SECURITY BUFFER

In February, the International Monetary Fund (IMF) conducted its latest Article IV consultations in Azerbaijan. Article IV consultations represent a mechanism through which the Fund evaluates the economic condition of member countries, the resilience of their financial systems, and the soundness of their macroeconomic policies. These consultations take place on an annual basis and, while they rarely generate sensational headlines, the wording of their reports provides insight into the strategic direction of the country.

The most recent IMF mission to Baku also passed without any dramatic statements being made. It was noted that Azerbaijan's economy is gradually emerging from a post-oil adjustment phase and entering a period of structural rebalancing.

No acceleration effect

The Fund has forecast that Azerbaijan's strategic foreign exchange reserves will reach $85.2 billion by 2026. It is anticipated that growth will continue, albeit at a rate of only 0.1%. Following a significant increase from $70 billion at the end of 2024 to $85 billion by the end of 2025, accumulation rates are expected to undergo a substantial slowdown.

A redistribution is to be expected within the reserves structure. The Central Bank of Azerbaijan's (CBA) reserves are to fall to $10.7 billion, while the State Oil Fund of Azerbaijan (SOFAZ) assets are to increase to $74.5 billion. It is anticipated that this trend will persist in the medium term: CBA's reserves are set to gradually decline, with SOFAZ assuming responsibility for the accumulation of the primary currency resources. This is a crucial detail. The country maintains a substantial external "shield", but its composition becomes more investment-oriented and less liquid. Meanwhile, total reserves remain comfortable — ranging between $84-86 billion through 2031. In summary, while a buffer remains in place, the rapid accumulation effect that was characteristic of high oil price periods has come to an end.

The IMF has forecast economic growth in 2026 to be 2.1%. This figure exceeds the 2025 result (1.4%), but is below the 2024 growth rate of 4.2%. The medium-term target is approximately 2.5% on an annual basis.

A key feature of the forecasts is the continued decline in the oil and gas sector: in 2026 its GDP will shrink by 2%, followed by an annual reduction of approximately 0.5% through 2032. In contrast, the non-oil sector is projected to grow by 3.7% in 2026 and stabilise around 3.5% in subsequent years.

Therefore, the structural shift is no longer merely declarative. By the close of 2025, the oil sector's contribution to GDP stood at 47.4%, while the non-oil sector accounted for 52.7%. The latest figures show a 2.6% decrease in oil production, with a 7.3% decline in crude oil extraction. Conversely, non-oil GDP grew by 8.6%. This suggests that the economy is undergoing a shift in its centre of gravity, albeit with generally moderate dynamics.

Concurrently, the nominal size of the economy will mirror accumulated growth effects. According to IMF projections, with real growth at 2.1%, nominal GDP in 2026 is set to reach ₼132.5 billion, rising to nearly ₼178 billion by 2031.

Nominal non-oil GDP is projected to grow at a faster rate, reaching ₼100.7 billion by 2026, with steady expansion expected in the subsequent years. This growth is driven by increased domestic demand and inflationary factors.

The government has estimated GDP in 2026 at ₼134.1 billion, indicating a slight increase. The Fund's forecast differs in technical aspects, particularly regarding assumptions related to commodity prices and domestic consumption.

Fine-tuning

Inflation is gradually returning to a controlled range. The IMF estimates that it will be 5% by the end of 2026, falling to 4% by late 2027 and remaining at roughly that level through to 2032.

In 2025, price increases temporarily exceeded the upper limit of the Central Bank's target range, but inflation had returned within the corridor by the second half of the year. Meanwhile, interbank market rates remained close to the regulator's policy rate, indicating effective liquidity management.

Nevertheless, the Fund highlights the need for further refinement of monetary policy transmission mechanisms. In order to achieve full signalling to the market, it is essential to develop a risk-free yield curve and resolve the structural banking sector issues. These issues include high dollarisation, significant operating costs and limited competition.

It is important to note that external risks remain significant. Azerbaijan still imports a considerable share of its foodstuffs, making domestic prices sensitive to geopolitical factors and potential logistical disruptions.

Anna Bordon, head of the IMF mission, emphasises the importance of: "Although inflation is expected to slow, it is vital for the regulator to remain vigilant — closely monitoring inflation risks and responding promptly to unexpected price fluctuations given heightened external uncertainties and an evolving transmission mechanism."

