Overview

Country Context

Azerbaijan

2015

Population, million

9.7

GDP, current US$ billion

53.4

GDP per capita, current US$

5,529

School Enrollment, primary (% gross) (2014)

98.0

Life Expectancy at Birth, years (2014)

70.6

Twenty-five years after independence, Azerbaijan voted on September 26, 2016, for a major amendment to its Constitution that will make it a fully presidential republic. With the institution of new vice-president positions, the changes will also affect the way the government functions.       

Azerbaijan’s economy is expected to contract in 2016 for the first time since 1995, due largely to low global oil prices, coupled with sharp cuts in public investment, the key driver of non-oil growth. Policy uncertainty, financial sector vulnerabilities, and a generally poor business environment cloud the country’s medium-term prospects. Continued progress on poverty reduction will require bold reforms to facilitate private sector growth and strengthen the labor market.

Heavy reliance on oil in an environment of low prices and declining output is Azerbaijan’s key challenge for long-term growth and poverty reduction. Despite some progress on the structural reform agenda, the country’s challenging business environment, limited macroeconomic policy coordination, and persistent banking sector vulnerabilities continue to constrain private sector growth and inhibit economic diversification away from oil.

Looking ahead, the past model of oil revenue–fueled poverty reduction is no longer sustainable, and further poverty reduction requires the Government to undertake bold reforms to facilitate private sector activity and strengthen the labor market. Poverty is expected to be the main concern over 2016–18.

Azerbaijan is trying to benefit from recent regional connectivity initiatives to boost transport and trade. In particular, the country is one of the sponsors of the East-West and North-South transport corridors. This effort will require improvements in infrastructure and logistics performance for trans-border trade.   

 

 

Last Updated: Oct 07, 2016

Strategy

Number of active projects

10

Lending

$2.157 million

IBRD

$1,980.2 million

IDA

$176.8 million

The new Country Partnership Framework (CPF) 2015–20 for Azerbaijan was endorsed by the Board of Directors on July 21, 2015. It is a joint strategy of the World Bank Group (WBG) aiming to support Azerbaijan on its path toward sustainable, inclusive, and private sector–led growth.

The CPF is underpinned by the Systematic Country Diagnostics (SCD) for Azerbaijan, the WBG’s comprehensive analysis of the country’s economic conditions, challenges, and constraints in the short and longer term. The Bank program in Azerbaijan will help address a selected set of those constraints. It is also well aligned with Azerbaijan’s own development priorities and the WBG’s global twin goals of reducing poverty and boosting shared prosperity.

The program has two main focus areas: Public Sector Management and Service Delivery and Economic Competitiveness. The Bank will help the country strengthen public resource management, facilitate public service delivery, and improve the quality of environmental assets, as well as improve selected infrastructure networks, increase the country’s financial inclusion, reduce the regulatory burden on the private sector, and support economic activities in rural areas.

Key Engagement

Seven percent of Azerbaijan’s population (approximately 623,000 people) are displaced, leaving Azerbaijan with one of the highest concentrations of internally displaced persons (IDPs) in the world. To respond to this challenge, the World Bank and the Government of Azerbaijan have been implementing the IDPs Living Conditions and Livelihood Project since 2012.

This project, funded by the World Bank with two loans (an original loan of US$78.5 and additional financing of US$66.7 million), aims to improve the living conditions and economic self-reliance of IDPs. The project is a result of a long history of partnership between the World Bank and Azerbaijan in addressing the needs of IDPs. The Social Fund for Development of IDPs is the project’s implementing agency.

The project has several components, including community micro-projects; income-generating activities; the rehabilitation of public buildings; a youth support program; and micro-credits.

The project has benefited about 250,000 people, half of whom are women. Beneficiaries of the livelihood support activities report, on average, a 45% increase in monthly household income. More than 1,000 young IDPs have found employment after participating in the youth training component. The IDPs who have started a business with support from the project have reported a 100% success rate. The repayment rate on micro-finance loans currently stands at 100%, and almost 90% of beneficiaries are interested in securing a new loan after paying back the current one.

Following project interventions, three-quarters of the families living at the community centers rate their housing conditions as good or excellent compared to only 1% at the start of project. Almost all of the project beneficiaries report feeling able to influence development decisions, and there is increased trust between IDPs and their host communities in the areas where project activities took place. 

 

Last Updated: Oct 07, 2016

Economy

RECENT ECONOMIC DEVELOPMENTS

Azerbaijan continues to suffer from the protracted slump in global oil prices, and GDP declined by 3.4% (y-o-y) in the first half of 2016. Although oil GDP grew by 2%, non-oil output shrank by 6%. This was due to cuts in public investment, a crucial component of non-oil growth, and depressed market sentiment related to the large manat devaluations in 2015. The Government is accelerating the implementation of its structural reform agenda, including measures to simplify customs clearance and licensing procedures.

The current account position deteriorated, recording a deficit of 4.6% of GDP at end-June 2016 from a near balanced position a year earlier, due to a 40% (y-o-y) decline in oil exports in value.

