Economic Development Economic Development in Azerbaijanin Azerbaijan

FIKRET PASHAYEV, PhDFIKRET PASHAYEV, PhD

CIS & Eastern Europe Business CIS & Eastern Europe Business ForumForum

Tucson, Arizona Tucson, Arizona

11/5/200411/5/2004

Quick feedback on AzerbaijanQuick feedback on Azerbaijan

Azerbaijan declared its independence from Azerbaijan declared its independence from Soviet Union on August 30,1991Soviet Union on August 30,1991

Population is 8,2 millionPopulation is 8,2 million The capital City is Baku – population 2 The capital City is Baku – population 2

million million Azerbaijan covers an area of 86 000 sq. km Azerbaijan covers an area of 86 000 sq. km

Macroeconomic situationMacroeconomic situation

Low inflation (2-3%) for the decade of yearsLow inflation (2-3%) for the decade of years Budget deficit/GDP ratio is around 1%Budget deficit/GDP ratio is around 1% GDP growth rates for the last 6 years GDP growth rates for the last 6 years

averaged 10.4% (11.2% in 2003, 10% in 9 averaged 10.4% (11.2% in 2003, 10% in 9 months of 2004) months of 2004)

In 2003 industrial output grew up 4.3%, In 2003 industrial output grew up 4.3%, agriculture grew up 5.6 %, construction – agriculture grew up 5.6 %, construction – 61%, services – 8 % 61%, services – 8 %

BudgetBudget

Budget proposal for 2004 – revenue growth Budget proposal for 2004 – revenue growth 25%, expenditures – 27%.25%, expenditures – 27%.

Major new expenses – substantial increase of Major new expenses – substantial increase of wages, development of SMEs (40 mln USD), wages, development of SMEs (40 mln USD), regional programs, agriculture projects (20 regional programs, agriculture projects (20 mln USD), infrastructure projects.mln USD), infrastructure projects.

Budget proposal envisages price of oil as 25 Budget proposal envisages price of oil as 25 dollar/barrel [conservative approachdollar/barrel [conservative approach]]

Economic reformsEconomic reforms

Further strengthening of legislative basis Further strengthening of legislative basis Liberalization of pricesLiberalization of prices Restructuring of banking systemRestructuring of banking system Modernization of tax systemModernization of tax system Privatization state-owned enterprisesPrivatization state-owned enterprises Attraction of foreign investmentAttraction of foreign investment

State ProgramsState Programs Decree of the President on measures for acceleration Decree of the President on measures for acceleration

of the social and economic development in the of the social and economic development in the Republic of Azerbaijan Republic of Azerbaijan

State Program for Social and Economic Development State Program for Social and Economic Development of the Regions for 2004-2008. Creation of 600.000 of the Regions for 2004-2008. Creation of 600.000 jobs in 5 years. jobs in 5 years.

State Program for Poverty Reduction Strategy and State Program for Poverty Reduction Strategy and Economic Development – SPPRED was adopted in Economic Development – SPPRED was adopted in 2003. Target - manage oil revenues, creation of jobs, 2003. Target - manage oil revenues, creation of jobs, infrastructure developmentinfrastructure development

Long-term strategy for use of oil revenuesLong-term strategy for use of oil revenues

Investment ClimateInvestment Climate

Law on protection of Foreign Investment Law on protection of Foreign Investment adopted in 1992adopted in 1992

Government established Investments Government established Investments Promotion FundPromotion Fund

Potential investment projects identifiedPotential investment projects identified Potential areas: chemical industry, machinery, Potential areas: chemical industry, machinery,

textiles, food processingtextiles, food processing

Volume of InvestmentVolume of Investment

Azerbaijan has the highest ratio FDI per capita Azerbaijan has the highest ratio FDI per capita among transition economiesamong transition economies

In 2003 from various sources $3.6 bln was In 2003 from various sources $3.6 bln was invested in economy of Azerbaijan,invested in economy of Azerbaijan,

