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Azerbaijan Country Economic Memorandum Stresses Importance of Export-Led Diversification for the Oil Rich Nation

February 24, 2010

In recent years, Azerbaijan has made big progress in reducing poverty, economic growth and providing key social and infrastructure services. However, the country needs to make more concerted efforts to diversify the economy to reduce dependence on oil and gas revenues, maintain macroeconomic and fiscal sustainability, and develop human capital; states recently issued Country Economic Memorandum (CEM) for Azerbaijan. CEM, prepared by a team of the World Bank specialists in collaboration with their counterparts in the Government of Azerbaijan during more than one year, analyzes macroeconomic developments since the mid-1990s and challenges facing Azerbaijan today, the prospects of Azerbaijan’s non-oil economy, fiscal sustainability issues and management of public finances, and reviews situation and challenges, as well as gives recommendations for reforms in the utilities sector, business environment and financial sector. Issues related to Azerbaijan’s human capital, as a key ingredient of the country’s development as it prepares for the post-oil era, are considered in particular detail.

CEM covers a range of sectors which are analyzed in details in seven chapters. In particular, the Report calls for strengthening macroeconomic coordination and management government finance. In the area of the public infrastructure and utility services, the recommendations include further improvement of pricing policies of public utilities, improving management of the state-owned enterprises and considering the role of private sector in some of the utilities.

In the area of private sector development, CEM notes government’s recent steps to improve regulatory environment for business, such as easing the rules for starting business. In few areas Azerbaijan still lags behind - the Report proposes to reduce number of licenses and permits, and rationalize the process and speed of issuing licenses and permits. Another recommendation that the Report makes is reducing tax rates and social contributions burdening private sector and continue making improvements in tax administration.

In the financial sector chapter the Report calls for maintaining and strengthening pro-active banking supervision and regulation, improving access to credit for micro, small and medium-sized enterprises. And finally, in the area of human capital development, CEM recommends to focus on reforms in tertiary education with a view that the system meets the market needs.

In conclusions, the report indicates that Azerbaijan’s oil and gas revenues have presented a unique opportunity to improve the quality of life of all its citizens. Per capita income in the country has quadrupled during 2004 through 2008, and expected to exceed USD 6500 by 2013. If the policies are right, poverty is likely to continue to fall, entire population can have the access to better quality health and education services, and put Azerbaijan in the group of upper middle-income countries. The Report also states that though Azerbaijan has been less affected by the global economic and financial crisis than its neighbors, the external global economy has become less supportive to diversification, and it will require even more efforts to build stronger private sector and attract foreign investment than before.