The IMF estimates the average export price for oil in 2026 to be $66.7 per barrel. A moderate correction to $64.9 is possible in 2027, followed by gradual increases: $65.4 in 2028, $66.4 in 2029, $67.2 in 2030, and $68.5 by 2031.

The state budget is based on a conservative benchmark of $65 per barrel, reflecting a cautious approach to planning oil revenues.

The gas sector is showing different trends: after $425.4 per thousand cubic metres in 2025, prices are expected to fall to $380 in 2026 and $326.5 in 2027, then stabilise near $287 from 2028 through 2032.

This trend suggests a gradual narrowing of export margins in gas, which lends further support to the case for more balanced budgetary policy and consistent fiscal consolidation.

Prudent transformation

According to international analytics firm Fitch Solutions, fiscal policy in Azerbaijan is set to remain conservative in 2026. The budget deficit is expected to amount to around 2% of GDP, with revenues and expenditures growing by only about 0.7%. Analysts regard this as a deliberate restraint amid uncertainty in the oil markets. Notably, non-oil revenues are predicted to increase by double digits in 2026.

The authors of the report observe that this will coincide with an 11% reduction in transfers from SOFAZ, signalling a gradual transition towards long-term fiscal sustainability.

The revenue structure is of particular importance in this regard. According to government forecasts, Fitch Solutions anticipates that the share of non-oil revenue will exceed 57% in 2026 and reach 63% in the consolidated budget. By 2029, this figure could rise to 69-70%.

This is not merely a temporary adjustment; it is a systemic shift. While the previous focus on oil transfers as a key driver of budget stability is evolving, there is now a gradual shift towards strengthening domestic revenue sources, broadening the tax base, and enhancing administrative efficiency.

The IMF advises the continuation of medium-term fiscal consolidation, the reduction of subsidies to state enterprises, the rationalisation of tax exemptions, and the strengthening of tax administration. These measures are regarded not as austerity measures, but as mechanisms for intergenerational equity and maintaining external economic resilience.

Competitive advantage

According to international rating agency S&P Global Ratings, Azerbaijan's net international investment position is expected to amount to around 76% of GDP between 2025 and 2028. It is anticipated that external liquid assets will exceed external debt, a position that is projected to persist until at least 2028.

S&P has forecast that the manat exchange rate will remain stable at ₼1.7 per $1. This means that, even with moderate growth rates, the external resilience of the economy will continue to be one of its core strengths.

S&P has calculated that despite being vulnerable to potential trade volatility, Azerbaijan's net external position can cushion adverse commodity price cycles, affecting both external liquidity and overall economic stability.

The agency forecasts GDP growth of 1.7% in 2026, accelerating to 2% in 2027 and reaching 2.1% in 2028; average annual growth from 2025-2028 is estimated at around 1.9%. Nominal GDP for 2025 is expected to reach ₼130.4 billion, rising to ₼152.3 billion by 2028.

Fitch Solutions anticipates a more dynamic acceleration, with domestic consumption driving growth of up to 2.5% by 2026. With unemployment at around 5.2%, rising real wages, and slowing inflation, domestic demand could contribute up to 2.5 percentage points to overall GDP.

The company's report emphasises the following: "Although oil continues to be the primary export sector, diversification initiatives are steadily yielding results, thereby enhancing resilience against external price fluctuations. The non-oil sector is set to continue its growth trajectory, driven by the implementation of targeted economic policies and new trade and investment agreements with China, Germany, Türkiye and various European partners."

At the same time, Fitch notes risks remain skewed upwards due to geopolitical tensions and possible supply chain disruptions, especially amid sanctions affecting food exports from Russia. Azerbaijan is still importing between 20% and 30% of its grain, dairy and meat products from Russia, which leaves it vulnerable to rising transport and transaction costs.

When we bring all the assessments together, a new macroeconomic configuration is starting to take shape. This is an economy without sharp fluctuations or record oil revenues, but also without any signs of macroeconomic destabilisation.

The key question now concerns the quality of structural reforms: can diversification become a source of acceleration rather than merely compensating for declining oil production? The answer to this question will determine whether growth remains capped at around 2-2.5% or becomes just an interim phase towards a new economic model.

Azerbaijan is currently entering a phase of economic maturity. In this phase, stability takes precedence over pace, and the quality of structural reform is given greater importance than short-term indicators.