MODEL OF EFFECTIVENESS

Azerbaijan's economic model is unanimously considered one of the best in the post-Soviet area for its ability to absorb the negative consequences of the global financial crisis.  Maintaining high macroeconomic stability this year, our government achieved a considerable foreign trade surplus and, most importantly, our people's living standards have increased.

Macroeconomic stability and positive growth

Azerbaijan accounts for more than three quarters of the total economic potential of the three South Caucasus states today. The main model of economic development in the post-crisis period is active state participation and, if necessary, emergency regulation of the finance and credit sector, as well as successful measures to maintain macroeconomic stability. This policy has maintained a healthy balance between, on the one hand, providing liquidity to the real sector of the economy and on the other, minimizing inflation and stabilizing the manat exchange rate.  Another key trend of the government's post-crisis policy was the boosting of the capital construction sector and broadening of infrastructure projects in the capital and provinces, which reoriented some non-oil sector production towards government orders.  Incentives were introduced to increase industrial and agrarian exports to new foreign markets.  An important component of government policy this year was the expansion of social support programmes and combating poverty, first and foremost in the provinces.

Despite the international economy's slow recovery in the post-crisis period, Azerbaijan maintained a positive dynamic in economic growth. According to the State Statistical Committee, the nation's GDP from January-November 2010 was AZN 36.6 billion, which is 4.5%, or AZN 1.4 billion, more than for the same period of 2009 at adjusted prices. About two thirds of total GDP in the first 10 months of this year was generated by industry, which grew by 3.4%, and services grew as much as 6.2%. For its part, the oil sector grew 2.6%, and the non-oil sector almost 6%. However, it must be noted that 75% of industrial growth is still accounted for by the raw materials sector. A positive dynamic was observed in the important figure for economic development, GDP per capita:  by 1 December 2010, per capita GDP amounted to AZN 4,096, a 3.2% increase.

To all appearances, the development of our country's economy, after calculating the year's results, will be just as positive: according to State Statistical Committee forecasts, GDP growth might reach 4.8%.

Positive changes were also recorded in the investment sector, especially when compared with last year, when growth in capitalization slowed a little. From January-November 2010, investment in capital assets from all financial sources reached AZN 7.7 billion, 15.2% more than for the corresponding period last year.  It is notable that, like last year, some three quarters of all investments were made by domestic investors - mainly local companies - as well as by state organizations and departments. As investment activity flags worldwide and international banks and donor organizations become more conservative in their lending, our country's reliance on its own resources is important in maintaining sustainable development in the economy. State investment activity this year alone allocated AZN 3.549 billion to capital construction and the development of industrial and transport infrastructure. For the past couple of years, this policy has helped to keep construction, service and other private companies afloat by supplying them with orders.

The sustainable development of Azerbaijan's economy, which has proven in practice its ability to withstand crises, serves as a beacon to attract considerable foreign investment. Statistics back this up: in the last 15 years, more than $37 billion of foreign investment entered the Azerbaijani economy. In terms of per capita foreign investment, Azerbaijan has been an undisputed leader among the CIS and Eastern Europe countries for a long time. In 11 months of 2010, total foreign investment was AZN 1.835 billion, which is growth of 38%, extrapolated over the year.  Of the foreign investors, Britain remains in the lead, investing more than AZN 964 million, which is 50% more than in the corresponding period last year.  Britain is followed by the United States, Japan, Norway and Turkey, which invested about AZN 700 million into our economy.  And of the international financial institutions, the World Bank invested most this year: more than AZN 63 million.

Reviewing the pattern of investment, it has to be said that this year some 70% of all investments have been made into the non-oil sector - industry, electrical energy, the gas distribution sector, as well as into transport, agriculture and construction. In some areas, investment has doubled.  However, investment into the oil sector also exceeded last year's figures somewhat; this is accounted for by the growing investment activity of BP and its consortium partners, the development of onshore deposits and an increase in SOCAR's own investment in the development of offshore deposits, petrochemicals and terminal infrastructure.

