Dependence on Extractives Revenues in Azerbaijan

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Overview

Azerbaijan's dependence on energy prices results in high volatility in the nation's export revenues.[1] The EITI estimated in 2012 that oil and gas receipts account for over 70% of Azerbaijan's export and nearly 50% of budget revenues.[2]

In 2009 gas, crude oil and related products made up a 92.5% share in overall export volume.[3] And as of 2012 around three-quarters of the state budget was funded by transfers from the State Oil Fund of Azerbaijan (SOFAZ) and taxes on oil companies. This degree of dependence on oil revenues led the International Monetary Fund (IMF) to express concerns about the stability of the national economy and vulnerability to inflationary pressures.[4]

According to the World Bank, the oil sector has been the key driver of Azerbaijan's rapid growth since 2000, however the country needs to uncover new sources of growth to sustain this pace, underlining the need for a more diversified economy. [5] The Asian Development Bank sees agriculture and tourism as the engines of Azerbaijan's non-oil sector development.[6] AZPROMO, a body set up in 2003 to increase non-oil Foreign Direct Investment (FDI) flow into Azerbaijan, also highlights that telecommunications are key to the non-oil sector, as the second largest recipient of foreign investment after the oil industry.[7] A 2008 report by think tank Chatham House notes that Azerbaijan's dependency ratios are lower than those of some more mature oil exporting countries, but large enough to threaten massive adjustments as and when oil revenues decline.[8]

'Dutch Disease' in Azerbaijan

Signs of 'Dutch Disease', a component of the 'resource curse' blighting many oil-producing nations whereby negative consequences such as appreciation of the local currency as a result of large increases in a country's income,[9] have been noted in Azerbaijan since the beginning of the country's second oil boom period post-1991.

The Economist magazine reported in 2006 that inflation had rise and the Azerbaijani currency, the manat, had appreciated, commonly seen as symptoms of a possible outbreak of Dutch disease.[10] The publication again reported in 2007 that a huge expansion in budgetary spending (over 2006 the government increased budgetary expenditures by 80%) had pushed inflation close to double digits and that there were early signs that the non-oil economy was losing competitiveness. Agriculture, for example, is the largest source of non-oil exports Agricultural output grew by only 1% in 2006 and output of staples such as cotton, rice and potatoes actually contracted.[11]

Since 2006 Azerbaijan's real Gross Domestic Product (GDP) growth rate has slowed to 9.3% (2009), 5% (2010) and 1% (2011), and in 2011 the inflation rate stood at 8.1%. According to the US State Department, Azerbaijan has enjoyed 'measurable success' in diversifying its economy outside of the energy sector, with the non-oil portion of the economy, growing by close to 10% in 2011, while energy sector growth was flat.[4]

Planning for the Future

According to a report by consultant Vugar Gojayev Azerbaijan, like many other oil-producing nations, has failed to translate its oil-derived wealth into greater prosperity for its citizens. Analysts have warned that the government has no master plan for managing the windfall nor a convincing strategy for the post-oil period.[3]

A key element of the country's strategy for managing oil and gas revenues for the future is the State Oil Fund of Azerbaijan (SOFAZ), Azerbaijan's fund-managing body which uses a mixture of political oversight and activity on foreign markets in order to strengthen the economy for future generations.[12] In his report Gojayev commends Azerbaijan for establishing the state oil fund and the massive transfers to infrastructure projects.[3] However civil society organisations (CSOs) have accused SOFAZ of funding development in the oil sector at the expense of strengthening other sectors in the country.[3]

References

  1. Azerbaijan Oil and Gas Report Q3 2012Charles Martin', 2012.
  2. AzerbaijanEITI, retrieved 2 August 2012.
  3. 3.0 3.1 3.2 3.3 Resource Nationalism Trends in Azerbaijan, 2004–2009RUSSCASP, March 2010.
  4. 4.0 4.1 Background Note: AzerbaijanUS State Department, 23 March 2012.
  5. Azerbaijan: Country Program SnapshotWorld Bank, 2010.
  6. ADB names engines of Azerbaijan’s non-oil sector developmentToday, 24 April 2012.
  7. IT and CommunicationsAZPROMO, retrieved 2 August 2012.
  8. Resource Depletion, Dependence and Development: AzerbaijanChatham House, November 2008.
  9. Dutch DiseaseInvestopedia, retrieved 2 August 2012.
  10. Azerbaijan and oil: Too much of a good thingEconomist, 17 August 2006.
  11. Boom and gloomEconomist, 8 March 2007.
  12. The Strange Case of Azerbaijan And Its Resource Blessing/CurseBertelsmanns Stiftung, 15 September 2011.