Foreign Investment totaled $2.9 bln. Foreign Investment totaled $2.9 bln. There are 3,250 companies with foreign There are 3,250 companies with foreign

investment in Azerbaijaninvestment in Azerbaijan In recent 10 years $20 bln have been invested In recent 10 years $20 bln have been invested

in economy of Azerbaijan in economy of Azerbaijan

Good GovernanceGood Governance

Very transparent budgetary system Very transparent budgetary system (USAID assistance)(USAID assistance)

Azerbaijan joined to Extractive Industries Azerbaijan joined to Extractive Industries Transparency Initiative (EITI)Transparency Initiative (EITI)

In 2003 Milli Majlis (Parliament) adopted In 2003 Milli Majlis (Parliament) adopted the Law on Fight against Corruption. the Law on Fight against Corruption.

Good Governance - IIGood Governance - II

In 2003 Parliament of Azerbaijan ratified the In 2003 Parliament of Azerbaijan ratified the “Criminal Law Convention on Corruption of 1999” “Criminal Law Convention on Corruption of 1999” of Council of Europe.of Council of Europe.

In the framework of Organization of Economic In the framework of Organization of Economic Cooperation and Development (OECD) Azerbaijan Cooperation and Development (OECD) Azerbaijan participates in Europe-Caucasus Anticorruption participates in Europe-Caucasus Anticorruption Initiatives Program.Initiatives Program.

In 2003 Azerbaijan has prepared National Plan on In 2003 Azerbaijan has prepared National Plan on Fight against Corruption Fight against Corruption [in the framework of OECD [in the framework of OECD Europe-Caucasus Anticorruption Initiatives Europe-Caucasus Anticorruption Initiatives ProgramProgram].].

Good Governance IIIGood Governance III

0) 0) Report “Anticorruption in Transition 2” Report “Anticorruption in Transition 2” published by World Bank in 2004 sayspublished by World Bank in 2004 says ““Significant declines in the perception of Significant declines in the perception of corruption as an obstacle occurred in some of corruption as an obstacle occurred in some of the countries where 1999 levels were high, the countries where 1999 levels were high, including Azerbaijan, Croatia, Kazakhstan, including Azerbaijan, Croatia, Kazakhstan, the Kyrgyz Republic, Lithuania, and Russiathe Kyrgyz Republic, Lithuania, and Russia .” .” (Executive Summary p. xii, p.14)(Executive Summary p. xii, p.14)

Banking systemBanking system

There are no separate regulations in regard of There are no separate regulations in regard of operation of foreign banks. The law named “Banks operation of foreign banks. The law named “Banks and banking activities in the Republic of Azerbaijan” and banking activities in the Republic of Azerbaijan” adopted in 1996 regulates all banking operationsadopted in 1996 regulates all banking operations

For 1 January 2003 - minimum level of charter For 1 January 2003 - minimum level of charter capital established at $2.5 million for existing and $5 capital established at $2.5 million for existing and $5 million for new establishing banks million for new establishing banks ((93 banks have 93 banks have received licenses, among them 2 state banks and 15 received licenses, among them 2 state banks and 15 banks with foreign capital participation) banks with foreign capital participation)

Major BanksMajor Banks

There are only 2 state-owned banks in There are only 2 state-owned banks in AzerbaijanAzerbaijan United Universal Stock bank – United Universal Stock bank – 15% of 15% of

marketmarket International Bank of Azerbaijan International Bank of Azerbaijan – – up to up to

70% of market70% of market Both banks will be privatized in the years Both banks will be privatized in the years

2003-20042003-2004

Tax systemTax system

Adoption of Tax Code Adoption of Tax Code Tax Code used recommendations of IFIs, IMF Tax Code used recommendations of IFIs, IMF

in particularin particular Tax Code – decrease of number of taxes, Tax Code – decrease of number of taxes,

reduction the tax rates, creation of favorable reduction the tax rates, creation of favorable investment environmentinvestment environment

