SHORT-TERM FORECAST

In addition to the budget package, the government customarily presents its forecasts for key macroeconomic indicators to parliament.

According to the announced expectations for 2026, the focus is on moderate GDP growth, with a particular emphasis on the non-oil and gas sector. In contrast, the fuel sector is expected to experience a slowdown due to a decline in oil production.

In light of the uncertain global economic outlook, these guidelines reflect the government's approach of basing its calculations on a cautious scenario that reduces external risks while strengthening the role of internal growth drivers, primarily investment, non-oil exports, and structural diversification of the economy.

External background

To gain a more nuanced understanding of the situation and the broader macroeconomic shifts, it is crucial to highlight the external factors that can exert significant pressure on the development of specific forecasts, at times surpassing the impact of internal dynamics.

Therefore, the outlook for the global economy in 2026 is influenced by mixed signals: global growth remains moderate and far from pre-crisis levels. According to international organizations, the range is expected to be approximately 3-3.3%. This indicates a slowdown in both developed and developing regions, along with a decline in inflationary pressures and a likelihood of a reduction in interest rates by central banks. Despite the moderate growth in GDP, there are risks to global growth. These risks include trade tensions, high debt burdens, and geopolitical conflicts. These risks could make the macroeconomic environment more uncertain, which could slow down investment activity.

Regarding inflation, the outlook is nuanced and susceptible to external shocks. On the one hand, core inflation in most developed economies is showing signs of slowing down due to the normalisation of supply chains, cooling consumer demand, and the tight monetary policy of previous years. Conversely, ongoing conflicts in the Middle East, the war in Ukraine, and increasing geo-economic fragmentation are creating persistent inflationary risks, primarily through energy markets, logistics, and food prices.

Therefore, it is reasonable to expect that inflationary pressures will not fully disappear in 2026. Instead, it is more probable that they will decline to a manageable level while volatility remains high. Central banks are gaining room for cautious policy easing, but will be required to act with extreme caution, remaining ready to respond quickly to new geopolitical or commodity shocks. Consequently, inflation in major economies will likely continue to decline towards the 2% target.

GDP: focus on the non-oil and gas sector

The Azerbaijani government is basing its medium-term calculations on a cautious but sustainable economic growth scenario, in light of its ongoing assessment of global risks and the limited external environment.

It is estimated that the country's GDP will grow by an average of 3.5% per year in 2026-2029. Concurrently, GDP growth in 2026 is projected to reach 2.9%. Minister of Economy Mikayil Jabbarov has stated that macroeconomic forecasts were made taking into account the high uncertainty of the global economic situation.

The parameters reflect ongoing structural shifts in the country's economy, primarily the gradual decline in oil production. This point was reinforced by Azer Amiraslanov, Chairman of the Milli Majlis Committee on Economic Policy, Industry and Entrepreneurship. He asserts that the decline in the share of the oil sector in the context of GDP growth "is neither stagnation nor economic pathology." Furthermore, this growth, which is comparable to global indicators, "reflects changes in the structure of industry, in particular the decline in oil production." At the same time, he noted: "The reality is that the decline in production volumes resulting from structural transformation may also slow growth in the non-oil sector."

Amiraslanov noted that the current dynamics of oil production were established long before today's macroeconomic conditions. Since 2011, there has been a gradual decline in production, reaching 34 million tonnes in 2020. In the first 10 months of 2025, production amounted to 23 million tonnes.

In this context, non-oil and gas GDP growth is projected to average approximately 5% in both 2026 and the medium term.

The projected decline in GDP in the oil and gas sector in 2026, accompanied by growth in the non-oil and gas segment, is seen as a key indicator of structural change.

Finance Minister Sahil Babayev shared a similar perspective, noting that over the past five years, the non-oil sector has expanded by 63% in nominal terms and 34% in real terms.

In turn, Prime Minister Ali Asadov stated that by 2029, the non-oil and gas sector's share of GDP will exceed 80%, compared to 52% in 2022 and 72% in 2025. The head of government emphasized that, in the medium term, the non-oil sector will continue to be the driving force of our economy, noting the stage of technological modernization and digital transformation.

