FROM SUSTAINABILITY TO DEVELOPMENT

Azerbaijan's robust external position, substantial government reserves and low debt levels enable the country to demonstrate considerable resilience in periods of global instability. However, the country faces a more complex challenge: to transform its accumulated resources into a foundation for sustainable development. This challenge arises from slowing economic growth, the budget's dependence on oil revenues and insufficient productivity in the non-oil sector.

Discussions held by the international rating agency at the Fitch on Azerbaijan 2026 conference showed that the country's economic prospects today extend far beyond oil prices, the volume of foreign exchange reserves and the dynamics of public debt. Representatives from Fitch Ratings, the World Bank (WB) and Pasha Holding discussed the conditions under which accumulated resources could help to expand private investment, boost productivity and foster new sources of growth.

Safety margin

According to the latest analysis by Fitch Ratings, the sovereign rating of Azerbaijan stands at BBB-, with a stable outlook. The agency anticipates a consolidated budget surplus of approximately 3.7 per cent of GDP by the close of 2026, with a current account surplus projected to reach around 11 per cent of GDP. Net sovereign foreign assets, including the funds of the State Oil Fund of Azerbaijan (SOFAZ) and the Central Bank, are estimated at approximately 73 per cent of GDP, whilst the total volume of accumulated assets stands at around $91 billion.

According to Fitch's forecast, direct public debt is set to reach 19.6% of GDP by 2026. By way of comparison, the median figure for countries in the BBB rating category is 57 per cent of GDP.

Eric Arispé Morales, Senior Director at Fitch Ratings and Head of the Eastern Europe Sovereign Ratings Group, highlighted that in oil-producing countries, the volume of financial assets is not the only factor to consider; the state's capacity to utilise various economic policy instruments is also crucial. "When assessing oil-exporting countries, it is not only the balance sheet that matters, but also the combination of various economic policy instruments," he emphasised.

These figures indicate that the country has significant capacity to withstand external shocks. However, it is of fundamental importance how exactly the accumulated resources are utilised and how consistently economic policy is implemented.

The agency's representative has stated that any further strengthening of the sovereign balance must be accompanied by improved effectiveness of monetary policy and a consistent reduction in the non-oil primary deficit of the consolidated budget. According to Fitch's baseline scenario, this figure is projected to decline from 18.6% of GDP in 2025 to 13% by 2029.

Elman Eminov, Chief Economist at Pasha Holding, in turn, drew attention to the specific nature of the formation of government reserves: “High energy prices do not automatically translate this surplus into the country’s gold and foreign exchange reserves,” he noted.

If the non-oil sector does not develop quickly enough, the decline in the contribution from hydrocarbons may be accompanied by a slowdown in overall economic growth and a reduction in budgetary capacity.

“One cannot assess the consequences of a decline in oil production without taking into account what is happening and will happen in the non-oil economy,” asserts Morales. According to him, the success of the current policy will largely depend on the extent to which the private sector is able to participate in the economy, what obstacles remain to its development, and how effectively these are removed in the medium term.

An increase in non-oil revenues is possible, first and foremost, through the expansion of economic activity beyond the oil and gas sector. For this to happen, new enterprises must enter the market, existing companies must improve productivity, and private investment must be channelled not only into traditional sectors but also into those with higher added value.

Steve Loris Gui-Diby, the World Bank’s Senior Economist for Azerbaijan, also pointed out that favourable oil market conditions give the government the opportunity to build up reserves to support the economy during downturns. However, at the same time, there is a growing need for reforms that will enable the non-oil sector to develop more independently. Fiscal policy should not remain the sole source of economic growth. As public capital expenditure is scaled back, the private sector is set to play an increasingly significant role in the economy.

This therefore involves a gradual transition from a model in which public expenditure is one of the main drivers of economic activity to a system where growth is driven to a greater extent by the private sector, investment and productivity gains.

Reforms are essential

Against this backdrop, Fitch Ratings’ forecasts are of particular interest: they predict that Azerbaijan’s GDP growth will stand at 1.6 per cent in 2026, 2 per cent in 2027 and 2.2 per cent in 2028. Elman Eminov noted, however, that various institutions’ estimates for non-oil and gas GDP growth range between 3.5 per cent and 4 per cent. “Bearing in mind that non-oil and gas growth stood at 2.7 per cent in 2025, whilst just over 2 per cent is forecast for this year, accelerating growth has become a prerequisite,” he pointed out.

In other words, the need for reforms is evident, as it is clear that total factor productivity indicators in the non-oil sector do not yet allow for the natural decline in hydrocarbon production to be fully offset. The World Bank believes that this reflects how efficiently the economy utilises labour, capital and other resources in the production of goods and services.

In this regard, Gui-Diby highlighted the growing importance of the private sector as the scale of public capital investment changes. In his view, measures to improve the competitive environment and attract investment could facilitate further growth.