Income tax (Income tax (14-35%, 14-35%, 12-70%12-70% beforebefore), Profit ), Profit tax (tax (24%24%, , 30-55%30-55% beforebefore), VAT (), VAT (18%,18%, 20% 20% beforebefore) )

PrivatizationPrivatization

During First Program in 1995-1998 around 35,000 small enterprises have been privatized

Second privatization program targeted to medium-size and large enterprises (started in 2000)

Sectors for privatization - transportation, communications, machinery, chemical, etc

Private sector share in GDP totals 73%

Land ownershipLand ownership

Land Code provides 3 forms of land Land Code provides 3 forms of land ownership: public, private, municipal ownership: public, private, municipal

99.7% of the land [designed for 99.7% of the land [designed for privatization] was privatizedprivatization] was privatized

3.3 million people (871.8 families) 3.3 million people (871.8 families) entitled to get land shareentitled to get land share

TradeTrade

Azerbaijan is trading with 112 countries Azerbaijan is trading with 112 countries Goods turnover increases 30-40% Goods turnover increases 30-40%

annuallyannually 40.4% of foreign goods turnover - EU, 40.4% of foreign goods turnover - EU,

28.2% - CIS countries 28.2% - CIS countries Accession to the WTOAccession to the WTO

Customs regulationsCustoms regulations

ValuationValuation transparencytransparency International standards International standards Licenses applied to alcohol and tobacco Licenses applied to alcohol and tobacco Tariff Council has been established (31 Tariff Council has been established (31

January 2002) – state control over forming of January 2002) – state control over forming of tariffs and dutiestariffs and duties

Key Business Development AreasKey Business Development Areas

Oil and Gas Oil and Gas Renewable energyRenewable energy Construction and Building materialConstruction and Building material Information and Communication Information and Communication

TechnologiesTechnologies Food processing and AgribusinessFood processing and Agribusiness TourismTourism

History of oil industryHistory of oil industry

- The existence of petroleum was known The existence of petroleum was known since 8since 8thth century century

- By the 15By the 15thth century oil for lamps was century oil for lamps was obtained from surface wellsobtained from surface wells

- Commercial exploitation began in 1872Commercial exploitation began in 1872

Oil and GasOil and Gas

Reserves estimated energy reserves Reserves estimated energy reserves 6.7 billions barrels of oil and 10.7 6.7 billions barrels of oil and 10.7 trillion cubic feet of gastrillion cubic feet of gas

Since 1994 Azerbaijan signed 23 oil Since 1994 Azerbaijan signed 23 oil contracts with 35 companies from 15 contracts with 35 companies from 15 countriescountries

Total value – more than $60 blnTotal value – more than $60 bln

BTC & SCPBTC & SCP

Baku-Tbilisi-Ceyhan Main Export Baku-Tbilisi-Ceyhan Main Export Pipeline – 85% finished. Length - 1760 Pipeline – 85% finished. Length - 1760 km. Capacity 1 mln barrels of crude oil km. Capacity 1 mln barrels of crude oil per day. per day.

South CaucasusSouth Caucasus Pipeline – for exportation Pipeline – for exportation of natural gas (Baku-Tbilisi-Erzerum). of natural gas (Baku-Tbilisi-Erzerum). Length - 442 km. Gas comes from Length - 442 km. Gas comes from Shahdeniz field.Shahdeniz field.