The dynamics of foreign trade serve as additional confirmation of the sustainability of this course. According to Mikayil Jabbarov, the value of annual non-oil and gas exports in 2019-2024 doubled to $3.4 billion, and the number of exported goods increased to 2,810. Despite the decline in hydrocarbon prices and production volumes, foreign trade turnover stabilised at $50 billion. Exports of non-oil and gas services increased and exceeded $6.5 billion. The minister also reported that the share of non-oil and gas revenues has grown and is projected to reach 57% in 2026.

Inflation: external risks

Regarding the second key macroeconomic indicator, inflation, Taleh Kazimov, Chairman of the Central Bank of Azerbaijan (CBA), stated that maintaining inflation within the target range will establish the foundation for both sustainable economic growth and financial stability.

"The CBA will prioritize managing the demand factors that contribute to inflation. Collaborations with the government will prioritize the effective management of supply factors," he stated.

Kazimov stated that annual inflation in 2026 is projected to be 5.7%, and the current account surplus at the end of 2026 in the baseline scenario is anticipated to reach $3 billion. "Supply factors are also expected to play a significant role in shaping inflation. Exchange rate stability will be the primary driver of price stability in 2026," he stated.

Consumer prices in Azerbaijan increased by 5.7% from January to November last year compared to the same period a year earlier.

According to the CBA, the formation of indicators was influenced by a number of supply and demand factors, with inflation in trading partner countries causing domestic prices to rise by 2.87 percentage points. The nominal effective exchange rate of the national currency also had an additional impact, increasing inflation by another 0.38 percentage points. Domestic supply and demand factors also influenced inflation.

According to CBA experts, inflation is expected to remain within the target range in 2026 and may even decline.

"Nevertheless, geopolitical tensions and instability in the global trading environment continue to maintain a high level of uncertainty in commodity and financial markets. The primary external risk is associated with the pass-through effect of import prices on domestic inflation. The scale of this adjustment will be contingent on inflationary trends in trading partner countries and the dynamics of the nominal effective exchange rate.

Domestic risks are primarily influenced by supply and cost considerations. At the same time, the initial parameters of the state budget for 2026, as well as the slowdown in annual lending growth, reduce the likelihood of excessive strengthening of aggregate demand," the regulator notes.

Discount rate and debt

A separate block of macroeconomic expectations for 2026 pertains to monetary and debt policy parameters. According to the authorities' estimates, these parameters remain balanced and focused on maintaining macrofinancial stability.

The Central Bank notes that the current discount rate in Azerbaijan is at its lowest level in the last four years and is close to a neutral interest rate, reflecting the easing of monetary conditions amid slowing inflationary pressures. During the year, the parameters of the interest rate corridor were discussed eight times in accordance with a predetermined schedule. Following six meetings of the Central Bank's board, the decision was made to maintain the discount rate, while two subsequent meetings resulted in a decision to lower it.

Another factor contributing to the stability of the macroeconomic environment is the growth of strategic foreign exchange reserves. According to Taleh Kazimov, their volume increased by 16.2% to $82.5 billion. "At present, the country's strategic foreign exchange reserves are sufficient to cover imports of goods and services for 37 months," he stated. The head of the CBA also emphasized that in 2025, monetary policy was focused on maintaining inflation within the target range by regulating monetary conditions.

Additionally, positive assessments are being made regarding debt parameters. According to S. Babayev, Azerbaijan is among the 20 countries worldwide with one of the lowest levels of public debt to GDP ratio. "At present, our public debt stands at ₼25.4 billion, which is equivalent to 19.5% of GDP. This represents a 2.2 percentage point decrease compared to the beginning of the year," he stated. At the same time, the forecast for the end of 2026 is estimated at 21.8%. The minister emphasized that there is no expectation of a significant increase in the debt burden in the medium term: "We do not anticipate an increase in this indicator in conjunction with GDP growth." According to his assessment, 67.2% of the debt portfolio consists of domestic debt, and the sensitivity of public debt to currency and external market risks remains unchanged.

Therefore, the forecasts presented indicate the government's intention to establish a macroeconomic trajectory that is adapted to external turbulence and based on a gradual reduction in dependence on the oil and gas sector. The primary challenge for 2026 and the medium term is maintaining a balance between stimulating growth, controlling inflation, and ensuring the sustainability of public finances in the face of ongoing global uncertainty.