declined by 7.3 percent in 2021, with a 9.6 percent drop in non-energy sec- AZERBAIJAN Key conditions and tor investment, driven largely by lower private investment. challenges Rebounding domestic demand, rising global commodity prices, and increased Table 1 2021 Azerbaijan faces structural challenges in administrative prices pushed CPI inflation Population, million 10.2 developing a vibrant non-energy private to 6.7 percent in 2021, overshooting the GDP, current US$ billion 54.6 sector. These include a large state foot- central bank’s target range of 4±2 percent GDP per capita, current US$ 5358.1 print, institutional challenges, an undiver- and prompting a 150-basis point policy a 95.8 School enrollment, primary (% gross) sified asset mix with a low and stagnant rate increase since August 2021, pushing it a 73.0 level of investment in human capital, the to 7.75 percent in March 2022. Life expectancy at birth, years Total GHG Emissions (mtCO2e) 79.9 lack of a level playing field, and shallow Soaring energy prices boosted external Source: WDI, Macro Poverty Outlook, and official data. financial markets. This, in turn, has con- revenues, and the current account record- a/ WDI for School enrollment (2020); Life expectancy tributed to low private investment in the ed a surplus of 15.2 percent of GDP. This (2019). non-energy sector. was offset by financial outflows (9.2 per- Following military tension with Armenia cent of GDP). Yet the overall balance of in 2020, a tripartite statement on armistice payments was in surplus at 5.6 percent of Russia’s invasion of Ukraine poses was signed between the two countries and GDP in 2021. downside risks to Azerbaijan’s economic Russia in November 2020. The reconstruc- Rapid economic recovery and high State tion effort has progressed in 2021, even as Oil Fund (SOFAZ) revenues supported outlook, particularly in the non-energy the situation remains fragile, especially fiscal revenues, which jumped 38.7 per- sector. This follows a strong rebound in along the border. cent, while fiscal spending increased by 2021, as recovering domestic and exter- 2.8 percent in 2021. As a result, the fiscal nal demand supported growth in both balance recorded a surplus of 4.2 percent energy and non-energy sectors, while of GDP in 2021. rising global energy prices aided exter- Recent developments According to official data, the unemploy- ment rate fell to 6 percent in 2021, from 7.2 nal and fiscal balances. Soaring energy Azerbaijan experienced a strong econom- percent in 2020, but was still above pre-pan- prices will provide a short-term wind- ic rebound in 2021, with output recover- demic trends. The official national poverty fall, but mounting inflationary pressures ing to pre-COVID-19 levels by end-year. rate reached 6.2 percent in 2020, on a rise of The energy sector grew by 1.8 percent, 1.4 percentage points from 2019. Rural and lower remittances are expected to with production constrained by OPEC+ poverty increased disproportionately, as weigh on poverty. quotas for some parts of the year. Non- households experienced job and income energy sectors’ growth was more robust losses in the COVID-19 induced crisis peri- at 7.2 percent, led by services (especially od. The economic rebound in 2021, and in- transport, hospitality, and retail trade) creased public wages and pensions, likely and manufacturing. led to improved household income in 2021, On the demand side, consumption re- although in real terms, this was offset partly bounded strongly, while investment by higher inflation. FIGURE 1 Azerbaijan / Non-oil GDP growth and oil price FIGURE 2 Azerbaijan / Official poverty rate and unemployment rate US$/bbl Percent Percent of population Percent 120 12 10 10 10 100 8 8 8 80 6 6 6 4 60 2 4 4 40 0 -2 20 2 2 -4 0 -6 0 0 2012 2014 2016 2018 2020 2022 2024 2010 2012 2014 2016 2018 2020 Average Brent oil price (LHS) Non-oil GDP growth (RHS) Official poverty rate (LHS) Unemployment rate (RHS) Sources: State Statistical Committee of Azerbaijan, World Bank, and World Bank Source: State Statistical Committee of Azerbaijan. Note: The World Bank has not staff estimates. reviewed the official