The World Bank representative highlighted three areas of reform on which the Bank is collaborating with the Azerbaijani government. The first is strengthening domestic competition and creating a level playing field for private companies and state-owned enterprises. The second is enhancing external competitiveness by attracting foreign direct investment, improving trade policy and reducing non-tariff barriers. The third is to improve productivity and the efficient use of resources.

“The priority for Azerbaijan at this stage is to implement a package of reforms aimed at strengthening the private sector, improving competitive conditions and increasing the inflow of foreign direct investment,” noted Gui-Diby. He identified the simplification of investment procedures, the protection of investors’ rights and the removal of barriers to market entry as key conditions. Accelerating Azerbaijan’s accession to the World Trade Organisation could help establish more transparent rules for foreign businesses.

The World Bank also highlights the importance of total factor productivity—a measure of the efficient use of labour, capital and other resources. The World Bank has launched the second phase of a study into the productivity of Azerbaijani enterprises, including the allocation of resources across sectors. The findings of this work will help identify measures to promote a higher return on investment.

Underestimated growth potential

The services sector plays a key role in the search for new sources of economic growth. Its development allows for the expansion of economic activity without such heavy reliance on large-scale capital investment, which is characteristic of many infrastructure and industrial projects.

“The services sector has been the main driver of Azerbaijan’s economic growth over the past 10 years. Recently, there has also been growth in exports of digital services. Nevertheless, we believe that this indicator still falls short of its potential due to regulatory barriers to trade in services,” said Gui-Diby.

The World Bank rates the potential impact of reforms in this sector quite highly: according to its analysis, removing regulatory restrictions on trade in services could deliver an additional 3 per cent increase in GDP.

Information technology, tourism, transport logistics and professional business services also remain key sectors. Digital services enable access to overseas customers without reliance on seaports or large cargo flows. However, this requires a skilled workforce, access to technology, capital and cross-border markets. “To attract investors to the services sector and transform the country into a regional hub, it is necessary to reduce barriers to capital inflows, liberalise the movement of labour and ensure unhindered access to cross-border services,” emphasised the World Bank representative.

Another prerequisite for sustainable growth remains the development of the domestic financial market. According to Fitch Ratings, Azerbaijan’s banking sector has significantly strengthened its position in recent years: dollarisation has declined, the external debt burden has decreased, sufficient capital buffers have been established, and asset quality has improved.

However, the stability of the banks does not yet mean that their potential is being fully utilised for economic development: even though they have sufficient resources, private enterprises do not always receive the level of financing required to expand production and implement new projects.

Thus, although the Central Bank of Azerbaijan has made progress in managing liquidity, refining monetary policy instruments and influencing short-term interest rates, the mechanism through which the regulator’s decisions on the policy rate are passed on to lending and deposit conditions remains limited. One of the obstacles is the significant excess liquidity in the banking sector. In such circumstances, changes to key interest rates do not always lead to a commensurate change in the cost of finance for businesses and the public.

“The key question is what exactly is required to establish a stable credit cycle: the removal of barriers to access to financial resources, or the emergence of the necessary volume of high-quality projects and demand from the private sector,” noted Morales.

There are also constraints linked to the insufficient depth of the domestic capital market.

Amidst inflation, all of this poses risks to the development of the private sector. According to Fitch’s forecast, average annual inflation in Azerbaijan will stand at 6.1 per cent in 2026, before falling to 5.6 per cent in 2027 and 4.9 per cent in 2028. The agency expects inflation to return to the target range in 2027, but points to a persistent gap compared with countries in a comparable rating category.

Near-term objectives

In this context, any upgrade to Azerbaijan's rating by Fitch would be dependent on a number of factors, including the volume of government assets and the level of debt, as well as the quality of economic policy.

Among the factors likely to have a positive impact on the rating, Morales highlights the strengthening of the economic and regulatory frameworks, the consistent application of these frameworks, the elimination of structural weaknesses and the creation of conditions to attract private investment.

A similar approach is evident in the World Bank's assessments. The bank's strategic vision for Azerbaijan, as outlined in the 3I concept (Investment, Infusion, Innovation), underscores a commitment to fostering economic growth and development.

The model's foundation is a systematic transition from capital accumulation to the adoption of technology and knowledge, followed by the development of domestic innovations. According to Gui-Diby, Azerbaijan has already completed a significant phase of infrastructure investment. The introduction of technology, increasing productivity and attracting high-quality foreign direct investment are now of particular importance.

It is evident that Fitch Ratings, the World Bank and Pasha Holding all concur on the primary issue. Azerbaijan has substantial financial and infrastructural foundations for further development; however, the transition to higher growth rates requires structural changes.

The next economic challenge is to ensure that accumulated capital forms the basis of a more diversified, productive and competitive economy—one capable of sustaining growth not only during periods of favourable oil market conditions, but also when external conditions change. It is precisely at this point that the line is drawn between financial stability and sustainable development.