The most important indicator of Azerbaijan's economic growth is the greater prosperity of its citizens.  For example, from January-November 2010, the population's income reached AZN 22.7 billion, which is 12% higher than last year. Indirect proof of the improvement in people's material circumstances lies in the increased turnover of goods in the trade and services sector. In the last 10 months, retail sales have almost reached AZN 11 billion, and the population purchased services worth AZN 3.7 billion. This is growth of 8.6% and 10.6% respectively, compared with last year.  At the same time, higher incomes and higher increased expenditure in a country often trigger inflation. This could not be totally avoided in Azerbaijan. Last year, which was difficult for the development of the non-oil sector, was characterized by widespread saving of money, at both corporate and individual levels. This process resulted in a record-low level of inflation for the last decade: it remained below 1.5% last year. In the first 10 months of 2010, inflation reached 5.3%, exceeding the forecast 3%. This is precisely why the adoption of measures to reduce inflation is the most important priority for the government this year and next. The first steps in this direction were taken recently by the Central Bank, which raised the refinancing rate from 2 to 3%; this should balance the pressure from money supply on the country's economy.

Foreign trade surplus

An important component of our country's economic success this year was the dynamic development of foreign trade. According to the State Customs Committee, the country's foreign trade from January-November 2010 increased by almost 36% compared with the same period last year to reach $25.1 billion. Most trading transactions were in the export of hydrocarbon raw materials, whose prices increased considerably during the year. Thanks to the favourable market situation, our country achieved a foreign trade surplus of $19.4 billion. Azerbaijan had 145 trading partner nations this year:  as before, Italy is the leading importer, followed by France, Israel and the United States. Surprisingly, Ukraine was fifth on this list, as Azerbaijan increased oil exports to that country increased considerably. Russian goods are the main imports, followed by Turkish, German, Chinese and Ukrainian products.  In spring and summer 2010, our country achieved a positive trade balance with CIS countries for the first time in its history. Yet another interesting fact merits attention: for the last 15 years, our country has mainly exported its hydrocarbons to the European, US and CIS markets but, from last year, Southeast Asia was added to the export routes.  It may well be that Asian trade will soon take up to 25% of all Azerbaijan's raw materials exports.

Our oil reserves still remain the foundation for the country's economic development, and Azerbaijan increases oil production every year. For example, in 11 months of this year, oil production increased by 1.6%, and 47.103 million tons of oil were extracted. A considerable proportion of the revenues from hydrocarbon export sales are accumulated in the State Oil Fund of Azerbaijan (SOFAZ), and the Central Bank of Azerbaijan (CBA) has also accumulated a significant amount of gold and currency reserves. In three quarters of 2010, the main financial reserve, the SOFAZ, increased its foreign currency holdings by the equivalent of AZN 9.578 billion. As a result, its aggregate assets increased by 45.8% from the beginning of this year, to reach $21.721 billion. Is this a lot or not? Bearing in mind that when the SOFAZ was founded its assets were only $271 million, its assets have grown more than 80-fold in the last 10 years. And in the last three years, they have doubled: the fund's reserves crossed the $10 billion mark in 2008 and two years later its accumulated reserves had passed $20 billion. According to SOFAZ management, if crude oil prices and the fund's expenses remain at current levels, assets will reach $50 billion within five years.

The Central Bank, too, has achieved noticeable success in building the country's monetary reserves: by late November, it had accumulated about $6.079 billion, of which 17.7%, or almost $917 million, in foreign currency reserves were received this year. By the end of this year, the country's total gold and currency reserves (SOFAZ and CBA) are expected to reach $30 billion. This sum is more than three times the foreign debt and, if need be, could cover import expenditure for more than four years.

In short, these considerable reserves not only ensure sustainable development in the economy, independently of world prices for raw materials, but also, most importantly, they constitute a strategic reserve for future generations.