poverty rates for 2013–20. MPO 7 Apr 22 production stabilizes and the non-energy prices eases and global monetary condi- sectors face headwinds from low invest- tions tighten. Outlook ment levels, subdued agriculture yields The external balance is expected to record (due to still stressed water supplies) and a sizable surplus in the medium-term, sup- Economic growth is currently forecast remaining spillover effects from regional ported by high energy prices. Imports are at 2.7 percent in 2022, which represents supply chain disruptions. projected to grow in 2022, in line with the a 0.9 percentage point downgrade from On the demand side, consumption will continued recovery in domestic demand, the baseline forecast prior to the inva- remain the principal driver of growth in and moderate in the medium term as sion of Ukraine. 2022, as there is still some pent-up de- growth slows. A short-term increase in oil and gas pro- mand accumulated from 2020 and early The fiscal balance is estimated to be in duction would propel growth in the en- 2021. Investment is expected to remain surplus in the medium term, averaging at ergy sector in 2021, but this increase is subdued with public investment stable 4.7 percent of GDP, supported by higher expected to subside beyond 2023. After and private investment anemic amid per- oil and gas prices even as spending re- a strong rebound in 2021, growth in the sisting structural challenges. External de- mains elevated. non-oil/gas sectors is expected to moder- mand is likely to moderate, as growth The negative impact on poverty in 2022 is ate in 2022. At the same time, spillovers in major trading partners declines. Non- expected to be amplified by higher infla- from Russia’s invasion of Ukraine and as- energy exports, even though relatively tion and reduced remittances from Rus- sociated sanctions on Russia are expected small, will be hard hit as Russia was the sia. Even though these remittances ac- to adversely affect export-oriented non- destination for 32 percent of these exports counted for only about 1 percent of GDP energy sectors, especially agriculture and in 2021 (2.5 percent of GDP). in 2021, they disproportionally benefit the tourism. Other sectors, e.g., manufactur- Inflation is projected to stay elevated in poor, especially those in small towns and ing, are also expected to face difficul- 2022, above the central bank’s target, rural areas. ties in accessing critical imports such as due to higher import prices. Food prices This forecast is subject to uncertainty given wood, steel, and fertilizers. are forecast to continue rising, as dis- the evolving global and regional environ- In the medium term, assuming a stabiliza- ruptions to global commodity markets ment, with elevated downside risks tion of the geopolitical situation, growth is linger. In the medium-term, inflation is around protracted war and disruption to projected to average at 2.4 percent during projected to moderate, as consumption global commodity markets. 2022-24, close to its potential, as oil and gas growth slows, pressure from imported TABLE 2 Azerbaijan / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices 2.5 -4.3 5.6 2.7 2.2 2.3 Private Consumption 4.2 -5.1 7.0 4.0 4.1 4.2 Government Consumption 7.9 4.8 3.8 3.9 3.2 2.3 Gross Fixed Capital Investment -2.4 -7.1 -6.0 -3.6 -1.4 -1.0 Exports, Goods and Services 1.5 -8.1 5.6 2.7 1.7 1.8 Imports, Goods and Services 2.2 -10.5 2.5 2.6 2.7 2.7 Real GDP growth, at constant factor prices 2.5 -4.4 5.6 2.7 2.2 2.3 Agriculture 7.3 1.9 3.3 1.1 1.8 3.2 Industry 0.4 -5.2 4.1 2.6 1.1 1.1 Services 5.1 -4.4 8.6 3.2 4.0 4.0 Inflation (Consumer Price Index) 2.7 2.8 6.7 9.0 6.6 6.0 Current Account Balance (% of GDP) 9.1 -0.5 15.2 22.7 16.5 12.3 Net Foreign Direct Investment (% of GDP) -2.9 -1.5 -4.1 -1.7 -1.2 -1.2 Fiscal Balance (% of GDP) 9.0 -6.5 4.2 6.4 4.2 3.5 Debt (% of GDP) 18.8 18.4 16.2 16.1 16.2 15.8 Primary Balance (% of GDP) 9.7 -5.7 4.8 6.8 4.7 3.9 GHG emissions growth (mtCO2e) 1.6 -2.3 2.7 0.7 0.3 1.0 Energy related GHG emissions (% of total) 42.9 44.1 46.6 48.1 49.3 50.6 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. MPO 8 Apr 22