Azerbaijan economy set for modest growth despite weak oil prices

Azerbaijan’s economy is projected to grow modestly in the coming years, with BMI, a member of Fitch Solutions, forecasting a 1.4% expansion in 2025 and 2.5% in 2026. Analysts highlight resilient domestic demand, supported by easing inflation and a stable labor market, as the main driver of recovery.

BMI notes that while the oil sector continues to face fiscal constraints and declining global prices, diversification efforts are beginning to yield results. As of December 2025, oil sector GDP accounted for 47.4% of the total, while non-oil GDP reached 52.7%. This reflects an 8.6% growth in non-oil output, even as overall production fell by 2.6% due to a steep 7.3% decline in oil production.

Private consumption is expected to contribute around 2.5 percentage points to GDP growth in 2026, driven by rising real wages, low unemployment at 5.2%, and improved consumer confidence. New trade and investment agreements with major economies like China, Germany, Turkiye, and several European partners are also expected to bolster non-oil sector expansion.

Why are oil prices so volatile?

The International Monetary Fund (IMF) projects that Azerbaijani oil prices will remain subdued through the end of the decade, averaging $66.7 per barrel in 2026 compared to $69.7 in 2025, with prices hovering in the mid-$60s until 2030 before a slight recovery. Natural gas prices are also forecast to decline, falling to $380.4 per thousand cubic meters in 2026 from $425.4 in 2025.

The reasons behind this prolonged weakness in energy prices are structural: first, global oversupply persists as oil production continues to outpace demand, resulting in elevated inventories that keep consistent downward pressure on prices. Even when geopolitical risks arise, high stockpiles limit sustained price increases.

Second, weak global economic growth continues to weigh on energy demand, as slower industrial output and softer trade flows reduce overall fuel consumption.

Third, policy uncertainty surrounding the energy transition, including stronger commitments to renewable energy in Europe and Asia, is dampening long-term expectations for hydrocarbon demand.

Finally, while geopolitical tensions in major producing regions can create short-term volatility, they have not been sufficient to reverse the broader trend driven by oversupply and subdued demand.

Azerbaijan’s economy remains structurally vulnerable due to its high exposure to global energy markets. With nearly half of GDP linked to oil, any prolonged period of low prices could significantly constrain fiscal revenues and reduce the government’s capacity for public investment.

At the same time, rising wages and stable employment are providing an important domestic demand cushion against external shocks, although sustaining this support will require prudent inflation management and continued progress in diversification. The government’s diversification strategy, supported by trade agreements and targeted investment policies, is beginning to show results, but expanding non-oil sectors such as manufacturing, agriculture, and services will be essential to reducing long-term dependence on hydrocarbons.

Persistently weak oil and gas prices also pose fiscal risks, testing budget sustainability and forcing policymakers to carefully balance short-term consumption-driven growth with deeper structural reforms.

Azerbaijan's economic growth in the coming years will mainly be driven by increased domestic spending and the development of non-oil sectors. In other words, not only oil but also other sectors will contribute more to the economy. Therefore, while the situation is not entirely risk-free, it can be described as cautiously optimistic.

These forecasts suggest that the diversification process, although not yet fully visible, is expected to yield positive results in the coming years. As a country whose economy depends heavily on oil and gas, Azerbaijan’s development of the non-oil sector should be gradual rather than sudden.

In the long run, however, everything depends on how successfully the country can diversify its economy. If global energy prices remain low for an extended period, Azerbaijan will need to adapt. This makes it essential to reduce dependence on oil and gas while strengthening other sectors.

The main challenge will be transforming current stability into sustainable, long-term economic growth beyond oil.