Azerbaijan: Economy

Plunging oil prices in 2015 cut export earnings in Azerbaijan, and sharp currency depreciation reduced household consumption and public investment, slowing growth to 1.1%. Continued weakness in oil prices is projected to cause the gross domestic product (GDP) to contract by 1.0% in 2016 before recovering to 1.0% growth in 2017 as oil prices revive. Only by financing the expansion of diverse sectors can Azerbaijan move away from heavy dependence on hydrocarbons.

Selected economic indicators (%) – Azerbaijan 2015 2016 Forecast 2017 Forecast
GDP Growth 1.1 -1.0 1.0
Inflation 4.0 12.0 5.2
Current Account Balance (share of GDP) 0.4 -0.6 1.5

Source: Asian Development Outlook 2016

Economic performance

Economic growth slowed to 1.1% in 2015 from 2.8% in 2014 as oil prices plummeted and a 50% depreciation of the Azerbaijan manat reduced nominal GDP by 8.0%. The oil sector is reported to have expanded by 1.2%, following a 3.7% contraction in 2014, while cuts in public investment constrained the economy outside the oil sector, which expanded by only 1.1%, down from 7.0% in 2014.

On the supply side, industry shrank by 1.9%, versus 0.5% growth in 2014, as a decline in construction outweighed improvements in mining and manufacturing. Cuts in public investment and lower demand for real estate reversed a 9.1% expansion in construction in 2014 to a 13.4% contraction. Growth in services decelerated to 4.5% from 7.4% in 2014, owing to a slowdown in social and other services. Agriculture had the strongest increase, as government concessions on inputs contributed to 6.6% growth following 2.6% decline in 2014.

On the demand side, private and public consumption are believed to have declined because of currency depreciation and some tightening of lending later in the year, even as household savings grew by 31.7% in 2015, more than double the 12.4% growth rate in 2014. Net exports fell sharply because of lower oil prices, as hydrocarbons constitute more than 90% of exports.

Economic prospects

Without strong fiscal stimulus, the economy is projected to contract by 1.0% in 2016 because of continued low oil prices, followed by 1.0% growth in 2017 as an expected revival in oil prices facilitates economic recovery. Higher social spending should limit the downturn in 2016. Despite a 10% salary increase for civil servants introduced in early 2016, real household spending is expected to slow as sharply higher inflation, at 12%, reduces real incomes.

On the supply side, industry is forecast to contract in 2016 because of slowing oil production, but it could improve in 2017 and raise incomes if oil prices rebound. Public investment, including assistance from development partners for infrastructure, should stabilize construction in both years. Some growth in agriculture is also anticipated each year with continued government support for farmers, including the anticipated completion of reservoir and irrigation networks.

On the demand side, private consumption and investment, both public and private, will be the main sources of growth. Net exports should narrow in 2016 and recover in 2017 along with oil prices, but the growth outlook remains vulnerable to any further energy price shock.

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