Inflation is on the rise, with the official rate reaching 11.4% in July (y-o-y), due to the devaluation pass-through effect.  To curb inflationary pressures, the central bank has raised policy rates in steps from 3 to 15% since February 2016 while holding deposit auctions to maintain tight liquidity conditions.

Despite significantly lower oil revenues and increases in wages, pensions, and targeted social assistance, the consolidated fiscal position (including extra-budgetary spending by the Oil Fund) recorded a surplus of 3.8% of GDP in the first half of 2016, supported by cuts in public investment and higher customs revenue resulting from the devaluation.

A bank restructuring process is under way. Since late 2015, the authorities have revoked the licenses of 12 small banks due to poor capitalization, while the rehabilitation of larger banks is under way. Deposit withdrawals have continued in 2016.  Bank credits contracted by 24% (y-o-y) in the first half of 2016.  

Steady poverty reduction over the past decade, fueled by growing oil revenues, is unlikely to continue in 2016. A poverty impact simulation of the inflation spike of June 2015–February 2016 indicates that close to 300,000 Azerbaijanis could be forced to live on less than AZN 72.5 per month, a consumption level about half the official poverty line of AZN 135.6 in 2015.

Administrative data in early 2016 show an increase in the number of people seeking employment and financial assistance, likely reflecting the collapse of the construction sector, which has been the largest contributor to employment growth in recent years.

ECONOMIC OUTLOOK

GDP is projected to contract by 3% in 2016. Over the medium term, the gradual recovery of oil prices and the anticipated opening of a new gas field in 2018 are likely to support growth and the current account balance.

The consolidated fiscal deficit is projected to widen sharply to 8% of GDP in 2016, reflecting extra-budgetary transfers from the Oil Fund for the construction of the Southern Caucasus Gas Corridor pipeline (5% of GDP), the bulk of which is being undertaken outside the country through foreign direct investment. 

The deficit will be financed primarily by withdrawals from the Oil Fund and Treasury cash reserves.  The fiscal stance is expected to improve over 2017–18, as oil prices gradually recover, pipeline construction ends, and efforts to boost non-oil revenue yield results.

Although data limitations do not allow for projections, rising poverty will be the main concern over 2016–18. Accelerated inflation raises concerns on poverty reduction, especially for fixed income earners, such as old-age, survivor, and disability pensioners. Labor market income and pensions, the key sources of poverty reduction, are also threatened by the shrinking fiscal space, as these income sources were to a large extent supported by public spending.

 

Last Updated: Oct 07, 2016

Highlighted Project

Modernizing Judicial Services in Azerbaijan. As Azerbaijan carries out reforms to modernize its judicial system, it recognizes the importance of eliminating deficiencies in the normative framework, judicial infrastructure, and institutional capacity and of addressing the governance issues.

During the first phase of the country’s judicial sector reform process, the World Bank helped build seven courts and court complexes across the country that pioneered the concept of user-oriented “smart courts” for more accessible and transparent judicial service delivery. Built for function, these smart courts included distinctive design features, such as separate access for the public, judges, judicial staff, and accused persons, which is critical to preserving due process and the dignity of those involved.  

The Judicial Services and Smart Infrastructure Project (JSSIP) constitutes a second phase of World Bank’s support for Azerbaijan’s efforts to improve the performance of the justice sector and strengthen access to justice, especially for the vulnerable. Economically and socially vulnerable groups, notably IDPs, refugees, women, juveniles, and unserved populations in remote areas, are among the beneficiaries of this US$200 million project, equally financed by the Bank and the Government of Azerbaijan, and the private sector will be the main beneficiary of the e-notary and business e-registry services.

The project is helping  to improve access, strengthen due process, and ensure transparency in the delivery of key justice and legal services by expanding e-justice services (through e-courts, smart courthouses, e-libraries, e-notaries, and e-bailiffs), strengthening management systems, and institutionalizing public feedback (through periodic user surveys). 

Building on the achievements of the previous collaboration, the JSSIP will also focus on an expansion of smart infrastructure. The next-generation smart courts will be functionally innovative district courts and court complexes, integrating information and communications technology (ICT) applications and services in selected cities and applying international best-practice experience. The building designs will emphasize functionality, accessibility, transparency, and energy efficiency.  

Among the results already achieved within the ongoing project are:

  • Courthouses with the electronic case management system in place are at least 25% more effective than the old-type courts.
  • An audio-video court proceedings transcription system has been operational since 2015 in Sheki Grave Crime Court and the Administrative-Economic Court of Sheki Court Complex.
  • The Supreme Court e-Library, aimed at providing online legal and judicial information resources to justice sector personnel as well as other professionals, media, and the general public, will be launched shortly.
  • The construction of courts and court complexes in the towns of Sumgayit, Masalli, and Narimanov and in the Surakhani districts of Baku is progressing.
  • 24/7, live, and publicly accessible web streaming of the smart court construction sites has been introduced to contribute to the transparency and accountability of the process.  

 

Last Updated: Oct 07, 2016


LENDING

Azerbaijan: Commitments by Fiscal Year (in millions of dollars)*

*Amounts include IBRD and IDA commitments