SOFAZSOFAZ

State Oil Fund of Azerbaijan (SOFAZ) was State Oil Fund of Azerbaijan (SOFAZ) was established in 2001 to save resources for the established in 2001 to save resources for the future generationsfuture generations

Main purpose is to diversify economyMain purpose is to diversify economy Reserves $810 million, will increase $1 bln Reserves $810 million, will increase $1 bln

annually starting 2006annually starting 2006 Azerbaijan joined EITI initiative by UK Azerbaijan joined EITI initiative by UK

GovernmentGovernment

Renewable energyRenewable energy

Visits to ORNL and NRELVisits to ORNL and NREL Executive Order by the President of Executive Order by the President of

Azerbaijan on adoption of “State program on Azerbaijan on adoption of “State program on development of alternative and renewable development of alternative and renewable energy sources” – 10/22/2004energy sources” – 10/22/2004

TDA Projects – Projects for Nakhichevan TDA Projects – Projects for Nakhichevan region of Azerbaijanregion of Azerbaijan

USAID sponsored programs USAID sponsored programs

AgricultureAgriculture

USAID implements several programs to USAID implements several programs to develop private sector in agriculturedevelop private sector in agriculture

Production of cotton, tobacco and grapes Production of cotton, tobacco and grapes reduced (comparing 1995 to 2003)reduced (comparing 1995 to 2003)

Production of grain increased 2.1 times, Production of grain increased 2.1 times, vegetable – 2.4 times, fruit - 1.2 times, sugar vegetable – 2.4 times, fruit - 1.2 times, sugar beet – 13 times, potato – 4.7 times (1995-beet – 13 times, potato – 4.7 times (1995-2003)2003)

ConstructionConstruction

Construction and Building materialsConstruction and Building materials Cement industryCement industry Steel plantSteel plant Apartment and office buildingsApartment and office buildings InfrastructureInfrastructure

ICTICT

National ICT Strategy was approved in 2003 (for National ICT Strategy was approved in 2003 (for 2003-2012). The Government decided to replace it 2003-2012). The Government decided to replace it with the State Program of Development of ICT with the State Program of Development of ICT technologies. It will include more tasks and projects.technologies. It will include more tasks and projects.

Regulatory framework and liberalization of sector Regulatory framework and liberalization of sector BAKUTEL 2004 – Annual ExhibitionBAKUTEL 2004 – Annual Exhibition Global ICT conference on "Digital Divide and Global ICT conference on "Digital Divide and

Knowledge Economy: Problems and Solutions" Knowledge Economy: Problems and Solutions" Baku, Azerbaijan – 25 -28 November 2004Baku, Azerbaijan – 25 -28 November 2004

TourismTourism

TDA – Master plan for development of TDA – Master plan for development of tourism for 50 yearstourism for 50 years

Ministry of Youth, Sports and Tourism has Ministry of Youth, Sports and Tourism has licensed 127 tourist service operators (122 licensed 127 tourist service operators (122 companies and 5 operators)companies and 5 operators)

Annual income is $40 mln, 97 % private Annual income is $40 mln, 97 % private tourist companiestourist companies

Tourists mainly come from CIS, Turkey, EUTourists mainly come from CIS, Turkey, EU

Important tasksImportant tasks

Adoption of banking lawAdoption of banking law Privatization of International Bank of Privatization of International Bank of

Azerbaijan (IBA) and BUSBankAzerbaijan (IBA) and BUSBank Adoption of competition lawAdoption of competition law Accounting lawAccounting law Accession to WTOAccession to WTO

ChallengesChallenges

Macroeconomic stability Macroeconomic stability Strengthening of regulatory functions of Strengthening of regulatory functions of

government institutions government institutions Development of non-oil sectorDevelopment of non-oil sector Liberalization of pricesLiberalization of prices Privatization Privatization

Economic growthEconomic growth

Import substitution policy (IFIs, Import substitution policy (IFIs, investment, legal framework)investment, legal framework)

Export oriented production (IFIs, FDI, Export oriented production (IFIs, FDI, incentives, infrastructure)incentives, infrastructure)

FTA and Custom UnionsFTA and Custom Unions MembershipMembership in World Trade Organization in World Trade Organization

(WTO)(WTO)

Useful linksUseful links

www.azembassy.com www.economy.gov.az www.sahibkar.biz www.bisnis.doc.gov www.usacc.orgwww.usacc.org