AZERBAIJAN - The Economic Base

Azerbaijan has all the qualities needed to build up a strong economy. It has a strategic location in geographic terms, a well educated but inexpensive workforce, a relatively stable and pragmatic government, a fairly efficient agricultural sector, and a vast base of natural resources including oil, gas, gold, iron ore and other minerals. Well aware of the country's potential, the government's aim is to use oil and gas development as a foundation from which to build up Azerbaijan's economic strengths. After the collapse of the Soviet Union in 1991, the Azeri economy was in a disastrous condition. The war with Armenia over Nagorno-Karabakh and internal political instability had made the situation worse. Between 1991 and 1993, there was no stable government. The assumption of power by President Aliyev in June 1993 was the first step towards political and economic stabilisation. But it was not immediately possible for Aliyev's leadership to get the situation under control. Hyper-inflation had reached 1,800% in 1994, for example. The government then took the critical step in March 1995, with a decree by Aliyev, to create a currency market. Subsequently, reform and aid agreements were concluded with the IMF, the World Bank, the European Bank for Reconstruction and Development, and other institutions. 1996 became a turning point for the Azeri economy in the post-cold war era. It marked a positive turnaround of various key macroeconomic fundamentals. GDP which had slumped by two-thirds from $21.8 bn between 1989 and 1995, began to grow again in 1996. Hyper-inflation was tamed to about 6.7% in 1996. In 1995 industrial production declined by 21.4%, but in 1996 the rate of decline was brought down to 6.7%. The agricultural sector showed a positive trend for the first time in 1996: production declined 7% in 1995 but grew 3% in 1996. And foreign capital began flowing into the country, mostly for oil and gas projects, but also for smaller scale consumer businesses in and around Baku. Economic indicators were generally positive in 1997 as well. The GDP grew by 5%, and inflation came down further to an estimated 4-5%. For the first time since Azerbaijan became independent, industrial production rose marginally. Due to inflows of foreign capital the currency appreciated against the US dollar. The Azeri economy as a result has in many respects the best macroeconomic profile among the Central Asian republics of the former Soviet Union. There are concerns about microeconomic conditions, however, as the positive changes have yet to reflect in a big way on the people. Government officials are also concerned that the sudden rush of oil wealth expected in the coming decade may cause Azerbaijan to succumb to the "oil curse", i.e. the problem of over-dependence on hydrocarbon revenues affecting many countries in the Middle East. Initiatives are being considered to avoid this danger. Small businesses

are being encouraged. Development of non-oil sectors are being pursued, such as gold, the fishing industry (with Azerbaijan being a source of caviar), textiles, etc. There are also plans to give a boost to the service industry. Economy Minister Namig Nasrullayev has been quoted in the 'Financial Times' of March 3, 1998, as saying that a major overhaul of microeconomic policy is required to make the economy diversified and more competitive. This includes large scale privatisation, land reform, restructuring of public finances and the banking sector, among other things. Administrative and tax reforms are also required, observers say, due to widespread corruption and bureaucratic red tape. But the reforms would have to wait until the presidential elections scheduled for later this year are over.