Economic Outline

Economic Indicators

Declining global gas and oil prices and the armed conflict between Armenia and Azerbaijan in Nagorno-Karabakh took a toll on the country’s economic growth in recent years. Following the strong rebound from the pandemic (+4.6% of GDP in 2022), growth moderated to 2.4% in 2023, attributed to a decrease in non-hydrocarbon growth to approximately 3% and a decline in hydrocarbon production. The IMF projects medium-term growth to hover at approximately 2.5%, buoyed by public investment, while the drag from the energy sector may alleviate with new oil production. However, advancements in economic diversification face hurdles due to the significant state presence, restricted financing access, governance issues, and limited non-energy foreign investment.

In recent years, significant efforts were made by authorities to reduce the non-oil fiscal deficit, surpassing targets in 2022 and aiding in curbing inflation. This surplus provided fiscal room for high-priority capital spending in 2023. Consequently, the non-oil primary deficit rose from 22.4% of non-oil GDP in 2022 to around 24.4% in 2023, slightly below the 25% target. The overall budget surplus decreased from 6.3% of GDP in 2022 to 2% in 2023, partly due to lower-than-expected oil prices. Azerbaijan has postponed its commitment to reduce the non-energy primary deficit to 17.5% of non-oil GDP by one year, now targeting 2027, as per its fiscal rule. This adjustment allows for expenditure commitments linked to Karabakh and defense. Additionally, the government has raised its public debt ceiling to 30% of GDP from the previous 20%. In 2023, government debt increased to 21.8% of GDP after assuming 8% of GDP domestic guaranteed debt from Agrarkredit. Fitch anticipates debt to stabilize at an average of 21.6% of GDP during 2024-2025. External government guarantees and on-lending decreased to USD 6 billion (8.2% of GDP) in 2023, primarily associated with the Southern Gas Corridor project, which remains profitable and unlikely to necessitate sovereign support. In 2023, average inflation decreased to 9%, buoyed by a robust manat compared to Azerbaijan's primary trading partners and reduced international food prices. Fitch forecasts a further easing to 4.5% in 2024.

After peaking in 2020, the unemployment rate returned on a downward path and stood at 5.9% in 2023, and is expected to remain stable over the forecast horizon (IMF). In Azerbaijan, inequality is deemed moderate in comparison to other transition and petroleum-rich nations. The majority of Azerbaijani citizens have reaped the rewards of the country's remarkable economic expansion: the GDP per capita (PPP) was estimated at USD 17,828 in 2022 by the World Bank, and according to the Asian Development Bank, only 5.9% of the population lives below the national poverty line.

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