Azerbaijan - Overview of economy

Azerbaijan is a nation of Turkic Muslims. It became an independent republic following the collapse of the Soviet Union in 1991. The country has come into conflict with Armenia over the Azerbaijani Nagorno-Karabakh enclave, when almost 20 percent of total land in Azerbaijan was occupied by Armenia. In comparison to Armenia and Georgia, the industrial sector in Azerbaijan is less developed, with its main focus on the oil industry. There is high structural unemployment , and a low standard of living.

Following the break-up of the Soviet Union in 1991, Azerbaijan's economy suffered from serious problems. Real gross domestic product (GDP) declined by 60 percent between 1991 and 1995, by which time high inflation

had eroded real incomes, the exchange rate had weakened, and monetary reserves were nearly depleted. This sudden economic decline had a disastrous effect on the people's living standards. Per capita GDP declined from US$5,841 in 1988 to US$1,770 in 1999, the inflation rate rose as high as 1,664 percent in 1994, and from 1988-1998 food prices multiplied as much as 28,750 times. Economic recovery started only after 1996, mostly driven by investment from abroad in the oil, construction, and communications industries. Foreign companies, primarily from the United States, were eager to control Azerbaijan's oil-rich lands.

The main products of the economy are oil, natural gas, and cotton. In order to improve industrial development, Azerbaijan signed arrangements with foreign firms, which have already committed US$60 billion to oil field development. The conflict with Armenia over the Nagorno-Karabakh region, however, stands as an obstacle to economic progress, including stepped-up foreign investment. Due to the fact that old Soviet ties have been broken in the transformation to a market economy, trade with Russia and the former Soviet republics has decreased, while the country has involved itself with other regions like Turkey, Iran, the United Arab Emirates, and Europe. Oil is a very important product of the country, and economic success will depend on world oil prices and the agreements over a pipeline project in the region. In 2000 the construction of a prospective oil pipeline, originating in Baku, passing through the Republic of Georgia, and terminating at Ceyhan, a Turkish port on the Mediterranean coast, was still considered a high cost project. Increasing oil prices will likely make the project more affordable in the near future.

The external debt of the country increased steadily from 1991 onward due to economic restructuring , and was recorded at US$684 million in 1998. Though economic stabilization measures improved the economic climate considerably during the second half of the 1990s, and inflation improved (exceeding 1,000 percent in both 1993 and 1994, but thoroughly contained in 2000) Azerbaijan needed increasing amounts of International Monetary Fund (IMF) credits. As a result of successful restructuring with the aid of the IMF, Azerbaijan started to repay its debts after 1999.