway on October 30, 2017, with an initial capacity to transport 1 million passengers and 5 million tons of freight a year, was an important step. As a result of this project, Azerbaijan, Georgia, and Turkey have combined to launch a rail link connecting the three countries, establishing a freight and passenger link between Europe and China. As President Ilham Aliyev stated, the 826km railroad is the “shortest and most reliable link between Asia and Europe.” Many countries and international organizations greeted the opening of this railway positively. The EU called the opening of the rail link “a major step in transport interconnections linking the European Union, Turkey, Georgia, Azerbaijan, and Central Asia.”

President Aliyev has determined that a major state policy goal should be to make use of the transit potential of the country, pointing to the Baku Port as a key strategic project in the diversification of the economy, set to become one of the country’s main investment projects in the non-oil sector, generating the second greatest share of budget revenues. In this context, on May 18, 2015, the Port of Baku was restructured by a decree of President Ilham Aliyev. To further advance the development of the Baku Port, on January 9, 2018, President Aliyev inaugurated a new Ro-Ro terminal. The terminal, initially consisting of two piers, will be capable of receiving some 60,000 truckloads or 1.8 million tons of cargo per year. The key aim is to turn the Port of Baku into a regional transport and logistics hub for Eurasia.

Azerbaijan is not only investing in the aforementioned global projects. The country is also paying special attention to increasing efficiency and transparency in the public sector, as well as education levels and enhance the labor market of the country. In this context, the ASAN-Service of the State Agency for Public Service and Social Innovations represents a quantum leap in the way public services are delivered, with equal access guaranteed to all citizens. ASAN service is central to the country’s transformation.

As a final illustration of the country’s progress, an initiative, “The state program on the education of Azerbaijan youth abroad in the years 2007–2015,” was introduced with the aim of ensuring the education of Azerbaijani youth at leading international universities, at state expense, in the specializations necessary for the country and thus transforming them into an important factor in the country’s future development. Such investment in education, focused on improving the quality of education in the country, are of huge long-term and strategic importance.