Countries and Regions

	Table of Contents
p. 1 of 11 BACK | NEXT I. Current Development Trends and Issues A. Recent Political and Social Developments B. Economic Assessment and Outlook C. Implications for Country Strategy and Program II. Implementation of the Interim Operation Strategy III. Portfolio Management Issues IV. Country Performance and Assistance Levels Appendixes

Country Strategy and Program Update 2006: Azerbaijan

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I. Current Development Trends and Issues

1. Azerbaijan stands at a critical juncture. On the one hand, the size of the economy may triple within the next 5 years as various oil sector investments begin to bear fruit. On the other, poverty rates remain high and economic opportunities are unevenly spread. Azerbaijan must contend with its post-Soviet legacy—collapse of the industrial base, deterioration of physical infrastructure and social services, and lingering environmental damage. The oil windfall has raised the expectations of the population, are high, placing pressure on the Government to increase spending. The threat of Dutch disease¹—with its deleterious effects on the nonenergy sectors of the economy—looms. Moreover, while some members of the Government champion the structural reforms needed to achieve broad-based growth, resistance to reform remains. The main development challenge is ensuring the windfall from the oil sector benefits the population evenly, without undermining macroeconomic stability.

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1. Dutch disease is the phenomenon where a booming export good leads to the deindustrialization of nonbooming sectors through an appreciation of the real exchange rate (making the nonbooming sectors’ exports less competitive) and by raising factor or input costs. This heightens the country’s vulnerability to shocks as it becomes increasingly dependent on the booming sector. For a detailed analysis of the Azerbaijan case, see IMF. 2004. Managing Oil Wealth: The Case of Azerbaijan. Washington, DC.

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