BETTER SLOW BUT STEADY

Azerbaijan is conti-nuing to sustain high growth rates in gross domestic product, retaining its top spot in the world rankings. However, these growth rates will gradually decrease in the medium term, according to government forecasts.

This trend can already be seen in the third quarter figures. "The fall in the rate of GDP growth from 32.5 per cent in January-August to 27.1 per cent is linked to the drop in Azerbaijani exports caused by the AIOC (Azerbaijan International Operating Company) stopping oil exports in September," Arif Valiyev, chairman of the State Statistics Committee, explained. The AIOC said that the interruption was caused by 10 days of repair work. 

However, despite this, Azerbaijan still leads both the CIS and Eastern Europe in the volume of GDP.

From rapid growth to stability

The rate of GDP growth this year in Azerbaijan will exceed last year's world-beating figures, according to Azerbaijani Economic Development Minister Heydar Babayev's optimistic forecasts.

He recalled that Azerbaijan leads the CIS in terms of investment per head of population too. In 1995-2007, $42 billion were invested directly in Azerbaijan of which 70 per cent were foreign investments. "Direct investment is the basis of a stable economy and a boost to its development," Babayev said.

He also acknowledged a number of problematic issues in the development of the Azerbaijani economy. For example, in developed economies the service sector accounts for 50 per cent of the economy while here it is 20 per cent. "I, therefore, urge businessmen to invest in this sector," he said.

The oil sector still plays a major role in GDP (56 per cent) and in budget revenue (around 50 per cent). With the expected fall in the volume of oil extraction by 2011 the rate of real GDP growth will fall to 3.5 per cent, compared to the 30.6 per cent expected in 2007. It is expected to be 18.2 per cent in 2008, 14.1 per cent in 2009 and 5.9 per cent in 2010. These are the government's very conservative forecasts. The Azerbaijani economy will enter a new phase of development in 2008. Rapid growth will be replaced by more moderate, stable rates.

Heydar Babayev said that it is unrealistic to sustain high growth rates permanently: "At some time the economy will reach a point when it does not need to grow so fast, because it has already reached its required goal. In this case it is important to maintain stable growth rates, even if they are not big. Moreover, the published figures are our most pessimistic forecasts. They might actually be a lot higher."

Not rich on oil alone

At the same time some analysts think that the government can act to retain average GDP growth rates. Experts from the Centre for Economic Research think that the competitive environment must be improved in the private sector where monopoly elements and barriers to entry to the market are still present.  

In addition, the government must further liberalize the movement of capital. Although the Azerbaijani parliament has just confirmed that up to $10,000 in cash can be taken out of the country without tariffs and up to $50,000 through the banking system, experts think that retaining even this quota creates problems for capital flow from the country, while retaining a money surplus only boosts inflation.

The government's main job in liberalizing trade must be to speed up Azerbaijan's entry to the World Trade Organization, which will increase transparency and accountability in the economy. It will be difficult to achieve balanced development without tackling these problems, experts think.

The head of the Fund to Monitor Public Finances, Inqilab Ahmadov, also thinks that the fall in the GDP growth rate in coming years will coincide with a fall in the peak oil extraction rates and the transition to mid-range extraction. A reduction in oil and gas investments will also have an effect, as the main investments were made in projects to develop the Sah Daniz gas condensate field and the Azari-Ciraq-Gunasli oil fields.

On the other hand, Ahmadov thinks a fall in GDP growth rates is natural as they have built up over the years and retained a constant 20-30 per cent increase in comparison with previous years. "This cannot go on forever," the economist reasoned.

However, he thinks that forecasts cannot always be right and some deviations are inevitable. In time the non-oil sector must compensate for the fall in rates in the oil sector.

Quality not quantity

The fact that the non-oil sector has recently been showing better development results inspires hope that analysts' proposals can be implemented. According to the State Statistics Committee, in the third quarter GDP in the non-oil sector increased by 8.9 per cent and stood at 6.3bn manats. Worth noting is the start this year of the export of our own sugar after the Imisli sugar refinery came into operation in 2006 (exports were 236,600 tonnes). Production has also begun of tractors (331 have rolled off the production line), cars (489) and televisions (6,285). 

The real growth in non-oil GDP is forecast to be 8.1 per cent in 2008. Only by 2011 will it reach 9 per cent, while a growth rate of around 26.1 per cent in the oil sector is expected, compared to 51.2 per cent in 2007.

According to the government's calculations, the extraction of oil by the Azerbaijan International Operating Company from the Azari-Ciraq-Gunasli field, operated by BP, will begin to fall in 2011 and will drop by 541,000 tonnes compared to previous year (54,204,000 tonnes in 2011 compared with 54,745,000 in 2010).

However, the situation could change significantly. Expecting a fall in oil output rates, BP plans to complete the construction of new platforms to extend the full field development of Azari-Ciraq-Gunasli and extract oil from new reservoirs. This applies to the Balaxani suite, which has reserves of oil and associated gas, the president of BP Azerbaijan, Bill Schrader, said. The Balaxani suite reserves have not been determined.

He said that new platforms had to be built to extract oil from the reservoir. Next year the company intends to carry out engineering and technical work after which the size of the project can be determined, Schrader said. The company hopes to keep extraction at a high level thanks to additional output from the new reservoirs. 

Azerbaijan remains an oil country and the economy will always depend to some extent on the oil sector. A qualitative change in the structure of GDP and annual increase in the contribution of the non-oil sector inspire confidence that the current economic stability will be maintained.