Azerbaijan

Azerbaijan is an upper-middle income country strategically located in the South Caucasus along the Caspian Sea, bordered by Armenia, Georgia, Iran, the Russian Federation, and Türkiye. Its geography includes mountainous regions, fertile plains, and rich natural resources, particularly oil and gas.

Azerbaijan has long relied on hydrocarbons for driving economic growth, but recent strategies aim to diversify beyond oil and gas.

Azerbaijan is transitioning toward a greener economy, with plans to reduce greenhouse gas emissions and expand renewable energy. The country’s central bank is embedding climate risk into financial systems, and the government is promoting green zones and sustainable infrastructure. Post-pandemic and post-conflict recovery efforts are shaping a new phase of country's development, with the regional connectivity enhancement ranking among the key priorities.

Economic activity slowed in 2025, with real GDP growth at 1.4%, reflecting weak performance in both hydrocarbon and non-hydrocarbon sectors. Hydrocarbon GDP contracted by 2% (yoy) due to lower crude oil output, while non-hydrocarbon growth eased to 2.7% amid slowdowns in construction, transport, and agriculture. On the demand side, investment declined by 4.9% (yoy) in real terms as public capital spending fell, while consumption growth moderated due to slower real wage growth and softer consumer lending.

Inflation rose to 5.5% in 2025, driven by food inflation (6.9%) and higher administered tariffs for electricity, gas, and heating. As inflationary pressures eased toward year-end, the Central Bank of Azerbaijan reduced the policy rate from 7.25% to 6.75%.

The current account surplus narrowed to 5.4% of GDP in the first nine months of 2025, reflecting weaker hydrocarbon exports. Foreign reserves increased to $11.5 billion, while State Oil Fund of Azerbaijan assets rose to $73.5 billion (97% of GDP), supported by gold revaluation.

Fiscal policy tightened as revenues and expenditures declined, narrowing the consolidated budget surplus to 2.6% of GDP. Credit growth slowed sharply to 3.4% (yoy) in real terms.

Growth is projected at 2% in 2026 and to average 1.8% in 2027–28, while inflation is expected to peak at 5.8% in 2026 before easing. Risks stem from geopolitical tensions, while improved regional connectivity could support medium-term growth.

The World Bank Group has played a pivotal role in Azerbaijan’s development since the country joined the institution in 1992. Over the past three decades, the World Bank has financed over 50 investment projects, totaling more than $4.5 billion, and provided extensive technical assistance, policy advice, and capacity building.

One of the earliest and most impactful areas of cooperation has been infrastructure. The World Bank supported the rehabilitation and expansion of roads, railways, water supply systems, electricity networks, schools, hospitals, and irrigation infrastructure. These investments helped modernize Azerbaijan’s physical capital, improve water supply and wastewater management, improve connectivity, and enhance access to essential services across urban and rural areas.

To reduce dependence on oil and gas, the World Bank helped Azerbaijan diversify its economy by investing in agriculture and rural development to boost agribusiness competitiveness, export-oriented value chains, and access to finance for small farms.

The World Bank has also been instrumental in strengthening Azerbaijan’s public sector institutions. It supported reforms in state-owned enterprises and public financial management. The Judicial Services and Smart Infrastructure Project helped digitize court systems, reduce case processing times, and improve transparency and service delivery.

The World Bank has supported Azerbaijan’s transition to low-carbon development, including the AZURE project to modernize energy infrastructure and attract private investment in renewables and battery storage. Technical assistance has also been provided for water diagnostics, climate-smart agriculture, and green urban ecosystems, helping Azerbaijan improve climate resilience.

The World Bank has supported the design and implementation of targeted social assistance programs, pension reforms, and employment support initiatives.

The World Bank Group’s Country Partnership Framework (CPF) for Azerbaijan sets out a strategic roadmap to support the country’s transition to a greener, more competitive, and inclusive economy. Discussed in January 2025, the CPF aligns with Azerbaijan’s 2030 Vision of National Priorities and its 2022–2026 Socio-Economic Development Strategy.

The CPF is built around two high-level outcomes:

1. Increased Productivity and Better Jobs

2. Increased Resilience and Sustainability

These outcomes are supported by four core pillars:

• Improving the Business Environment and Employment Access: The CPF promotes job creation, small and medium enterprise development, and access to sustainable finance. It emphasizes inclusion, particularly for women entrepreneurs and vulnerable groups.

• Strengthening Transport and Digital Connectivity: The CPF supports the development of the Middle Corridor for trade and transit, digital infrastructure upgrades, and adoption of emerging technologies like artificial intelligence.

• Accelerating the Shift to Renewable Energy: The strategy includes investments in energy transmission and green energy corridors. It aims to attract private capital and scale up renewable energy projects.

• Enhancing Climate Change Adaptation: The CPF promotes climate-resilient urban ecosystems, green buildings, climate-smart agriculture, and improved water efficiency. It encourages private sector participation in climate adaptation efforts.

The CPF will be delivered through a mix of investment projects, technical assistance, and advisory services, leveraging collaboration between the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), and Multilateral Investment Guarantee Agency (MIGA). It also seeks partnerships with other development institutions and the private sector to maximize impact.