Azerbaijan overview

Cityscape at night

In Azerbaijan we focus on:

Promoting market-driven economic diversification. The EBRD will support leading local corporates with direct financing while helping our partner banks to remain active in the corporate segment through MCFF. In the MSME sector the EBRD will place a special emphasis on the agribusiness sector, and will support local banks to develop their capacity to support agricultural and regional lending. Our continued support for regional roads will also help facilitate the development of a viable agricultural sector while facilitating integration of smaller communities.

Developing a sustainable financial sector to support private sector development. The EBRD will aim to strengthen financial intermediation to ensure efficient financing of the private sector, particularly SMEs and MSEs, including in the regions.We will promote high standards of corporate governance and risk management, which should contribute to increased competition, setting new standards and opening new markets for banks, and will support consolidation in the banking sector through potential equity investments. The EBRD will extend its co-operation with existing partner banks and assist in the development and promotion of new financial instruments to target improved access to finance for women-owned and women-run businesses, and will aim to promote energy efficiency investment projects through local banks via the Caucasus Energy Efficiency Programme.To develop local capital markets, we will seek to bring corporate (non-FI) issuers to the corporate bond market and expand the institutional and retail investor base.

Improving governance and the business environment. In order to support the authorities’ goals of promoting competition and improving the business environment, the EBRD will prioritise engagement with private and public sector clients who can demonstrate commitment to high standards of corporate governance and transparency and who have a commitment to improving management practices. In parallel, we will work closely with the Government of Azerbaijan to deepen institutional and regulatory reform. Drawing on the lessons of hydrocarbons and financial sectors, the EBRD will strive to create a more favourable investment climate in the real sector by promoting improvements in the legislative framework, enhancing competition and reducing the incentives for corruption. In order for these measures to be successful, opening new channels for constructive policy dialogue with key government agencies will be crucial. The EBRS will also continue to pursue investments in energy projects that improve energy security, create new generating capacity, stimulate competition, diversify energy sources, increase efficiency, and create wider and larger markets through regional integration.

The EBRD’s latest Azerbaijan strategy was adopted on 30 April 2014

EBRD forecast for Azerbaijan’s Real GDP Growth in 2016 -3.0%

EBRD forecast for Azerbaijan's Real GDP Growth in 2017 1.0%

Azerbaijan’s economy contracted by 3.9 per cent year-on-year in the first nine months of 2016. In the same period, non-oil GDP declined by 6.1 per cent year-on-year. Capital investment, an important driver of growth in the previous years, dropped significantly in January-September 2016. External and fiscal surpluses changed swiftly into twin deficits on the back of falling hydrocarbon revenues. After two step-devaluations in 2015, currency pressures lingered in the first nine months of 2016 despite efforts to bolster confidence in the manat. Inflation increased from 4.0 per cent in 2015 to 11.2 per cent in the first nine months of 2016 reflecting the earlier depreciation of the manat. In reaction to rising inflation and exchange rate pressures, the Central Bank of Azerbaijan raised the refinancing rate five times from 3.0 per cent in February 2016 to 15.0 per cent in September 2016, although the monetary impact of the hike is dampened by the high level of dollarization and an insufficiently developed money market.

The share of foreign exchange deposits as total deposits increased from approximately 50 per cent in the beginning of 2015 to approximately 80 per cent in August 2016. At the end of the third quarter of 2016, the combined assets of the State Oil Fund (SOFAZ) and of the Central Bank’s foreign exchange reserves stood at approximately US$ 40 billion (75 per cent of 2015 GDP), providing adequate safeguards against foreign exchange liquidity risks. Official foreign reserves of the Central Bank of Azerbaijan decreased by approximately US$ 11 billion since the fourth quarter of 2014, before stabilising at around US$ 4.2 billion in April-September 2016. SOFAZ provided liquidity for the Central Bank’s foreign exchange auctions, preventing further drain of Central Bank’s foreign reserves in the second and third quarters of 2016. The conflict in the Nagorno- Karabakh region presents a risk to the growth outlook.

We leave our growth forecast for Azerbaijan’s economy unchanged at -3.0 per cent in 2016 and +1.0 per cent in 2017.

Azerbaijan in the EBRD’s 2016-17 Transition Report